About a month ago, Elon Musk took a redeye to China to try and salvage Tesla’s falling market share numbers in the world’s biggest market for Electric Vehicles (EVs).
It’s been a rough stretch for Tesla over the last 18 months or so.
At the start of 2023, Tesla had a 10.5% share of EV sales in China. As of a couple of months ago, that share had fallen to 7%. And Tesla has had to make price cuts that have virtually wiped out profit margins in China just to keep its share at 7%.
The challenge for Tesla is pretty obvious: it has a tough time competing on price with China’s heavily subsidized domestic EV companies. Throw in the fact that nearly half of Tesla’s production is based in China and it’s clear that Musk needed to do something…
Musk actually blew off a meeting with India’s Prime Minister Modi to meet with the #2 man of China’s Communist Party and hopefully get some concessions that will help Tesla’s China business.
What Musk got was permission to start testing Tesla’s Full Self Driving technology on China’s roads.
This may not sound like a very big deal. Here in the U.S., self-driving technology seems a bit like a pipedream. Anecdotal evidence about robo-taxis in the markets where they are being tested is not very encouraging. They’ve hit pedestrians and sometimes when confronted with a challenging scenario, they just stop, blocking traffic and causing headaches.
Still, the robo-taxi market is expected to be worth $100 billion in a few years, and maybe $200 billion by 2030, so there’s incentive to get it right. Full Self-driving (FSD) like what Tesla wants to start rolling out in China is the stepping stone to fully automated cars, like robo-taxis.
Tesla’s Advantage: Cameras
Tesla has a bit of a unique approach to FSD. Instead of programming every “if/then” scenario into the software so the car knows what to do, Tesla is taking an AI neural net approach, so the cars can essentially “think.”
But Tesla’s real advantage comes from the cameras that have been installed in its cars from the get-go.
These cameras have been collecting data for years. A supercomputer called Dojo uses all that data to train its AI models. Taiwan Semiconductor (NYSE: TSM) has just started producing Tesla-designed Dojo chips to make the whole system more powerful.
The ability to test the FSD system in China could be a game-changer for Tesla.
And it’s pretty clear that Tesla’s current share price does not include much optimism for the future of FSD and fully automated cars.
Is Tesla a Car Company? Or an AI Company?
During the conference call with analysts after Tesla’s most recent earnings report, Elon Musk said, “We should be thought of as an AI robotics company. If you value Tesla as just an auto company — it’s just the wrong framework.”
You can’t blame Musk for trying. Tesla would have a higher share price if it was considered an AI company. But investors seem content to value Tesla like a regular car company, albeit one that still has growth ahead.
Tesla gets left out of the conversation when people talk about AI stocks.
That might be a mistake.
The stock is more than 50% below its highs of over $400 from a couple of years ago:
And the stock has traded between ~$175 and $200 just about all year, even as the outlook for EV sales has weakened. That suggests the bad news is priced in.
Today, Reuters reported that Tesla is preparing to register its FSD software in China very shortly. It could begin testing FSD on China’s roads in a couple of months. It could also start selling subscriptions to FSD in China, and maybe even licensing the software to other Chinese EV makers.
It’s worth buying some Tesla stock now, while it’s out of favor with investors. A couple of months from now, investors might be thinking of Tesla as an AI company. If so, the stock will be a lot higher.
Godspeed,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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