Tesla Inc (NASDAQ:TSLA) CEO Elon Musk said on Wednesday that the company will likely have to update hardware for customers whose vehicles are equipped with an older version of the AI hardware called Hardware 3, for it to achieve fully unsupervised autonomous driving with full self-driving (FSD) driver assistance software.

What Happened: “I think the honest answer is that we’re going to have to upgrade people’s Hardware 3 computer for those that have bought full self-driving, and that is the honest answer and that’s going to be painful and difficult but we’ll get it done,” Musk said in response to investor questions on its fourth-quarter earnings call on Wednesday.

“Now, I’m kind of glad that not that many people bought the FSD pack,” Musk laughed.

Another Tesla executive, however, said that the company has not yet given up Hardware 3 yet.

Recent versions of Tesla’s FSD were rolled out to vehicles with hardware 4 first and hardware 3 vehicles later, raising doubts about the capacity of hardware 3 to support unsupervised versions of the software.

Why It Matters: Musk himself said during Tesla’s third-quarter earnings call in October that the company is unsure of hardware 3’s capability for fully autonomous driving.

“Hardware 4 has really several times the capability of Hardware 3. It’s easier to get things to work with. Then it takes a lot of effort to sort of squeeze that functionality into Hardware 3,” Musk then said while adding that there is a likelihood that Hardware 3 does not achieve the safety level that allows for unsupervised FSD.

Musk added that the company will upgrade the hardware for those who bought FSD on hardware 3 vehicles, in that case, free of cost to customers.

“And we have designed the system to be upgradeable so it’s really just to sort of switch out the computer thing; the cameras are capable,” Musk then said.

A free upgrade will allow buyers to retain value for the $8000 they spent to purchase FSD capability instead of making a new vehicle purchase. However, the effort might cost the company.

Financial Results: For the fourth quarter, Tesla reported operating expenses of $2.60 billion, marking an increase of 9% year-on-year. The company also warned that it expects operating expenses to increase in 2025 as it seeks to support its “growth initiatives.”

For the entirety of 2024, the company reported a capital expenditure of $11.34 billion, up from $8.9 billion in 2023.

Tesla on Wednesday reported fourth-quarter revenue and earnings below estimates as it resorted to cheap financing and discounts to drive vehicle deliveries in the three months.

The stock, however, rose as much as 5% after-hours on the company’s promises of launching new models in the first half of the year, in addition to other promises regarding the deployment of autonomous vehicles.

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