[Tesla Files #2] Tesla Sold 1.2 Million Cars Without a Key FSD Chip Since Q4 2021

In order to meet Q1 2022 production targets, Tesla removed an Infineon chip from the steering racks of all cars made in China between Q4 2021 and at least Q1 2023.

(This report is based on internal information from Tesla that became public after it was posted on Twitter in late December. The portion of the files I have is less than 10% of the total “Tesla Files” which were taken from Tesla by a whistleblower. This is my second report on the Tesla Files. My first “Tesla Files” report was on January 1st and here is the link for your reference. This report exposes more fraud that Tesla committed in China).

On April 29th, Tesla's stock surged by 15% on news that Elon Musk met with China’s Premier, Li Qiang, who reportedly gave Tesla the green light to roll out its “Full Self-Driving” (FSD) product in China.

Tesla’s stock rose as much as 19% intraday and closed up 15%, which is a $70 billion rise in Tesla’s market value, or more than the combined market caps of BMW, GM, Honda, and Ford.

China Daily later reported that Tesla received approval to test its FSD in China but was not given permission for full deployment, as this would involve transferring data from its fleet in China to its US data center (see the article here) which is illegal in China.

As noted in this report after the April 29th “China FSD” stock pump (here), even if Tesla saw a 50% take rate of FSD in China at a $50/month subscription rate (it would have to be half of the US price to attract interest in China), FSD would only provide $180 million in annual revenues or $0.06/share in value.

FSD could actually be worthless as a source of revenue if its rivals in China start giving their more advanced driver-assist products away for free to incentivize sales (see comments from an expert in China below).

Nevertheless, assuming Tesla is serious about moving forward with FSD not only in China but worldwide, this report shows how Tesla could face at least a $2.5 billion recall if it ever reaches Level 3 autonomy. It also implies some big legal liabilities Tesla faces due to cutting corners during the chip shortage as a UK court recently ruled in favor of a Tesla FSD buyer getting a refund due to no “self-driving”:

1. Tesla Removed Crucial Chip for FSD Level 3 in China: During the peak of the semiconductor shortage in 2021, Tesla began removing the second (backup or redundant) chip from its steering rack which is crucial for FSD if it attains Level 3 autonomy (imagine a robotaxi unexpectedly losing steering control because there is physical damage to the communication line or that the processor/chip freezes and has no back-up chip to take over). Tesla decided to do this because only 1% of Chinese customers buy the watered-down version of FSD that Tesla offers in China (it can only do lane changes and I’m told sales staff even advise clients not to buy it). As of November 18, 2021, Tesla had sold 1,516 cars with FSD that only had a single chip in its steering rack and 3,027 cars with Enhanced Autopilot that only had one chip.

2. Chips Also Removed From China-Made Export Vehicles: While initial discussions within Tesla were to only remove the second chip from steering racks shipped within China, the shortage of chips became so dire that Tesla decided to remove them also from cars exported from Shanghai to the EU, the UK, and APAC. While Tesla cars exported to the EU can’t sell FSD yet, they do sell FSD in over 10 regions where Tesla Shanghai exports cars (see Figure 2).

3. Minimum $2.47 Billion Recall Cost Looms: While I’m skeptical about Tesla ever reaching Level 3 autonomy, the replacement of these one-chip steering racks could cost Tesla at least $2.47 billion at current rates. To attain a Level 3 autonomy rating in the US, one needs to have a redundant chip in the steering column. And Tesla knew this, yet plowed ahead with pumping out cars ill-equipped for Level 3 or above autonomy while Musk continuously assured investors that FSD would be “feature-complete next year.” Most automakers around the world idled their factories while searching for new chip supplies for over a year and didn’t see normal flow of automotive chips until 2 years later.

4. Tesla Still Sold One-Chip Cars in Q1 2023: As of March 2023, the website ev-cpo.com used for tracking inventory was still showing Teslas with configuration/option codes for single-chip steering racks available for sale. When inquiries were made about the option codes, Tesla removed access to them in their inventory cars and EV-CPO data disappeared as well. During the peak of the microchip shortage in Q4 2021, Tesla made a clear decision to leave out a redundant chip from the steering racks of cars made in China. During this time, every other carmaker in the world idled production while trying to figure out which alternative chips they could use to get production back up again. Tesla out-produced every rival during this period by not validating alternative chips used to keep production going, as well as pumping FSD despite knowing nearly half of the cars produced lacked a critical chip needed for Level 3 FSD.

5. Tesla Reduced Warranty Provisions in 2022 by 29%: Despite Tesla knowing that the average recall cost of a steering rack without 2 chips would cost around $2,500, Tesla didn’t seem to care. Its 2022 warranty provisions dropped by 29% YoY to $1,334 per unit versus $1,883 per unit in 2021.

Mind you that on Tesla’s website, they still say that every Tesla sold has the hardware required for “Full Self-Driving”. The data and internal communications covered in this report show otherwise and point to fraud. Figure 1 is a screenshot from Tesla’s website.

Figure 1: Tesla Guarantees Full Self-Driving in All of its Cars

In one text message from November 18, 2021, a Tesla technician said that Infineon could only supply 55% of the chips Tesla ordered. That’s when this issue was escalated to Musk.

In Tesla’s 2021 financial disclosures, they reveal that “domestic” pre-tax profits were a loss of $130 million and that “foreign pre-tax profits” were $6.35 billion or basically 100% of total 2021 profits. That’s mostly Tesla’s Shanghai factory, which is why the engineers were toiling over what to do with this steering-rack chip that Infineon didn’t have enough supply for.

From communications in the Tesla Files, it appears that Tesla engineers knew they had a chip shortage problem as early as July 2021. Here is an exchange from a key engineer on November 26, 2021, as the chip shortage became increasingly serious.

“As you may already be aware of, we are de-poping [removing] the secondary chip from EPAS (Electrical Power Assisted Steering) from all GFSH [Gigafactory Shanghai] made non-FSD Model 3 and Y due to supply constraint.”

And, this was all a rushed decision in order to meet Q1 2022 production plans of 357,000 units (which ultimately came in 14.5% below target at 305,407 units).

Figure 2 below shows the FSD take rate by country as of Q4 2021 sent between engineers at Tesla trying to decide which cars bound for which country should have the chip removed. Due to strict national security laws regarding telematics, China has the lowest FSD take rate, which is why Tesla chose to remove the redundant chip needed for Level 3 autonomy or above from cars made in Shanghai. But as of Q1 2022 (the last data set available on this from the Tesla Files), all cars shipped from Shanghai had the FSD chip removed.

Figure 2: FSD % Take Rate by Model & Country as of Q4 2021

At the time of these heated negotiations within Tesla in late 2021, one engineer posted these numbers below to show how much of Tesla’s production in China (domestic sales and exports) was already shipped without the crucial second chip for FSD Level 3 or above. One-chip cars were already 7% of output.

Figure 3: How Many China-Made Teslas Sold Without Crucial FSD Chip as of November 2021

This led to Tesla prioritizing the Infineon chips mainly for the US where the FSD take rate is the highest, while removing it from countries where FSD is unpopular (mainly China). This makes the 15% spike in Tesla’s share price on April 29 over the news of Musk having received a “green light” to roll out FSD in China all the more surprising: How many cars in China have steering racks without the crucial chip needed for Level 3 autonomy?

While it is unclear if Tesla cut crucial FSD chips worldwide, we know it did remove them in order to increase worldwide output at its Shanghai factory during the severe chip shortage. Figure 4 shows my estimates of shipments from Tesla’s Shanghai factory by region. My assumptions are that labor costs in China are half of the industry average in the US and parts cost 20% less in China.

This leads me to estimate a potential recall cost of $1.1 billion in China if FSD ever reaches Level 3 autonomy and Tesla owners in China with only 1 chip in their steering racks choose to purchase FSD. In other countries where the cost of refitting the steering rack with the redundant chip is needed, the cost could be at least $1.4 billion.

Figure 4: Cars Shipped by Tesla From China Without Key FSD Chip

Tesla FSD is a Joke in China Versus the Competition

My “go-to” expert on autonomous vehicle technology is Taylor Ogan, the CEO of Snow Bull Capital who is based in China and analyzes autonomous driving and EVs, along with other new technologies. I had a quick chat with him the other day and he was kind enough to let me quote him. This was a great conversation in light of the fact that Tesla went up $70 billion just 2 weeks before on speculation that it would roll out FSD in China:

• Huawei is the number one supplier of autonomous driving tech in China.

• Huawei sent 24 employees out to test drive Teslas in California during the free trial period Tesla gave for FSD. Their response involved lots of laughter.

• Musk’s meeting with Li Qiang did not get any approval for Tesla’s FSD roll-out in China. There wasn’t even any such news in China.

• Even Chinese EV makers need to go through arduous steps in each city in China to get their Level 2 driver-assist systems approved (none have Level 3 approved as of now).

• Ogan believes the most advanced autonomous driving system is Pony Ai, which has huge operations in China but goes through extremely high hurdles to exchange data between its tests in China and the US (Tesla doesn’t even have sizable data centers in China set up to do the same).

• DJI and NIO are the next contenders to Huawei in autonomy in China, leaving Tesla in the dust.

Final Thoughts: Did Tesla Know FSD Was Far Off?

Musk has been pumping Tesla’s “self-driving” capabilities since 2016. He went on a TED Talk in April 2017 and said, “In November or December of this year we should be able to go from a parking lot in California to a parking lot in New York, no controls touched at any point during the entire journey”. Tesla has yet to achieve this. As pre-tax profits dropped by 27% in 2023 and another 45% YoY in Q1 2024, Musk has been pumping the FSD story even harder and emphasizing that Tesla is an “AI/Robotics” company.

Tesla’s 2022 warranty provisions were only $1,334 per unit sold that year, which is a 29% drop from 2021’s provision of $1,883 per unit. The engineers knew that it would be at least $2,500 to replace the steering racks in cars sold without the redundant chip required for Level 3 FSD. My take is that Musk is lying about FSD becoming “feature-complete” anytime soon.

There is no mention of how much money Tesla generates from AI or Robotics in Tesla’s financial statements. They do state that their deferred FSD revenues are worth $3.5 billion in their recent financial statements, but that would largely be erased by the roughly $2.5 billion in recall costs to replace the 1.17 million cars they shipped from China without the crucial chip needed for Level 3 FSD. Those deferred FSD revenues could also be wiped out if the US traffic safety authority (NHTSA) rules that FSD in its current state is too dangerous to use on US roads.

Figure 5 shows how much Tesla trades at a premium to its main auto rivals. Figure 6 shows how expensive Tesla is compared to other “AI” stocks. No matter how you look at it, Tesla is possibly one of the biggest bubbles in financial history.

Figure 5: Tesla Returns & Valuations vs Auto Rivals

Figure 6: Tesla Returns & Valuations vs the Magnificent 7

Note: Nothing in this report is investment advice.