[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 from Q4 2021 through 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 5% of the total “Tesla Files”, which is said to be a 100 GB mountain of data taken from Tesla by a whistleblower who witnessed malfeasance. 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, but closed up 15%, which is a $70 billion rise in Tesla’s market value, more than the market caps of BMW, GM, Honda, and Ford. The traded value of Tesla’s stock that day alone was $47 billion which was nearly equal to Ford’s market cap. If you’re still unsure about whether the US stock market is in a bubble, here’s your proof.

China Daily 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.

To this day, Tesla trades at 69x consensus EPS estimates (while its major rivals trade at 8x and are much more profitable). Unlike its rivals, Tesla’s sales are plunging amid a lack of new models. Because of this, Musk has tried since last year to make FSD the focus of attention at Tesla, often saying that Tesla is not a “carmaker”, but an “AI/Robotics” company. There is close to zero disclosure about Tesla’s “AI/Robotics” earnings or capex in any Tesla financial statements.

As I noted in a report after the April 29th 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 driver-assist products like FSD away for free, given the stiff competition in China’s auto market (don’t miss Taylor Ogan’s comments at the end of this report to see how Tesla FSD matches up to Chinese rivals).

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 systems 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 ill-equipped cars while Musk continuously assured investors that FSD would be “feature-complete next year” while rivals idled production due to a lack of chips.

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 really seem to care. Its 2022 warranty provisions dropped by 29% YoY to $1,334 per unit versus 2021’s $1,883 per unit. This might have been due to juicing profits even more ahead of Musk’s $56 billion bonus award that year.

Mind you that on Tesla’s website, they still say that every Tesla sold has the hardware required for “Full Self-Driving”. This report from the Tesla Files proves otherwise. It’s pure fraud. Figure 1 is a screenshot from Tesla’s website.

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

In one communication 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 (Q1 2022 output was ultimately only 305,407 units). It is also noteworthy that Musk received his (now contested) $56 billion bonus award in 2022.

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. Naturally, China had the least customers so was the first choice of exclusion. But as of Q1 2022, 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 these heated negotiations were going on 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. One-chip cars were already 7% of output.

Figure 3: How Many China-Made Teslas Sold Without 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).

In spite of this large gap of FSD-capable cars sold in China, Tesla spiked by 15% on April 29th because of unconfirmed news reports that Tesla might roll FSD out in China. This is complete insanity, especially if all Tesla buyers from 2021 and 2022 in China decide to sue Tesla. The recall costs alone for the steering column would be $1.1 billion in China.

While it is unclear if Tesla cut crucial FSD chips worldwide, we know it did at its Shanghai factory. Here’s a table of my estimates of shipments from Tesla’s Shanghai factory by region. My assumptions are that labor costs in China are half of that in other countries and parts cost 20% less in China.

This leads me to estimate a recall cost of $1.1 billion in China if FSD reaches Level 3 autonomy and $1.4 billion in other countries where costs are higher.

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 studying all things AI and EVs. 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.

If Tesla was experiencing chip shortages as recently as Q1 2023 for key FSD components required for Level 3 autonomy, why is Musk pumping Tesla as 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 NHTSA orders FSD in its current state as 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 slice it or dice 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.