Elon Musk's Biggest Bet After His Return: Will Robotaxi Kill Uber?

$Tesla Motors(TSLA)$   's Robotaxi is set to launch in Austin, Texas next month. On May 21st, Musk announced that he anticipates the autonomous taxi fleet in Austin will expand to 1,000 units within the following months, signaling the commercial debut of Tesla's Robotaxi.

How will autonomous driving affect how people travel? What does it mean for Tesla and its competitors? 

Market Space and Competitive Landscape

The robotaxi industry requires long-term technological research and high R&D expenditures, with only a few tech companies that have sufficient capital and transportation scenarios capable of entering this field. 

Google's Waymo was able to expand before Tesla not only due to years of R&D accumulation but also because its Google Map application provides high-precision maps that shorten the data accumulation period. Tesla's greatest advantage lies in hardware integration, and its software development and deep learning capabilities are equally formidable. In the future, the U.S. autonomous driving field may form a duopoly between Tesla FSD and Google Waymo, similar to the standoff between Apple iOS and Google Android in the mobile internet era.

Other independent third-party autonomous driving technology companies and traditional automakers may find it difficult to enter this field due to technology, ecosystem, and compatibility issues, and are likely to be phased out. General Motors' Cruise and Apple have both announced their exit from this market.

Tesla and Google face a vast blue ocean market. According to Precedence Research, the global market size for Robotaxi is expected to reach $188.9 billion by 2034, with a CAGR of 52.5% from 2024 to 2034. The most important part in the Robotaxi value chain can be classified into a "triangular" model: 1. Autonomous driving technology including algorithm software and core computing chips; 2. Vehicle design and manufacturing; 3. Dispatch platform and services.

Although Tesla has not yet established its own ride-hailing platform and may initially rely on third-party dispatch platforms, it is highly likely to eventually bypass Uber and launch its own app. Meanwhile, Uber may continue its existing partnership with Waymo; its competitor Lyft is expected to collaborate with the Israeli company Mobileye.

Technology Path

Autonomous driving can be classified by different criteria, such as by sensor solutions (cameras vs. lidar), by technological development paths (gradual vs. leapfrog), by map and positioning technologies, and by methods of hardware integration (pre-installed mass production vs. post-installed retrofit).

From the perspective of environmental perception or sensors, autonomous driving technology mainly divides into two solutions: lidar and cameras. Tesla and Waymo's approaches each have their advantages, positioning them to occupy different market segments.

Safety Issue

The most important criterion for autonomous driving is ensuring passenger safety, which requires the vehicle to handle various passive risks from all sides. A key technical indicator is whether the vehicle has an extremely fast response time. Tesla's pure vision system can achieve a response time of 0.05 seconds, while Waymo relies on lidar with a response time of 0.3 seconds. This means that in complex traffic conditions, Tesla has more time to adjust for unexpected behaviors from non-motor vehicles and pedestrians, animals crossing, and non-conventional traffic situations.

 Cost, Pricing, Profitability

Due to the low marginal cost of autonomous driving algorithms, as scale increases, Waymo is expected to gradually realize a positive unit economic model; Tesla's profitability methods are more diversified and cost-effective. Waymo has already established a mature business model in California, holding a market share of over 20% in San Francisco, nearing that of Lyft. With virtually no labor costs, no tips, and lower prices, Waymo is highly competitive in the taxi market. As retrofit costs decrease year by year, Waymo is projected to achieve profitability around 2028.

In comparison, Tesla's profit model is more diversified. First, it profits through direct car sales; second, by directly owning and operating its own Robotaxis through its app; and third, by charging brokerage fees for Tesla vehicles owned by customers joining the Robotaxi fleet during specific periods. 

Considering that Tesla does not require vehicle modifications, its costs will be lower. If deployed on a large scale, this could have a significant impact on Google's Waymo. Musk has repeatedly stated that the per-mile cost of Robotaxi is only about $0.2, far below the $2-3 per mile of traditional taxis. Additionally, Tesla's FSD subscription service for the personal market also provides a continuous cash flow.

After deducting costs such as operations and insurance, the long-term gross margin of Robotaxi is estimated to reach 60-70%. ARK Invest, based on a per-vehicle cost of $15,000, calculates that the gross margin could even reach 80%. Considering the market space mentioned in this article, Tesla is expected to achieve tens of billions of dollars in revenue and tens of billions of dollars in gross profit. Therefore, a market valuation of hundreds of billions of dollars for this business is not unreasonable.

 Legal Regulations: Federal Legislation Still Pending

Regulatory levels for autonomous driving vary by state in the USA, with most state legislations already in effect. The AVIA (Autonomous Vehicle Industry Association) shows the regulatory policies of various states as follows. In California, for example, three types of licenses are issued for autonomous driving: Testing with a Driver; Testing without a Driver; and Deployment, fostering the development of autonomous driving at different stages. The introduction of federal-level legislation in the future is expected to expedite the commercial implementation of autonomous driving across other states.

In April 2024, the U.S. Secretary of Transportation announced a new framework for autonomous vehicles. This framework simplifies processes, helping developers more quickly apply autonomous driving technology on U.S. roads and fostering the establishment of unified national standards to change the situation where each state sets its own rules, reducing compliance costs for businesses. Perhaps, in the near future, autonomous taxis will appear in more cities in the U.S., profoundly changing the way people travel.

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