Tesla’s ambition to transform the automotive business is increasingly centred on artificial intelligence (AI), autonomous driving and recurring software revenues, as Elon Musk explores a possible merger between the electric vehicle manufacturer and his rocket company, SpaceX.
The proposal emerged just five days after Tesla’s futuristic Roadster appeared to jump and flip through the air in a spectacular stunt powered by compressed-gas thrusters developed by SpaceX. While the demonstration attracted global attention, the potential merger points to a more consequential strategy: combining automotive engineering, advanced computing and space technology to strengthen Tesla’s position in an increasingly competitive market.
The move comes as traditional carmakers face mounting pressure from Chinese electric vehicle (EV) manufacturers, which are challenging established players on price, production efficiency and technological innovation. Across the industry, manufacturers are seeking to move beyond the conventional model of selling vehicles towards subscription-based services and AI-powered technologies capable of generating recurring income.
“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 technology analyst and partner at merchant bank Yorkville Ives.
Software emerges as Tesla’s next growth engine
Despite its strategic shift towards AI and autonomous driving, Tesla’s automotive business remains central to its financial strength. Vehicle sales account for about 75 per cent of the company’s total revenue, providing the cash needed to finance the substantial investments required to compete with major technology companies.
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| A visualisation of Tesla’s ‘Full Self-Driving’ software in August © Smith Collection/Gado/Getty Images |
Tesla has also moderated its ambitions for vehicle sales. Musk previously targeted annual deliveries of 20 million vehicles by 2030, but that goal has since been reduced to five million. Even the revised target represents a considerable challenge, given that the company delivered approximately 1.6 million vehicles last year.
Analysts believe that expanding adoption of Tesla’s Full Self-Driving (FSD) software could play a critical role in achieving future growth. Despite its name, the company's supervised FSD system still requires drivers to remain behind the wheel and pay full attention to the road.
Tesla lost its position as the world’s largest electric vehicle manufacturer to China’s BYD last year, but Musk maintains that his company retains an advantage in autonomous driving 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,” Musk said during an earnings briefing on Wednesday, when Tesla disclosed that its vehicle order backlog had reached its highest level in four years.
The company reported that more than 75 per cent of new Teslas sold in North America were equipped with its supervised FSD system. Globally, active FSD subscriptions had risen to 1.7 million, representing a 67 per cent increase from a year earlier.
Tesla has not disclosed the recurring revenue generated by the software. Its pricing varies by market, with a monthly subscription costing $99 in the United States.
Nevertheless, analysts view the technology as one of the company's most promising sources of high-margin income. Ives said wider adoption could “transform the whole financial model” if FSD reached about half of Tesla’s global customer base, compared with an estimated 10 to 15 per cent currently.
He argued that expanding software subscriptions could create greater financial value than a relatively modest increase in vehicle deliveries.
“For every dollar of FSD revenue, the market rewards it 50-70 per cent more than that dollar they would generate from selling an actual car,” Ives said.
The argument reflects a broader shift in the automotive industry, where software licensing and subscription services are increasingly viewed as potential sources of predictable income beyond one-off vehicle purchases.
Regulatory hurdles threaten autonomous driving ambitions
Tesla’s software ambitions, however, remain constrained by regulatory requirements. The company has yet to secure approval for its fully autonomous version of FSD, while its supervised system continues to require active human oversight.
In Europe, Tesla is competing with Volkswagen-backed Chinese manufacturer Xpeng to secure approval for advanced driver assistance and autonomous driving technologies.
Tesla’s supervised FSD system has received approval in the Netherlands and several other European countries. However, the company is seeking broader European Union backing to expand its rollout across the bloc, with a vote by member states delayed until December.
Xpeng is also working with German authorities and plans to seek EU approval for its competing XNGP system after the bloc adopts regulations governing advanced driver assistance and autonomous driving, expected early next year.
“We aim to be one of the first,” said Zheng Yeqing, Xpeng’s general counsel.
The regulatory contest highlights the importance of gaining access to major markets as manufacturers attempt to turn autonomous driving from an expensive research project into a commercially viable service.
For Tesla, wider approval would potentially unlock additional subscription revenue while strengthening its competitive position against Chinese manufacturers and established technology companies investing in self-driving systems.
SpaceX merger could strengthen Musk’s technology empire
Against this backdrop, a potential merger with SpaceX could give Tesla access to additional technological capabilities and resources as it competes with rivals backed by substantial AI budgets.
Combining the companies could create opportunities for collaboration in materials science, artificial intelligence, manufacturing and the development of critical components, including computer chips. Supporters believe the arrangement could accelerate research, improve production efficiency and reduce costs across both businesses.
“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 long-term direction of the automotive industry would favour companies capable of integrating vehicles with advanced autonomous systems.
“The future of mobility and vehicles will be autonomous, and autonomy will likely benefit from SpaceX tech,” he said.
Evan Horetsky, a former Tesla executive and founder of industrial project developer Atlas Partners, acknowledged the strength of Chinese manufacturers while cautioning against underestimating Tesla’s technological capabilities.
Chinese EV growth was “phenomenal and predicated on quick and full value chains of manufacturing,” he said, adding that observers should “never underestimate the Tesla team, always pushing technical boundaries in at least autonomy and robotics”.
A top-15 Tesla shareholder has also expressed support for the proposed merger, arguing that the automaker could benefit from “all the AI-related innovations now happening at SpaceX”.
The transaction could also have significant implications for corporate control. According to William Blair analyst Jed Dorsheimer, a merger approved by shareholders and regulators could give Musk control of 50 per cent or more of the combined entity.
However, the potential benefits come with substantial risks. Bringing the businesses together could expose otherwise successful operations to financial and technological difficulties in other parts of the group.
“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.”
Willson warned that problems in AI could spread across the merged group, putting otherwise strong businesses at risk. He argued that SpaceX’s success should be protected rather than used to finance an expanding range of ambitions.
The concerns underline the uncertainty surrounding the proposal, particularly as both companies operate in capital-intensive industries where technological breakthroughs often require substantial and sustained investment.
Global carmakers rethink their business models
Whether or not the merger proceeds, Tesla’s technological ambitions are already influencing the strategies of established automotive manufacturers.
Ferrari chief executive Benedetto Vigna acknowledged the significance of the flying Roadster demonstration at a recent automotive conference in Milan.
The spectacle, he said, “certainly shows that even in the car world there’s a lot to do”.
Across the industry, manufacturers are broadening their ambitions beyond conventional vehicle production. China’s Xpeng, South Korea’s Hyundai and Japan’s Toyota are expanding their robotics operations, while US manufacturers General Motors and Ford are pursuing additional revenue opportunities in energy storage.
Autonomous driving has emerged as a particularly important battleground as electric vehicles become increasingly similar in range, performance and pricing. Manufacturers are therefore looking for ways to differentiate their products through software, advanced driver assistance and other technology-driven services.
Tom Narayan, an analyst at RBC Capital Markets, described Tesla as “a classic case of an innovator that disrupts and the other follows because they don’t want to be left behind”.
General Motors has moved to strengthen its own capabilities, hiring former Tesla executive Sterling Anderson last year to oversee product development. His mandate includes developing a new generation of fully autonomous personal vehicles.
European manufacturers are also pursuing partnerships with technology companies to accelerate development. BMW and Mercedes-Benz, for instance, have worked with companies including Qualcomm and Nvidia on advanced driver assistance systems, including Level 2-plus technologies that still require drivers to monitor the road.
Igal Raichelgauz, chief executive of Israeli autonomous driving technology start-up Autobrains, said leading manufacturers were reconsidering their strategies as they sought to develop more advanced systems and new revenue models.
“The leading carmakers today . . . are trying to reconsider their strategy completely,” he said.
He added that manufacturers wanted to move towards subscription-based services supported by more advanced technology that could eventually allow drivers to take their eyes off the road where legally permitted.
Volvo Cars chief executive Håkan Samuelsson also recognised Tesla’s position in the race for autonomous driving, while maintaining that his company remained strong in software development.
“Tesla is probably leading the development in the west,” he told the Financial Times.
Samuelsson said Volvo would work with Nvidia to develop vehicles capable of automated journeys from door to door, adding that the technology would arrive in a new Volvo model “pretty soon here”.
The next phase of the automotive race
The battle for the future of the car industry is increasingly being fought beyond vehicle design and manufacturing. Software, AI, robotics and autonomous driving are becoming central to how manufacturers compete, generate revenue and retain customers.
For Tesla, the challenge is to turn its technological ambitions into commercially sustainable growth while defending its position against Chinese EV makers and technology companies with significant financial resources.
A potential merger with SpaceX could strengthen that effort, but it would also introduce new questions about corporate governance, financial exposure and the concentration of control under Musk.
Ultimately, Tesla’s next chapter may depend less on how many cars it sells than on how successfully it can transform those vehicles into platforms for recurring software revenue and autonomous services.
The flying Roadster may have captured the public imagination, but the more consequential contest is unfolding in the race to redefine how cars are built, operated and monetised.