Is Tesla Already Betting on Artificial Intelligence to Move Margins?

Tesla’s reduced margin expectation for the quarter has the industry looking towards the future of artificial intelligence to recoup profit margins.

Artificial intelligence powers more advanced Autopilot and Full Self-Driving features, which are available today in feature suites at varying levels of realization at price points of $6,000 and $15,000 respectively.

Beyond research & development, these respective feature suites and subscriptions carry essentially pure margin to the automaker.

Elon Musk has recognized the potential of this, highlighting the fact that Tesla could theoretically sell cars for zero profit today, then yield tremendous potential in the future when Full Self-Driving is released.

That’s important to note as Tesla’s gross margin was impacted by price cuts in Q1 2023, dropping to their lowest level in nearly three years:

Q1 2023 yielded a gross margin of 19% on each vehicle sold, as compared to a record margin of 30% in Q1 2022 when automotive demand had reached an all-time high.

Margins and autonomy remain as Tesla’s two key competitive advantages, which are only compounded by unprecedented demand for the brand.

Tesla is partially taking this strategy today on Model Y, which saw the starting price for its base Model Y All-Wheel Drive configuration drop to $46,990 less than two weeks after being formally released.

The automaker can respond to the market and demand in real-time.

This is being compared to a new automotive paradigm, a modern Ford Model T with unique production and innovation that will drive obsolesce.

This comparison was made by none other than the current Ford Motor CEO Jim Farley, who recognizes Musk as a visionary. In practice, this means that Ford is similarly taking as much inspiration as possible from Tesla: be it the direct-to-consumer mirroring across its franchise dealership network, bets on autonomy, or cost efficiencies which both automakers share.

Global automakers including Renault are feeling the reduced-pricing effect across the industry, in particular regard to Tesla’s pricing strategy that’s rapidly trending downwards as other automakers are forced to operate on paper-thin electric vehicle margins.

Tesla is able to achieve this via its healthy production output, with copious investments being made into expanding the locations of its factories. Model Y’s swift price reduction across its lineup despite high demand can be attributed to its production at multiple Gigafactories.

Model 3 is much more immediately-available, and could benefit from its ‘Highland’ revamp later this year rather than following pricing to the bottom despite the tremendous future potential.

On the other hand, competing automakers have no options to recoup margin in a sense that’s consumer-friendly: ill-fated subscriptions for heated seats or Apple CarPlay/Android Auto only lead to dismay among conventional automakers’ most outspoken customers.

Subscriptions or features sold after delivery have to offer a unique value proposition, rather than necessarily a feature that potentially should have been included as standard.

In the modern day-and-age, that equates to artificial intelligence and autonomy.

Effectively, this has many third-party startups joining the autonmous space competing for the attention of conventional automakers. They utilize relatively inexpensive hardware and develop software that can be sold as a subscription; albeit, they present no real competition or even notable progression to Tesla’s model of offering standardized hardware then selling advanced, evolving software features powered by artificial intelligence.

Tesla’s volumes in the space also can’t be compared to any conventional competitor, as the brand is the undisputed global leader in electric vehicles with the exception of Chinese electric automaker BYD. While BYD doesn’t have the same level of investment into artificial intelligence, Musk has said that he believes that it’s likely for a Chinese company to solve Full Self-Driving after Tesla.

Frankly competitors should be worried about the prospect of Tesla reducing profit margins on new cars to essentially zero, which is the typical standard of the high-volume automotive market, then recouping margins down the line through software and specifically artificial intelligence.

Tesla still has several thousand dollars of gross margin to potentially give up on each vehicle configuration, not accounting for aggressive ongoing cost reduction efforts. A Tesla Robotaxi with a $25,000 starting price doesn’t seem unrealistic at this point.

Then the future has the imminent rise of Tesla’s training computer Dojo, which with enough advancement could advance into a multi-hundred-billion-dollar segment of the business.

Eminence can also be attributed to Tesla’s upcoming humanoid robot Optimus, which has the potential to be more valuable than the automotive or Autopilot/Full Self-Driving sectors of Tesla.

Thus, artificial intelligence may be the key to pure gross margin that Tesla is already accounting for today as the automaker drops prices with an eye on the future.

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