Tesla Faces Potential Multi-Billion Dollar Liability Over Inadequate Self-Driving Hardware in 4 Million Vehicles

Tesla (NASDAQ: TSLA) may be required to retrofit or financially compensate owners of approximately 4 million vehicles equipped with its HW3 self-driving computer, following CEO Elon Musk’s recent admission that the hardware lacks the capacity to support the promised level-4 or level-5 autonomous driving.

This development could result in one of the most expensive product liabilities in automotive history—potentially exceeding the costs of even the largest recalls to date.

A Decade of Unfulfilled Promises

In 2016, Tesla publicly stated that all vehicles produced from that point forward would include “all the hardware necessary for full self-driving capability.” Over the years, this promise was reiterated by Musk, who suggested that a future software update would transform Tesla vehicles into fully autonomous "robotaxis"—capable of operating without human intervention.

However, nearly a decade later, the overwhelming majority of Tesla vehicles are still not capable of unsupervised autonomous driving, and it has become clear that many never will be.

Hardware Evolution: From HW2.5 to HW4

Tesla originally equipped vehicles with its HW2.5 computer, but quickly transitioned to HW3 starting in 2019, citing HW2.5’s limitations. HW3 was marketed as the foundation for Tesla’s “Full Self-Driving” (FSD) suite and included in vehicles through late 2023. In 2023, Tesla introduced HW4—a significantly more powerful system—on newer models.

Unlike the transition from HW2.5 to HW3, during which Tesla offered free upgrades to FSD buyers, the move to HW4 came with public assurances from Musk that the company’s focus remained on optimizing FSD performance for HW3 vehicles. He even claimed HW4 would “lag behind HW3” in early performance. Those assertions proved short-lived.

By January 2025, Musk acknowledged that HW3 lacks the processing capability to support true autonomous driving. This revelation affects roughly 4 million vehicles globally.

Who Gets a Retrofit—and Who Doesn’t?

Musk stated that Tesla will retrofit HW3-equipped vehicles only if their owners purchased the FSD package. “That’s going to be painful and difficult,” Musk admitted, “but we’ll get it done.” He also downplayed the scale of the challenge by suggesting few customers had opted in.

However, available data tells a different story. By the end of 2022, Tesla had over 400,000 FSD beta testers in North America alone, with global figures likely exceeding 500,000. Retrofitting even that number of vehicles would demand hundreds of thousands of labor hours and cost upward of $500 million—without factoring in the remaining 3.5 million HW3 vehicles whose owners were also led to believe their cars were “robotaxi-ready.”

Legal and Ethical Implications

Tesla’s promise that “all vehicles produced since 2016 have the hardware necessary for full self-driving” now appears to be inaccurate advertising. In fact, in 2022 a judge ordered Tesla to upgrade a customer’s self-driving hardware for free to enable their use of FSD services, establishing legal precedent that could impact other owners—even those who did not initially purchase FSD.

Tesla quietly removed the “hardware-ready” language from its marketing in recent years, possibly in anticipation of these legal challenges. Still, owners of HW3 vehicles—FSD customers or not—have a strong case that their vehicles were misrepresented in terms of technological capability.

Electrek’s Analysis

It remains uncertain whether Tesla will follow through on Musk’s stated intention to upgrade FSD purchasers. The operational burden is immense, and the long-term feasibility of retrofitting aging vehicles with cutting-edge hardware remains questionable.

Tesla has historically used incentives, such as temporary “FSD transfer windows,” to push customers toward purchasing new vehicles rather than investing in upgrades. A similar strategy may emerge in this context—prioritizing trade-ins or buyback schemes rather than wide-scale retrofits.

For HW3 owners who did not purchase the FSD package, legal recourse may be the only option. Several lawsuits are already in progress regarding Tesla’s self-driving claims, and Musk’s public admission is likely to intensify litigation in 2025.

Ultimately, Tesla may face a reckoning that reshapes not only its financial outlook but also public trust in its self-driving roadmap.