“Almost no one actually realizes how well (supervised) FSD actually works,” he told staff in an internal email. “Going forward, it is mandatory in North America to install and activate FSD V12.3.1 and take customers on a short test ride before handing over the car. I know this will slow down the delivery process, but it is nonetheless a hard requirement.”

According to the CEO, it’s not just new owners who will have a chance to participate either: “All U.S. cars that are capable of FSD will be enabled for a one-month trial this week.” 

There is financial incentive in mandating a demo of FSD upon delivery.

(Tesla's average selling price is $45k; Cost to produce is $36k; Incremental sales of $12k software add-ons is highly gross margin accretive)

But the strategic considerations are probably paramount.

A happy… https://t.co/Wgd1qeBJmI

— Brett Winton (@wintonARK) March 25, 2024

Demand for FSD has struggled after the initial hype in late 2022, when Tesla opened up the beta test to anyone willing to pay after initially limiting its testing program to those U.S. customers with high safety scores. 

However, the beta version that enables FSD activation on all roads, which is not approved for use outside North America, proved highly unreliable from one update to the next. 

Interest therefore remained largely limited to Tesla’s more hard-core enthusiasts willing to pay the high cost—at one point $15,000—for the privilege of being a tester at the forefront of the technology.

Talks to license it to other automakers have also proved fruitless.

In January, Musk estimated the number of cars on North American roads with FSD beta installed had reached a cumulative 400,000 vehicles.

If true, the number has barely changed in roughly a year.

Step change improvement with new AI-enabled software

Things may now begin to change with the switch in December 2023 from hard-coded commands in C++ software to a neural net.

Hopes have since risen that Tesla would finally celebrate its “ChatGPT moment,” when cars could drive entirely on their own without human supervision.

While that hasn’t happened yet, v12.3 recently released to an overwhelmingly positive response.

Musk also further ignited hopes that the software could rapidly iterate now that Tesla, in his words, was no longer AI training compute-restrained.

Such a breakthrough would go a long way in justifying Tesla’s high valuation, especially now that growth has ground to a halt, as software margins can be notoriously high, well into the double digits. 

That is because FSD has upfront costs to develop and continuously update, but each additional license does not come with incremental costs.

FSD is therefore, in theory, easily scalable thanks to over-the-air updates pushed out to the fleet, as every Tesla built comes equipped with the necessary computer, and the software can be installed after purchase.   

Rising FSD demand is sorely needed as it looks increasingly likely that quarterly sales will drop year on year for the first time since the pandemic triggered a minor decline in Q2 of 2020.

Brett Winton, a senior analyst with ARK Invest, supported the carmaker’s decision to make a more concerted push with its proprietary technology.

“People will probably see this as Tesla looking to sell FSD,” he wrote on Monday. “The reality is that FSD will sell Teslas.”