Last October, Tesla Motors CEO Elon Musk stepped onstage in Los Angeles to announce the new P85D edition of the Model S and a new semi-autonomous driving feature called AutoPilot. Surprisingly, Musk told the audience that, starting two weeks prior to the event every Model S coming off the line was already equipped with the package of radar, camera and ultrasonic sensors that would enable AutoPilot. The engineers were still working on the software and it would debut in 2015. It’s now August 2015 and AutoPilot still hasn’t been turned on but the company’s second quarter earnings release did make an interesting mention of the new capability.
Like the Super Cruise system that Cadillac will launch on the CT6 next year, AutoPilot combines radar-based adaptive cruise control (ACC), camera-based lane keeping (LKS) and a perimeter array of ultrasonic sensors to enable the Model S to run down the highway hands-free while maintaining a safe following distance to other vehicles. As Musk said in the presentation, every car rolling out of the Fremont, Calif. factory since the beginning of October 2014, has all sensors built in.
The earnings release included this sentence:
Non-GAAP gross margin was about 100 basis points below guidance, primarily due to higher manufacturing and part costs related to the ramp of our small drive unit line and the deferral of revenue recognition for certain Autopilot features which are now scheduled for release later this year.
If you go back and watch the video of Musk’s presentation, there was no mention of pricing for AutoPilot. In fact, the implication was that it would be standard since the hardware is included in every car. However, that deferred revenue statement clearly says otherwise, indicating that there will be additional revenue associated with AutoPilot. I checked with Tesla and it turns that if you go to the build & price section of the website, the pricing has been there for some time.
If you decide to get AutoPilot when you take delivery of the car (and presumably for all customers that have taken delivery since last October prior to the function being released) you’ll have to pony up $2,500. If you opt to add AutoPilot after you’ve been driving the car around for a while, it will cost $3,000. That pricing is pretty reasonable compared buying ACC and LKS on other vehicles which typically run $1,000-1,200 each and AutoPilot has more functionality.
There is a very important business difference between what Tesla is doing and what other companies do. If you go to a Mercedes-Benz, Audi or BMW dealer to buy a car and you opt to not to add ACC or LKS, the sensors are not included and you won’t have the option to change your mind later. While including the hardware and providing the option for a software upgrade later is very customer friendly, it means that Tesla’s manufacturing costs will be higher and margins will be reduced when customers pass on AutoPilot.
The decision to include the sensors on every car built will certainly reduce build complexity for Tesla and they may even get better pricing on the hardware by committing to more volume but it seems unlikely to be enough to offset the hardware cost. It will be interesting to see what kind of take-rate Tesla gets for AutoPilot. Tesla is clearly betting that enough customers will pay for AutoPilot that they will come out ahead overall on the profit margins even when the unactivated hardware is factored in.
Time will tell, but for a company that has been unable to turn a profit after 12 years in business, it’s a risk.