The Fight for the Top of the Stack

Legacy automakers aren't abandoning the automobile — they're hedging against a future where the metal no longer captures the margin. From Hyundai's robotics push to Tesla's AI ambitions and Toyota's disciplined restraint, the industry is splitting over where durable value will reside.

Legacy automakers are not chasing Tesla's technology. They are reacting to its valuation.

That distinction matters more than most coverage acknowledges.

Tesla's market multiple has never been a reflection of realized platform economics. Full Self-Driving generates no material autonomous revenue. Robotaxi networks do not exist at commercial scale. Optimus is a development program. What markets have priced — repeatedly, stubbornly — is optionality: the possibility that future automotive value migrates beyond the vehicle into software, autonomy, energy infrastructure, and robotics.

That optionality premium forced a question inside every legacy boardroom that no amount of ICE profitability could silence: What if the car itself becomes the lowest-margin layer in the stack?

When Hyundai CEO José Muñoz says he wants Hyundai to become "a tech company, a mobility company that happens to sell cars," he is not dismissing the automobile. He is signaling that Hyundai's leadership believes the vehicle alone may not anchor durable value — and that capital must be deployed accordingly.

Across the legacy landscape, that same signal is being sent. GM is targeting software-derived recurring revenue. Mercedes is building its own operating system. BMW is repositioning software-defined architecture as a core competitive asset.

This represents capital allocation signaling — and the industry is now splitting along the fault line it reveals.

Internal combustion is not disappearing anytime soon.

In many regions it remains dominant. EV adoption is uneven. Political timelines are fluid. Most legacy automakers still generate the majority of their profits from combustion-powered vehicles.

They are not abandoning ICE.

They are hedging against what happens if EV architectures eventually scale to dominance.

Internal combustion engines created mechanical complexity. Complexity rewarded hardware engineering depth. Engineering depth supported differentiation. Differentiation supported pricing power.

EV drivetrains are mechanically simpler. Fewer moving parts. Fewer proprietary tuning advantages once platforms mature. Battery ecosystems are scaling globally. Architectures are converging.

The urgency is structural, not speculative. BYD's reported battery cell cost now sits below $60 per kWh — a threshold that, if sustained at scale, puts EV total cost of ownership at parity with ICE in most major markets without subsidy support. Western OEMs are not close. GM and Ford have both disclosed per-kWh targets in the $80–100 range as medium-term aspirations, not current reality. When a competitor is operating at cost levels you are still treating as a future goal, the margin compression isn't a forecast — it's already in the structure.

That does not mean vehicles become identical. But it does mean the traditional mechanical moat narrows if EVs become the default platform. When hardware complexity compresses, value migrates — upward into software, data ownership, compute and AI integration, digital experience layers, and energy and automation ecosystems.

Legacy OEMs are not walking away from the car. They are hedging against the possibility that the car alone will not sustain their margins.

Tesla began as an automaker trying to prove EVs could outperform gasoline vehicles. Its survival depended on manufacturing scale and battery economics. "Production hell" was existential.

Even today, Tesla's revenue is overwhelmingly automotive. Full Self-Driving remains largely an advanced driver assistance product. Robotaxi networks do not generate material revenue. Optimus is developmental. Energy storage is growing but remains secondary to vehicle sales.

Tesla is not currently an AI platform company in economic terms.

But markets have often valued it as if it might become one.

At peak valuation, Tesla traded at over 100x forward earnings — a multiple that bore no relationship to automotive sector norms and could only be rationalized by pricing in platform adjacencies that had not yet generated revenue. Legacy OEMs, by contrast, have persistently traded at 5–8x earnings regardless of EV investment levels. Capital markets are not rewarding the transition — they are waiting for proof that the transition produces a different business model, not just a different powertrain. That gap is the actual strategic problem legacy OEMs are trying to solve.

Legacy OEMs are not reacting to Tesla's realized platform economics. They are reacting to the possibility that future automotive value may migrate beyond the vehicle itself — into software, autonomy, robotics, energy systems, and other technology layers that sit above or adjacent to the metal.

Whether Tesla captures that value remains uncertain. But the willingness of capital markets to price that possibility forced incumbents to reconsider where long-term value might reside.

Hyundai's robotics investments, GM's software monetization strategy, Mercedes' proprietary operating system, and BMW's push toward software-defined architecture are not rejections of the vehicle-centric industrial model that has defined the auto sector for a century. They are attempts to avoid being confined to it.

The shared logic is straightforward. If EV hardware compresses margins, adjacent technology layers must compensate. If Chinese automakers win on cost, differentiation must migrate upward. If Big Tech controls the digital interface inside the vehicle, OEM pricing power erodes. If capital markets reward recurring digital revenue, industrial cyclicality becomes a structural weakness.

Hyundai's expansion into robotics signals a belief that automation — not just vehicles — may define future value creation. GM's subscription strategy reflects an effort to extract lifetime digital value from each vehicle delivered. Mercedes and BMW are attempting to protect premium positioning by controlling the operating system layer rather than outsourcing it.

None of these companies are exiting the auto business. They are trying to ensure the auto business does not become the lowest-margin layer in a broader technology stack.

The most powerful pressure behind this shift is not Silicon Valley. It is China.

Chinese automakers — led by BYD — are scaling EV production at cost levels Western OEMs struggle to match. They are vertically integrating battery supply, iterating rapidly, and expanding into Europe and other global markets.

The European exposure is already measurable. Chinese EV brands — led by BYD, SAIC's MG, and Geely's portfolio — captured roughly 8% of Western European EV registrations in 2023, up from near zero three years prior. The EU's tariff response, which imposed provisional duties of up to 38% on Chinese-made EVs in 2024, has slowed the trajectory but not reversed the structural cost advantage that enables it. Tariffs compress the timeline; they do not eliminate the underlying competitive asymmetry.

If EV hardware becomes globally competitive on both price and quality, Western OEMs face sustained margin compression in their historical core. And the competition does not stop at vehicles. Chinese firms are expanding into battery energy storage, industrial robotics, and AI-enabled manufacturing systems. This is ecosystem competition.

If Chinese manufacturers dominate cost in hardware while U.S. technology firms dominate the digital interface layer, legacy automakers risk being squeezed from both ends. This is not just an automotive transition. It is a fight over which layer of the stack captures the profit.

Toyota's approach is notably different. It has not aggressively repositioned itself as a tech platform. Instead, it has maintained a multi-pathway powertrain strategy across hybrids, BEVs, and hydrogen; preserved manufacturing discipline and scale efficiency; prioritized capital efficiency over narrative expansion; and integrated software without redefining its identity around it.

Toyota is hedging too. But its hedge is propulsion optionality and capital discipline — not identity transformation.

Where others are preparing for EV dominance and climbing upward into robotics, autonomy, and platform narratives, Toyota is preparing for multiple regulatory and technological outcomes simultaneously. It may believe the greater risk is not failing to become a tech company. It may believe the greater risk is misallocating capital in pursuit of a single forecast.

In a capital-intensive industry defined by long product cycles, restraint may prove to be the superior strategy.

The industry is not dividing into EV believers and ICE defenders. It is dividing into two philosophies about where durable value will reside.

One camp assumes value migrates decisively upward — into digital platforms, automation, AI, robotics, and energy ecosystems — and is repositioning accordingly. The other assumes uncertainty will persist — and that disciplined vehicle production, diversified propulsion bets, and capital efficiency remain the foundation of resilience.

Tesla represents the high-variance bet on upward value migration. Hyundai, GM, Mercedes, and BMW are hedging toward that possibility. Toyota is hedging against overcommitment.

The shift beyond cars is not about abandoning automobiles. It is about the fear that the automobile, by itself, may no longer anchor the industry's economics.

In this transition, identity will not determine survival. Capital allocation will.

The thesis that value migrates upward — from metal to software to autonomy — is a capital allocation bet, not a technological certainty. These are the indicators that will determine whether the bet is paying off.

MB.OS adoption and margin impact. Mercedes has committed significant development capital to its proprietary operating system. Watch for disclosure on third-party developer adoption and, critically, whether software-derived revenue begins to show up in segment reporting. A platform without an ecosystem is an expensive IT project.

GM's software subscription attach rate. GM has publicly targeted $25 billion in software and services revenue by 2030. Current attach rates on features like Super Cruise remain modest relative to that ambition. The delta between the target and the realized rate is the most honest measure of whether the software monetization thesis is real or aspirational.

BYD's European market share post-tariff. If BYD sustains or grows share in Europe despite elevated duties, it signals that the cost advantage is structural enough to absorb policy friction — and that Western OEMs face compression regardless of regulatory protection. If share stalls, the tariff buys time. Watch the quarter-over-quarter registration data, not the annual headline.

Hyundai Boston Dynamics revenue trajectory. Hyundai's robotics bet is the most explicit adjacency play among legacy OEMs. Boston Dynamics remains pre-scale commercially. If Hyundai can demonstrate a credible path to industrial robotics revenue at meaningful scale — not demos, not pilots — the stack-climbing thesis gains its first real proof point outside of software subscriptions.

Toyota's hybrid margin in a softening EV demand environment. If EV adoption continues to slow in key Western markets, Toyota's multi-pathway discipline may produce the best risk-adjusted returns in the sector. Watch whether Toyota's operating margin holds above legacy peer averages — if it does, capital discipline will be vindicated over narrative transformation.

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