Tesla is running out of time to deliver on self-driving promises

Chief Executive Elon Musk tweeted earlier this month that the company would unveil a long-awaited driverless Tesla or robotaxi on August 8. (File Photo: Reuters)
Chief Executive Elon Musk tweeted earlier this month that the company would unveil a long-awaited driverless Tesla or robotaxi on August 8. (File Photo: Reuters)

Summary

The electric-vehicle pioneer seems to be shifting its growth hopes to the unproven technology of automated driving.

If Tesla wants to be seen as an artificial-intelligence company rather than just a carmaker, it needs to come up with hard data to back its claims.

The electric-vehicle pioneer is cutting a 10th of its workforce, The Wall Street Journal and other outlets reported on Monday. Its top executive in charge of powertrain and energy engineering, Drew Baglino, also said he was leaving after 18 years at the company.

This latest news, which sent the shares down more than 5%, fits a recent pattern pointing to a strategic shift. Tesla seems to be giving priority to its efforts to make cars autonomous over its previous pursuit of the most rapid possible sales growth.

Chief Executive Elon Musk tweeted earlier this month that the company would unveil a long-awaited driverless Tesla or “robotaxi" on August 8. Employees have been told that the robotaxi is now a higher priority than the cheaper Tesla model that previously underpinned expectations for growth, The Wall Street Journal has reported.

Tesla’s current driver-automation software can perform most driving tasks but still requires human drivers to keep their eyes on the road and intervene where necessary. The company has promoted its capabilities more aggressively since the release of an update late last year that replaced some human-written code with artificial intelligence. On Friday Tesla halved the price of a subscription to $99 a month for its most advanced package, called “Full Self-Driving" or FSD.

A pivot from vehicle to software sales could be a reason for Baglino’s departure as the company’s top hardware engineer. A recognition that the company won’t sell as many cars as it hoped might also explain the job cuts, which will affect factory workers too. In 2022, the last time Tesla announced layoffs, they only affected salaried employees and the company’s overall head count grew.

Why would Tesla shift focus? The most obvious reason is that its current strategy isn’t working: Price cuts haven’t succeeded in keeping its targeted sales growth on track in a slowing EV market. Their most noticeable effect has instead been to trim Tesla’s margins, reducing profit expectations and the share price.

Still, this was precisely the problem the next-generation Tesla was supposed to address. If the project is being delayed, it could be that Musk is losing confidence in the company’s capacity to master the engineering challenge of making an EV that is cheap, attractive and profitable. Compact cars have been a tough business for the car industry for years, even without the addition of expensive EV batteries and the recent arrival of new competitors from China.

A more generous interpretation is that Musk is gaining confidence in the company’s software capabilities, allowing Tesla to re-emphasize an alternative growth strategy that was previously overshadowed by the success of the Models 3 and Y. Selling software has long been a more lucrative business than selling cars—not to mention the only thing that could justify Tesla’s outsize valuation. So if the company actually has sight of a workable driver-automation product, giving it priority is a strategic no-brainer.

The problem is this “if": Musk has a long record of promising that autonomy is just around the corner. He is “the boy who cried FSD," as he himself said last year. So why should investors believe him now?

Shareholders will look for clarity on the company’s strategy next week, when it will hold a call to discuss its first-quarter results. But if a pivot from hardware to software is indeed under way, Tesla needs to give investors reasons to believe the latest talk of FSD and robotaxis amounts to more than just the same old promises.

The current evidence is overwhelmingly anecdotal, as Tesla drivers air their opinions of the latest version of FSD on social media. Just about the only hard data investors have to go on is a lengthening bill: Tesla boosted spending on research and development last year even as growth slowed, adding to the margin squeeze from vehicle price cuts.

Giving the number of Tesla owners who have bought FSD or subscribe to it would be a start. More fundamentally, though, the company needs to define, disclose and target metrics for the product’s performance, such as how far it goes on average before human drivers need to intervene and how that has changed over time. This isn’t just for investors; regulators and the public also need to be brought on board.

Only with detailed, trustworthy disclosures on FSD’s performance will it become clear when Tesla might think about taking legal responsibility for driving functions, paving the way for a genuinely autonomous “robotaxi." The August reveal could prove to be a red herring, given the delay between past product unveils and actual road-ready output: Production of Tesla’s Cybertruck only started four years after its unveiling, and has been extremely slow to increase.

Investors could get behind Tesla’s plans for a compact EV because of its record with the Model 3 and Y. With autonomy, the company still has everything to prove.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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