Autonomous Driving – End of Cruise

Tesla is the main beneficiary of Cruise’s demise.

• GM’s withdrawal from the robotaxi market is a sign that the economics of this industry are not going to be what Elon promised but it will make it easier for Elon to prove me wrong.
• GM will restructure its autonomous driving unit to focus on equipping GM vehicles with autonomous features and away from becoming a provider of robotaxi services.
• This will involve GM acquiring almost all of the shares in Cruise that it does not own which is where Microsoft’s $800m write-down of its investment in Cruise is coming from.
• This implies that GM has already agreed with Microsoft to acquire its shares at 40% less than what Microsoft paid for them meaning that the new valuation of Cruise is $18bn down from the $30bn where it raised money in 2021.
• I suspect that this is still too high meaning that Microsoft is getting a pretty good deal on its exit from Cruise.
• GM is not giving up on autonomy entirely, but it is giving up on the business model of being a transportation services provider.
• The business will now be focused on offering differentiated autonomous features in GM vehicles for which GM will charge a fee at the point of sale as well as ongoing subscriptions.
• The annual expense rate of Cruise will be halved from $2bn to $1bn and it is in the development of a robotaxi vehicle and the infrastructure required to provide the service where the cuts are going to be made.
• GMs argument for this is almost entirely based on the $10bn that GM has already invested adding weight to what I have long suspected which is that the best option for OEMs is to wait until they need a solution and then buy one off the shelf.
• I have argued for years that the economics of the robotaxi industry are going to be far worse than Tesla has led the market to believe as the $1 per mile price for the service was just not realistic.
• This is because, at $1 per mile, a well-run service will have 70%+ gross margin, attracting many competitors and driving the price down to something closer to 20% gross margin.
• To earn 70%+ gross margin one would need to have the market to oneself which Tesla is never likely to achieve but now that Cruise has ignominiously exited from the market, the probability that I am wrong has risen.
• Tesla’s biggest problem is now Waymo which I think is closer to a working solution than Tesla and will be more than happy to sell its solution to anyone who wants to offer a robotaxi service.
• Hence, I don’t think that Cruise’s exit signals that Tesla will have the robotaxi market to itself, but it does remove one of the major competitors that was going to cause Tesla a lot of trouble.
• The geopolitical situation is also likely to make it more difficult for Chinese players like Pony AI, WeRide & Apollo to compete in US and Western markets, but others such as Mobileye, Nebius, Wayve and so on are still around and ready to compete.
• As a result, the market is still likely to be very competitive meaning that the economics will be very unfavourable meaning that the only way to make a good return will be to achieve large scale.
• Hence, Tesla’s recent rally makes little sense other than a meme trade on US politics and gives me more reason to avoid it.