The White House has refused to exempt the “brain” of Tesla’s Autopilot technology from punitive import tariffs, a decision that could endanger the company’s ambitions that were self-driving, TechCrunch has heard.
At a special “autonomy day” event last week, Tesla CEO Elon Musk unveiled innovative Autopilot 3.0 hardware, including a new custom chip meant to enable full self-driving (FSD) operation for each of its new vehicles. This hardware is standard in all new Model 3, S and X vehicles. Clients pay an additional $6,000 for the software update called FSD.
The self-driving hardware resides within the Autopilot ECU (or engine control unit), a module which Tesla describes as the “mind of the vehicle. ” This module is assembled in Shanghai, China, by a company called Quanta Computer.
Tesla’s plans could be affected by a previously unreported decision last month by the White House to not grant the automaker an exemption from tariffs. President Trump imposed these tariffs this past year on a wide selection of imports, including electronic equipment, in a bid to decrease the U.S. trade deficit with China.
Tesla has suggested that the tariffs could make it stop making its self-driving computers in China, thus delaying their introduction and reducing vehicle safety.
“The imposed tariffs are forcing us to either source a new supplier, pass the price increase to the end client, or decrease operational costs within our internal operations, all having a reverse impact for what [we believe] to be the intention of this tariff,” the company wrote in an application to the United States Trade Representative (USTR) on November 16, requesting relief from the tariffs.
But on March 15, the USTR’s general counsel advised Tesla it was denying that the company’s request since it “concerns a product strategically significant or connected to ‘Made in China 2025’ or other Chinese industrial programs. ” The USTR also rejected a retroactive exemption request for heritage Autopilot 2.5 hardware, for the same reason.
Made in China
Made In China 2025 is China&rsquostrategic plan to move to produce higher value goods, especially in the fields of AI, electrical vehicles and robotics. The White House sees the attempt as a direct threat to U.S. domestic tech and automotive businesses.
However, U.S. firms have long been among the largest beneficiaries of Chinese manufacturing experience. Tesla’s Autopilot manufacturing partner in Shanghai, Quanta, has worked with Apple, Amazon and Verizon.
“Tesla was unable to find a [U.S.] manufacturer with the requisite expertise to produce the Autopilot ECU 3.0 with the necessary specifications, at the volume requested and under the timelines necessary for Tesla’s continued growth,” the company wrote.
Tesla claimed that using Quanta wouldn’t help China reach a target for 80 percent of EV earnings to come from Chinese firms. “To the contrary, if granted, the exclusion request would ensure that Tesla is able to keep its edge gained by manufacturing EVs and completed lithium-ion batteries in the United States,” it composed.
Tesla also pointed out that more than 75 percent of the value of this computer’s printed circuit board originates from outside of China. As an example, Tesla’s new cutting-edge neural network chips, which are a vital piece of Autopilot 3.0, are being made by Samsung in Austin, Texas.
The Tariff Effect
However, the White House wasn’t and the USTR’s rejection is likely to hit Tesla hard. The company has told investors that it could not guarantee hitting its gross margin goals now that it has begun selling the lowest-priced Model 3 version.
“These tariffs detract in a very tough industry,” composed Tesla.
Last week, the automaker posted a $702 million reduction in the first quarter of 2019, on the back of lower than expected deliveries, and it just announced its intention to raise about $2.7 billion by selling a mixture of debt and equity. The company originally said it intended to raise $2.3 billion in convertible notes and equity, then upped the total offering just a day later, according to regulatory filings.
Tesla is selling 3.1 million shares at a price of $243 per share through underwriters Goldman Sachs and Citigroup and fostered its convertible notes offering to $1.6 billion, according to filings. Musk is also doubling back on his investment and now intends to buy up to 102,880 stocks in stock worth $25 million.
With limited ability to increase costs or reduce costs, Tesla’s option would be to relocate manufacturing to the United States. However, this comes according to the company.
“Tesla’s decision to begin production [of this Autopilot computer took] from development to production,” it wrote in its application. “With condensed timelines like this, there’s absolutely no leeway to check out a supplier that does not yet have considerable experience … Choosing any other supplier would have postponed the program by 18 months with clean room installation, line identification, and personnel training. ”
Safety concerns
Even more critically, given that Tesla’s present Autopilot technology was connected with multiple crashes and lots of deaths, the company believes that such a move would also have safety implications: “Sourcing a new supplier increases the risk of poor part quality resulting in possible quality issues that would impact the safety of our automobiles and the last product… We cannot risk our clients ’ lives because of flaw from a supplier. ”
The tariffs could even disrupt Tesla’s ongoing research into artificial intelligence, machine learning and computer vision, it fears.
“Tesla&rsquoleadership position is contingent on our ability to deploy these advancements and elements said its application. Musk told investors that freedom would finally make Tesla a $500 billion company, a increase to its valuation today.
Despite its strong wording to the USTR, Tesla has just mentioned the tariffs in investor filings in passing, where it focused on their impact on its bottom line: “Recently increased import duties on certain components used in our products which are sourced from China may increase our costs and negatively impact our operating results. ”
Tesla declined to comment on this story.
Greg Linden is an economist at the University of California, Berkeley, specializing in the supply chain for electronic equipment. “For high-volume and speed, China is the place,” he told TechCrunch at a recent interview. “U.S. companies headed down the China road for board assembly about 25 years ago and never looked back. Suppliers followed, and now China has a heft for high-volume electronics that no country can match. ”
Linden has calculated a U.S.-assembled Apple iPhone could add up to $40 per unit in price, and estimates that building Autopilot 3.0 hardware at the U.S. would lead to an increase of the same order of size.
Lingering exemption requests
Tesla has several more tariff exemption requests outstanding with the U.S. government. A petition to exempt the Model 3’s auto computer, including its media management unit, connectivity board and innovative driver assistance system (ADAS) hardware, was filed at the end of December. Most recently, Tesla last week asked to be excluded from tariffs for specialized aluminum sheets from Japan, needed for lithium ion battery cell fabrication at its Gigafactory in Sparks, Nevada.
But it isn’t all bad news for Musk on the trade front. Last July, The Boring Company requested relief from tariffs on Chinese-made tunneling machinery. It claimed an inability to source tunnel boring machine parts from China would cost jobs and delay its proposed underground Loop transit system between Baltimore and Washington DC up to two decades.
On March 19, the USTR granted a retroactive exemption for imports of tunneling machinery.
Ironically, the autonomous electric vehicles meant for the Baltimore to DC Loop are based on Tesla cars which will probably rely on Autopilot systems being built in China.
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