oTA software updates vehicles search results
It’s hard to imagine manufacturing cars will someday have the same margins as a hardware-software tech company today. It’s equally hard to imagine how much cars will change in the next decade, from 97% gas-powered and human-directed today, to eventually 100% electric and machine-driven. This shift opens a window for automakers to realize tech-like margins. To succeed, the industry needs to get high-margin software right. Our recent analysis looked at one aspect of the auto software stack, over-the-air (OTA) updates, and found Tesla enjoys a multi-year lead over traditional auto. Closing that gap will be a challenge – another sign legacy automakers are in a tight spot.
As evidence of this lead, Tesla recently released early access to its Full Self-Driving (FSD) beta, a milestone that is at least three years away for traditional auto.
An introduction to vehicle software updates
Historically, when you bought a car, a vehicle’s features were static for the life of the vehicle. However, OTA updates enable a vehicle’s performance and features to be continually updated and improved. Effectively, your car gets better over time. The mechanics of OTA updates are simple, with the software updates delivered remotely through a cellular or WiFi connection (similar to updating apps or the OS on your phone).
OTA report card
Tesla was the first car company to make use of OTA updates in 2012. While legacy automakers have since begun to add some OTA update capabilities, their progress has been slow.
Not all OTAs are created equal
The above report card doesn’t show the full extent of legacy auto’s OTA shortcomings. Today, most automaker’s OTA updates improve a vehicle’s infotainment system (maps, Apple CarPlay, Bluetooth compatibility), which, in our view, does not add material value to a vehicle. On the other hand, Tesla’s OTA updates improve infotainment systems, along with range, autonomy features, braking/acceleration functions, and safety systems.
We believe most legacy automakers are 3-5 years from offering meaningful OTA updates. The reason is that OTA capability is just one piece of the puzzle. There must be important functions built into the car and controlled by software for OTAs to be valuable. Commentary in Tesla’s 2019 10K filing illustrates this point: “Software algorithms control traction, vehicle stability, the acceleration and regenerative braking of the vehicle, climate control and thermal management, and are also used extensively to monitor the charge state of the battery pack and to manage all of its safety systems.”
- Tesla has several underappreciated, unique advantages including their tech brand, battery production, charging network, autopilot data, and over-the-air updates.
- Tesla is the only automaker that is able to perform over-the-air (OTA) updates. Every other car manufacturer requires the car to come in for service to receive an update.
- The power of OTA updates was demonstrated this week after the Model 3 failed to receive Consumer Reports’ recommendation due to long braking distances. Tesla pushed an OTA software update that was able to recalibrate the ABS system and reduce braking distance by 13%. The Model 3 was then retested and earned CR’s recommendation.
- Updating vehicle performance without having to service the vehicle in person shows the real power of OTA updates, which we believe will be a continued advantage for Tesla as vehicles become more reliant on software.
- Because of the heavily entrenched relationships between automakers and dealers, few other vehicles are able to receive OTA updates. This compounds with the fact that Teslas are manufactured with more heavily-integrated software that is able to control more functions of the car.
Friday’s news of Apple’s permit to test self-driving cars in California should not have come as much of a surprise given the poorly kept secret of Project Titan. But the permit begs the question of whether Apple is building a car or just building software for a car.
Tesla will host its AI Day on August 19. We view the event more like the second edition of Autonomy Day, given autonomy is the principal application of AI within Tesla. A key question for investors will be what the latest timeline is for achieving full autonomy. Despite Elon’s ambitious goal of the end of this year, our best guess is that 2025 will be the first year of public availability of level 4 autonomy.
Autonomy timeline aside, what will likely be missed at AI Day, as was the case with Battery Day 2020 and Autonomy Day 2019, is the substance and long-term implications of the technology. The reason it gets missed is that it comes with a high geek factor, which requires sufficient industry knowledge to judge its validity. Absent that industry knowledge, investors tend to downplay the significance of the roadmap.
While autonomy is the primary focus of AI efforts at Tesla, applications of AI will extend beyond it. The private RSVP invite (shared on Twitter) for AI Day indicates the event will showcase AI use cases at Tesla “beyond our vehicle fleet”:
Utilizing AI beyond autonomy resonates with Musk’s comments during Tesla’s Q1 2021 earnings call, in which he said, “I think long term, people will think of Tesla as much as an AI robotics company as we are a car company or an energy company.” Specifically, we expect Tesla will give updates at AI Day regarding its Dojo Supercomputer. Dojo is still in development and will eventually replace Tesla’s existing supercomputer, which is used to train the neural networks that power the software for Autopilot and FSD. Ultimately, Musk has said Tesla will make Dojo available to other companies that want to use it to train their neural networks.
From a business standpoint, we believe extending AI applications outside of full self-driving aligns with Tesla’s broader strategy of leveraging the software and hardware expertise it has built within automotive to enter new markets, including battery storage, HVAC, insurance, and trucking logistics.
What’s changed since Autonomy Day 2019?
As a reminder, in April 2019 Tesla hosted Autonomy Day. Since that event, there have been two notable developments in Tesla’s autonomy approach: