Tesla has faced a significant challenge regarding its Full Self-Driving (FSD) feature, which it had been selling to customers for years without achieving its promised unsupervised autonomous capability. This reality was starkly revealed during Tesla’s 2026 Q1 earnings call, where CEO Elon Musk admitted that Hardware 3, the computer system launched in 2019 to enable full autonomous driving, simply lacks the necessary memory bandwidth to achieve unsupervised FSD. Musk explained that Hardware 3 possesses only one-eighth the memory bandwidth of Hardware 4, a critical component for true unsupervised FSD.

This admission has raised serious questions for Tesla customers who purchased Hardware 3-equipped vehicles and paid for the FSD feature, potentially leading to a wave of lawsuits and substantial compensation payouts. The situation draws parallels to Volkswagen’s Dieselgate scandal, which reportedly cost the German automaker over $25 billion in total, including fines and compensation to U.S. customers for cars that did not meet emissions standards.

In response to the limitations of Hardware 3, Musk proposed a remedy for affected customers: a discounted trade-in for cars equipped with Hardware 4, or the option to upgrade existing Hardware 3 cars to Hardware 4. However, this upgrade is not straightforward, as it also necessitates the replacement of cameras. To facilitate this complex process efficiently, Tesla plans to establish microfactories or small factories in major metropolitan areas. Musk indicated that converting all Hardware 3 cars to Hardware 4 would be a strategic move in the long run, as it would enable them to join the Robotaxi fleet and support unsupervised FSD.

The financial implications for Tesla are potentially massive. With approximately 4 million Hardware 3-equipped cars built between April 2019 and early 2023, and conversion costs estimated at $1,500–$2,000 per car, the company could face a significant financial hit. This comes at a challenging time for Tesla, which reported its second-worst quarterly profit in five years during Q1 2026, with a net income of $477 million, despite being up 17 percent year-on-year. The company also ended the quarter with 50,000 unsold cars in stock.

Beyond the immediate financial and logistical challenges, a fundamental question remains: will Hardware 4 genuinely deliver unsupervised Full Self-Driving? Since 2021, Musk has championed a vision-only approach, relying solely on cameras and artificial intelligence, to the extent that radar and ultrasonic-sensor systems were removed from Tesla vehicles. Although some Hardware 4-equipped Model S and Model X cars were fitted with a different type of radar in 2023, Musk maintains his conviction that the vision-only method is the exclusive path to achieving Level 4 or 5 autonomous driving capability at scale, drawing an analogy to how humans navigate using only their eyes and brain.