Tesla Adjusts Pricing As Markets Weigh "Full Self-Driving" Promise

Tesla's continues search for an optimal balance between demand and margins, but these changes hardly matter in the face of its Full Self-Driving ambitions.

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Tesla is not an easy company to cover, given its constant software, strategy and pricing changes. Pricing in particular has been all over the place since the start of 2019, with near-constant changes ever since the expiration of the full $7,500 federal tax credit in the United States. Now, another round of price changes has been announced as Tesla continues to fiddle with its lineup ahead of the rollout of "Full Self-Driving" and "Enhanced Summon" features that CEO Elon Musk says will take Tesla's pricing even further from traditional auto industry norms. As hard as it is to keep track of all these changes, there's a much tougher question facing anyone covering or following Tesla: will Tesla's robotaxi ambitions make these tweaks to its traditional car business totally irrelevant?

After a rough first quarter that saw combined S and X sales drop to just 12,100 vehicles, Q2 deliveries rose again to 17,650 vehicles, supporting Tesla's decision to once again raise the price of entry for the S and X to $80,000 and $85,000 respectively. The now-defunct "Standard Range" Model S and X (the base model after the January cancellation of the 75 kWh version) had only been available for three weeks at the end of the first quarter before being canceled for the first time, and then reintroduced it with the "Raven" upgrade in late April before finally canceling it again this week. The free Ludicrous Mode upgrade with purchase of a Performance Model S or X, which was made available to existing customers when the "Raven" upgrade rolled out, is now standard for all Performance Model S and X purchases instead of a $20,000 option.

The cheapest Teslas now comes with "Pearl White Multi Coat" instead of the standard white that Musk announced would replace the standard black color last month, since two white paint colors "add too much to service complexity" according to Musk on Twitter. In addition to this upgrade (the new base paint previously cost $1,500 extra) Tesla is cutting another $1,000 from the base price of the entry-level Model 3 Standard Range Plus, pricing the most affordable Tesla listed on the company's website at $38,990. According to the Tesla fan blog Electrek, the $35,000 Standard Range Model 3 continues to be available as an "off menu" purchase but only for the North American market. The previously "off-menu" Model 3 Long Range Rear-Drive model has been discontinued.

Tesla's kaleidoscopic pricing and option changes have solidified the California automaker's position as the industry's leading controversy generator, raising questions about demand, margins and even the future of its retail operations and sales strategy while frustrating customers who never know when to buy and when to wait for a deal. Since Tesla proudly avoids market research and no longer has pre-orders with which to gauge demand, the firms seems to always be adjusting some element of its production, pricing and options as it feels around for an optimal equilibrium between volumes and margins. But for all the reading of Tesla's tea leaves that go on with each tweak of its offerings, a much bigger question hangs over Tesla's pricing: why isn't the Full Self-Driving option driving demand for Tesla's vehicles through the roof?

In the wake of the latest pricing changes, Musk took to Twitter to announce that the price of "Full Self-Driving" would increase by $1,000 on August 16 which is roughly when he expects the "Enhanced Summon" feature to reach wide release. Over the course of a remarkable conversation thread, Musk argued that "if we make all cars with FSD package self-driving, as planned, any such Tesla should be worth $100k to $200k as utility increases from ~12 hours/week to ~60 hours/week." When a Tesla owner pushed back on his projections, pointing out that the possibility of generating revenue in the future doesn't make a Tesla an appreciating asset, Musk responded by saying that his Model 3 only needed to achieve a value of $75,000 to become an appreciating asset, and that "something is not a commodity if you can't make enough of them & we won't be able to." The owner seems not to have been particularly convinced by Musk's position, at least in part because the MSRP of his Tesla has fallen from $75,000 to $60,000 in the eight months since he bought it, making it anything but an "appreciating asset."

This awkward exchange is a preview of the tough sales job Musk faces going forward as Tesla's future increasingly relies on its ability to deliver on Musk's promise of self-driving Teslas that can generate tens of thousands of dollars every year for their owners. A significant percentage of new Tesla buyers seem to have some level of confidence in Tesla's ability to deliver Full Self-Driving, with a take rate of over 68% since Autopilot was made standard according to Teslike's order tracker, but that hardly guarantees that Teslas will become appreciating assets. Indeed, the toughest part of Musk's job is explaining why Tesla will sell its cars at all given its challenged profitability and the promise that each car will earn enough revenue to more than pay for itself at retail prices. Steadily raising the price of Full Self-Driving does signal Musk's confidence, but he didn't become a billionaire by selling vehicles with a future value of $100,000 or more for as little as half that much. 

What the high take rate for Full Self-Driving does show is that pricing fluctuations cover a more fundamental shift in Tesla's core business: sales of its cars at current prices and volumes now depend on the promise of Full Self-Driving. Having repeated the promise of appreciating robotaxi Teslas several times now, including at length during the company's Autonomy Day presentations, it's unlikely that anyone who takes Musk's pronouncements at face value hasn't already purchased a vehicle with the option. Until Tesla can convincingly prove that its cars can drive themselves without human supervision, Full Self-Driving seems to have little upside for Tesla on the strength of Musk's word alone. If, on the other hand, confidence fades in Tesla's ability to deliver the unprecedented value proposition of a car that drives itself and pays for itself, Full Self-Driving will become not only a legal and financial liability but potentially a significant headwind on sales as well.

After the challenges of the Model 3's "production hell," Musk has said that he wouldn't bet Tesla's future on a single model again but with Full Self-Driving he's done precisely that. Not only has Tesla taken millions of dollars for the option, which will have to be refunded if it can't deliver, it could lose upwards of half its current sales assuming Musk's promise was a significant factor in purchases with the option. Those two impacts could easily be fatal for the company, even before civil or criminal penalties are imposed for potentially fraudulent sales of a system based on capabilities Tesla was ultimately unable to deliver. If, on the other hand, Tesla is able to deliver on its ambitious promise of Level 5 autonomy without human supervision next year and its vehicles are able to function as robotaxis that earn their owners money when not in use the company will upend everything we know about the car business and effectively create a license to print money.

Tesla has long been a binary faith of test, with observers and investors either fully believing that the startup can transcend the profound challenges of the car business and become a dominant player in the future of mobility or suspecting that the company and its mercurial CEO have only been able to survive this long by exploiting the faith of believers. With new reporting by CNBC's Lora Kolodny showing that Tesla's manufacturing culture remains deeply troubled, and Tesla's pricing and retail strategy in near-constant flux, the company is more of an all-or-nothing bet on Full Self-Driving than ever before. With a $45 billion market cap at stake, the divide between believers and skeptics will only become deeper and the debates over every new piece of news will only become more intense. Until Tesla proves that it can rise above the brutally tough business of profitably building and selling cars and create an autonomy-based business with totally different economics, the ups and downs of its production, deliveries and pricing will become increasingly irrelevant in the face of the biggest gamble the auto industry has seen in recent memory.