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Original first release | Jinjiao Finance (ID: F-Jinjiao) Author | Chong Lei, CFA

Musk is in "Mercury retrograde" again.

Tesla's latest second-quarter financial report showed that both operating profit and net profit fell sharply year-on-year, with net profit falling 45% year-on-year.

The highly anticipated driverless taxi (Robotaxi) failed to deliver again, causing the stock price to plummet; the FSD (Full Self Driving) that was about to go global received bad news. The latest investigation showed that the FSD mode has caused fatal collisions in the United States.

However, Musk remains confident. "If you believe we can achieve autonomous driving, buy Tesla stock. If you don't, sell it."

In fact, there is no way out. Dragged into a price war by Chinese automakers, Tesla's "profits will plummet if it wins, and it will lose market share if it doesn't." In the United States, more than half of car owners have returned to fuel vehicles. Musk's "far-ahead" autonomous driving technology is the last bargaining chip for a comeback.

However, autonomous driving technology requires astronomical investment. Musk previously stated that Tesla plans to invest $10 billion in artificial intelligence infrastructure and computing power this year.

The investment of tens of billions of dollars forms a huge gap with Tesla's glacial performance. Musk seems to be chewing glass while staring into the abyss.

This time, whether the dream of driverless cars can become a reality will not only determine whether Tesla can make a comeback, but will also be the key to the future direction of the global new energy vehicle industry.

Dilemma

If you only look at the energy business, Tesla's second-quarter financial report is quite impressive.

In terms of energy integration and energy storage business, revenue in the quarter increased by 100% year-on-year to US$3.014 billion. Tesla said that the installed capacity of energy storage products reached 9.4 GWh in the quarter, an increase of about 132% month-on-month, and the growth rate of energy business revenue will exceed that of the automotive business in 2024.

But the most important business - cars - is disappointing.

Tesla's second-quarter revenue was $25.5 billion, up 2% year-on-year. After deducting $600 million in restructuring and other expenses, operating profit was $1.605 billion and net profit was $1.478 billion. Both figures fell sharply year-on-year, with net profit falling 45% year-on-year.

In the quarter, Tesla delivered a total of 444,000 vehicles worldwide, up 14.8% from the previous quarter and down 4.8% from the previous year. Although the decline narrowed from 8.5% in the first quarter to 4.8%, which was better than the capital market's expectations, the continuous decline reflects the plight of this global electric vehicle leader.

At present, the global new energy vehicle market mainly includes China, Europe and North America, and the sales of new energy vehicles in the three regions will account for as much as 95% of the global sales in 2023.

Tesla has a presence in these three major markets, but the sales growth of new energy vehicles in Europe and the United States has encountered a temporary bottleneck. Although it maintains its dominant position, it is unlikely that Tesla will make more breakthroughs in Europe and the United States in the short term.

As for China, the largest market for new energy vehicles, Tesla is facing many fast-following competitors. For example, BYD's pure electric vehicle sales surpassed Tesla in the fourth quarter of 2023.

According to data from the National Passenger Car Market Information Joint Conference, Tesla China delivered 71,000 vehicles in June 2024, with domestic sales of 59,000 vehicles and the rest exported. Tesla's sales in China have increased month-on-month for two consecutive months, but there is still a significant decline year-on-year.

Also in June, Ideal Auto and Huawei Hongmeng Zhixing sold 47,000 and 46,000 vehicles respectively, gradually approaching Tesla's domestic sales scale. Of course, these two companies mainly focus on extended-range hybrid models.

In the field of pure electric vehicles, Zeekr's sales in June exceeded 20,000 units, and NIO's sales exceeded 20,000 units for two consecutive months, allowing the market to see the erosion of Tesla's market share by domestic new forces.

In addition, Chinese automakers have generally set higher full-year sales targets, which means that more new products may be launched and prices may be further cut in the second half of the year.

For example, on July 1, the Zeekr X model, which originally had a starting price of 200,000 yuan, was remodeled and the price dropped to 179,000 yuan. On the same day, Tesla China announced a five-year interest-free car purchase preferential policy.

This is a microcosm of Tesla being forced to continue the price war.

Tesla has offered discounts and other incentives in both China and the United States over the past period to boost sales.

However, the preferential measures have obviously dragged down Tesla's profitability. In the second quarter, Tesla's automotive business revenue fell 7% year-on-year to US$19.878 billion, and its adjusted profit margin also fell from 18.7% in the second quarter of 2023 to 14.4%.

Tesla has long been lacking new models that surprise the market, and the production of the electric pickup Cybertruck is still struggling to climb. The new platform model will not be launched until 2025, causing Tesla to seem to be caught in a dilemma of "losing market share if it does not expand, and plummeting net profits if it expands."

Naturally, betting on autonomous driving technology has become the key to Tesla's turnaround and comeback.

Repeated delays

Robotaxi is Tesla's highly anticipated growth engine, but its progress in manufacturing the vehicles has not been smooth, and even caused its stock price to plummet.

On July 11, according to relevant media reports, in order to give the project team enough time to manufacture more prototypes, Tesla may postpone the release of Robotaxi for two months. On the same day, Tesla's stock price plummeted 8.44%.

In a recent earnings call, Musk emphasized the prospects and value of autonomous driving. He also disclosed that Robotaxi will be released on October 10 and is expected to start operation before the end of 2025.

Two weeks ago, he said the Robotaxi launch was delayed because he requested some important adjustments to the front of the vehicle, which would also add some new features.

At present, Tesla has not disclosed specific information about the configuration and form of the Robotaxi product. Musk previously said that Tesla plans to own and operate its own fleet, and Tesla owners can voluntarily join or quit at any time.

"You can think of this fleet as a combination of Uber and Airbnb," Musk said. Tesla also plans to add a ride-hailing feature to its own app.

The vision is beautiful, but the capital market is cautious about Tesla's Robotaxi plans.

Morgan Stanley said that autonomous driving technology is affected by a series of unpredictable factors such as laws, regulations, and ethics, and its market penetration may follow a very extreme curve, and the industry is still a long way from the turning point.

The agency predicts that the size of Tesla's Robotaxi fleet will be 1,000 vehicles in 2026, reaching 157,500 vehicles by 2030 and increasing to 1.7 million vehicles in 2035.

It is worth noting that Tesla's Robotaxi has once again sparked debate on technology routes in the industry.

Regarding how to achieve autonomous driving, there have always been two main routes in the industry:

Waymo, which was spun off from Google, advocates a one-step approach, first launching a fully autonomous Robotaxi service in a limited area, and then gradually expanding the scope of services by achieving a high degree of automation in a specific environment and ensuring the reliability and safety of the technology.

Tesla insists on gradual iteration, starting with the assisted driving function, applying its system first on mass-produced models, and gradually improving autonomous driving capabilities through continuous software updates and iterations.

The former was more popular in the capital market in the early period, but due to the limitation of operation scenarios, the scale of vehicles cannot be compared with mass-produced models, and it is difficult to obtain high-value data such as rare scenarios to promote system progress. In addition, this route has not yet completed the commercial closed loop and has not yet achieved profitability.

The above pain points have made Waymo's one-step approach increasingly unsuccessful in recent years. Companies that once followed Waymo have either chosen to sell related businesses or turned to developing assisted autonomous driving systems.

However, what’s interesting is that Caroline, which is more similar to Waymo in China, has been operating in more than 11 cities in China, leaving Waymo far behind, and is expected to become profitable by 2025.

This is not good news for Tesla.

FSD goes global

While Robotaxi is experiencing twists and turns, Tesla's ultimate trump card FSD is expected to go global from North America by 2024.

FSD is an assisted autonomous driving system, which Tesla calls "supervised autonomous driving". It is still being upgraded and iterated. Musk revealed at the earnings conference that after the new version of FSD is launched, Tesla will apply to regulators in China, Europe and other regions, and it is expected to be approved by the end of 2024.

This means that FSD is getting closer to entering China.

There are many voices in the market that believe this is a historic moment and that the entry of Tesla FSD or Robotaxi into China will have an impact comparable to Tesla's local production in China.

This will also bring about a catfish effect, accelerating the improvement of domestic autonomous driving technology.

Regarding the future competition landscape of intelligent driving, many practitioners believe that the business model of autonomous driving technology is similar to that of mobile phone operating systems, and there will not be too many companies in the market in the future. Currently, the world's major mobile phone operating systems are Apple iOS, Google Android and Huawei Hongmeng.

In the Chinese market, Huawei Intelligent Driving is clearly the biggest competitor of Tesla FSD. Some time ago, when talking about Tesla FSD, Yu Chengdong said that even the version without LiDAR of Huawei Intelligent Driving is better than Tesla FSD, and the version with LiDAR has better performance.

"Tesla has a large number of vehicles, a large amount of data, and its FSD is doing well. We also did test comparisons in the United States, Canada, and other countries, and our experience was slightly better. They didn't use lidar, but we did, which made up for the perception ability. In China, we are slightly better than them." Regarding the introduction of Tesla FSD in China, Yu Chengdong expressed his willingness to compete, and only after the competition can we see who does better.

On July 29, Richard Yu revealed that Huawei will release the ADS 3.0 version of its advanced intelligent driving system in August, and the M7 and M9 will be upgraded to ADS 3.0 in September. Huatai Securities Research Report said that ADS 3.0 has achieved progress from simple "obstacle recognition" to in-depth "understanding of driving scenarios" based on the GOD (General Obstacle Detection) network.

It is worth noting that in order to maintain its competitive advantage, Tesla's investment is actually extremely large. Musk has publicly stated that Tesla plans to invest $10 billion in artificial intelligence infrastructure and computing power in 2024. If other companies' investment intensity does not reach this level or their capital utilization efficiency is not high, they will not be able to compete.

However, Tesla FSD's biggest competitor may not be Chinese automakers, but safety challenges. On July 31, local time, Washington state authorities said on Tuesday that they had determined that the Tesla car that hit and killed a motorcyclist near Seattle in April this year was running in FSD mode at the time of the accident.

William Stein, an analyst at Truist Securities, an American investment institution, said that he personally tested Tesla's fully autonomous driving system, but almost had a car accident. In a report to investors, he said that when the car in front had not completed the right turn, the Tesla Model Y he was driving accelerated through the intersection. Without his intervention, a car accident would definitely have occurred. He believed that Tesla FSD had serious safety risks in actual road testing.

Tesla CEO Musk also admitted in a recent earnings call that his past FSD forecasts were "too optimistic." He said that he expects the FSD system to be able to operate without human supervision by the end of this year.

The bad news continues. According to the latest survey data from Edmunds, more than half of Tesla owners in the United States will switch to fuel vehicles in 2024, and only 32% of owners will continue to choose pure electric models.

Specifically, 51% of Tesla owners switched to traditional fuel vehicles, 10% chose hybrid models, and 6% chose plug-in hybrid models. In addition, more and more buyers are replacing Tesla with electric vehicles from other traditional automakers.

In the short term, I'm afraid Musk still has to focus on overcoming the trough, otherwise the dismal financial performance may very likely drag down his ambitions in autonomous driving.

References:

Caixin: Tesla's second-quarter net profit fell 45% year-on-year, and it will release Robotaxi on October 10.

Caixin: Tesla's Robotaxi may be delayed, stock price plummets