Tesla wants software and artificial intelligence to become a larger part of its business as competition in electric vehicles intensifies. The company still depends heavily on car sales, but subscriptions to its supervised Full Self-Driving system offer a potential source of recurring revenue with higher margins.
Cars still fund Tesla’s ambitions
Vehicle sales account for 75 percent of Tesla’s total revenue, making the car business a crucial source of cash for its planned investment in AI. That investment is intended to help Tesla compete with technology companies as well as automakers.
The competitive picture has changed since Tesla launched its first battery-powered Roadster in 2008. Chinese manufacturers are winning ground in electric vehicles while also building software and AI capabilities for autonomous driving. Tesla ceded its position as the world’s largest electric vehicle manufacturer to BYD last year.
Tesla’s target of selling 20 million vehicles a year by 2030 has been reduced to 5 million. Reaching even that goal would be a major increase from the 1.6 million vehicles the company delivered last year.
Subscriptions could change the revenue mix
Analysts see Full Self-Driving, or FSD, as an important near-term lever for demand. Despite its name, Tesla’s system still requires a person in the driver’s seat to pay full attention. Elon Musk has said there is no competitor for FSD in any car available to buy, and Tesla reported its largest car order backlog in four years at an earnings briefing on Wednesday.
More than 75 percent of new Teslas sold in North America now include the supervised version of FSD. Globally, the company has 1.7 million active FSD subscriptions, up 67 percent from a year ago. Tesla has not disclosed the recurring revenue those subscriptions generate. Pricing varies by market, and the service costs $99 a month in the US.
Dan Ives, a tech analyst and partner at merchant bank Yorkville Ives, said FSD is already Tesla’s highest-margin business segment. He said expanding its share of the global customer base from roughly 10-15 percent to about 50 percent could “transform the whole financial model.” In his view, the value investors assign to each dollar of FSD revenue is 50-70 percent higher than for a dollar from car sales.
That comparison points to why recurring software revenue matters: a subscription can continue after the vehicle sale, while each additional car requires another sale. But the opportunity depends on how many customers adopt the feature and whether Tesla can offer it in more markets.
Regulatory approval remains a hurdle
Tesla has not received approval for a fully autonomous version of FSD. Its supervised system has been approved in the Netherlands and several other European countries, but Tesla is seeking wider EU backing to roll it out across the bloc. A vote by member states has been delayed until December.
Tesla is competing with Volkswagen-backed Xpeng for European approval of advanced driver assistance and autonomous driving systems. Xpeng is working with German authorities and aims to win EU approval for its XNGP system after the bloc adopts regulations expected early next year. “We aim to be one of the first,” said Xpeng’s general counsel Zheng Yeqing.
These approvals matter to the software business because regulatory limits can restrict where and how a driver assistance system is offered. Wider access could support subscriber growth; delays leave that growth dependent on a narrower set of markets.
A SpaceX tie-up brings both promise and risk
Musk has said Tesla and SpaceX are exploring a merger. Supporters argue that combining the companies could speed work on materials, AI and manufacturing, reduce costs, and improve access to important parts such as chips. A merger could also give Tesla more resources to compete with Chinese rivals and technology groups with larger AI budgets.
There are governance and business risks alongside the potential benefits. If approved by shareholders and regulators, the deal could allow Musk to control 50 percent or more of the merged company, according to William Blair analyst Jed Dorsheimer. Critics also worry that problems in AI could spread across the combined group and put otherwise strong businesses at risk.
The wider industry is responding to the same pressure. Xpeng, Hyundai and Toyota are expanding robotics businesses, while General Motors and Ford are pursuing energy storage revenue. General Motors hired former Tesla executive Sterling Anderson to oversee product development, with a mandate to develop a new generation of fully autonomous personal cars. The contest is no longer only about selling electric vehicles: automakers are also trying to build software and services customers will keep paying for.