Tesla is looking beyond electric vehicle sales as it pursues a bigger opportunity in autonomous driving, artificial intelligence and subscription-based software. The company hopes these services will deliver higher profit margins and recurring income as competition from Chinese automakers intensifies.
Elon Musk’s futuristic Roadster demonstration, which saw the vehicle leap and flip through the air using compressed-gas thrusters developed by SpaceX, captured global attention. But behind the spectacle lies a broader ambition to transform Tesla’s business model.
Just five days later, Musk revealed that Tesla and SpaceX were exploring a potential merger. Such a deal could strengthen Tesla’s efforts to develop autonomous-driving technology and compete with rivals that have increasingly sophisticated AI capabilities.
Tesla Wants Software to Become Its Next Big Money Maker
Automakers are increasingly exploring ways to earn money beyond selling vehicles. Software subscriptions and AI-powered services offer the possibility of recurring revenue and potentially higher profit margins than traditional car manufacturing.
Despite Tesla’s growing focus on AI and autonomy, its automotive business remains the company’s financial backbone, generating about 75% of its total revenue, according to the report. That income will be essential as Tesla invests heavily in AI infrastructure and attempts to compete with major technology companies.
However, the competitive landscape has changed considerably since Tesla launched its first battery-powered Roadster in 2008. Chinese manufacturers are gaining ground in electric vehicles while investing aggressively in software, robotics and autonomous driving.
Musk’s earlier ambition to sell 20 million vehicles annually by 2030 has reportedly been scaled back to five million. Even that target will be difficult to achieve, given that Tesla delivered approximately 1.6 million vehicles in the previous year.
Full Self-Driving Could Boost Tesla’s Growth
Tesla’s Full Self-Driving (FSD) software is emerging as a key part of its strategy to increase sales and build a subscription-based revenue stream.
Despite its name, the supervised version of FSD still requires drivers to remain attentive and ready to take control. Nevertheless, Musk argues that the technology gives Tesla a competitive advantage.
During a recent earnings briefing, he pointed to rising demand and the company’s largest vehicle order backlog in four years.
More than 75% of new Teslas sold in North America reportedly included the supervised FSD system. Worldwide, Tesla had 1.7 million active FSD subscriptions, representing a 67% increase from the previous year.
In the United States, the subscription costs $99 per month, although pricing varies across markets. Tesla has not disclosed how much recurring revenue the service generates.
Technology analyst Dan Ives believes FSD could become one of Tesla’s most valuable business segments because software can generate significantly higher margins than selling physical vehicles.
He estimates that expanding adoption from roughly 10–15% of Tesla’s global customer base to around 50% could contribute more to the company’s growth than selling an additional 50,000 to 100,000 cars annually.
The challenge will be persuading more customers to subscribe while securing regulatory approval for the technology in additional markets.
Tesla Faces a Regulatory Battle in Europe
Regulatory restrictions remain a major obstacle to Tesla’s autonomous-driving ambitions. The company has yet to receive approval for its fully autonomous version of FSD.
Its supervised system has been approved in the Netherlands and several other European countries, but Tesla is seeking broader European Union authorization. A vote by member states on wider deployment had been delayed until December, according to the report.
Tesla is also facing competition from Xpeng, the Chinese electric vehicle manufacturer backed by Volkswagen. Xpeng is working with German authorities as it pursues European approval for its XNGP driver-assistance system.
The company is targeting approval after the EU adopts new regulations governing advanced driver assistance and autonomous driving, which were expected early the following year.
The contest highlights the importance of regulation in determining how quickly manufacturers can introduce more advanced driving systems and turn them into commercial products.
Could a Tesla–SpaceX Merger Accelerate AI Development?
A potential merger between Tesla and SpaceX could give Musk’s companies an opportunity to combine expertise in AI, materials research, manufacturing and advanced technology.
The companies could potentially share resources, reduce costs and improve access to critical components such as chips. Supporters believe the arrangement could strengthen Tesla’s ability to compete with Chinese manufacturers and technology companies with substantially larger AI budgets.
Some investors have welcomed the idea, arguing that Tesla could benefit from SpaceX’s technological advances. Industry observers have also suggested that SpaceX’s expertise could contribute to the future of autonomous vehicles and robotics.
However, the proposed deal raises questions about corporate governance and control. According to the report, William Blair analyst Jed Dorsheimer believes Musk could control at least 50% of a combined company if the merger received shareholder and regulatory approval.
Critics have warned that combining the businesses could also concentrate risk. If difficulties in AI or other speculative projects affected the wider group, otherwise successful operations could be exposed to financial and strategic uncertainty.
For now, the merger remains under exploration, and its final structure and implications are unclear.
Traditional Automakers Are Ramping Up Their Own Technology
Tesla’s ambitions are already influencing the wider automotive industry. As electric vehicles increasingly offer comparable driving ranges and prices, manufacturers are searching for new ways to distinguish their products and create additional revenue.
China’s Xpeng, South Korea’s Hyundai and Japan’s Toyota are expanding their robotics operations. In the United States, General Motors and Ford are exploring additional revenue opportunities in energy storage.
General Motors has also recruited former Tesla executive Sterling Anderson to oversee product development, with the goal of creating a new generation of fully autonomous personal vehicles.
European manufacturers are pursuing their own strategies. BMW and Mercedes-Benz have partnered with technology companies such as Qualcomm and Nvidia to develop advanced driver-assistance systems that still require active human supervision.
The industry’s longer-term objective is to develop systems capable of operating with less driver involvement under approved conditions. Such advances could open the door to subscription services that generate recurring revenue for manufacturers.
Volvo is also developing automated-driving technology alongside Nvidia. Its chief executive, Håkan Samuelsson, acknowledged Tesla’s strong position in autonomous-driving development in the Western market, while maintaining that Volvo has its own software strengths.
The Race to Control the Future of Mobility
Tesla’s next phase of growth will depend on whether it can turn its ambitions in autonomous driving, AI and robotics into commercially successful products.
Its expanding FSD subscription base offers a potential foundation for recurring income, but regulatory barriers, technological challenges and intensifying competition could slow progress.
A merger with SpaceX might provide additional resources and accelerate innovation, yet it could also introduce new risks and increase Musk’s control over the combined businesses.
Meanwhile, established automakers and Chinese rivals are investing heavily in their own technologies, determined to secure a place in the next generation of mobility.
Tesla’s challenge is no longer just about selling more electric cars. It is about turning software and autonomy into a profitable business before competitors catch up.