The Electric: Inside Tesla, Analysts Predicted the Robotaxi Could Lose Money
A little over a year ago, Tesla CEO Elon Musk killed the mainstream $25,000 crossover SUV for families and pivoted the company to driverless Robotaxis and other artificial intelligence products. That decision has continued relevance for investors who are looking for Tesla—its share price down 36% this year amid declining vehicle sales—to release much-needed new models to lure customers.
In interviews with former Tesla employees and people familiar with Musk’s thinking for a long article I wrote at The Information this week, I learned that the primary context for his moves was a fixation with AI. Musk—always drawn to big potential impact—decided that the AI revolution was a challenge he had to pursue.
EVs conversely had lost their allure for him: In Musk’s eyes, these people said, he had accomplished his goal of jump-starting the EV industry. What remained was more mundane work, such as pumping out less-meaningful new models and massaging the sensibilities of Wall Street analysts.
The result of these moves will become clear soon. In the coming six weeks or so, Tesla has said it will make two big releases: the launch of the Robotaxi in Austin, Texas, and one or more “affordable” electric vehicles. These won’t be the Model 2, as the $25,000 vehicle is popularly known, but unspecified other cars costing less than Tesla’s Model 3 sedan and Y crossover SUV.
There is reason for skepticism about these coming cheaper cars. Tesla has disclosed no details about them, but leading analysts do not expect completely new models—ones that would open untapped markets and potentially attract customers to Tesla. Instead, they expect scaled-back versions of the Models 3 or Y.
If so, Tesla risks cannibalizing sales of the two original models. And that would make it more likely the company will suffer its second straight year of falling sales.
My story focused on 2022 and 2023, when some of Musk’s most senior lieutenants assigned company analysts to study the financial prospects for the Robotaxi. The studies, carried out by Tesla’s power train, financial and regulatory teams, concluded that the Robotaxi could lose money for years to come and might never be profitable.
If valid, their conclusions could be crucial: Wall Street’s valuation of Tesla is tied significantly to the Robotaxi, a driverless EV without a steering wheel, pedals or rear-view mirrors that the company’s Full Self Driving software would power. In a note to clients on Tuesday, for instance, Alexander Potter, an industry analyst with Piper Sandler, said revenue from FSD and the Robotaxi accounted for the bulk of his 20-year profit outlook for the company.
Musk’s lieutenants urged their boss to hedge his bets by producing both the Robotaxi and the Model 2, which they predicted would sell in the millions per year and bankroll Tesla’s AI efforts.
One of Musk’s big hesitations was whether the compact SUV would make enough money to justify producing it, according to the people I spoke with. One person said the substantial innovations Tesla envisioned for the Model 2, including an unusual manufacturing process, were ultraexpensive.
Musk doubted that Tesla could make the Model 2 cheaply enough or that it would sell as well as his lieutenants predicted without cannibalizing sales of the Model Y, the best-selling car of any type in the world in 2023 and last year. He repeatedly asked his lieutenants why the company couldn’t simply make a cheaper version of the Model Y.
“In order to see revolutionary benefits, the cost differential between your current products and the new products really need to be significant. Otherwise you’re just eating into margins,” one person said.
As it was, Musk had embarked on about $10 billion in spending for 2024 to develop Tesla’s AI products, including chips from Nvidia, sensors for cars and Tesla’s Dojo supercomputer, used to train its self-driving software.
“That’s a lot for a car company, and especially one that has ongoing energy, battery investments, vehicle investments, new factories that need expansion, lots of other projects ongoing,” this person said. “So as demand is sagging, you have some tough decisions to make.”