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2 Things Tesla Shareholders Need to Know

Tesla (NASDAQ: TSLA) has seen a flurry of press coverage in recent months, much of which has been focused on its troubles in China. But there's another story evolving as well, and this one deals with the company's pursuit of self-driving cars.

Both of these stories could have short- and long-term impacts on the stock. Here are two things investors need to know about Tesla.

1. Trouble in China

In early 2019, Tesla started construction of Gigafactory Shanghai, making it the first foreign automaker to operate a wholly owned plant in China -- the world's largest electric vehicle (EV) market in terms of cars on the road.

Image source: Tesla.

For years things went very well. Tesla delivered its first China-made Model 3 in late 2019. And despite the coronavirus pandemic, it ramped Model 3 production and started making the Model Y in Shanghai last year. But the trouble arose in April 2021, when an angry customer's protest about quality issues and the safety of Tesla vehicles at the Auto Shanghai expo went viral.

This sparked a consumer backlash in China, as people took to social media, voicing anger over Tesla's perceived arrogance and quality problems. Shortly afterward, the company issued a public apology, promising to create a customer-satisfaction unit in the region.

Then Tesla hit another speed bump in June. After an investigation, a Chinese regulator said the cruise-control system in Tesla vehicles could be inadvertently activated, causing unexpected acceleration. To fix the issue -- which regulators termed a recall -- affected customers had to upgrade the cruise control software remotely (i.e. without a trip to the dealership). In total, over 285,000 vehicles were affected.

That's bad news for Tesla, especially after the recent consumer backlash. But there's a silver lining here: After dipping in April, demand for Tesla vehicles has rebounded in China, as evidenced by growing unit sales on a month-over-month basis.

Unit Sales in China

March 2021

April 2021

May 2021

June 2021

Monthly change

94%

(67%)

88%

28%

Data source: China Passenger Car Association.

China is currently Tesla's second-biggest market behind the U.S., but CEO Elon Musk believes it will eventually be the largest. That makes sense given that the country currently represents nearly half of the EV market worldwide.

Between January and May 2021, Tesla captured 12% of the EV market in China, ranking the company third behind SAIC-GM-Wuling Automobile and BYD Auto. Investors should keep an eye on these figures -- if Tesla is to be a long-term global leader, it needs to be a major player in China.

2. Full self-driving software

Since early 2019, all Tesla vehicles have come equipped with hardware 3.0 -- the third-generation supercomputer that powers its autopilot and full self-driving (FSD) software. Notably, the computer chip used in this hardware is 1,000% more powerful than the previous generation, and Musk has called it "[objectively] the best chip in the world."

Of course, Musk has never shied away from bold claims. In fact, during the company's battery day event last September, he told investors: "About three years from now, we're confident we can make a very compelling $25,000 electric vehicle that's also fully autonomous."

In early July, Tesla moved a little closer to that goal when it released version 9.0 of its FSD software to beta testers. In April, Musk teased the launch on Twitter, saying: "FSD Beta V9.0 will blow your mind." Musk also said the software is achieving higher safety performance with pure vision rather than vision plus radar, referencing the company's decision to rely solely on cameras to provide the input data used by its self-driving cars.

Image source: Tesla.

That's what makes this debut so momentous -- FSD 9.0 is the first version of the software that no longer uses input from radar sensors. This strategy stands in stark contrast to that of rivals like General Motor's Cruise, Intel's Mobileye, and Alphabet's Waymo, all of which rely on radar and lidar to build maps with centimeter-level accuracy.

However, Tesla believes this map-based approach is flawed, citing its lack of scalability. For instance, self-driving cars built on map-based technology would only work safely on roads that have been extensively mapped out. And even then, the slightest change (e.g. a piece of debris) could wreak havoc. By comparison, if Tesla's vision-based approach works, it would theoretically be instantly scalable.

Investors should pay close attention to how well (or poorly) FSD version 9.0 is received. This could be a turning point in Tesla's pursuit of autonomy -- one way or the other.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine owns shares of Tesla. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Tesla, and Twitter. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.


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