Tesla Q1 2023 earnings call (2023)
Questions on ElonsFAQ asked in this interview (14)
Transcript
5:49Martin Viecha (IR)Good afternoon everyone and welcome to Tesla's first quarter 2023 Q&A webcast. My name is Martin Vieja, VP of Industry Relations and I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives.
6:03Martin Viecha (IR)Our Q1 results were announced at about 3pm Central Time in the update deck we published at the same link as this webcast. During this call we will discuss our business outlook and make forward looking statements.
6:16Martin Viecha (IR)These comments are based on our predictions and expectations. As of today, actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the sec.
6:29Martin Viecha (IR)During the question and answer portion of today's call, please limit yourself to one question and one follow up. Please use the raise hand button to join the question queue.
6:39Martin Viecha (IR)But before we jump into Q and A, Elon has some opening remarks.
6:43Zachary Kirkhorn (CFO)Elon?
6:46Elon MuskThank you, Martin. So, just a Q1 recap. Model Y became the best selling vehicle of any kind in Europe and the best selling non pickup vehicle in the United States.
6:57Elon MuskAnd this is in spite of a lot of challenges in production and delivery. So it's a huge credit to the Tesla team for delivering achieving these great results. It is worth pointing out that the current macro environment remains uncertain.
7:13Elon MuskI don't think I'm telling anyone anything people don't already know, especially with large purchases such as cars. And while we reduced prices considerably in early Q1, it's worth noting that our operating margin remains among the best in the industry.
7:29Elon MuskWe've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles over time will be able to generate significant profit through autonomy.
7:47Elon MuskSo we do believe we're like laying the groundwork here. And then it's better to ship a large number of cars at a lower margin and subsequently harvest that margin in the future as we perfect autonomy.
8:04Elon MuskAutonomy. This, this is an extremely important point. Let's see. Regarding the Cybertruck, we continue to build alpha versions of the Cybertruck on our pilot line for testing purposes. It's a great product and we're completing the installation of the volume production line at Giga, Texas and we're anticipating having a delivery event, a great delivery event, probably in Q3.
8:36Elon MuskAs with all new products, it'll follow an S curve of, you know, so production starts out slow and then accelerates. So the cybertruck is no different. So it's, it's you know, there's tremendous amount of demand for the product.
8:55Elon MuskObviously it is my view, a fantastic product, a hall of famer. But as with, as with all new products, it takes time to get the manufacturing line going and this is really a very radical product.
9:11Elon MuskIt's not, it's not made in the way that other cars are made. So let's see, with regards to Megapack, we're making great progress. Our energy storage deployment reached nearly 4 gigawatt hours in Q1, so by far the strongest quarter ever.
9:27Elon MuskAnd this growth was achieved thanks to the ongoing ramp at our mega factory in Lathrop, California. There's still some way to go to reach the full run rate of 40 gigawatt hours per year.
9:39Elon MuskAnd then we additionally announced the start of a new mega factory in Shanghai. So we're, as we've expected, the stationary storage growth actually will significantly exceed the vehicle growth.
9:58Elon MuskRegarding autopilot and full self driving, we've now crossed over 150 million miles driven by full self driving beta and this number is growing exponentially. We're, this is a data advantage that really no one else has.
10:14Elon MuskThose who understand AI will understand the importance of data, of training data and how fundamental that is to achieving an incredible outcome. So yeah, so we're also very focused on improving our neural net training capabilities, as is one of the main limiting factors of achieving full autonomy.
10:41Elon MuskSo we're continuing to, to simultaneously make significant purchases of Nvidia GPUs and also putting a lot of effort into Dojo, which we believe has the potential for an order of magnitude improvement in the cost of training.
11:01Elon MuskAnd it also, Dojo also has the potential to become a sellable service that would offer to other companies in the same way that Amazon Web Services, you know, offers more web services, even though it started out as, as a bookstore.
11:17Elon MuskSo I really think that, yeah, the Dojo potential is very significant. In conclusion, we're taking a view that we want to keep making and selling as many cars as we can, despite this being an uncertain macro environment.
11:32Elon MuskThis is a good time to increase our lead further and we'll continue to invest in growth as fast as possible. Once again, I'd like to give a huge thanks to Altez employees worldwide for doing an incredible job again and yeah, super appreciated.
11:53Martin Viecha (IR)Thank you very much. And Zach has some remarks as well.
11:57Zachary Kirkhorn (CFO)Yeah, thanks Martin. I want to start by congratulating the Tesla team for record vehicle production and deliveries. And I also want to congratulate our energy storage team for record volumes as well.
12:09Zachary Kirkhorn (CFO)There's three main points I want to make first automotive gross margin and operating margin reduced sequentially, but as Elon mentioned, these remain at healthy levels. In particular, automotive gross margin was impacted by a few factors since our discussion on the last earnings call, which include additional action taken in the second half of the quarter to improve vehicle pricing and one time items, most notably warranty adjustments on older S and X vehicles as well as increased deferred revenue for certain autopilot features as we transition technologies.
12:41Zachary Kirkhorn (CFO)Progress on vehicle cost reduction continued in Q1 with meaningful improvements on logistics and the beginnings of some commodity cost reductions starting to be realized. Per unit costs for Austin and Berlin improved as well, driven by record volumes.
12:56Zachary Kirkhorn (CFO)However, these factories still provide a margin headwind and will likely continue to do so until after we reach and stabilize at our intended volumes. Note that Q1 was our third quarter in our multi quarter plan to move to a more regionally balanced mix of build and deliveries.
13:12Zachary Kirkhorn (CFO)As I've mentioned previously, this results in lower deliveries and production within a quarter due to a higher volume of cars in transit at the end of the quarter and has an associated impact on quarter ending free cash flows.
13:24Zachary Kirkhorn (CFO)This was particularly prevalent in Q1 for S& X as we began exporting cars for international deliveries. Second, our storage business is starting to take shape and this is exciting to see.
13:36Zachary Kirkhorn (CFO)After many years of investment and focus, this business is growing as a percentage of the businesses of the company's revenue and reached its highest level yet in Q1 driven by an increasing rate of deliveries for our megapack products.
13:49Zachary Kirkhorn (CFO)We are also making progress on storage profitability, generating our highest gross profit yet in the quarter. Third, I want to reiterate the philosophy by which we are operating the business this year.
14:00Zachary Kirkhorn (CFO)Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses. We plan to continue to invest heavily into our future plans which include the cybertruck next generation platform in house cell production, energy storage business and our autonomy and AI enabled products and we plan to do this while keeping the business financially healthy and industry leading.
14:23Zachary Kirkhorn (CFO)To accomplish this we need to remain focused on cost efficiency and working capital and in particular unwinding the strategic inventory buildup left over from the pandemic. I want to conclude by thanking the Tesla team again as well as thanking our suppliers and our customers.
14:40Martin Viecha (IR)Thank you very much and let's go to Investor questions on sei.com the first one is what is the process to make auto pricing adjustments? What variables do you consider?
14:51Martin Viecha (IR)How frequently do you review pricing?
15:01Zachary Kirkhorn (CFO)Do you want to take that Elon or do you Want me to take it?
15:04Elon MuskMy apologies. Sorry, I was on mute. Yeah, I think this is not something that we. We can really talk about. It's just we do our best to evaluate the, you know, the production output, macroeconomic conditions, and we make a decision, but it's.
15:20Elon MuskYeah. Unless it's something you'd like to add, Zach.
15:24Zachary Kirkhorn (CFO)I think that's right. I mean, as a team, we review where we stand globally on a weekly basis and certainly can't get into the details of the reasons why certain decisions are made.
15:33Zachary Kirkhorn (CFO)But it is something that's very actively managed by a subset of the leadership team. Thank you.
15:41Martin Viecha (IR)The second question is, do you still believe Tesla Energy will be bigger than Auto? And when will you provide more formal guidance on megapack and overall Tesla Energy?
15:53Elon MuskYeah, I should just clarify, like, bigger than auto from the standpoint of like
15:58Analysttotal
16:00Elon Muskgigawatt hours deployed. So it's possible automotive revenue may be higher, but gigawatt hours I think will be probably higher. With stationary storage, if you just look at the. What's needed to transition the world to a sustainable energy economy, there is more stationary energy storage needed than there is mobile energy storage.
16:21Tesla ExecutiveSo.
16:24Elon MuskAnd we are seeing growth of our stationary storage while in excess of automotive. So that is in line with expectations.
16:38AnalystYeah.
16:38Zachary Kirkhorn (CFO)And on the guidance part of the question, and maybe, Martin, we can combine this with the next question, which is on guidance for margins. Just have a single comment there.
16:48Zachary Kirkhorn (CFO)You know, I think we are. We will get to the point where we as a company provide guidance on the storage business. I say storage is a combination of both the megapack business and the powerwall business.
17:01Zachary Kirkhorn (CFO)Relative to total of the company, it's still fairly small. And the business has a lot of volatility currently, both in terms of volumes as well as financials, just given the small volumes and kind of diversification of the customer.
17:17Zachary Kirkhorn (CFO)A pool there. But as this business grows and smooths out, I don't think we're that far away from it. You know, I think including these volumes on our day two production and deliveries release is something that we'll start doing and then we can talk more formally as a business about our expectations over the coming year.
17:36Zachary Kirkhorn (CFO)I think it'll be a few more quarters before we get there.
17:40Elon MuskThank you.
17:42Martin Viecha (IR)The next question, as you said, was already answered, so let's go to the battery question.
17:46Zachary Kirkhorn (CFO)Just one other thing I wanted to mention on margin, you know, while we're not providing specific guidance there, I mean, just to set expectations of where we think this business will go in terms of margins you know, probably generally in the ballpark of what we've seen historically on the vehicle business.
18:03Zachary Kirkhorn (CFO)You know, we generally look to mid 20% gross margins for any program that we launch. And so we're not there yet on this business, but that's what we're working towards.
18:14Elon MuskWe're hopeful to get there later this year, but that's not a promise. That's, that's an aspiration.
18:21Martin Viecha (IR)Thank you. The next question is how well are 4,680 cells meeting the expectations described on the battery day? How long will it be until the cells meet those goals?
18:32AnalystDrew?
18:33Drew BaglinoYeah. So on battery day, we established a cost down roadmap through 2026 across five areas of effort. There was the cell design we discussed anode cathode materials, the structural pack concept, and the cell factory itself.
18:48Drew BaglinoWe've been making progress across all these aspects since then. For the cell factory, the, the Texas 4680 factory, we, you know, are partway through building and commissioning and installing and operating will be 70% lower capex per gigawatt hour than typical cell factories when fully ramped in line with what we described on battery day.
19:07Drew BaglinoAnd we're continuing to further pursue densification and investment reduction opportunities in future factory buildouts like in Nevada. On the cell design, we're in production with not only the first generation tablet cell we unveiled on battery day, but a second more manufactured version in Texas today.
19:22Drew BaglinoOn the cathode material side, we have a number of activities underway per the battery day roadmap for lithium. Our Corpus Christi lithium refinery breaks ground this May. Our goal is to start commissioning portions of the facility for the end of the year.
19:37Drew BaglinoThe refinery uses the sulfate free spodumene refining process with reduced process costs. No acid or caustic reagents, lower embodied energy and actually produces a beneficial byproduct that can be repurposed in construction materials.
19:51Drew BaglinoWe discussed all of these concepts on battery day. Same with cathode precursor. We've successfully demonstrated a lower process cost, zero wastewater precursor process that we described on battery day at both lab and pilot scale and are on the detailed design phase for incorporating this technology into the front end of our Austin cathode facility.
20:11Drew BaglinoOn cathode production, we are 50% equipment and 75% utilities installed at our new cathode building in Austin with our goal to begin dry and wet commissioning this quarter and next quarter with a target to produce first material before the end of the year.
20:26Martin Viecha (IR)Structural pack.
20:27Drew BaglinoWe saw big improvements with pack manufacturing with the 4680 cell and the structural pack concept, 50% lower capex and 66% smaller factory for the same output in gigawatt hours per year.
20:41Drew BaglinoYou know, we do believe structural is as a concept is a good one.
20:44AnalystIt's simpler.
20:46Drew BaglinoWe'll continue to structurally load the cells and use the pack as the floor of the vehicle while iterating the design to closer to B level. Execution of this A level architecture in future programs and zooming out for the 4680 team, Q1 was all about cost and quality.
21:01Drew BaglinoWe made significant improvements in both areas. In Texas, production increased 50% quarter over quarter, through yields increased 12% and Cato peak rate increased by 20% and through yields improved by 20%.
21:14Drew BaglinoAltogether, the team accomplished a 25% reduction in COGS over the quarter. And we are on track to achieve steady state cost targets over the next 12 months and going forward the rest of the year.
21:26Drew BaglinoThe priority one is yielding cost for the 4680 program as we steadily ramp production ahead of cybertruck next year.
21:34Martin Viecha (IR)Thank you very much. The next question is, what do you anticipate 2023 automotive gross margins X credits will be at the company's current pricing levels?
21:49Zachary Kirkhorn (CFO)Yeah, I can start off on this one. You know, this is a difficult environment to make a projection like this. You know, there's a lot of macro uncertainty. There's also headwinds and tailwinds.
22:03Zachary Kirkhorn (CFO)And you know, this is basically a question I think that's asking about our viewpoint on where costs will go. And within costs, there's a set of costs in which we do control the set of costs in which we're kind of subject to what's going on in the macro world within the bucket of things we control.
22:24Zachary Kirkhorn (CFO)You know, most of the cost down that we're working on is around ramping our Austin factory, stabilizing that and then doing the cost optimization work once we get to our intended volumes there.
22:38Zachary Kirkhorn (CFO)And a part of the cost journey in the Austin factory is, as Drew mentioned, the 4680 cell, which is an input into our Austin cogs. And so, you know, as the 4680 program improves over the course of the year on cost, as Drew mentioned, and then the non cell portion of the factory improves, we see a pretty good trajectory in the Austin facility.
23:00Zachary Kirkhorn (CFO)A similar story exists in the Berlin factory. It does not have 4680 as an input. But for that factory, the journey to complete localization is still ongoing. And so over the course of this year, as volume increases, more localization occurs.
23:18Zachary Kirkhorn (CFO)We do see a good path to cost reduction in the Berlin factory as well in existing factories, too. We talk about this on every call, so I don't need to rehash it.
23:27Zachary Kirkhorn (CFO)But the expectation is that every existing factory improves all of their key metrics, and we continue to see the progress there. There's also a handful of other costs in which we have influence.
23:40Zachary Kirkhorn (CFO)But the philosophy here is that we're aggressively going across every cost bucket that we can within the world, that we don't control. The two major costs there being logistics, which fortunately is moving in our favor.
23:53Zachary Kirkhorn (CFO)And I think our supply chain team has done a great job both on logistics optimization and taking advantage of reduced spot rates where they can. So thank you to our supply chain team.
24:04Zachary Kirkhorn (CFO)And then there's the commodities world, which has been a huge page point in our cost structure over the last, say, two years or so. And we're still kind of at the maximum of paying for commodities in our cost structure.
24:19Zachary Kirkhorn (CFO)Kind of maximize it maxed out in the second half of last year. We did start to see in Q1 a little bit of improvement. We think there'll be a little bit more improvement in Q2, but lithium has dropped a lot.
24:34Elon MuskIt's worth mentioning that the price of lithium has dropped significantly.
24:37Zachary Kirkhorn (CFO)Yeah. And that's the piece that we expect to see more impact from in Q2. And generally, as a company, we do expect commodity prices to come down and have a more meaningful impact in the second half of the year.
24:49AnalystYeah.
24:50Zachary Kirkhorn (CFO)So, you know, this is our approach, how that nets out. I mean, there's just a lot of risk, and we'll have to see how the year progresses.
25:01Martin Viecha (IR)Thank you. The next question is how has global order intake tracked since the most recent round of price cuts?
25:10Elon MuskI think the overall thing we can say is that orders are in excess of production.
25:19Martin Viecha (IR)Thank you. And maybe the last question from investors. Can you give updated specs and pricing for Cybertruck and any new features that will make it to production?
25:31Elon MuskWell, I think we'll save that for
25:33Drew Baglinothe
25:35Elon Muskcybertruck handover, which will hopefully be around the end of Q3 this year. And one thing I am confident of saying is that it's an incredible product. It's a Hall of Famer, I think.
25:50Elon MuskAnd a product like this only comes along once in a long while, so people will not be disappointed at all. It's amazing.
26:01AnalystGreat.
26:02Martin Viecha (IR)Thank you very much. And let's go to analyst questions. We'll start with Alex Potter from Piper Sandler. Alex, go ahead and unmute.
26:12Elon MuskCan you hear me?
26:13AnalystYep.
26:14Elon MuskYes, okay, perfect.
26:16AnalystSo first question was on Lathrop, obviously, that's, it's great to see the growth there. Just wondering when you think that facility might be closer to full utilization. Are you just sort of deliberately working your way up the S curve there?
26:32AnalystDemand obviously isn't the limitation.
26:34Elon MuskSo what are you, what are the
26:35Analyststeps, I guess, to unlocking full utilization there?
26:43Drew BaglinoSure, there are some classic factory ramp aspects of what's going on in Lathrop. We actually have two phases of the CAPEX there. We faced some of the general assembly parts of the facility.
26:55Drew BaglinoBut in addition, we also have ramps with our suppliers that we are following. So both on the, on the cell side and on the power electronic side. And we will see that unlock in the latter half of this year with both those inputs.
27:10Drew BaglinoSo the overall facility was phased with the second phase of CAPEX coming online towards the end of this year.
27:20AnalystOkay, great. And then I guess my second question is on your ability to serve other markets out of Shanghai. Obviously the facility in Berlin should be opening up your ability to, I guess, allocate more vehicles to Southeast Asia, Australia, other areas.
27:35AnalystI'm just wondering what other regions you think you're maybe not yet serving effectively. What are your timelines for addressing some of those gaps in your regional exposure? Thanks.
27:47Elon MuskYeah, that's a good question because there are still many parts of the world that we do not yet serve with respect to vehicles especially. So we do expect to open up new markets around the world.
28:00Elon MuskAnd while those markets are not necessarily individually gigantic, they do add up to, you know, if you add up a whole bunch of markets, they do collectively sum up to something significant.
28:13Elon MuskSo it's high time that Tesla offered its cars to the rest of the world. And that is something that we intend to do.
28:25Martin Viecha (IR)Thank you very much. Let's go to the next analyst, George from Kenacourt. Go ahead and unmute.
28:32AnalystHi, thanks for taking my question. I was wondering first if you could discuss your FSD take rates and whether you've seen any significant positive or negative change there. And also, given that you've reduced the prices for your vehicles, do you think you need to do that for FSD as well?
28:51Martin Viecha (IR)Thanks.
28:55Elon MuskI'll be kind to answer the details on the FSD take rate. But the. It's a tricky pricing question because the value of a car that is autonomous is enormous.
29:09Elon MuskSo in a way, the price right now is an option value on an autonomous vehicle and that value will ultimately be very significant. And, you know, it's really, really.
29:28Elon MuskYeah. I mean, for those that are Using the FSD beta. I think you can see the improvements are really quite dramatic. You know, there'll be a little bit of two steps forward, one step back between releases and for those trying the beta, but the, the trend is very clearly towards full self driving towards full autonomy.
29:52Elon MuskAnd you know, I hesitate to say this, but I think we'll do it this year. So that's what it looks like.
30:04AnalystYeah. Thank you. Maybe on the dramatic change we've seen in EV related commodity prices, do you think it's a reflection of any recent overcapacity in mining and refining or is that sort of a coincident indicator on global EV demand and how do you expect those prices to kind of track
30:28Vaibhav Tanejaover the next several quarters?
30:29AnalystThank you.
30:31Elon MuskAnd I wish I had a crystal ball to answer your question. I, I don't know if we can provide a question that would, with, with that would have any value really.
30:46Elon MuskIt's, I think we're in uncertain times and if somebody's got a crystal ball they can lend me, I'd really like to borrow it. But you know, these are, these are uncertain times.
31:01Elon MuskYou know, my guess is this, it's you know, economic stormy weather for about a year or so and then roughly 12 months. And then this is my guess, it's just pure speculation stormy weather for about 12 months and then provided there are no major geopolitical wild cards that show
31:22Tesla Executiveup,
31:25Elon Muskthings start getting sunny around spring next year.
31:31Drew BaglinoThe only thing I would say on
31:32Tesla Executivethe
31:34Drew BaglinoEV materials markets, they're not all super liquid. And some of them, for example, less than single digit percentage of the market is actually traded on the spot market. And not only are they not super liquid, there's not like storage isn't particularly facile for all of the materials.
31:52Drew BaglinoSo like small mismatches in supply and demand drive like large price swings. Not, not really real price swings, but just like temporarily large price swings. So it's hard to read into those price swings.
32:04Drew BaglinoI don't know Karna, if you want
32:06Vaibhav Tanejathis Karl, by the way, we are seeing, you know, as Elon mentioned, quite a bit of softening in the lithium carbonate market. This was, you know, six months ago we were trading at like $85,000 a ton and today's spot price is about 26.
32:19Vaibhav TanejaSo there's been a dramatic decrease in that. Of course we were able to take advantage of low lithium pricing earlier on with fixed price contracts. And we find that this is going to be another opportunity, opportune moment, basically extend that into the later half of the decade.
32:35Vaibhav TanejaBut you know the quantities we're procuring. We're not as impacted by the spot market because we have those contracts in place and we're just going to be going and doing more of that.
32:47Vaibhav TanejaThe other thing that's happening is because of the price spike, a lot of the companies that are in this business are becoming more ambitious about finding more upstream resources and exploring locations in Africa as well as South America.
33:00Vaibhav TanejaSo that's also helping the macro situation with pricing.
33:04Elon MuskYeah, but just on the lithium front to reemphasize, the choke point is much more on refining capacity than it is on mining. Lithium is actually very common throughout the world, including in the US and really it's just a very common element on Earth is lithium.
33:26Elon MuskSo it's much more a question of where's the refining capacity and can the refining capacity keep up. That's really what matters more than where is the lithium ore. It's everywhere, basically.
33:42Elon MuskI think that same question also extends to refining of the cathode and to some degree, refining of the anode. And this is why we've, at Tesla, we're building our, you know, lithium refinery capability at Corpus Christi and our cathode refinery outside Austin.
34:09Elon MuskIt's worth noting, like, I hope other companies do the same thing. We'll have by far the most lithium refining capability and the most cathode refining capability in North America.
34:24Elon MuskI think probably more than everyone else combined by a lot. So can other people please do this work? That would be great. We're begging you. We don't want to do it.
34:40Elon MuskCan someone please, instead of making a picture sharing app, please refine lithium mining and refining heavy industry? Come on.
34:51Drew BaglinoIt's fun. It's actually fun.
34:52Elon MuskYeah, yeah, exactly. It's real.
34:55Zachary Kirkhorn (CFO)You have a customer. We're here, ready to buy.
34:58AnalystYeah, that's right.
35:00Elon MuskI just want to emphasize Tesla's not doing this because we want to do it. We have a lot of, we have a lot of fish to fry, obviously, but we're doing it because others aren't doing it and we wish others would do it.
35:13Martin Viecha (IR)Awesome. Thank you very much. Let's go to Emmanuel Rosner from Deutsche Bank.
35:24Elon MuskHey, Emmanuel, can you hear me?
35:26Tesla ExecutiveYeah, we can.
35:26AnalystYep. Perfect. Thank you so much for taking my questions. Maybe your first question for Elon on your pricing strategy. So if I understand your message, you're saying, you know, Tesla feels it's worth maximizing the volume, increasing the size of the fleet as fast as you can because you'll be able to monetize this over the, the life cycle of the vehicle.
35:48AnalystCould you be a little bit more specific around ways you would be able to monetize sort of like this existing fleet in the future? Obviously, I think autonomous seems to be a big piece of it by my understanding was that robotaxi would probably be for the next generation vehicle, not the existing one.
36:05AnalystSo I guess in which ways would you monetize it?
36:08Elon MuskSorry, the robotaxi terminology can be a bit confusing because that's sort of like a generic term for our next generation vehicle. And we obviously are working on next generation vehicle.
36:21Elon MuskThat's going to be very compelling. This is just not the time to talk about it in detail as product. So we internally call it robo taxi. But really all of the vehicles that have hardware three, which is the vast majority of our fleet, we believe will achieve full autonomy.
36:40Elon MuskSo they will be robo, they will be a rope like a Model 3 or Model Y would be a robo taxi, a robotic taxi. So yeah, that's the best of our knowledge that we believe the current hardware can achieve full autonomy.
36:58Elon MuskUnderstood.
37:00AnalystAnd then maybe a question for Zach. Back on the automotive gross margins, I think, I guess a few months ago, even after major price cuts, you felt pretty strongly that 20% automotive gross margin was still probably a reasonable floor.
37:17AnalystObviously the macro has gone worse and additional price cuts have happened. Is there anything else that has changed in terms of the outlook? Is it just the macro deteriorating?
37:27AnalystIs it the competitive landscape? Anything else that's makes you think differently around the full year? And is there a way therefore to frame a floor?
37:39Zachary Kirkhorn (CFO)Yeah, about half of the myths against that previous conversation last quarter is attributed to adjustments we made in pricing in the second half of the quarter. I guess you could argue that that that lowers the floor in a sense.
38:00Zachary Kirkhorn (CFO)We've also made pricing adjustments so far this quarter, you know, so that brings it down further. About the other half of the myth in Q1 was attributed to things that are non recurring.
38:16Zachary Kirkhorn (CFO)So I mentioned these in my opening remarks. The warranty adjustment for cars that were previously produced, but not part of the pedigree of cars we're building now. And some autopilot related deferrals as we make some technology changes here that those deferrals should get recognized once some of the software catches up.
38:38Zachary Kirkhorn (CFO)So those two things are non repeating. So hopefully that helps answer your question.
38:44Elon MuskYeah, I mean there's really two macro factors that are tricky, the biggest being the interest rate. So if there's a very high Fed rate or interest rates are very high, every time the Fed raises interest Rates that's equivalent to increasing the price of a car.
39:06Elon MuskIt makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So, so it's just almost directly equivalent to a price increase is any kind of interest rate increase.
39:24Elon MuskThen the other factor is whenever there's uncertainty in the economy, people will generally postpone. Big new capital purchases like a new car. So there's a natural human reaction. So if people are reading about layoffs and whatnot in the press, they're like, well they might be worried about, they might be laid off, so then they'll be naturally a little more hesitant than they would otherwise be to buy a new car.
39:55Elon MuskNow this, this is just the nature of the auto industry. You know it, but, but there is, there will be tremendous amount of pent up demand for new cars.
40:06Zachary Kirkhorn (CFO)So.
40:07Elon MuskBut it goes through cycles.
40:13Martin Viecha (IR)Thank you. Let's go to Ben Kalo from Baird. Ben, go ahead and unmute.
40:19AnalystHey guys. You know Elon, when you talk about many fish to fry, you talked about dojo being a product that you could sell outside of Tesla. How do we, how do we rank all the things you have going on and then in the economic environment, I mean like heat pumps and everything else you have going on versus you know, investing in the vehicle business, there's not that, not the right way to look at it.
40:50Elon MuskI'm not sure I fully understand your question. But the, the, you know, I look at dojo as like kind of a long shot bet. But if it's a long shot bet that pays off, it'll pay off in
41:02Tesla Executivea very, very big way.
41:06Elon MuskBut potentially, you know. Yeah, potentially in a very, very big way.
41:11Tesla ExecutiveLike
41:14Elon Muskyou know, in the multi hundred billion dollar level. But it, but the thing with like, you know, still put it in the long shot category, but long shot with a multi hundred billion dollar, you know, potential outcome.
41:29Elon MuskAnd so it's a bet worth making but not one you can take. You can sort of say like, you know, take it to the bank type of thing. Although these days take it to the bank, it's maybe not as secure as it used to be.
41:46Elon MuskSo, and obviously we're big believes in heat pumps, you know, and that is on our list that, you know, over time is to do a really good heat pump for homes and you know, commercial offices and stuff.
42:05Elon MuskAnd we have the technology, it's really good. But it's, it's still, it's, it's a back burner item, you know, focuses very much on, on vehicles Autonomy, stationary storage, basically as solving sustainable energy and solving autonomy, which would be, you know, like I said, solving autonomy.
42:28Elon MuskIf we're able to have a fleet of several million vehicles that with a software update can, can be potentially worth several times their original value. That's. That, that will be.
42:40Elon MuskIf that happens. That will be the. And I think it will happen. That'll be the biggest asset value increase in history, I think.
42:50AnalystThank you. Just on pricing, a lot of pundits talk about pie and losing share or gaining share and. But how do you guys look at pricing versus EVs or ICE vehicles or does that not come into the equation?
43:09AnalystSorry to ask about price again. Thank you.
43:12Elon MuskNo, it's really just like, you know, we're. Every day we get a daily real time update of how many cars were ordered yesterday. How many cars were produced yesterday.
43:25Elon MuskWe must have.
43:25Tesla ExecutiveI.
43:26Elon MuskIf there's a company that's got more real time data than Tesla, you know, I'm not sure, I'm not sure there's any company on earth that has better real time data than Tesla.
43:37Elon MuskExcept maybe SpaceX, Starlink, you know, so, because, because like we don't have to, you know, for the other car companies, they will make the cars, send them to the dealers, then the dealers will sell the cars and you know, and then it takes quite a long time for them to get the data back to actually figure out how many cars are sold.
43:57Elon MuskWhereas we know how many cars were ordered yesterday throughout the world. So, so our fingers on the pulse is real time and does not have latency. Whereas the other car companies have a lot of latency in their data, as does the government.
44:13Elon MuskThe government has a lot of latency in their data. So we're just looking at and saying,
44:17Tesla Executiveokay,
44:20Elon Muskyou know, what does it take to achieve a clearing price for our vehicle production? And then we make a pricing change and we see what happens immediately and adjust course.
44:35Elon MuskSo we're adjusting course and we're thinking about it literally every day, seven days a week. Seven days a week. I look at that email and so does the rest of the team and we try to make the least dumb decision that we can.
44:47Elon MuskYou know, on balance, I think our decisions are pretty good. You know, sometimes they'll be, you know, dumb, but on average they're, I think, better than the rest of industry.
45:01Zachary Kirkhorn (CFO)Just to add on the question about EV market share or ice, this comes up a lot. I think a lot of the public debate is around this concept of EV market share.
45:13Zachary Kirkhorn (CFO)We don't look at it that way. We look at it as
45:18Analystit's the
45:19Zachary Kirkhorn (CFO)car market, not the EV market. And actually the mission of the company requires internal combustion engine cars to be switched over to electric vehicles. So that's what we pay attention to.
45:32Elon MuskYeah, I've said that last time too. We got to, you guys got to stop looking at it as the EV market. It's how many cars are we selling? Just start looking at it that way.
45:42Elon MuskAll cause will be EVs. It's, you know, it's going to, you know, I've said this for a long time, but we'll look back. I don't know, assuming civilization still around in 20 years, we'll look back on internal combustion engine vehicles the same way we look back on external combustion engine vehicles, which, like a steam engine.
46:00Elon MuskA steam engine is an external combustion engine vehicle. And, you know, there's still a few around. They're kind of quirky and, you know, kind of cool collectors items. That's how gasoline cars will be in the future.
46:13Martin Viecha (IR)Thank you. Let's go to Colin Rush from Oppenheimer. Colin, go ahead. Go ahead and unmute, please.
46:20AnalystThanks so much.
46:20Drew BaglinoGuys, can you talk a little bit
46:22Analystabout how much of the actual cost structure is variable, you know, on these vehicles? And if you could give us a range on plus or minus the lithium cost within those contracted volumes that you're seeing?
46:38Tesla ExecutiveWell, I think
46:43Elon Muskwe'd really love to have a crystal ball here, but we don't have it. Depending on what timescale you're looking at, most of the car is variable. So most like most car costs variable.
46:59Elon MuskSo. And probably, if I were to guess, I think we will see improved costs from suppliers,
47:10Analystyou know.
47:11Elon MuskYeah, I think we will. That is our expectation, and we're already
47:16Vaibhav Tanejastarting to see that. Elon, I think you mentioned before we anticipated a crash in the lithium prices, and some of that has flowed through by way of lithium carbonate reductions into battery cost.
47:29Vaibhav TanejaAnd the same thing will happen with lithium hydroxide. The length of the supply chain matters also, because what we're talking about is very far upstream. So by the time it makes it into the battery that ends up in a car, it'll be several months.
47:41Vaibhav TanejaBut, you know, beyond just commodity pricing, as Zach mentioned earlier, we're also very focused on other metrics that make production very efficient. So, for example, detention and demurrage, air expedites, I think our air Expedites are down 90%.
47:54Vaibhav TanejaDetention and demerge is down 93% from the peaks.
47:58AnalystThat's.
47:58Vaibhav TanejaThat can be hundreds of thousands of dollars per vehicle. So we're sort of attacking all vectors and becoming very efficient. Okay.
48:08AnalystAnd then my follow up is really around stationary storage demand on the utility scale. I mean, obviously there's a gigantic queue for, you know, interconnection in the US and can you talk about, you know, the volume of quotation you're seeing at this point around stationary storage for that renewables queue on a global basis and how much of that is converted into actual sales?
48:35Elon MuskDrew, you want to take that?
48:36Drew BaglinoI mean, yeah, that's also not exactly how we look at it, really. We're not like. Yeah, we're not engaged in the interconnection queue. Like, we're focused on ramping megapack as quickly and efficiently as we can.
48:51Drew BaglinoAnd we have visibility into the pipelines of a variety of different renewable energy and just pure stationary storage developers. And we also develop our own projects, and we're mostly just going.
49:04Drew BaglinoWe're being selective and trying to pick the products that projects that best fit our mission and our objectives.
49:11Elon MuskYeah, this is not a product call, but we'll have something. I mean, we're making improvements on many fronts, including make pack. So I think some of those improvements will improve the speed at which you can connect the megapacks to the grid.
49:30Martin Viecha (IR)Thank you. The next question is from Mark Delaney from Goldman Sachs.
49:35Elon MuskYes, good afternoon.
49:37Tesla ExecutiveThank you for taking the question. Do you still see 2 million units as an upside case for volume this year? And is the gating factor for reaching 1.8 million or 2 million units in 2023 still supply chain, as was mentioned on your last conference call, or is it more about demand at this point?
49:52Elon MuskWell, you know, if you have a crystal ball, you can lend me back to the Crystal bowl situation. These are volatile times from a production standpoint. If things go well, we've got a shot at 2 million vehicles this year.
50:10Elon MuskBut that is an upside case, and we feel comfortable with 1.8. And we'll have to see how this year unfolds.
50:22Tesla ExecutiveThat's helpful. Thanks. And then the company has spoken at the investor day and in some of the past conference calls about opening up its vehicle charging network. Can you speak to some of the feedback you've been getting from both Tesla owners and non Tesla owners and how the ramp of the charging network may progress from here?
50:40Elon MuskThanks, Drew. You want to take that?
50:45AnalystYeah.
50:46Drew BaglinoSo, as you may have seen, we opened our first V4 post in Europe and our MagicDoc post in North America in Q1, and that is indicative of the direction we're heading with universal compatibility for all vehicles.
51:05Drew BaglinoNo matter where the charge, Ford is, et cetera, in all major markets. And we're going to continue to roll out those sort of improved offerings as we build new stations.
51:17Drew BaglinoYou know, we're always balancing like our ability to serve our own customers with our ability to serve new customers. When doing that, I think we've been able to balance it rather well.
51:27Drew BaglinoFor example, in Europe, 50% of all of our of our supercharging stations are open to all EVs. And we've been able to do that without any increase in wait times at all for anybody.
51:37Drew BaglinoSo we're going to continue to take a similar approach as we do this in North America and China over the coming quarters.
51:47Martin Viecha (IR)Okay, thank you very much. Let's go to Rod Lash from Wolf Research.
51:53AnalystHi everybody. I just wanted to first just follow up on your comments in your letter about leveraging your cost position as others struggle with unit economics and also taking into account the lifetime revenue actually in a way that most other automakers will never see.
52:12AnalystJust given your service network and supercharging and other attributes, can you just maybe give us a sense of how far you'd be willing to take this? Are there brackets around the range of initial margin that you'd be comfortable with and again, any color that you might provide on the updated range of margins that you'd expect in the auto business?
52:42Elon MuskI think we may have answered this question or tried to answer this question a few times, but it's difficult to say what the margin will be. It depends on what the macroeconomic environment is like.
52:56Elon MuskYou know, for example, if the Fed were to lower the rates, that would be super helpful for demand. If they keep, if they raise them, that's, that's, you know, that just raises the interest costs that buyers have to pay for to buy a car.
53:11Elon MuskSo it reduces affordability and therefore reduces demand.
53:19Elon MuskSo it's, but if, you know, like if we look past say this year or like go, you know, sometime next year, middle next year. So I think things are looking really, I think, you know, like I said, well, you know, we'll best rough if there's some, you know, major geopolitical wild card that that turns up.
53:37Elon MuskBut in the absence of that, I think I would be very optimistic about your middle of next year, end of next year.
53:49Zachary Kirkhorn (CFO)So just to add to Elon's comments, just two other points. You know, what's really important for us this year in addition to just managing the day to day of the business, but is also investing in, as Elon mentioned, what 20, 24 and 2025 will look like.
54:07Zachary Kirkhorn (CFO)And so, you know, using the cash generated from the sale of products today and reinvesting that, this is very important for us. I think that what happens to margins over the next couple of quarters only matters in the context of what that means for our ability to reinvest into 2024 and 2025.
54:27Zachary Kirkhorn (CFO)And we have a lot of space before that becomes something that we have to revisit our investment plans. And so, you know, we're, we're planning to keep the business healthy.
54:38Zachary Kirkhorn (CFO)But I just want to caution folks about reading too much into what happens over the near term here because we're very focused as a company on making sure that when we exit this macroeconomic situation, this company is positioned in the best possible way.
54:53Elon MuskYeah, exactly.
54:55AnalystJust to elaborate on that point though, the long term lifetime revenue that you're targeting from each vehicle is massive. So if you took that to the extreme, it would seem that you'd be comfortable with a relatively low initial margin.
55:13AnalystAm I correct misinterpreting that or is that. That exactly right? And, and that is exactly right. Okay. And the, normally in, in, in a recession when consumers feel less financially secure, actually price elasticity deteriorates.
55:32AnalystJust based on your pulse taking of the consumer. Do you have a view on elasticity of demand? Well,
55:44Elon MuskI can't emphasize enough the whole, just fundamental question of affordability. For most people, their ability to buy a car is a function of can they make monthly payment or not.
55:56Elon MuskAnd you know, so like I said, if interest rates are really high like they are right now, then in some cases people can't get a loan at all. You know, so it's, it's.
56:09Elon MuskAnd I think probably banks are pretty not leaning forward in providing loans, I expect these days. So, you know, so that's, but like there is quite a powerful story here when you, you know, going back to something that was alluded to a moment ago, I mentioned a moment ago that Tesla is in a uniquely strong strategic position because we're the only ones making cars that technically we could sell for zero profit for now and then yield actually tremendous economics in the future.
57:00Elon MuskBut through autonomy, no one else can do that. I'm not sure how many of you will appreciate the profundity of what I've just said, but it is extremely significant.
57:17Martin Viecha (IR)Thank you. Let's go to Adam Jonas from Morgan Stanley.
57:25AnalystHi everybody. So first, Elon, good luck with tomorrow's launch of Boca Chica. Break a leg.
57:31Elon MuskWe definitely can't have too much luck in the rocket business. That's for sure.
57:36AnalystIncredible. So now that you've gotten to know the Twitter architecture kind of intimately well over the past six months, what can you tell Tesla stakeholders about how an X.com or super app could be potentially accelerative to Tesla's business model?
57:59AnalystWell,
58:03Elon MuskI don't know. I guess it could make it potentially make it easier to buy cars. So. But we are straying somewhat off topic here because this is.
58:13AnalystOkay, all right.
58:15Elon MuskI think there's some benefit. I think probably there's some benefit.
58:17AnalystYeah, let's. I get it, Elon. So just as a follow up on manufacturing, you're a student of history and you'll know that back in 1913, Henry Ford introduced the roving assembly line in Highland Park, Michigan, and the price of a Model T, which had already, you know, been undercutting cars around the time, fell another 70 or 80%.
58:43AnalystAnd hundreds of rival car companies went bustling. Yeah, I'm wondering if history is repeating itself here, Elon, and that the recent pattern of cuts with you is way ahead of the cost curve compared to competition is this.
58:58AnalystIt seems like it's a calculated strategy, not just in reaction to competition or changing supply demand in the market, but could we catalyze some Darwinian forces in the EV market?
59:13Elon MuskWell, I mean, we're not trying to say, take pricing actions in order to be deliberately, to deliberately undermine competitors or anything like that. We really don't think about competitors that much.
59:25Elon MuskWe just look at, you know, do people like our cars? How can we make the product better? Can they afford our cars? And you know, the sort of the things like improving service and, and whatnot.
59:39Elon MuskBut, but like I said, we do have this unique strategic advantage that, that we haven't. We're making a car that if we're autonomy pans out and we think it will.
59:53Elon MuskWhere that that asset is actually will be worth a hell of a lot more in the future than it is now. So it is technically possible to sell it at zero profit, but still have the net present value of future cash flows associated with that asset.
1:00:05Elon MuskVisa gain. Very significant.
1:00:08AnalystYeah.
1:00:09Drew BaglinoAnd service and charging and insurance and all of these other ongoing revenue streams that other companies don't have.
1:00:17Elon MuskYeah, certainly we want all EVs to succeed too. We just want to say that we're not in like some malicious attack to try to discourage everybody. Definitely not. We're like opening up superchargers.
1:00:29Elon MuskWe've made our patents available for free. So it's like. But we're trying to be helpful here, you know, so we're not trying to, we're not out to just destroy competitors or anything like that.
1:00:39Elon MuskWe're trying to help competitors, frankly, in any way that we can.
1:00:45Martin Viecha (IR)Thank you. Let's go to Dan Levi from Barclays.
1:00:50AnalystHi, good evening. Thank you. First question, you're ramping supply at at Austin and Berlin. So I wanted to understand just how critical it is to further increase volume at those plants just to get the vertical integration benefits in the face of the sort of market with some demand questions.
1:01:10AnalystAnd just broadly, should we generally, I mean historically you've been operating at the pace at which your supply allows you to produce as opposed to gauging to demand. Should we generally expect that you're going to continue to produce at your whatever the max capacity that you're allowed within your supply constraints, regardless of what the broader economic environment is, just to continue to get that volume out there?
1:01:36Elon MuskThat, that is.
1:01:38AnalystYes.
1:01:38Elon MuskI mean there could be like obviously a macro shock that is so severe that you know, people just stop buying cars for some reason. But in the absence of that, we will continue to grow output at a rapid clip.
1:01:54Tesla ExecutiveGreat, thank you.
1:01:55AnalystAnd then just on the margins associated with Austin and Berlin, you mentioned Austin and Berlin have a margin drag until you reach intended volumes. I don't know if you can disclose what those volumes are, then maybe you could just remind us of what the margin profile of Austin and Berlin will look like versus Shanghai once you get the vertical integration benefits in place.
1:02:21Elon MuskWell, probably won't have be quite as good as Shanghai is hard, you know, has a very efficient cost structures, obviously our lowest cost structure in the world. But we do expect to be make significant improvements in Austin and Berlin and continue to make improvements in Fremont as well.
1:02:43Elon MuskSo yeah, we've increased, this is Roshan by the way.
1:02:49Martin Viecha (IR)We increased our localization efforts.
1:02:51Elon MuskSo that will then drive down days on hand requirements.
1:02:55Martin Viecha (IR)We've made 10% quarter on quarter, you
1:02:57Elon Muskknow, improvement in days on hand.
1:03:00Martin Viecha (IR)So we'll continue that path as the localization improves.
1:03:08Martin Viecha (IR)Okay, thank you very much. And our final question comes from Philippe Pushois from Jefferies.
1:03:17AnalystYes, good evening. Thanks for taking the question. It's slightly longer term. I completely agree with your comments that we should look at Tesla in terms of auto market share, not EV market share.
1:03:27AnalystBut I'm just wondering, as you build up the market share globally, is there a limit to the direct selling business model as you practice it and should we think about going forward?
1:03:37AnalystYou need to look into the agency or using importers to basically develop market share more smoothly, I guess. Globally. And so in other words, is there kind of fell by date for the direct business model as you, as you practice it today
1:03:56Elon Muskseems to be working well so far.
1:04:02AnalystWe hear different feedback from customers who miss the human interaction or unhappy with the service. And I'm just wondering if you're seeing some growth pains in there that would lead you to change.
1:04:14AnalystYou're not seeing that?
1:04:17Elon MuskWell, I mean there are since we're always going to have some growing pains where at times, and it depends on which geography we're talking about where sometimes service is behind sales, sometimes it's ahead of sales.
1:04:33Elon MuskThis is, I mean Tesla is growing, I believe faster than any company in history that has, that has, that makes a large complex manufactured object. So you know, there's these are, if you're trying to max, it's always difficult to match exponentials.
1:04:54Elon MuskSo but, but I think it is helpful to have the feedback loop with that service because that means we feel the pain of service and then we can adjust the design to make the car need less service.
1:05:09Elon MuskAnd I think that gives us the right incentive structure because the best service is no service. The car doesn't break. And you know, whereas if you have say a dealer network that is reliant upon services revenue, then you arguably have misalignment of incentives where they're making money on service.
1:05:36Elon MuskBut actually we want to the best thing for the consumer is the car doesn't need servicing.
1:05:45AnalystIf I can follow up. Have you worked out for many of your traditional competitors a fair amount of profits for them comes from selling spare parts and servicing. And you don't have that in your, in your profit structure.
1:06:00AnalystAnd have you, have you worked out how much of a deficit you have compared to your peers?
1:06:06Elon MuskYeah, actually this one's something I could wax on about for a while because really people didn't understand that the best short selling argument against Tesla for the longest time was the fact that Tesla does not have an existing fleet and that the auto industry, the reason incumbents succeed and newcomers fail, the biggest reason is that the incumbents have a large fleet and they're able to sell new cars at close to zero margin and then sell spare parts at a very high margin, sort of, you know, razors and blades type thing.
1:06:45Elon MuskAnd so the only way to actually succeed for newcomer to succeed is to have a product that is so compelling that people are willing to pay a premium over the incumbent product.
1:06:57Elon MuskAnd in the absence of electrification and autonomy, I don't think a newcomer can succeed.
1:07:08Martin Viecha (IR)Thank you very much everyone. Unfortunately, that's all the time we have for this quarter. We'll see you again in three months from now. Thank you.