Elon Musk’s “flying” Roadster jumped and flipped through the air this month in a stunt that went viral around the world. But his bigger bet is on changing the way Tesla makes money—and the wider car industry is scrambling to catch up.
Five days after the spectacle, made possible by compressed-gas thrusters developed by Musk’s SpaceX, he revealed the companies were exploring a merger that could accelerate his push into autonomous driving.
At stake is more than a technological race. Car groups, already grappling with growing Chinese competition, are seeking to move beyond a business model centered on vehicle sales towards one that also generates recurring revenues from software and AI-powered services.
“Automakers are starting to look in the mirror and the software piece is what they are all looking at as the golden goose, because the margins are so high,” said Dan Ives, a tech analyst and partner at merchant bank Yorkville Ives.
Even with Tesla’s strategic shift in recent years, its car business remains a crucial cash cow for the group, where it generates 75 percent of total revenues and will be pivotal for the heavy spending Tesla will need to make in AI to compete with its Big Tech rivals.
But Musk faces a vastly different competitive environment from 2008, when Tesla launched its first battery-powered Roadster. Chinese rivals are now winning the electric vehicle race while also investing heavily in software and AI to mount a tech challenge in autonomous driving.
Against that backdrop, Musk’s earlier goal to sell 20 million vehicles a year by 2030 has been watered down to 5 million, but even that is ambitious considering it only delivered 1.6 million last year.
Analysts said the near-term key to driving Tesla’s growth to 5 million sales would be its “Full Self-Driving” software, which, despite its name, still requires humans to sit in the driver’s seat and pay full attention.
Although Tesla ceded its position as the world’s largest electric vehicle manufacturer to BYD last year, Musk has claimed his company remains ahead of Chinese competitors in autonomous technology.
“The biggest driver for demand is Full Self-Driving. And today, there’s really no competitor for FSD in any car that you can buy,” he said at an earnings briefing on Wednesday where the company revealed it had its largest car order backlog in four years.
The proportion of new Teslas sold in North America with the company’s supervised version of FSD reached more than 75 percent, while it now has 1.7 million active FSD subscriptions globally, up 67 percent from a year ago.
The company has not disclosed how much recurring revenue is generated by FSD, which is priced differently depending on market but costs $99 a month in the US.
However, Ives noted that the technology was already the highest-margin segment of Tesla’s business, with the potential to “transform the whole financial model” if it were to be expanded to about 50 percent of its global customer base from roughly 10-15 percent at present.
He argued that such an expansion would contribute more to the business than selling an extra 50,000-100,000 cars a year: “For every dollar of FSD revenue, the market rewards it 50-70 percent more than that dollar they would generate from selling an actual car.”
But realizing that potential will depend on overcoming regulatory hurdles in multiple markets.
Tesla has yet to win any approval for its fully autonomous version of FSD.
Musk’s company and Volkswagen-backed Xpeng are in heated competition to win European approval for their advanced driver assistance and autonomous driving systems.
Tesla’s supervised version of FSD has been approved in the Netherlands and several other European countries, but it is seeking wider EU backing to roll it out across the bloc through a vote of member states that has been delayed until December.
Xpeng is working with German authorities and is targeting EU approval for its FSD rival XNGP after the bloc adopts regulations on advanced driver assistance and autonomous driving, expected early next year. “We aim to be one of the first,” said Xpeng’s general counsel Zheng Yeqing.
As competition intensifies, a SpaceX merger could offer Tesla the firepower to take on Chinese rivals as well as big tech groups with far bigger AI budgets.
Combining the businesses would create an integrated company that could accelerate research into materials, AI, and manufacturing while cutting costs and improving access to critical parts such as chips.
“You’re going to see the results of what happens when you have a collaboration with the world’s best car company and the world’s best rocket company,” Musk said at the flying Roadster event.
Lei Xing, founder of Chinese consultancy AutoXing, said “the future of mobility and vehicles will be autonomous, and autonomy will likely benefit from SpaceX tech.”
Evan Horetsky, a former Tesla executive and founder of industrial project developer Atlas Partners, said Chinese EV growth was “phenomenal and predicated on quick and full value chains of manufacturing—but don’t ever underestimate the Tesla team, always pushing technical boundaries in at least autonomy and robotics.”
One top 15 Tesla shareholder said he supported the merger, arguing that Tesla stood to benefit from “all the AI-related innovations now happening at SpaceX.”
The deal could also significantly increase Musk’s control over the businesses. According to William Blair analyst Jed Dorsheimer, the tie-up, if approved by shareholders and regulators, could allow Musk to control 50 percent or more of the merged entity.
But bringing the two businesses together could multiply existing risks.
“I think Elon Musk is playing a dangerous game,” said Max Willson, an industry observer and Tesla enthusiast. “SpaceX and Tesla have achieved extraordinary things, but combining his businesses risks tying their futures to his most speculative bets.”
