Tesla Next FSD Level Game-Changer For Above $200 level

Tesla is preparing to register its 'Full Self-Driving' software with authorities in China in the run up to its planned rollout of the technologically advanced feature this year

The U.S. electric vehicle maker is also considering selling the software as a monthly subscription to users of its cars in China, its second-largest market, they said.

A successful software registration with China's Ministry of Industry and Information Technology will pave the way for Tesla to internally test Full Self-Driving (FSD) by having its employees drive on China's public roads before delivering it as an upgrade to its Chinese users in the coming months, said two of the people. The company currently offers two, less-advanced versions of its Autopilot driver assistance system in China.

The Society of Automotive Engineers (SAE) defines 6 levels of driving automation ranging from 0 (fully manual) to 5 (fully autonomous). These levels have been adopted by the U.S. Department of Transportation.

Most vehicles on the road today are Level 0: manually controlled. The human provides the "dynamic driving task" although there may be systems in place to help the driver. An example would be the emergency braking system―since it technically doesn’t "drive" the vehicle, it does not qualify as automation.

This is the lowest level of automation. The vehicle features a single automated system for driver assistance, such as steering or accelerating (cruise control). Adaptive cruise control, where the vehicle can be kept at a safe distance behind the next car, qualifies as Level 1 because the human driver monitors the other aspects of driving such as steering and braking.

This means advanced driver assistance systems or ADAS. The vehicle can control both steering and accelerating/decelerating. Here the automation falls short of self-driving because a human sits in the driver’s seat and can take control of the car at any time. Tesla Autopilot and Cadillac (General Motors) Super Cruise systems both qualify as Level 2.

The jump from Level 2 to Level 3 is substantial from a technological perspective, but subtle if not negligible from a human perspective. Level 3 vehicles have “environmental detection” capabilities and can make informed decisions for themselves, such as accelerating past a slow-moving vehicle. But―they still require human override. The driver must remain alert and ready to take control if the system is unable to execute the task.

The key difference between Level 3 and Level 4 automation is that Level 4 vehicles can intervene if things go wrong or there is a system failure. In this sense, these cars do not require human interaction in most circumstances. However, a human still has the option to manually override.

Level 5 vehicles do not require human attention―the “dynamic driving task” is eliminated. Level 5 cars won’t even have steering wheels or acceleration/braking pedals. They will be free from geofencing, able to go anywhere and do anything that an experienced human driver can do. Fully autonomous cars are undergoing testing in several pockets of the world, but none are yet available to the general public.

While the future of autonomous vehicles is promising and exciting, mainstream production in the U.S. is still a few years away from anything higher than Level 2. Not because of technological capability, but because of security—or the lack thereof.

This would open up a new revenue source for Tesla from its FSD sales, as the sales volumes in China has fallen by 7.6% in 2024 until April. This is due to the increased discount and competition coming from Chinese EV makers.

There would be at least 10 automakers and suppliers including Huawei and Xpeng in offering so-called level-two autonomous driving capabilities in China. Tesla would face these competition, and for a start.

Tesla CEO has indicated that more fully autonomous vehicles are close, but we will have to see whether Musk mean that Tesla is moving toward Level 3 or higher. If that is the case, then Tesla would be in a good stead for higher stock price gain.

I believe if Tesla CEO has make such an indication, it would be something to do with Tesla’s technology deployed into its FSD.

Traditionally a more rule-based algorithms have been used to train self-driving systems, but Tesla’s model for autonomous driving is known as an end-to-end neural network. This model might allow Tesla to get to the next level faster than its competitors.

The advantage of this model is that the model can allow the self-driving cars that learn faster and make more human-like decisions on the road. And we do see proof that this model is going to be Tesla’s competitive advantage as Huawei and Xpeng also said recently that they had started end-to-end AI model development for autonomous driving that would follow Tesla’s lead.

You might wonder what happen if Tesla’s competitors does catch up? There is another area that Tesla have an advantage over its competitors which is the data and the computing power development needs, Tesla has used a supercomputer it calls Dojo to train the FSD system using video clips from millions of Tesla EVs.

That connected network of vehicles, the world's largest fleet, and the ability to process the data it generates give it a major advantage over any competitors.

So if we were to consider the time and efforts need to capture these data and process it, it is not merely buying more hardware or developing more models. Data collection need to be purposeful and also time-sensitive.

I have previously wrote an article on Tesla target price and I believe it is able to get it. With the development in the FSD now, we are seeing more and more EV makers going into development following Tesla’s end to end model.

But that would take time for these EV makers as the data is not sufficient. So if we look again at Tesla’s estimated target price, I believe above $200 is possible.

As I have mentioned above, looks like Tesla might have been testing its FSD to move one level up higher than L2, as they started selling level 2 to capture the market, this might help the existing car owners to experience how L2 looks like before they get used to higher level of autonomous driving.

This looks like a sound strategy rather than fighting using price, because that is not sustainable. Tesla’s competitive advantage in data and computing power efficiency could be key.

Appreciate if you could share your thoughts in the comment section whether you think Tesla would be gaining more market confidence as we moved into more advanced level of autonomous driving.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.