Tesla Q3 2023 earnings call (2023)
Questions on ElonsFAQ asked in this interview (15)
Transcript
5:11Martin Viecha (IR)Good afternoon everyone and welcome to Tesla's third quarter 2023 Q&A webcast. My name is Martin Vieja, VP of Invest Relations and I'm joined today by Elon Musk, Abaftaneja and a number of other executives.
5:25Martin Viecha (IR)Our Q3 results were announced at about 3pm Central Time in the update that we published at the same link as this webcast. During this call we will discuss our business outlook and make forward looking statements.
5:36Martin 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.
5:49Martin 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.
5:59Martin Viecha (IR)But before we jump into the Q and A, Elon has some opening remarks.
6:02Elon MuskElon thank you Martin. So, just a Q3 recap. Our last quarter was impacted by downtime for global factory upgrades that will help us reduce cost per vehicle as well as increase production.
6:16Elon MuskWe remain focused on three main objectives which is the cost reduction of our products, investments in artificial intelligence and other growth projects like Optimus, and continued free cash flow generation.
6:30Elon MuskRegarding vehicle cost, our team was able to reduce the cost per vehicle further in Q3 despite headwinds from factory idle costs and ramp up of new factories and we believe there's still meaningful room for improvement there.
6:46Elon MuskRegarding autopilot and AI, our vehicles now driven over half a billion miles with FSD Beta, full self driving beta and that number is growing rapidly. We recently completed a 10,000 GPU cluster of H1 hundreds we think probably bringing it into operation faster than anyone's ever brought that much compute per unit time into production.
7:14Elon MuskSince training is the fundamental limiting factor on progress with full self driving and vehicle autonomy, we're also seeing significant promise with FSD version 12. This is the end to end AI where it's photon count in, controls out.
7:36Elon MuskOr really you can think of it as there's a just a large bit stream coming in and a tiny bit stream going out, compressing reality into a very small set of outputs, which is actually kind of how humans work.
7:54Elon MuskThe vast majority of human data input is optics from our eyes and so we are like the car, photons in, controls out, with neural nets, just neural nets in the middle.
8:13Elon MuskSo interesting to think about that we will continue to invest significantly in AI development as this is really the massive game changer and I mean success in this regard in the long term, I think has the potential to make Tesla the most valuable company in the world by far.
8:40Elon MuskIf you have fully autonomous cars at scale and fully autonomous humanoid robots that are truly useful, it's not clear what the limit is regarding energy storage. We deployed 4 gigawatt hours of energy of storage products in Q3 and as this business grows, the energy division is becoming our highest margin business.
9:11Elon MuskEnergy and service now contribute over half a billion dollars to quarterly profit. The Cybertruck. I know a lot of people are excited about the Cybertruck. I am too. I've driven the car.
9:22Elon MuskIt's an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck and then in making the cybertruck cash flow positive.
9:39Elon MuskThis is, this is simply normal for when you've got a product with a lot of new technology, any brand new vehicle program, but especially one that is as different and advanced as the cybertruck, you will have problems proportionate to how many new things you're trying to solve at scale.
10:03Elon MuskSo I just want to emphasize that while I think this is potentially our best product ever, I think it is our best product ever. It is going to be require immense work to reach volume production and be cash flow positive at a price that people can afford.
10:25Elon MuskOften people do not understand what is truly hard. That is why I say prototypes are easy. Production is hard. People think it's the idea or you make a prototype, you design a car, and as soon as they're designing a car is just anyone can do it.
10:42Elon MuskIt does require taste, it does require effort to design a prototype. But the difficulty of going from a prototype to volume production is like 10,000% harder to get to volume production than to make the prototype in the first place.
10:57Elon MuskAnd then it is even harder than that to reach positive cash flow. That is why there have not been new car startups that have been successful for 100 years, apart from Tesla.
11:13Elon MuskSo, you know, I just want to temper expectations for Cybertruck. It's a great product, but financially it will take, I don't know, a year to 18 months before it is a significant positive cash flow contributor.
11:36Elon MuskI wish there was some way to that to be different, but that's, that's my best guess,
11:47Elon MuskYou know, so it really, the demand is off the charts. We have over a million people who have reserved the car, so it's not a demand issue. But we have to make it and we need to make it at a price that people can afford.
12:03Elon MuskInsanely difficult things in Conclusion we continue to focus on ramping production while maintaining positive cash flow and we continue to target expect to have around 1.8 million vehicle deliveries.
12:23Elon MuskAs stated earlier this year, the Tesla AI team is I think one of the world's best and I think it is actually by far the world's best when it comes to real world AI.
12:38Elon MuskI'll say that again, Tesla has the best real world AI team on Earth, period. And it's getting better. And lastly, I wanted to thank all of our employees who are making a lot of extra effort during uncertain times.
12:54Elon MuskThank you very much for your hard work and the impact that you're making.
12:58Martin Viecha (IR)Thank you very much. Elon and our CFO Ybuff have some opening remarks as well.
13:03Vaibhav Taneja (CFO)Thanks Martin. Vehicle deliveries in Q3 outpaced production and we had yet another record quarter of profitability in our energy business. Congratulations to the Tesla team for their continued focus on operational excellence as we navigate through a period of economic uncertainty, higher interest rates and shifting consumer sentiment.
13:22Vaibhav Taneja (CFO)As Elon mentioned, our Q3 operational and financial performance was impacted by planned downturns for our factory upgrades. This was necessary to allow for further factory improvements and production rate increases.
13:37Vaibhav Taneja (CFO)Despite such factory shutdowns, our cost per vehicle decreased to approximately 37,500. We saw sequential decreases in material cost and freight. Reducing the cost of our vehicles is our top priority.
13:51Vaibhav Taneja (CFO)On the operating expenses front, R and D expenses continue to rise due to cybertruck prototype builds and pilot production testing combined with spend on AI technologies like full self driving, Optimus and Dojo.
14:04Vaibhav Taneja (CFO)We have and will continue to make investments in these areas and hence our capital expenditure and R and D will continue to grow in the near term. However, our focus is to continue making investments through positive cash flow from operations.
14:19Vaibhav Taneja (CFO)This year itself, we have generated operating cash flows of approximately 8.9 billion and free cash flows of approximately 2.3 billion. Our other businesses are becoming more prominent on a standalone basis, with energy business leading the charge primarily from the growth in megapyte.
14:37Vaibhav Taneja (CFO)Our services and other businesses on a year on year basis also continue to show positive momentum as we benefit from our growing fleet. As regards our pricing strategy, in addition to what we have shared before, I want to elaborate that most car buying happens with one or other form of financing and hence we also view pricing in terms of monthly costs for the customer and therefore as interest costs in the US have risen substantially, it has required us to adjust the price of our vehicles to keep the monthly cost in parity.
15:11Vaibhav Taneja (CFO)We've tried to offset such adjustments via focus on Reducing cost. However, there is an inherent lag in cost reductions which in turn impacts margins to that extent. We recently announced a partner vehicle leasing program in the US whereby you can get a standard range model Y for as low as $399 a month.
15:34Vaibhav Taneja (CFO)In conclusion, as we navigate through a challenging economic environment, we're focused on reducing costs, maximizing delivery volumes and continuing making investments in the future. In particular AI and other next generation platform.
15:49Vaibhav Taneja (CFO)We believe this strategy positions us well for the long term. Once again, I would like to thank the Tesla team for their efforts in the last quarter.
15:59Martin Viecha (IR)Thank you very much. And now let's go to investor questions. The first investor question comes from Craig. How many cybertruck deliveries do you anticipate for 2024?
16:12Elon MuskIt's difficult to make an accurate guess at this point. Going back to what I said earlier, that the ramp is going to be extremely difficult. And like I said, there's no way around that.
16:29Elon MuskIf you try to make. If we just try to do some copycat vehicle design, of which there are literally 200 models that are slight variations on a theme in the combustion engine world, just distinctions without a difference, then it's really not that hard.
16:51Elon MuskBut if you want to do something radical and innovative and something really special like the cybertruck, it is extremely difficult because there's nothing to copy. You have to invent not just the car, but the way to make the car.
17:08Elon MuskSo the more uncharted the territory, the less predictable the outcome. Now I can say that if you say, well, where will things end up? I think we'll end up with roughly a quarter million cybertrucks a year.
17:25Elon MuskAnd I don't think we're going to reach that output rate next year. I think we probably reach it sometime in 2025. That's my best guess.
17:41Martin Viecha (IR)Thank you. The second question is, can you provide a progress Update on the 4680 cell? Particularly towards performance improvements and cost savings outlined on battery day.
17:52Elon MuskThank you.
17:53Drew BaglinoSure thing, Martin.
17:56Elon Musk4680.
17:57Drew BaglinoCell production in Texas increased 40% quarter over quarter. Congrats to the Texas team for producing their 20 millionth cell off of line one. Texas is now our primary 4680 facility.
18:09Drew BaglinoWe're heavily focused on quality. Scrap is down 40% quarter over quarter with the increased volume and yield improvements. Cell costs consistently improved month over month within the quarter. Although we have a lot more work to do to achieve our steady state goals.
18:23Drew BaglinoAnd that is our priority. The Cybertruck cell, with 10% higher energy than our model Y Cell started production on line two in Texas this quarter. We convert to building 100% Cybertruck cells to simplify and focus the factory as we ramp all four lines in phase one over the next three quarters.
18:40Drew BaglinoPhase two of the Texas 4680 facility is currently under construction. The additional four lines incorporate further capital efficiencies over phase one and our target is for them to start producing in late 2024.
18:53Drew BaglinoLastly, in Cato we're retooling to enable large scale pallet runs of our next generation cell designs. Cato's long term goal is to be the launch pad for new cells one generation ahead of our mass production facilities, enabling faster iteration and smoother ramp ups of new designs.
19:09Martin Viecha (IR)Thank you. The next question from institutional investor is could you please provide an update on capacity expansion plans for companies factories in Berlin and Austin and the opening schedule of Gigafactory in Mexico
19:26Tesla ExecutiveBerlin and Austin factory. The current priority is actually maximize the output from our existing lines by laser focus on efficiency improvement. As always, maintaining a high quality and reducing per unit cost will be as critical as growing production volume for Mexico.
19:45Tesla ExecutiveWe're working on infrastructure and factory design in parallel with the engineering development of the new products that will be manufactured there. That's I can share for them.
19:56Elon MuskIn Mexico we're laying the groundwork to begin construction and doing all the long lead items. But I think we want to just get a sense for what the global economy is like before we go full tilt on the Mexico factory.
20:15Elon MuskI am worried about the high interest rate environment that we're in. I just can't emphasize this enough that the vast majority of people buying a car is about the monthly payment.
20:29Elon MuskAnd as interest rates rise, the proportion of that monthly payment, I.e. interest increases naturally. So that's. If interest rates remain high or if they go even higher, it's that much harder for people to buy the car.
20:48Elon MuskThey simply cannot afford it. And we are tracking, I believe at this point for model Y to be the a selling car on earth, but not just in revenue but in unit volume.
21:00Elon MuskIf you compare that to the other vehicles that are, you know, number two and number three and whatnot, they, they cost much less than our car. So you know, we're just hitting low of large numbers situations here.
21:16Elon MuskI know people want us to advertise and we are advertising. I think there is some, there's something to that. There is something to be gained on the advertising front.
21:26Elon MuskI don't think it's nothing but informing people of a car that is great that they cannot afford doesn't. Doesn't really help. So that is really the thing that must be solved is to make the car portable.
21:46Elon MuskThe average person cannot buy it for any amount of money or they afford. They can't afford it. They can't afford it. So this is a big deal.
22:02Martin Viecha (IR)Okay, thank you very much. The next question is when do you expect Model 3 Highland to be available in the US? I just wanted to address that. Unfortunately we don't answer product related questions and timings on earnings calls.
22:15Martin Viecha (IR)So let's go to the next one. Current sell side consensus assumes that Tesla will deliver 2.3 million vehicles in 2024 representing 28% growth versus 2023 guidance. Is this growth rate achievable without any mass market launches in 2024?
22:32Martin Viecha (IR)And when does Tesla expect to return to its 50% long term CAGR?
22:39Vaibhav Taneja (CFO)Thanks for the question. When we look at 2024 there are a lot of moving pieces. Elon just talked about what is happening in the macroeconomic environment. So we're focused on growing our volumes in a very cost efficient manner and are carefully reviewing all our options and we'll be able to provide a much more meaningful update at our next earnings call.
23:02Elon MuskYeah, I mean the risk of stating the obvious, it's not possible to have a compound growth rate of 50% forever or you will exceed the mass of the known universe.
23:13Elon MuskSo. But I think we will grow very rapidly and much faster than any other car company on earth by far.
23:23AnalystThank you.
23:25Martin Viecha (IR)Next question is do you have an approximate timeline in mind for the robotaxi driven or non driven? What excites you most about how this project is progressing?
23:36Elon MuskWell, robotaxi is like necessarily non driven. The I guess I am very excited about our progress with autonomy. The end to end nothing but nets. Self driving software is amazing.
24:04Elon MuskDrives me all around Austin with no interventions. So it's clearly the right move.
24:18Elon MuskSo it's really pretty amazing. And obviously that same software and approach will enable optimus to do useful things and enable optimists to learn
24:40Tesla Executivehow to
24:41Elon Muskdo things simply by looking so extremely exciting in the long term.
24:55Elon MuskAs I mentioned before, given that economic output is number of people times productivity, if you no longer have a constraint on people effectively you've got a humanoid robot that can do as much as you'd like.
25:14Elon MuskYour economy is quite infinite or infinite for all intents and purposes.
25:26Elon MuskSo. And I don't think anyone's going to do it better than Tesla, not by a long shot. Bus Dynamics is impressive but their robot lacks a brain Sort of like the wizard of Oz or two Minutes.
25:43Elon MuskYeah, that's the brain. And then you also need to be able to design the humanoid robot in such a way that it can be mass manufactured and then at some point the robots will manufacture the robots.
25:59Elon MuskNow obviously we need to make sure that there's a good place for humans in that future and we do not create some variant of the Terminator outcome. So we're going to put a lot of effort into localized control of the humanoid robot.
26:15Elon MuskSo basically anyone will be able to shut it off locally and you can't change that. Even if you like a software update, you can't change that. It has to be hard coded.
26:30Martin Viecha (IR)Thank you. The next question is why was the price dropped on FSD if it is getting better and Robotaxi is expected so soon?
26:45Elon MuskWell, we just wanted to make it more affordable. Some more people could try it. Yeah, I think over time the price of FSD will increase proportionate to its value.
26:59Elon MuskSo regard the current price as a kind of a temporary low.
27:07Martin Viecha (IR)Thank you. The next question is again on FSD, Mercedes is accepting legal liability for when its Level 3 autonomous driving system drive pilot is active. Is Tesla planning to accept legal liability for FSD and if so, when?
27:24Elon MuskWell, there's a lot of people that assume we have legal liability. Judging by the lawsuits, we're certainly not being let that off the hook on that front, whether we like would like to or wouldn't like to.
27:39Elon MuskI mean, I think it's important to remember for everyone that Mercedes system is limited to key roads in Nevada and some certain cities in California. Doesn't work in the snow or the fog.
27:49Elon MuskIt must have a weed car marked lanes, only 40 miles per hour. Our system is meant to be holistic and drive in any conditions. So we obviously have a much more capable approach but with those kind of limitations really not very useful.
28:06Elon MuskI think some people understand the profundity of the Tesla AI system. Very, very few. It's basically baby AGI. It has to understand reality in order to drive. Maybe AGI.
28:31Martin Viecha (IR)Thank you. The next question on Optimus. Will Optimus be working on gigafactory lines next year? If so, how many would you guess will be deployed?
28:49Elon MuskI think at this point we
28:51Vaibhav Taneja (CFO)not
28:52Elon Muskready to discuss details of the Optimus program, but we will provide periodic updates online. So as you can see where Optimus a year ago could barely walk and now it can do yoga.
29:14Elon MuskSo a few years from now can probably do valet.
29:21Martin Viecha (IR)Sounds good. And the last question from investors is neural net path planning represent a Significant advance in capability and safety for fsd. What steps is Tesla taking to make this technology available outside the U.S.
29:40Elon MuskYeah, our approach has been to try to get it like the more places we try to make it work, the harder the problem is. So the reason we don't do it in all countries simultaneously is that it would take much longer to make it work anywhere at all.
29:53Elon MuskSo that's why it's currently just North America. And also for most parts of the world you have to get approval before deploying things, whereas in the US you can deploy things at risk or take liability for what you deploy.
30:15Elon MuskSo it's whereas most countries require some sort of extensive approval program. So we only want to go through that extensive approval program when we think it's kind of ready for primetime in that country.
30:36Elon MuskI apologize if it's not, not in those countries. But we keep finding ways to make it better. And it really needs to drive. It needs to drive such that it exceeds the.
30:55Elon MuskEven unsupervised significantly exceeds the probability of injury of a human significantly better. A lower probability of injury than a human by far. I think we're tracking to that point very quickly.
31:12Elon MuskObviously in the past I've been overly optimistic about this. The reason I've been overly is that the progress tends to sort of look like a log, a log curve, which is that you have kind of rapid initial improvements that if you were to extrapolate them, sort of rapid, fairly linear rate of improvement,
31:39Analystyou get to
31:40Elon Muskself driving quite quickly, but then the rate of improvement curves over logarithmically and starts to asymptote. That's not happened several times. I would characterize our progress in real world AI as a series of stacked log curves.
32:04Elon MuskI think that is also true in other parts of AI like LLMs and whatnot. Series of stacked log curves. Each log curve gets higher than the last one. So if you keep stacking them, if keep stacking logs, eventually you get to fsd.
32:22Martin Viecha (IR)Thank you. Let's now go to analyst questions. The first question comes from Will Stein from Truist. Will, please go ahead and unmute yourself.
32:33AnalystGreat. Thanks so much for taking my question and thanks for all the updates today. We learned earlier in the call it sounds like you don't think the truck will ramp to significant volume until its third year of production.
32:49AnalystShould we have a similar anticipation for the ramp of the next gen platform? Or is there any reason that we should be maybe more optimistic or pessimistic about the ramp profile there?
33:03AnalystThank you.
33:06Elon MuskYeah, I mean to be clear, it's it's not really the third year of production. It's kind of like the 18th month of production is roughly my guess. So it's just that they happen to.
33:20Elon MuskIt'll happen is that the. It starts this year, spans next year and gets to 2025. So technically there are three calendar years in there, but there's actually only 18.
33:30Elon Musk18 months, not three years. I would be very disappointed if it took us and that would be shocking if it took us three years but 18 months from initial deliveries to have to reach volume and reach prosperity with an immense.
33:46Elon MuskI can't tell you how much the blood, sweat and tears level required to achieve that is just staggering. I've been through it many times and then here we go again.
33:59Elon MuskYou know,
34:02Analystsimilar path for the next gen platform.
34:04Drew BaglinoI mean there's like unique complexity to cyber.
34:06AnalystYeah, yeah.
34:07Elon MuskI mean cybertruck is.
34:09Tesla ExecutiveYeah.
34:10Elon MuskI mean we dug our own grave with cyber cybertruck. You know, nobody generally, I find every big zort gray better than themselves. And so it is. Cybertruck's one of those special products that comes along only once in a long while.
34:36Elon MuskAnd special products that come along once in a long while are just incredibly difficult to bring to market to reach volume to be prosperous. It's fundamental to the nature of the newness.
34:53Elon MuskSo now the sort of high volume,
34:57Analystlow cost,
34:59Elon Musksmaller vehicle is actually much more conventional. Yeah. In terms of like the technologies we're putting into it. We didn't have to invent how to bend full hard stainless steel or have mega 9000 ton castings or the largest hot stamping in the world or new high voltage, low voltage architectures.
35:19Elon MuskIt's learning from everything we've done. So we hope it will ram faster than the technology.
35:26Drew BaglinoWe also went through a ruthless simplification exercise.
35:29Elon MuskYeah, we did significantly less parts. You're only as bad as the slowest part. If you have less of those, that means you could probably do faster. Yes, exactly. I mean that said, it's, you know, it's still pretty revolutionary in how we're going to build is.
35:53Elon MuskYes, it's a. The manufacturing approach for the high volume small vehicle is revolutionary. Not revolutionary quite in the same way as the cybertruck. I think it will be quite a fast ramp.
36:13Elon MuskSo as Liz was saying, we're doing everything possible to simplify that vehicle in order to achieve a units per minute level that is unheard of in the auto industry.
36:33Drew BaglinoI mean the simplification makes it easier to automate. It also makes it lower cost. Yeah, it's Intrinsically lower cost.
36:41Elon MuskYeah, just to be clear is it'll be cool, but it's utilitarian, it's not meant to be, you know, fill you with, you know, Owen magic. It can get you from A to B.
36:59Elon MuskIt'll be still beautiful. But it's a utility doesn't have 14 inches of travel under suspension as an example. Yeah, I mean the Cybertruck has a lot of bells and whistles.
37:22Martin Viecha (IR)All right, thank you very much. Let's go to Pierre Ferragou from New Street Research.
37:30AnalystHey, can you hear me fine?
37:32Elon MuskYes, yes.
37:34AnalystHey, I have first like a follow up question on FSD and pricing and adoption. So I agree with you that as FSD improves we should see its value increasing.
37:48AnalystBut I guess like the ultimate values of fsd, which is to be able to handle like a robotaxi is not going to necessarily interest everybody and you have a bit of a degraded version that would be like a chauffeur service where the car drives by itself but
38:05Elon Muskyou still have to be in the car and around.
38:08AnalystAnd then there is like the hands on izone version of the service and I guess there should be like much lower cost, lower feature kind of variants of the service that could have a very large penetration on your install base and more expensive one that would remain at a lower penetration level.
38:32AnalystSo I'm just wondering if you're taking that. And last but not least, like the simplest version of FSD are available and are going to work from a technical perspective probably before like the ultimate robotaxis version can work, if ever.
38:48AnalystAnd so I'm wondering how you take that into account in how you're thinking like the financial contribution of FSD over time and whether you could evolve your pricing along that kind of tiers to increase adoption.
39:10AnalystYeah,
39:13Elon Muska fully autonomous vehicle, I think here, you know, sort of the economics of a fully autonomous vehicle are truly astounding in a positive way. When you look at passenger vehicles today, they only get about 10 to 12 hours of usage per week.
39:31Elon MuskThat's if you drive an hour and a half a day on average. That's roughly 10 hours a week out of 168 hours. And then there's also you got to have parking and insurance, you got to take care of the car.
39:47Elon MuskIt's like there's a lot of overhead. So I mean, yeah, it's like the economics of the system are just insanely positive given that the car, all of the cars we're making and have made for a while we believe are capable of full autonomy.
40:15Elon MuskSo Then if you, if you're able to say, increase the utility of that car by a factor of five, which slowly means that you're being used for maybe 50 hours a week out of 168.
40:29Elon MuskSo you're still not as you're still assuming that still assumes less than a third of the hours of the weak R is doing something useful. You've increased the value of that by 5, but it still costs the same like you have something then.
40:48Elon MuskWe're a hardware company with software margins.
40:56Martin Viecha (IR)Pierre, do you have a follow up?
40:58AnalystYes, I have actually a follow up on a different topic for you, if that's okay. It's about like your gross margin in the quarter. Could you give us a sense of like in, in how the gross margin evolved sequentially?
41:13AnalystHow much was the impact of idle cost? How much was like the sequential benefit, I imagine of production ramping at Berlin and Austin. And then I saw like this massive jump in energy storage.
41:27AnalystVery strong positive surprise. So if you can give us the background on that and tell us, you know, how we should think about that gross margin going model.
41:35Vaibhav Taneja (CFO)Thanks for that question. So in terms of. You have a. You have a few different aspects of your question. So for if I just look at from Q3 perspective, you know, obviously factory idle time had an impact.
41:52Vaibhav Taneja (CFO)It did impact by. I mean, I won't give you the exact percentage, but it had decent impact from. For the quarter. And you know, when you look at the other pieces which we are trying to do, we did see certain of our other factories ramping up pretty well.
42:15Vaibhav Taneja (CFO)Right. And they actually contributed pretty well to the margin for this quarter. In fact, one of the factories pretty came pretty close to in terms of per unit costs to where we are for one of our other established factor, which is Fremont.
42:33Vaibhav Taneja (CFO)So that, that was a positive in the quarter when it comes to energy margins. You know, Megapack deployment was the key driver there and that product has done well.
42:47Vaibhav Taneja (CFO)I mean, on the Costco also we've been able to do a lot there. But I do want to caution that, you know, Megapack deployments are a bit lumpy. So yes, we had a great quarter this period.
43:02Vaibhav Taneja (CFO)But depending upon where we are trying to deploy that product in the, in different markets, you would see periods wherein there would be downward pressure on deployment because of us trying to get the product to the exact place where.
43:18Drew BaglinoYeah. Product in transit.
43:19AnalystYeah. Yes.
43:22Martin Viecha (IR)Okay, thank you very much. Let's go to Rod Lash from Wolff Research. Rod, feel free to unmute yourself.
43:31AnalystThanks. Really nice to see the rate of vehicle Cost improvement, despite the downtime that you took, you've taken now about $2,000 out of the average vehicle cost over the past year.
43:44AnalystCan you give us maybe a sense of the rate of improvement that you see from the changes that you alluded to, the factory changes you alluded to? Is there a way maybe to convey the speed of improvement on your existing product from here and then related to that, can you share the timing of your next gen that the lower priced product that you talked about earlier this year.
44:09Vaibhav Taneja (CFO)Yeah, so just in terms of product margins, there are lots of puts and takes. When you look at this, you know, there are certain things which we control and there are certain things which we don't control.
44:21Vaibhav Taneja (CFO)You know, we get, we expect that we'll get some benefits from our cost reduction efforts which are all underway. hand, we just finished our FACU upgrades late in Q3.
44:33Vaibhav Taneja (CFO)Some of these factors are still in the early ramp phase. In Q4, we're still not up to where we want those factors to be, so they'll impact in the near term.
44:43Vaibhav Taneja (CFO)Plus, like Elon mentioned, we're going to be ramping cybertruck, which is going to be another headwind which we'll be dealing with. On top of all that, you know, there's overall uncertainty in the macroeconomic environment which even makes it harder to predict precisely as to where we land.
45:03Vaibhav Taneja (CFO)But yes, this is something which, you know, it's, it's an evolving thing which we're observing every day and reacting to it on a daily basis.
45:14Drew BaglinoI would just say that on the cost reduction efforts like we, we are not, we are unflagging in our pursuit of additional Cost Downs for 2024.
45:23Elon MuskWe do have a good pipeline of,
45:25Drew Baglinoof them and work on both the engineering side and the factory operations side. And you know, our intention is to like maintain or exceed the trend that you saw.
45:36Drew BaglinoWe're trying as hard as we possibly
45:37Analystcan the timing of the next gen product.
45:42Drew BaglinoCan you share that?
45:45Elon MuskNot at this time.
45:46AnalystOkay. And just as a follow up, obviously price is also a driver of demand, but that's obviously not happening in a vacuum. And you, you mentioned that, I think you mentioned it at some point during this call that you're also maybe hitting the law of large numbers on some of your products.
46:05AnalystCan you just share how you're thinking about price elasticity just at this point and in this macro environment and any
46:13Drew Baglinothoughts along those lines?
46:17Elon MuskI think that there's very significant price elasticity. I mean, to be totally frank, if our car costs the same as a RAV4. Nobody would buy a Rev Bull. Or at least they're very unlikely to.
46:34Elon MuskIt's worth noting that a lot of these incentives like the tax credit and whatnot, they're actually very difficult for the average person to access because most people do not have ten grand or even $7,500 burning a hole in their bank account.
46:52Elon MuskLarge number of people are living paycheck to paycheck and with, with a lot of debt. They've got credit card debt, mortgage debt. So yeah, that's reality for most people.
47:07Elon MuskIt's sometimes difficult for people who are high income owners, you know, and I'd say high be like someone who's earning over $200,000 a year to understand what life is like for someone who is earning 50 or 60 or $70,000 a year, which is most people.
47:29Elon MuskSo, so that like, for a lot of people like these, these tax credits just, they can't, they can't front $7,500 for, you know, 18 months or, or even six months to get for the tax credit.
47:43Elon MuskAnd they actually don't in some cases even have that money. Then I have to pay $500 in taxes. So, you know, so it's really just the vast majority of people, it's how much money do they have to pay immediately and how much per month?
48:01Elon MuskThat's it. And just off right there. And a car is still much more expensive than a raffle when you look at it that way.
48:13Vaibhav Taneja (CFO)Yeah. One other thing which I'll add, you know, when, when you look at, you know, car buying in general, we're trying to get to the next set of EV adapters.
48:23Elon MuskNot even, not an EV adapter, just next. Who wants a great car?
48:27Vaibhav Taneja (CFO)Exactly.
48:28Elon MuskIt's, it's not a, you know, sometimes you get these like, you know, honestly, I'd say it's like somewhat correlates with the why doesn't everyone work from home crowd. I'm like, I mean this is like some real Mariannette vibes from people that say, why does everyone work from home?
48:46Elon MuskLike, what about all the people that have to come to the factory and, and fill the cars? What about all the people that have to go to, to the restaurant and make your food and deliver your food?
48:57Elon MuskIt's like, what are you talking about? You, I mean, how detached from reality does the work from home card have to be while they take advantage of all those who do cannot work from home.
49:11Elon MuskSo I mean, you have to say like, why did I sleep in the factory so many times? Because it Mattered.
49:22Martin Viecha (IR)So.
49:30Elon MuskSo I just can't emphasize how important cost is. It's not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable so people can buy it.
49:46Elon MuskAnd I keep harping on this interest thing, but I mean, it just raises the cost of car. I mean, we're looking at an additional, an internal analysis which we think is more or less on track, that when you look at the cost or the price reductions we've made in say the Model Y, and you compare that to how much people's monthly payment has risen due to interest rates, the price of the Model Y is almost unchanged if
50:22Vaibhav Taneja (CFO)you factor in the change in interest rates.
50:25Elon MuskYes, right. Which is what I'm trying to say. The thing that matters is the monthly pay. It's how much money do they have to put down? And do they literally have that in their bank account or will it check, bounce?
50:35Elon MuskAnd then what is the monthly payment? And it doesn't matter how. If that monthly payment is principal interest or whatever, it's just a number. And that number has to not cause their bank account to go negative as it so going from near zero interest rates to the current very high interest rates, the actual monthly payment is basically the same.
51:05Elon MuskIt's just a bunch more of it is going to interest. And there are some incremental challenges beyond that, which is the difficulty of getting credit at all has increased.
51:15Elon MuskAnd so the number of people who simply cannot get credit, period, even if they've got a job and everything's solid. The banks are a little gun shy on handing out credit, given that a bunch of them kicked the bucket earlier this year.
51:33Drew BaglinoThere's also just fewer options. Even if they hand out credit, there's
51:36Elon Muska few banks to go there. Does your bank still exist? Well, if your bank does not exist, you have to establish a relationship with a new bank. And so a lot of regional banks are died.
51:51Elon MuskAnd I mean even Credit Suisse, I mean, geez, that was a shocker. Got a 160-year-old ish Swiss institution that doesn't exist anymore. That's mind blowing. And I think there's still quite a few shoes to drop on the bad credit situation.
52:18Elon MuskCommercial real estate obviously is in terrible shape. You know, credit card debt has been rising significantly. The credit card interest rates are usurious. It's over 20% interest rates. Meaning like which over time becomes obviously extremely punishing because if somebody's paying 20% interest on their credit cards means they cannot pay them off.
52:48Elon MuskIf you cannot pay them off and you're still accruing interest at 20%. That's headed to a bad place.
52:58AnalystThank you.
52:59Martin Viecha (IR)Let's go to next question from George from Canaccords.
53:04Elon MuskThank you for taking my question.
53:06AnalystJust to focus on the cost per vehicle, you know, coming down in future quarters. As you discussed in your written remarks, I'm curious as to what the levers of that could be.
53:19AnalystIs it more scale, more factory utilization, is it material cost reductions, things like gigacasting? I mean, can you just kind of give us some data points to give us confidence that that's going to come down over time and if I can sneak one in, please.
53:32AnalystThere are press reports and I know how perilous it is to believe some of these, but they say that you've included radar as an option in some Model Y's in China.
53:45AnalystAnd I'm just here to ask if that's true and if so, why thank you.
53:51Elon MuskWe've not included radar. We have radar as a Tesla designed radar experiment in the Model S and X. That's it. We'll see whether that experiment is worth it. But there are no plans to integrate radar into 3 and Y.
54:15Elon MuskJust as humans drive well and in fact an excellent human driver can drive with amazing safety simply with their eyes, the car will, will far exceed the average human safety just with vision.
54:29Elon MuskFar, far, far. Because I mean the car is looking at all directions at once and we don't have eyes in the back of my head. So. And the computer never gets tired and never gets distracted, get drunk hopefully.
54:44Elon MuskAnd so radar is, you know, what really matters is how much does it affect the probability of an accident. And in order for the radar to be effective, you have to be able to do radar only braking.
55:04Elon MuskYou have to do actions that are that are radar only. Otherwise you get this disambiguation problem between vision and radar. That's why we actually turned off the radar in cars historically that we had to.
55:17Elon MuskAll three and Y used to have radar, but we turned it off because the radar actually generated more noise than signal. Now the Tesla designed radar is a high resolution radar that has some potential to be useful.
55:32Elon MuskBut the jury is, is still very much out on, on whether that is in fact the case.
55:41Elon MuskOn the cost question, I guess from the vehicle side, like you know, as Drew mentioned earlier, we are always trying to engineer our products to be cheaper to make and more efficient to make.
55:50Elon MuskThat comes obviously on the engineering side as we come up with new innovations, but as well on the supply chain side with our partners, we work with Them to automate some of their lines, remove their, you know, bottlenecks and their high costs as well.
56:03Elon MuskOn the logistics side, getting parts to the factory, it's not. It's not. It's not like a one thing that you have to check cost everywhere. And we do it ruthlessly at all times.
56:16Elon MuskOperations efficiency, all of the above.
56:19Vaibhav Taneja (CFO)Yeah. I mean, I would say there's a whole laundry list of things which we are chasing. We internally call it that cost attack, where we're literally going line by line and saying, how can we make it better?
56:31Vaibhav Taneja (CFO)And it's a grind.
56:33Elon MuskIt's a grind. It's a game of pennies. It's like Game of Thrones, but pennies. I mean, first approximation, if you've got a $40,000 car and roughly 10,000 items in that car, that means each thing, on average costs four bucks.
56:52Elon MuskSo in order to get the cost down, say by 10%, you have to get 40 cents out of each part on average. It is a game of pennies. We play it willingly.
57:05Elon MuskYeah. We've done it many, many times. And even something as simple as a sticker, there's too many stickers internally in the car that nobody ever sees. There's something as simple as a QR code.
57:25Elon MuskYou might think, well, putting a QR code on part. Why not just put them on there? It's like, well, are we actually going to use that QR code? Cost a penny.
57:34Elon MuskYeah, exactly. And then inevitably, sometimes the QR code doesn't go on properly or you can't read it properly, and then it stops the line. It's more than a penny.
57:42Elon MuskYeah, absolutely. Chipping away. I mean, it is trying to. It does feel like digging a tunnel with a spoon at times. Very much. Escaping prison.
57:58AnalystYeah.
58:01Vaibhav Taneja (CFO)You know, on top of it, like we said, you know, we did some factory upgrades, so we expect volume to go up. That would also bring some savings from higher production.
58:13Vaibhav Taneja (CFO)But then on the flip side, we're going to be ramping a new product like Cybertruck, which we talked about.
58:19Tesla ExecutiveSo.
58:20Vaibhav Taneja (CFO)Yeah, so those are the real puts and takes which we are working for.
58:26Elon MuskYeah. But there's not like some accidentally, some brick of gold that we shot and left in the car, unfortunately. And it's. We're trying to be very rigorous about improving the quality and capability of the car, because any fool can reduce the cost of a car by making it worse and just deleting functionality and capability.
58:52Elon MuskAnd that's how I call this sort of any fool. Like, if you want to lose weight and you Say, well, I need to
58:59Vaibhav Taneja (CFO)lose
59:02Elon Musk£15 right away. Well, you could chop your arm off, but then you're sitting there with one arm, you're still fat. Sort of like, yeah, you gotta work at it.
59:16Drew BaglinoYeah.
59:17Elon MuskYou actually have to eat it, Eat less food and work out. That's the actual way. And doctor's advice. Yeah. Super fun. Because food is delicious. And I personally am not a huge.
59:30Elon MuskI don't love working out. I know some people do. I wish I did, but I don't. Unless moving the mouse consists of working out, in which case I love moving the mouth.
59:41Martin Viecha (IR)All right, let's go to Colin Langham from Wells Fargo.
59:52Martin Viecha (IR)Colleen, can you unmute yourself?
59:57AnalystOh, sorry about that. Can you hear me now? Yes.
1:00:00Elon MuskOh, great. Thanksgiving question.
1:00:02AnalystYou said in the commentary that you're not going full tilt on the plant in Mexico until there's signs that the economy is strong. Can you continue at a 50% CAGR without that plant?
1:00:15AnalystAnd where would that come from? And any color on what you mean sort of not going full tilt? Could that plant get delayed indefinitely or what are we talking about?
1:00:25Elon MuskNo, we're definitely making the factory in Mexico. We feel very good about that. We put a lot of effort into looking at different locations and we feel very good about that location and we are going to build a factory there and it's going to be great.
1:00:43Elon MuskThe question is really just one of timing and there's going to be a broken record on the interest front. It's just interest rates have to come down. If interest rates keep rising, you just fundamentally reduce affordability.
1:01:02Elon MuskIt is just the same as increasing the price of the car. So I just don't have visibility into. If you can tell me what the interest rates are, I can tell you.
1:01:12Elon MuskWhen we should build the factory. We are going to bullet and I mean, I think we'll start the initial phases of construction next year. But I am still somewhat scarred by 2009 when if General Motors and Chrysler went bankrupt so.
1:01:35Elon MuskWell, that's now 14 years ago. That is seared into my mind with a branding irony because Tesla was just hanging on by a thread during that entire time. And we closed off a financing round in 2008 at 6pm, December 24, Christmas Eve.
1:02:01Elon MuskAnd if we had not closed that financing round, we would have bounced payroll two days after Christmas. So we, we actually closed that round on the last hour of the last day that it was possible, stressful to say the least, and then barely made it through 2009.
1:02:22Elon MuskSo I'm like, I want to just. I don't want to be going at top speed into uncertainty. A lot of wars going on in the world, obviously, as well, so.
1:02:42Elon MuskAnd we have room here, like in Giga, Texas, you said, where we still have room in this building. It's not full with cybertruck and moi. And, you know, there's plenty of growth opportunities still to have inside the building where our team already is.
1:02:53Elon MuskWe also have 2,000 acres here. There's also a lunch. We're actually only occupying a tiny corner of the land that we own. But, you know, we could. We could technically do all the scaling necessary just here.
1:03:07Elon MuskSo, I mean, personnel is our biggest challenge. And in that. The greater Orson area only has generously. The greater Orson area only has 2 million people. So people are moving here and they're willing to move here, but there is somewhat of a housing crisis.
1:03:26Elon MuskThey got to live somewhere, so.
1:03:30AnalystYeah.
1:03:35Elon MuskSo I don't know. I mean, I'm just curious. Like, I just. I'm not saying things will be bad. I'm just saying they might be. And I think Tesla is an incredibly capable ship, but we need to make sure if the macroeconomic conditions are stormy, even if the best ship is still going to have tough times, the weaker ships will sink.
1:04:06Elon MuskWe're not going to sink. But even a great ship in a storm has. Has challenges. Now, that storm will apply to everyone, not just us, and not just. Not just the auto industry, by everyone, I think.
1:04:24Elon MuskSo, you know, apart from necessary sort of staples like food and stuff, but, you know, so I just. I don't know. If interest rates start coming down, we will accelerate.
1:04:46Martin Viecha (IR)All right.
1:04:49AnalystIf any.
1:04:49Elon MuskScott, got any guesses on this? I'd love to be less wrong. And I apologize if I'm perhaps more paranoid than I should be, because that might also be the case, because I am.
1:05:03Elon MuskI have PTSD from 2009 big time. And in 2017 through 19, we're not picnic either. That was very tough going. So the auto industry is also somewhat cyclic because people tend to hesitate to buy a new car if there's uncertainty in the economy.
1:05:32Elon MuskSo product companies do very well in good economic times, and they don't do as well in tough economic times. So it's just. Whereas if somebody's selling bread, then I think people still need to have bread.
1:05:53AnalystYeah.
1:05:54Elon MuskIf we need for all the time. But new car, you don't have to have bright cement.
1:05:58Vaibhav Taneja (CFO)Especially if you have wars going on and then that impacts your sentiment.
1:06:03Elon MuskYeah, I mean, people are reading about wars all over the world, you know, buying a new car tends to not be front of mind.
1:06:15Vaibhav Taneja (CFO)All right.
1:06:15Martin Viecha (IR)Unfortunately, that's all the time we have today. Thank you very much for all of your good questions, and we'll see you again in three months.
1:06:22Elon MuskThank you very much.