Tesla’s FSD Strategy
As full-self-driving (FSD) technology continues to roll out across the world. It is fascinating to ponder about the future of FSD. Will there be a monopoly in FSD who licenses its technology to all EV manufacturers? Will automakers develop their own FSD technologies that are embedded in their vehicles only? Or else, will that be multiple developers in the FSD space operating like an oligopoly?
The year 2020 marked a significant year for EV development and FSD development. Despite all the popularity, FSD shared among EV users, companies like Waymo, Tesla, GM Cruise, Argo AI, and Nuro face a series of challenges from engineering, regulatory, and profitability.
Context
What is Full Self Driving (FSD)? FSD represented the highest vehicle autonomy level, where vehicles are enabled to perform point-to-point transport without supervision. The majority of mainstream automakers in 2019 are still moving from Level 1 to Level 2 until the proof-of-(EV)-concept became evident when EV manufacturers began to overcome the issues with battery technology (Cost, Mileage) and safety (Assistance, Materials). Under the environment of Green Energy Advocacy and the potentials of implementing FSD the electric vehicles, consumer demand eventually picked up in 2020
What industries will be disrupted by FSD? The short answers are automakers and transportation.
The auto industry starting from 2010 has emerged a strategic convergence trend, which basically means all manufacturers are just taking their competitor’s best practices. As a result, there is a huge lack of differentiation among the products (vehicles). Automakers are basically only competing in marketing and distributions without the incentives of making investments in technology. The FSD functionality revolutionizes how people commute/drive from point A to point B. It saves time and saves attention, which is going to increase the buyer’s utility substantially.
Not to mention millennials and GenZ increasingly environmental awareness and government’s tax incentives to new electric car buyers, driving both buyer’s share and firm’s share in both an organic way.
The trucking industry represented a staggering $790 billion industry, with over 947,000 full-time employees working as truck drivers. Ride-hailing & Taxi generated over $75.4 billion in 2019 alone, with 3.3 million part-time employees working for only Uber and Lyft in the United States. FSD technology could directly replace most of these drivers for freight companies, implying that driving is no longer considered a career skill.
Trade occupations have been increasingly threatened by technological development. Automated Workforce poses a serious threat to populations lack of income-generating skills, as the BBC suggested that technology will replace up to 20 million jobs by 2030 — Technology will result in more job losses than new opportunities, despite it will enhance the overall welfare of the society by addressing various pain-points.
Tesla seemed like they were driving electric vehicles and leading FSD development. However, from a strategic perspective, Tesla’s strategy or problem-solving approach is fairly different from other EV makers/FSD developers in three major ways.
Strategy 1: Computer Vision vs. LiDar
LiDAR Technology, by definition, is a field of 3D Imaging utilizes laser-scanning technology to detect spacious distance and identify obstacles at a 360 angle. Despite the high development and installation cost, the technology is extremely accurate at detecting objects even up to 500 meters.
By definition, Computer Vision is a field of Artificial Intelligence that trains computers to understand the visual world. This is basically reverse engineering human vision.
LIDAR is a fool’s errand… and anyone relying on LIDAR is doomed. — Elon Musk
In fact, almost all other FSD developers, Uber, Waymo, Ford, GM Cruise, and Toyota all used LIDAR but Tesla, who held a strong opposition against LIDAR. LiDAR is a really safe and technology-driven solution to localize obstacles and identify road situations; however, it comes with a high cost and low adaptability to moving objects.
From a regulatory perspective, LiDAR is more convincing as the technology enables a 360 vision, and multiple companies have already been testing the technology. From a financial perspective, LiDAR requires less road testing as the algorithm does not require to be trained for millions of miles. From a strategic perspective, having LiDAR technology in-house provides future licensing revenue/partnership opportunities. — It makes absolute sense for other companies to adopt LiDAR technology.
However, Tesla is incentivized to not go with LiDAR, mainly because of cost. Elon made an argument that “you don’t need laser tech to perceive road condition, all you need is your eyes, I could still drive with an eye closed.” Being the only FSD develop using computer vision is difficult because of the lack of references and support.
Is one of LiDAR or Computer Vision going to lose? Can they both win? The answer is not sure, but it is a question that regulators or EV buyers are looking closely to address. By finding metrics like “miles per accident,” “regional accidents,” “death/injuries incurred,” etc.
Strategy 2: By State vs By Country
How companies roll-out their products/services differ on a great scale. Waymo/Uber is looking forward to creating Robo Taxis in a state-by-state fashion. Walmart/Nuro is looking forward to creating Electric Freight Trucks on a country basis. Tesla is looking forward to introducing an incremental FSD function in their Tesla Electric Vehicles on a country basis. Toyota/Ford is looking forward to introducing a premium line of FSD Vehicles for sale on a state-by-state basis.
The decisions are technically not made by these companies, but the regulators. To successfully apply for permits of adopting these technologies commercially, companies have to convince them with their research findings, typically with a data-driven approach, explaining Why FSD will increase living standards and reduce the number of accidents. “Regulators are not looking for 90% accuracy (safety measures), not 95%, not 99%, but 99.999%” Elon Musk at China AI Conference in 2019.
While everyone else decided to roll-out at a state level, Tesla decided to roll-out at a country level. While Waymo is convincing states like California and North Carolina, Tesla has been trying to convince the United States, Germany, and China for permits simultaneously. If you were to describe Waymo’s approach is like a pitch to state regulators, Tesla’s approach is like working in a longitude study with federal regulators. This strategy allows Tesla to understand different regions’ expectations and provides them with a time edge as they will take First-To-Market Advantages.
Tesla rolled out its FSD Beta in the United States in Oct 2020, Canada, in Dec 2020. It is prevalent that this progress is unlikely to be achieved/replicated by their competitors in such a short span.
Strategy 3: Investing vs Integrating
Incentives alignment is a big topic of Strategy. Maybe all these FSD developers are working on similar tasks, developing similar technology, and marketing them to similar customer sets. However, there are quite a few players that are INVESTING in FSD; however, there is not many companies that can INTEGRATE FSD into their core businesses.
For example, Waymo is a subsidiary of Google to create a robotaxi platform. Other business segments of Google (Alphabet) is not incentivized to help Waymo out with technological difficulties. There could even be a difficult process for Waymo to raise money/get talents because they compete with other segments of Google, like Stadia and Google Suite.
For example, General Motor’s Argo AI. GM leveraged their manufacturing expertise into developing Robo-taxis that have FSD, without an intention to introduce FSD functions to their vehicles. Like Google, General Motor allocated a budget to Argo ai to develop its operational strategy. Even though it is a greater focus than Google on Waymo, GM is currently seeing Argo ai as a cost center instead of a core practice, likely to stall growth from Argo Ai.
Tesla, with a focus on integration, to include FSD into their car models. It is a differentiation of economic interest alignment, as the company made the transition from charging a unit price for FSD Add-ons to a subscription-based pricing model. It manifests that Tesla will be expecting FSD to another mainstream of organic recurring revenue in the future and its hardware sales. As a result, Tesla can integrate the FSD component into its core business seamlessly.
I hope you all enjoyed reading this article. In the future, I’ll be continuing my pure-strategy bi-weekly updates on Medium. Thumbs up and feedbacks are much appreciated! My name is Alex, a third-year student at Ivey Business School, with interest in Mergers & Acquisition and Strategy.
