Jul 26, 2019

Axios Navigate

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  • Expert Voices contributor Oren Betzaleli predicts a dramatic increase in cars with over-the-air software updates.
  • Today's Smart Brevity count: 1,289 words, ~ 5 min read.

Heads-up: Every quarter Axios journalists highlight the trends they are watching in politics, energy, science, technology, business and more. As a subscriber to this newsletter, you'll see that in your inbox from Mike Allen on Saturday. 

1 big thing: Tesla's expected AV windfall

Illustration: Sarah Grillo/Axios

Elon Musk predicts full self-driving features — which Tesla is now selling as a $6,000 option on its electric vehicles but aren't yet available — will transform the company's bottom line.

The big picture: Right now, Tesla's Autopilot has only limited self-driving capabilities on highways.

  • When Tesla can offer fully self-driving cars, Musk said this week in Tesla's Q2 earnings call, profit margins will soar to as much as 30% (from today's 19%).
  • Revenue that had been deferred will be recognized, but more importantly, Musk expects orders for the full self-driving package to increase significantly.
"The gross margin over time will be really quite compelling when factoring in the full self-driving option."
— Elon Musk

Between the lines: Tesla had about $1 billion of deferred revenue on its balance sheet as of March 31, for "unsatisfied performance obligations."

  • Deferred revenue is common in businesses where customers prepay for a subscription or service, for example.
  • In Tesla's case, these aren't just self-driving features that have yet to be activated but certain other services, including access to Tesla's Supercharger network and internet connectivity.
  • Of the $1 billion in deferred revenue, Tesla expects to recognize $462.3 million in the next 12 months — a sign that it intends to add some of the promised features. The remainder will be counted over time, up to the 8-year life of the vehicle.

Tesla's timetable for driverless cars is far more ambitious than the rest of the industry.

  • While most carmakers say fully automated vehicles are still a decade away, Musk says Tesla will have a million robotaxis on the road by next year.
  • Tesla timetables have proven unreliable, however, and the company is still working on two promised features — traffic signal recognition and automated city driving — in the "full self-driving" package.
  • Since Tesla says it will keep improving the technology — and raise prices accordingly — the package description could also change.

What to watch: Tesla, which had said it expected to return to profitability in the third quarter, has changed its outlook slightly.

  • The company now says instead of "expecting" a profit, it is "aiming" for one but adds its main focus will be boosting deliveries, expanding factory production and generating cash.
  • Barclays automotive analyst Brian Johnson notes: many weekend athletes "aim" to run a four-minute mile. It doesn't mean they achieve it.

Go deeper:

2. Behind the automakers' emissions deal with California
Gridlock in Boston. Photo: Jessica Rinaldi/The Boston Globe via Getty Images

Major automakers sued California 15 years ago to block its tough emissions laws. Now they are surprising allies in a deal to thwart a major Trump administration regulatory rollback.

Catch up fast: VW, Ford, BMW and Honda this week struck an emissions agreement with California to gradually increase mpg standards through model year 2026, Axios' Ben Geman reports.

  • It rebuffs White House plans to freeze Obama-era emissions and efficiency mandates at current levels.
  • The top-line goals are similar but slightly more modest than the Obama-era rules.
  • The deal would extend what's now a 2025 standard until 2026 and "smooth out the interim years from 2022 through 2025 to provide additional lead time and slightly less aggressive year-over-year reductions," according to California's summary.
  • Per AP, that means new vehicles would average about 36 mpg in real-world driving conditions in model year 2026.

What we're hearing: The 4 automakers are likely to adhere to the deal, even if it doesn't prompt the White House to back off.

  • "Our intention is to honor the agreement with California regardless of other developments," a BMW spokesperson said.

What's next: It's likely other automakers will join, the New York Times says.

Don't forget: A standing reminder about why California matters so much...

  • It's the largest U.S. auto market and has a waiver under the Clean Air Act that gives it power to set tougher rules than federal standards. Roughly a dozen states follow its example.
  • The Trump administration wants to yank that waiver and a legal battle is certain if that goes forward.
  • Automakers' biggest priority is ensuring there's a single nationwide standard to avoid the expensive mess of meeting separate state rules.

Go deeper: Reuters has a piece on this here.

3. Over-the-air updates are convenient but risky

Illustration: Rebecca Zisser/Axios

The next two years will see a dramatic increase in the number of vehicles capable of over-the-air software updates, Oren Betzaleli of Harman writes for Axios Expert Voices.

The big picture: OTA software updates are a convenient delivery method for rolling out new features and protecting increasingly sophisticated vehicles from safety and cyber threats — if the right security and logistics measures are in place.

  • Encrypted software keys and other tools to implement effective safety and security measures will be needed.

Yes, but: Different updates will still likely require varying levels of driver and dealer intervention to complete — and will sometimes need to be idle for a period of time for installation.

  • For instance, cybersecurity updates should be automatic, whereas ADAS-related updates should require driver approval and training on any new features.
  • It could be possible to make any updates that impact vehicle operation active only after the driver views a training video, reads through a tutorial, or receives training from the dealer.
  • Unsuccessful or incompatible installations should automatically roll back to the prior version, ensuring continuity and safety.

What to watch: Tesla was the first to offer OTA updates but now GM is launching a new OTA platform in 2020, FCA will offer OTA in all new vehicles by 2022, and Jaguar plans to expand its OTA rollout after successful tests with management cars.

Read more

Betzaleli is an SVP at Harman, which develops OTA, cloud and cybersecurity systems for automakers, including FCA and Jaguar.

4. Driving the conversation

Unicorn: Supplier to self-driving car makers nears financing at $1 billion valuation (Zoe Bernard and Amir Efrati — The Information) (subscription)

  • Why it matters: Scale is one of many companies whose software helps AV developers train their algorithms to identify objects on the road. Its potential billion-dollar valuation is because it was among the first to annotate three-dimensional data collected using lidar and radar sensors, and not just two-dimensional cameras.

Downfall: Nissan will cut 12,500 jobs, and its chief hints at leaving (Ben Dooley — New York Times)

  • The big picture, per NYT: Nissan's profit "essentially evaporated" in its most recent quarter, underscoring deep problems, including fissures in its alliance with longtime partner Renault plus industry-wide challenges like slowing car sales, global trade friction and the cost of new technologies for electric and automated vehicles.

Partnering: Toyota seeks tech strength with $600 million investment in Didi Chuxing (Mayumi Negishi — Wall Street Journal)

  • My thought bubble: Toyota is spreading its money around as it tries to identify other sources of income beyond car manufacturing. Besides Didi in China, the Japanese company has also invested in Uber in the U.S. and Grab in southeast Asia. With $280 billion in annual revenue, Toyota has the resources to dabble in different business models in various regions.
5. What I'm driving

2019 Toyota Tundra. Photo courtesy of Toyota

This week, I'm driving a 2019 Toyota Tundra Limited double cab pickup truck, which came in handy for hauling our old refrigerator to Habitat for Humanity.

The big picture: Like all Toyotas, the Tundra gets high marks for reliability. The problem is it hasn't received a complete makeover in more than a decade. Up against giants like the Ford F-150, Ram 1500 and Chevrolet Silverado, the Tundra just can't compete.

  • With a 5.7-liter V-8 engine kicking out 381 horsepower, the Tundra is not best-in-class, but it's certainly a capable truck.

Still it falls short in a number of ways:

  • It lacks the bells and whistles that make other modern trucks so useful, like corner steps, configurable tailgates and storage lockboxes.
  • Its 17 mpg highway mileage pales in comparison to Ram's 21 mpg, with a similar-sized engine.
  • It doesn't have a 360-degree camera like most competitors to help maneuver.
  • The infotainment system feels dated, especially compared to Ram's 12-inch portrait touchscreen.

On the plus side, all 2019 Tundras come with Toyota Safety Sense assisted-driving technology, including:

  • Pre-collision warning with pedestrian detection.
  • Lane departure alert with steering assist.
  • Adaptive cruise control.
  • Automatic high beams.

The bottom line: Pickups are the new luxury vehicles, but if you're just looking to move a refrigerator, the $46,610 Tundra might be all you need.