Tesla's Full Self-Driving Promises Collide With Reality

Elon Musk's claim about Tesla's autonomous driving capabilities 'does not match engineering reality,

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May 07, 2021
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Tesla Inc. (TSLA) has spent the last few years selling Full Self-Driving (FSD) as an expansion of Autopilot, the advanced driver-assistance system (ADAS). In October 2016, the electric vehicle (EV) company claimed that "all Tesla cars being produced now have full self-driving hardware."

Whether or not Tesla will finally be able to deliver on its FSD promises in 2021 remains to be seen. Based on Tesla's patchy track record and the current observable state of its FSD technology, I see little reason for optimism. If anything, the legal, regulatory and financial risks attached to FSD and Autopilot look set to intensify. Indeed, those risks could well threaten to puncture Tesla's ballooning valuation.

Full autonomy remains a far-off prospect

Last October, Tesla released FSD City Streets to a select group of test drivers, which many bullish observers declared to be proof of the imminent release of full FSD to all. However, as a multitude of beta testers released video footage of their experiences, it soon became apparent that FSD City Streets was still far from being a fully autonomous driving system, which is known as Level 5 autonomy in the parlance of the autonomous vehicle (AV) industry.

While some Tesla boosters were eager to portray FSD City Streets as a material step toward Level 5 autonomy, their hopes were soon dashed. In March, PlainSites published a number of communications between Tesla and the California Department of Motor Vehicles from November and December. California's DMV, which is responsible for regulating autonomous vehicle testing within the state, wanted to know whether Tesla was testing a real AV system, which must be carefully tracked and reported, or an ADAS upgrade, which does not.

As Ars Technica explained on March 9, Tesla's answer left little room for ambiguity:

"In its first response, sent in November, Tesla emphasized that the beta software had limited functionality. Tesla told state regulators that the software is 'not capable of recognizing or responding' to 'static objects and road debris, emergency vehicles, construction zones, large uncontrolled intersections with multiple incoming ways, occlusions, adverse weather, complicated or adversarial vehicles in the driving path, and unmapped roads.' In a December follow-up, Tesla added that 'we expect the functionality to remain largely unchanged in a future, full release to the customer fleet.' Tesla added that 'we do not expect significant enhancements' that would 'shift the responsibility for the entire dynamic driving task to the system.' The system 'will continue to be an SAE Level 2, advanced driver-assistance feature.'"

According to Tesla's formal representations to the California DMV, FSD City Streets is a Level 2 driver-assist system that is not, nor is expected to become, a Level 5 system.

Clearly, there is a wide gulf between what Tesla has been saying publicly about its FSD capabilities and what it tells the state authorities privately. While Tesla has been happy to portray its FSD beta to the public as the next step toward genuine autonomy, the reality is far more mundane.

Constant hype fosters overconfidence

Tesla's autonomy claims faced still more scrutiny on May 6, when research website PlainSite published an unredacted communication between the California DMV and Tesla in which a Tesla autonomy engineer directly contradicted Musk's public statements about Tesla's aggressive self-driving timeline. On May 7, Reuters highlighted the clear discrepancy between Tesla's public claims and the reality reported privately to government agencies:

"Tesla CEO Elon Musk said during an earnings conference call in January that he was 'highly confident the car will be able to drive itself with reliability in excess of human this year.' Tesla has also rolled out what it describes as a 'beta' version of its 'full self-driving' (FSD) program to a limited number of employees and customers since October, and Musk has touted the capability on Twitter. ''Elon's tweet does not match engineering reality per CJ. Tesla is at Level 2 currently,' the California DMV said in a memo about its March 9 conference call with Tesla representatives, including autopilot engineer CJ Moore. Level 2 technology refers to a semi-automated driving system, which requires supervision by a human driver."

Tesla's FSD issues are more than a matter of mere "overhyping and under-delivering." They also create grave safety concerns. Specifically, when Musk and other Tesla evangelists espouse the capabilities of Autopilot and FSD, they risk instilling too much confidence in the minds of vehicle owners. After all, Musk has repeatedly regaled the public with promises of full autonomy being achieved within a matter of months.

A Tesla owner might be forgiven for taking Musk at his word and thus conclude that their Autopilot system is far more robust than it actually is. That in turn could create the conditions for potentially dangerous collisions.

There is already substantial evidence that stands in stark contrast to Tesla's safety claims regarding its Autopilot ADAS system. Even the company's own most recent safety report shows a year-over-year increase in collisions, the first time this has occurred since Tesla began publishing safety data. That result would seem to throw into doubt Tesla's assumption that Autoplot safety will consistently improve over time.

My take

Tesla has booked hundreds of millions of dollars in recent quarters by recognizing deferred revenue from FSD sales. This has been possible due to Tesla's apparent progress toward achieving true autonomy. Yet it is abundantly clear that Tesla remains far from achieving that ultimate goal. Indeed, it is unclear whether it ever will.

Should more Tesla buyers pass on adding FSD to their orders, Tesla is liable to face significant margin compression as an essentially 100% margin add-on dries up. Worse still, Tesla risks potential financial and legal risks from those buyers who paid for FSD only to never get what they paid for.

Ultimately, my advice to investors is to reassess any forward-looking assumptions about Tesla based on imminent FSD profits. Level 5 autonomy is still a far-off prospect. When that becomes clearer to more investors, Tesla's valuation may come under pressure.

Disclosure: Author is short Tesla.

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