Tesla Q3 2020 earnings call (2020)
Questions on ElonsFAQ asked in this interview (10)
Transcript
20:01OperatorLadies and gentlemen, thank you for standing by and welcome to the Tesla Q3 2020 financial results and Q and a webcast. At this time all participants are in a listen only mode.
20:12OperatorAfter the speaker presentation there will be a question and answer session. To ask a question during the session, you will need to press Star one on your telephone. If you require any further assistance, please press Star zero.
20:23OperatorI would now like to hand the conference over to your speaker, Mr. Martin Vieja, Senior Director of Investor Relations. Please go ahead sir.
20:32Investor RelationsThank you Sherry and good afternoon everyone. Welcome to test third quarter 2020 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn and a number of other executives. Our Q3 results were announced at about 1pm Pacific Time in the update deck we published at the same link as this webcast.
20:50Investor RelationsDuring this call we will discuss our business outlook and make forward looking statements. 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.
21:07Investor RelationsDuring the question and answer portion of today's call, please limit yourself to one question and one follow up. Please press Star one now if you would like to join the question queue.
21:17Investor RelationsBut before we jump into the Q and A, Elon has some opening remarks.
21:20AnalystElon.
21:22Elon MuskThanks Martin. All right, so Q3 was our best quarter in history. We achieved the record production, delivery, record revenue, record net income, both GAAP and non GAAP and record free cash flow of $1.4 billion.
21:37Elon MuskThis is really due to the amazing execution by the Tesla team. I could not be more proud to work with such a great group of people. Just really kick out performance across throughout the world.
21:49Elon MuskOf course we had battery day so we hosted our plans for how we can expand the future and improve core battery technology, core cell technology at the form factor level, chemistry level, and I think most significantly at the manufacturing technology level.
22:07Elon MuskA comment I've made in the past is that I think Tesla's long term competitive strength will be primarily manufacturing. This is counterintuitive but I'm quite confident this will be what happens.
22:19Elon MuskSo we presented what the team's been working on for a long time. Batteries. We wanted to step back and really rethink batteries from scratch first principle thinking, just look at the fundamental physics and say what?
22:33Elon MuskRather than compare to other parts in the market, just say from a physics Standpoint, if you what's the limit of physics? What's the platonic ideal of a perfect cell and how close can we get there?
22:47Elon MuskAnd that was our aspiration and I think we've got a pretty good approach to it which will only get better over time. And we went through all of the engineering solutions for every important part of battery design and production and we'll continue to iterate on that and just recursively improve the core cell and battery technology.
23:09Elon MuskThe result we think in a few years will be batteries that cost half as much and where the capital expenditures required are a third or less of what they are today.
23:22Elon MuskAnd we expect Giga Berlin will see our first battery cell production line at scale. Regarding the full self driving beta release, the Autopilot team, again just a really all star team.
23:38Elon MuskI spent a lot of time with the autopilot team and there's a lot of really talented people on that team who worked incredibly hard to make the, to get the beta release out.
23:49Elon MuskSo I just really like to thank them for their hard work and it's just a very smart group of people. So I think we're starting very slow and very cautiously because the world is a complex and messy place.
24:05Elon MuskAnd so we put it out there last night and then we'll see how it goes and then probably release it to more people this weekend or early next week and then just gradually step it up until we have hopefully a wide release by the end of this year.
24:26Elon MuskAnd of course as the system collects more data and it becomes more robust. So it's sort of like, you know, how does Google as a search engine get better?
24:39Elon MuskIt's because everyone is programming it by asking it questions all the time and clicking on particular links. So it's got this great feedback loop and that makes it an extremely effective search engine.
24:50Elon MuskIt's the same thing for autonomy, having on the order of a million cars that are providing feedback and specifically feedback on strange corner case situations that you just can't even come up with in simulation.
25:05Elon MuskThis is the thing that is really valuable. It's not like the obvious stuff, obvious stuff you can do in simulation, weird corner cases. Only reality can give you that.
25:17Elon MuskSo that's. But we're able to say, okay, we need to train the system on this corner case situation and look for examples so we can then train against those examples and improve some very esoteric corner case.
25:36Elon MuskAnd also important to emphasize that this is a generalized neural net based approach. There is no need for high definition maps or a cell phone connection. So the Car.
25:48Elon MuskThe system is designed such that even if you have no connectivity whatsoever and you're in a place that you have never been to before and no Tesla has ever been there, the car should still be able to drive just like a person.
25:59Elon MuskThat is the system that we are developing and aiming to release this year. Then in terms of capacity build out, we're making progress on three major factories. We're continuing to expand Shanghai significantly, which is going incredibly well.
26:20Elon MuskThe Tesla China team is just, I mean, incredibly good, super smart, work hard. It's like I'm always amazed by how much progress the Tesla China team makes. It's beyond all reasonable expectations.
26:37Elon MuskAnd then we're under construction in Berlin and Austin, so. Also making good progress there. Yeah, it's overall going well. I should make the point that for Berlin and Austin we do expect to start delivering cars from those factories next year.
27:01Elon MuskBut because of the exponential nature of the spool up of a manufacturing plant, especially one with new technology, it will start off very slow at first and then become very, the upper will become very large.
27:18Elon MuskJust in general, manufacturing follows the S curve. And, and I think sometimes people, if they haven't spent a lot of time manufacturing, kind of think that once you have a factory you can just sort of turn it on and it's at capacity.
27:32Elon MuskBut it will typically take about 12 to 18 months to reach capacity and that is a very fast period of time, especially for new technology. So yeah, I'd say 12 to 24 months even.
27:48Elon MuskSo generally what I see is the manufacturing capacity is underestimated in the beginning for quite some time. Then it is sometimes overestimated because this is an S curve. It goes exponential to linear to logarithmic.
28:11Elon MuskAnd it's actually an incredibly hard thing just bringing a production plant to volume technology because you can actually think of it like you've got two first order approximation, 10,000 unique parts of processes, all of which operate on an S curve and with a bunch of uncertainty and you can just slide 10,000s curves on an X axis.
28:37Elon MuskAnd that's what bringing up a large automotive plant is like. And which one's the, the laggard? Which one's the leader? It's very difficult to tell and it's constantly changing.
28:51Elon MuskSo it's really one of the most difficult challenges I've ever seen. So let's see. In conclusion. Thank you. All we've achieved would not be possible without the incredible hard work of tens of thousands of Tesla employees.
29:10Elon MuskAnd all the people at our suppliers as well like to thank our suppliers we continue to grow as fast as we can while focusing on cost control and improving quality.
29:21Elon MuskAnd ultimately the best company will be that which makes great products at an affordable price. And that is our goal. I think I've never felt more optimistic about the future of Tesla than I than I do today.
29:37Elon MuskAlso like to thank investors who stuck with us through thick and thin. This is. I think there's a lot more good stuff to come. All right, with that, we can move to questions.
29:50Investor RelationsThank you, Lim. I think our CFO Zachary Kirkhorn has some opening remarks as well.
29:55Elon MuskOkay, sure.
29:56Tesla ExecutiveYeah.
29:56Zachary Kirkhorn (CFO)Thanks, Martin. Overall, our financial health continues to rapidly improve, with Q3 being another great quarter on nearly all dimensions. As Elon has mentioned mentioned, on net income, we achieved our fifth sequential quarter of profitability, our best net income and nearly double digit operating margins.
30:15Zachary Kirkhorn (CFO)Two things that are important to note to set context for Q3 profitability. First, the regulatory credits business was stronger than our expectations and we are tracking to more than double this year compared to last.
30:26Zachary Kirkhorn (CFO)Second, as a result in the rise of the market cap of the company, the second and third tranche of the CEO grant vested during the quarter. Additionally, we have begun expensing one more tranche, resulting in roughly 300 million of combined period expense.
30:41Zachary Kirkhorn (CFO)I think it's reasonable to view the quarter excluding both these items to get a true sense of the health of the core business. On automotive gross margin, excluding regulatory credits, it increased materially from 18.7% to 23.7%, with some of our programs achieving greater than 25% gross margin.
31:01Zachary Kirkhorn (CFO)Keep in mind that inefficiencies related to factory shutdowns affected our margins in Q2, we continue to reduce our manufacturing and operational costs. We are also seeing benefits from the ongoing upward trend of locally built and delivered cars, which has increased from under 50% at the beginning of last year to over 70% most recently, which is a core component of our cost reduction strategy.
31:25Zachary Kirkhorn (CFO)We are also seeing financial benefits from improved vehicle reliability across across the fleet services and other margin improved yet again driven by our used vehicle business and efficiencies in our service operations.
31:39Zachary Kirkhorn (CFO)In the energy business, we achieved record storage deployments, aided by the positive reception of the Megapack and Powerwall products as production and deployments grow. Additionally, our solar deployments doubled and we're continuing to make progress on that front.
31:54Zachary Kirkhorn (CFO)On cash flows, our cash balance increased to 14.5 billion, which includes free cash flows of 1.4 billion, our highest yet. Our operating cash flows were 2.4 billion, including a 600 million benefit from working capital as we've made progress on days of receivables and inventory despite a reduction in days of payables.
32:15Zachary Kirkhorn (CFO)Note that the majority of our operating cash flows are driven by the strengthening
32:18Tesla Executiveof our core operations.
32:21Zachary Kirkhorn (CFO)Capital expenses grew to 1 billion driven by model Y investments in Shanghai, Berlin and Austria. In as for previous investments in Model 3 Shanghai and Model Y in Fremont, we are expecting these programs to have already fully paid for their respective investments by the end of this year.
32:38Zachary Kirkhorn (CFO)Looking forward to 2021 and 2022, we have revised up our expectations for capital spending by 2 to 2.5 billion, which we have ample liquidity and expected cash flows to fund.
32:51Zachary Kirkhorn (CFO)This is driven by an increase in in source scope for certain factories, including battery cell manufacturing and as well as investments to enable greater capacity expansion in the future.
33:02Zachary Kirkhorn (CFO)While we expect the return on our investments to remain very strong, keep in mind that with additional scope and location specific costs, the payback of these investments may be slightly longer than what we saw in Model 3 in Shanghai and
33:13Tesla ExecutiveModel Y in Fremont.
33:15Zachary Kirkhorn (CFO)Financing cash flows were 4.5 billion as we reduced use of our working capital lines, offset by a 5 billion equity raise in September. Note that we're currently expecting over a billion in early convert paydowns in Q4, primarily associated with the 2021 conversions, but also our 2022 and 2024s.
33:34Zachary Kirkhorn (CFO)Looking forward, we remain focused on strengthening the core fundamentals of the business. We are increasing production to meet demand, reducing costs including localization, driving higher efficiency across the business and tightening our cash conversion cycle.
33:49Zachary Kirkhorn (CFO)We've made tremendous progress on this front over the last year and a half. We're also aiming to achieve our original 2020 guidance of 500,000 deliveries despite the operational interruptions earlier in the year.
34:01Zachary Kirkhorn (CFO)While this goal remains a genuine challenge, we believe it's possible with tight execution across the company. So congratulations again to the Tesla team for a great quarter and a great year.
34:11Zachary Kirkhorn (CFO)I'll hand it over to RJ Johnson, who joined Tesla earlier in the year and is leading our energy business for a few companies.
34:17Tesla Executive (Energy)Comments thank you Zach. First, I'd like to also thank and congratulate the team on a job well done. Q3 was a strong quarter for the energy business and we're poised for continued strong growth in energy storage and solar.
34:29Tesla Executive (Energy)Megapack is going to be a large growth segment for the business and deployments will continue to expand rapidly as the product reaches full capacity. We have more demand than supply through 2021 and we continue to ramp the product to match unprecedented demand across the globe through 2023 and beyond.
34:47Tesla Executive (Energy)Our order book is rapidly filling up through 2023 in a multiple gigawatt hour scale. Large scale solar plus storage is now more cost effective than traditional fossil fuel generation in many locations across the globe.
35:01Tesla Executive (Energy)This trend will continue as we remove costs which will further displace existing and new fossil fuel generation. This is true for stand alone storage as as well well many customers are utilizing Autobidder to maximize returns as we optimize our hardware and software with advanced real time bidding strategies that continue to outperform the market where deployed for powerwall, we see continued strong demand for residential storage as customers seek increased reliability and backup home generation.
35:32Tesla Executive (Energy)We have a very large backlog of powerwall orders and we continue to invest to increase capacity to fulfill customer orders. We're just now capturing the full power of customer sided Solar plus storage as customers in some jurisdictions are providing services back to the grid when they don't need to consume energy or have backup power.
35:51Tesla Executive (Energy)This has massive potential to reduce system costs and make the grid more efficient globally. In the United States we lowered our residential solar retrofit price to $1.49 a watt after tax incentives incentives which is the lowest in the industry.
36:07Tesla Executive (Energy)We're able to do this by leveraging our online vehicle ordering infrastructure which substantially reduces soft cost associated with sales and marketing. As a result, our fixed costs remain relatively flat as our volume and efficiency increase leading to increased profitability in the retrofit business.
36:24Tesla Executive (Energy)We're using the same methodology across the entire energy business including service to capitalize on the technology backbone of the company. Company Solar Roof is especially exciting as we've gained significant experience over the last year in the installation process which is a key enabler to scale the business.
36:43Tesla Executive (Energy)We've recently demonstrated our ability to complete solar roof installation in just one day. Please note, this still requires one to two days to remove the existing roof and prepare it for the solar roof installation.
36:55Tesla Executive (Energy)Clearly, there will be a range of installation times based on size, complexity, weather and other factors. Overall, our reduced installation time provides a better customer experience and will enable the business to grow exponentially as scale effects allow for increased efficiency.
37:10Tesla Executive (Energy)In closing, we believe the energy segment is poised for a strong growth as we continue to focus on increasing scale while reducing cost to maximize profitability. I want to thank the team again for their hard work and I look forward to another strong quarter ahead of us.
37:24Investor RelationsThank you very much everyone. And let's begin with questions from set.com the first question from retail shareholders is if Tesla Planning to start 4680 cell production at Giga Berlin at the same time as vehicle production.
37:38Investor RelationsCan Tesla share more information on what products will use the battery cells from the pilot line in Fremont?
37:49Elon MuskYes. Drew, do you want to take that?
37:52Tesla ExecutiveSure, sure. Yeah. We will incorporate 4680 design solutions into many applications in time across both energy and vehicle. And we can use our pilot production facility in Fremont to support the new factory in Berlin as it ramps.
38:09Investor RelationsThank you very much. Let's go to the next question, which is question number two from retail shareholders. Does Tesla's tablet cell design allow for significantly higher peak charging rates?
38:21Investor RelationsDoes it improve the required taper curve?
38:25Tesla ExecutiveYeah. The fundamental limitation on charge rate and lithium ion batteries is avoiding lithium plating on the anode. And while the tablet's architecture helps avoid overheating because it's a more power dense architecture at high continuous charge rates, it doesn't change the anode plating story.
38:45Tesla ExecutiveElectrode design and anode material choice more directly determines the maximum charge rate and how to avoid that lithium plating problem.
38:53Investor RelationsOkay, thank you very much. The third question from retail is would FSD be able to be transferred to our next vehicle or pay a transfer fee? It would add a broad, it would add to a brand loyalty.
39:10Investor RelationsThe same way gaming companies and cell phone companies keep you in their ecosystem system by letting you transfer purchases to upgraded hardware.
39:24Elon MuskYeah, I think we'll give it some thought.
39:31Investor RelationsOkay. The fourth question is what are the remaining constraints to be solved for solar roof installations to ramp significantly? Carl?
39:43Carl PetersonYeah, this is Carl Peterson. I'm on the solar roof engineering and installation. The biggest constraint right now in solar roof ramp is getting enough installers on board and trained and experienced.
39:56Carl PetersonWe've made a lot of progress this in Q3 and we're continuing to hire. The next opportunity is improving the material flow on the job site. We've talked about this a lot in the factory as well, that setting up the right packaging kitting so that every installer on the roof has the parts they need at their fingertips.
40:16Carl PetersonAlso, we've had great response from third party roofing contractors as they're ramping up installations for solar roof on their customer homes, which is a big source of future growth.
40:28Elon MuskThank you, Carl. Here's a way to think about a product. In my opinion. You have to say, I think what do you want the world to look like when you look around the neighborhood future decade from now, you know, what do you want?
40:46Elon MuskWhat products are going to make your life better? What future do you want? And I think a Future where we've got beautiful roofs with generating energy that are top and resilient and better in every way than a regular roof and alive with energy.
41:03Elon MuskThat's the future we want. Solar roof is a killer product. This will become obvious next year.
41:15Investor RelationsThank you. And the last question from retail shareholders is, you recently referred to Tesla as a conglomerate of startups. Other than manufacturing electric cars, what do you suppose will be the most valuable business units within Tesla over the next five to seven years?
41:29Tesla ExecutiveYears.
41:29Investor RelationsCould you envision any of them ever spinning out from Tesla?
41:35Elon MuskWell, as thinking about this today, Tesla is probably, there's probably in excess of a dozen startups effectively in Tesla. Every major product line is a startup, every new big new plant is a startup.
41:56Elon MuskAnd sometimes, frankly, we have to learn the lesson a few times before it sinks in.
42:04Elon MuskEven things like service and sales are setups. Other car companies, OEMs, they don't own their sales and service. So we have to create our service network, we have to create our sales and delivery network.
42:17Elon MuskWe have to do this in, I don't know, 40 countries, multiple languages. Something that people don't really even know much about is our internal applications team that writes the core technology that runs the company.
42:34Elon MuskWe are not dependent on enterprise software. Like, for those who understand what this means, this is a very big deal. And my hat is off to the great work of the internal applications team.
42:53Elon MuskThey write the Nova system, the operating system of the company, the Tesla operating system. Extremely fundamental. Obviously insurance is substantial. So insurance could very well be 30, 40% of the value of the car business, frankly.
43:14Elon MuskAnd as we've talked about before, with a much better feedback loop, instead of it being statistical, it can be specific. Now obviously somebody does not have to choose our insurance, but I think a lot of people will.
43:31Elon MuskIt's going to cost less and be better, so why wouldn't you? And the whole autonomy thing as a startup, the computer chip was designing our own computer chips was a startup, obviously cells startup, designing and making our own power electronics for the drive unit, designing, manufacturing our own motors, chargers, the supercharger network is a startup.
44:02Elon MuskThe thing I think that people just don't really understand about Tesla is that, that it's a whole chain of startups and they're like, well, you didn't do that before.
44:12Elon MuskYeah, we're doing it now. I mean, I think so far we have not. We've maybe been a bit slow with some of the startups, but I don't think we've had any of them fail.
44:26Elon MuskSo so far so good. No plans to spin anything out. That just sounds like added complexity.
44:37Investor RelationsThank you very much. Let's go to institutional investor questions. The question number one is, as a bridge to the route hailing network, could you leverage the insurance product to give customers the ability to rent out their vehicles via the app, thereby enabling the car to make money for them?
44:55Investor RelationsSo, basically, proprietary version of two roads.
45:01Elon MuskI think we're going to focus on enabling the robo taxi system. So you can just basically, like, that's really quite a small subset of the overall robotaxi or robocar thing, where you can have the car be autonomous for you, you can have the car be shared with friends and family, you can add or remove it from the network, you can have it be entirely in the network.
45:25Elon MuskI mean, if you're an Uber or Lyft driver, you could be managing, you know, a fleet of 10 cars. This sort of seems like a, you know, shepherd tending the flop type of thing.
45:37Elon MuskIt's like you just get way more leverage. So, you know, I think that's sort of. We could do that and it wouldn't be very difficult, but we're going to just be focused on just having an autonomous network that has sort of elements of Uber, Lyft and Airbnb.
46:01Elon MuskYeah.
46:04Investor RelationsThank you. And the second question from Institutionals is residential energy use accounts for roughly the same magnitude of carbon emissions as road transport. Today's boilers and aircon units are profoundly unsexile.
46:18Investor RelationsCould you elaborate on hints that H Vac advances with a Y could also find use in a domestic system?
46:28Elon MuskYeah, yeah, go ahead, Drew.
46:32Tesla ExecutiveI was just going to say, I mean, I think one of the things we focused on with the Model Y and now Model 3 heat pump system was learning how to build a tightly integrated system capable of moving heat heat to and from anywhere, really.
46:45Tesla ExecutivePowertrain, battery, cabin, the environment, outside, ambient temperatures all the way down to like negative 20C, so 30C. And that's definitely applicable to the home's needs of heating and cooling the home and the water in your house.
47:03Tesla ExecutiveSo certainly applicable, Elon.
47:06Elon MuskYeah, absolutely. I think for heat pump in the car, being able to use the battery as both a thermal and an electric energy reservoir is very significant. Same thing could be applied to a home with the water heater and the battery pack itself.
47:26Elon MuskOf course, I think there's potential for an integrated home system that kind of does power generation, storage, heating, cooling, air filtration, you know, water purification in a really tight package.
47:46Elon MuskWe don't actually have like a prototype or anything, but I think Conceptually, that is something that would be probably good to have.
47:55Investor RelationsThank you. The third question from Institutionals is if meeting your long term volume targets requires price reductions that preclude you from achieving your low double digits stated margin targets for the autos business, will you still reduce prices accordingly?
48:16Elon MuskWell, we want to make our cars more affordable and it's always important to separate out affordability from value for money. If the car is too expensive or given product is too expensive and people don't have enough money in their bank account, they simply can't buy it no matter what the value proposition.
48:33Elon MuskSo it is important to lower the prices in order to such that people can literally just have enough money to buy it. I do not think we lack for desire for our products, but we do lack for affordability.
48:43Elon MuskAnd so we have to improve the affordability of our products so they are not out of reach of people. We want to bring them more in reach over time, but also improve our cost of production.
48:57Elon MuskObviously we get hopefully a little bit better every year, sometimes a lot better. And in terms of margins, all of these margins are going to look pretty comically small when you factor in autonomy.
49:16Zachary Kirkhorn (CFO)Yeah, two things I'll add to that,
49:21Tesla Executivewithout a doubt. We're moving forward to push as much volume as we reasonably can. So Elon talked through earlier kind of how the S curve in the timeline of incremental factories looks like.
49:33Tesla ExecutiveAnd so we're moving full speed ahead with as much volume as we can reasonably move forward with.
49:40Zachary Kirkhorn (CFO)The second comment I'd make is if you just look at the journey of
49:43Tesla Executivethe company over the last year and a half, we have grown volumes and
49:48Zachary Kirkhorn (CFO)grown gross margins despite a number of
49:52Tesla Executiveprice reductions over that period of time. And we have kept OPEX fairly stable during that period of time as well. And so the key is what Elon mentions here.
50:01Tesla ExecutiveI mean, we have to improve the affordability of the vehicle. We have to also continue to make progress improving the cost structure of not only cogs, but of opex, which we've demonstrated over the last year and a half, I think quite successfully, and improve the value of the vehicles at the same time.
50:19Tesla ExecutiveSo in addition to reducing the cost of the car, we're making the cards better. And that's the formula to sell the volume. That's what we're focused on.
50:29Investor RelationsThank you very much. The fourth question from Institutionals is at what point do you expect to have enough internal or external battery capacity to start ramping up stationary storage deployments again?
50:43Elon MuskYeah, we're ramping up stationary storage a lot. So I mean it's approximately doubling that. We expect it to approximately double next year. So that's pretty good. And hopefully we can accelerate that in years to come
51:08Tesla Executiveand approximately doubling it this year too. So the growth.
51:11Elon MuskYeah, yeah. I mean if you just keep doubling things, pretty soon you hit the mass of the universe and we'll need to start turning Jupiter into cells.
51:23Investor RelationsAnd the last question from institutionals is manufacturing is hard. Delays happen. What contingencies do you have in place to ensure that bottlenecks that you might encounter while renting internal cell production will not preclude you from your ability to hit your model Y production volume targets in Berlin and Texas?
51:44Elon MuskYes, I think we've tried to de risk 2021 so that there's almost no dependency on our internal cell production. It's very, very small. The internal cell production will help US ramp in 22, but we're not dependent on it for 21.
52:07Tesla ExecutiveAnd to de risk the manufacturing system itself. That was one of the reasons why we located our pilot production facility here in Fremont so we can rapidly iterate on manufacturing scale up challenges provide rapid feedback to the design of both the product and the equipment.
52:23Elon MuskYeah, our pilot line is pretty big as pilot lines go. It will be in the top 10 cell factories on Earth, I believe.
52:31Tesla ExecutiveYeah, that is true.
52:34Elon MuskI'll subscale one,
52:38Investor Relationsthank you very much. And now we can go to questions from analysts online.
52:43OperatorCherie, thank you again. We remind you to please ask one question and one follow up question. Our first question will come from Rod Lachey with Wolff Research. Please go ahead.
52:55AnalystHi everybody. Just wanted to ask about the targets from your battery day. Look like you could be approaching something like 20 million vehicles by 2030. If you hit those goals.
53:09AnalystCould you maybe share with us a little bit more of a midterm target, like where would you be by 2025 and maybe give us a little bit more insight into the investment required to get there just to put that extra 2 to $2.5 billion per year into contract.
53:27Elon MuskYeah, I mean I think the tricky thing with trying to predict things midway through an exponential is that if things are doubling every year or Even just growing 50%, then if you shift one plus minus one year, it has a huge effect on the number.
53:46Elon MuskSo then it sounds like, wow, you either massively exceeded or massively undershot. But actually what's going on is a giant S curve. So a whole bunch of pretty big S curves that integrate into a gigantic S curve.
54:03Elon MuskSo that's why it's difficult to predict the Middle. And I'm not saying for sure we'd hit 20 million vehicles, but it does seem like a good goal to have because that would mean that we're replacing 1% of the global fleet per year.
54:16Elon MuskAnd it's difficult to say that we're. Are we really changing the world if we're not switching out 1% of the global fossil fuel vehicles? I mean, I'm not sure that we can make that argument unless we change at least 1% of the vehicles per year.
54:34Elon MuskSo that's where the 20 million vehicles per year comes from. It's like 1% of 2 billion vehicles, which is the global fleet. Currently, the global fleet is growing, so probably be a bit bigger in the future.
54:49Elon MuskSo, you know, it's hard to say. It's like, I don't know, map an S curve to a $20 million, 20 million vehicle target in 2030 and move the slider around and see what that number looks like.
55:03Elon MuskThat will give you about as much insight as we have.
55:06Tesla ExecutiveOkay.
55:08AnalystAnd just secondly, if solid state lithium metal were to become viable, could you just maybe just pass along your perspective on that and would you be able to repurpose most of what you're putting into place for changes in technology?
55:24Elon MuskYeah, I mean, answering the first,
55:28Operatorthe
55:28Elon Muskcell production system is fairly agnostic on anode, cathode, electrolyte, Subaru, that kind of thing. It's. We could change and we will change and upgrade the all aspects of the cell.
55:44Elon MuskSo we could, for example, make iron phosphate or nickel, manganese or something like that. It's quite adaptable. So I wouldn't say it's too much to worry about the lithium like a pure lithium anode is maybe not, it's not as.
56:08Elon MuskIt's not as great as it may sound, you know. Yeah. Volumetrically you're not gaining all that much because if you've got nothing on the, let's say, on the anode side and just played out lithium, it's got to go somewhere.
56:29Elon MuskSo you've got to have room for.
56:32AnalystYeah.
56:32Tesla ExecutiveLithium is less volumetrically dense in the pure metal form than it is in turculated into silicon. So it's kind of hard to understand, but that's the truth. And then as we showed in our presentation, the total anode cost that we're talking about is only a dollar or two per kilowatt hour.
56:51Tesla ExecutiveSo the value of removing the anode material isn't super high either. So. So, yeah, I totally agree, Ilan.
56:59Elon MuskYeah, exactly. But if it should turn out that a pure Lithium anode is the right move. That would simply. That would be no problem, Right, Agreed.
57:09AnalystAll right, thank you.
57:11Investor RelationsThank you. Next question, please.
57:13OperatorOur next question will come from Colin Rush with Oppenheimer. Please go ahead.
57:18AnalystThanks so much, guys. You're talking about insourcing a number of processes. Can you talk a little bit about which processes you're moving in house, in equipment that you're planning to make yourself versus buying from other folks.
57:33Elon MuskSo are you talking about the. For cell manufacturing or something or.
57:39AnalystFor sure, as well as on the molds that you talked about. But you know, in terms of the capex budget that you mentioned earlier, talking about, you know, the number of processes coming in house and which equipment pieces you're planning to make yourself versus buying.
57:57Elon MuskOkay, well, I mean, Tesla is absurdly vertically integrated compared to other auto companies or basically almost any company. We have a massive amount of internal manufacturing technology that we build ourselves.
58:12Elon MuskWe literally make the machine. In fact, we design. It's like, okay, what is the thing we want to make? Design the machine that will make that thing. Then we make the machine.
58:20Elon MuskThis is what, this makes it quite difficult to copy Tesla, which we're not actually all that opposed to people copying us, but it's quite difficult because you can't do catalog engineering.
58:31Elon MuskYou can't just. I'll pick up the supplier catalog, I'll get one of this machine, one of that machine. Bingo. I'm now on Tesla. You have to. There is no catalog.
58:40Elon MuskSo we made the machine that made the machine that made the machine. No, no, we don't want to get carried away here, but. And quite frankly, we would like to outsource less.
58:50Elon MuskThat would be great because then if we could outsource, if we could take something that we're doing and outsource it, then we could take those people and we can have them do something else.
58:59Elon MuskBut yeah, it's like we just make a crazy amount of machinery internally. Not well understood. If you walk around the factory, get a sense for it and yeah, I don't know if this is like a smart move, but I just know, like, hey, if we're trying to make progress and nobody's got the machine that we need, we got to make it.
59:27Elon MuskSo that's what we do.
59:31AnalystOkay, and the second question is really around. You know, the balance sheet has really changed. You guys have run awfully lean and you've got a lot more cushion at this point, you know, and obviously there's opportunities around insurance to drive up some of the cost of ownership as well as financials how are you guys thinking about that as you move into trying to accelerate demand a little bit and your ability to leverage your access to capital, enable some of those other products?
59:57AnalystIs that changing from where you've been in the past?
1:00:01Elon MuskYeah, something like insurance is a good example of a product that's basically made by our internal applications team. So we made the insurance product and connected to the car, look at the data, calculate the risk.
1:00:15Elon MuskThis is all internally, basically internal software application. It's pretty low capital but has very high return. I don't know. We're trying to spend money at the fastest rate that we can possibly spend it and not waste it.
1:00:33Elon MuskThat's our current plan. And so it's quite hard to spend money without wasting it or just, you know, we're like really just trying to not waste too much of it, frankly.
1:00:44Elon MuskWe will certainly waste some of it, but trying to waste, not waste too much of it, this is very difficult. But otherwise we just try to spend money as quickly as possible in a way that is sensible and yields more value than it costs.
1:01:04OperatorThank you. Our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.
1:01:10AnalystHey Elon, question on lidar. If LIDAR were totally free, would you want to use it in your cars near term? Would that tech significantly help Tesla and the training of your neural network for fsd?
1:01:28Elon MuskI mean, totally free? Probably not. I think, probably. I think even if it was free, we wouldn't put enough.
1:01:39AnalystOkay, let's follow up then. Amazon appears to be investing and building an autonomous or electric transport network of some ilk through some organic investments, but also Zoox, Aurora, Rivian, et cetera.
1:01:55AnalystWhat advice would you give Jeff Bezos in his endeavor?
1:02:03Elon MuskWell, I don't know how much he cares about this, but I guess he sure is investing a lot of money in it.
1:02:14Elon MuskI mean, I think he also needs to vote for if you care about autonomy. And he's focused on vision because the entire road system is based on passive optical.
1:02:24Elon MuskSo you have to solve passive optical to have a self driving system that is a generalized solution. And once you solve passive optical, you've solved self driving, so why bother with anything else.
1:02:36AnalystThanks, Elon.
1:02:38Investor RelationsThank you. Let's go to the next question, please.
1:02:40OperatorOur next question will come from Pierre Faragu with New Street Research. Please go ahead.
1:02:47AnalystHey, thanks a lot for taking my question. A very simple one. You haven't talked that much about like the cybertruck today and I was wondering how like the ramp of that product is looking like when we, when we should See the product hitting the road and how fast you expect to ramp volumes.
1:03:10AnalystCan I have a quick follow up? Sure.
1:03:13Elon MuskI was in the studio actually last Friday with Franz and the team just going over.
1:03:22Elon MuskSome improvements to the cybertruck. Generally at Tesla, we really aim to make the car that is delivered better than the car that is unveiled because it always drove me crazy.
1:03:35Elon MuskCar companies would unveil these awesome looking cars and you're like, great, can't wait till I make that. And then the car they actually make is like much worse and that is just, it's like really disappointing.
1:03:47Elon MuskSo, man, we always want to make the car that we deliver be better than the car we unveil. And that's the goal with the cybertruck. So there's like a lot of small improvements compared to what was unveiled.
1:04:03Elon MuskI think it's going to be better than what we showed and yeah, that's cool. It's going to be made in Austin, so this can depend on completing that factory.
1:04:18Elon MuskAnd there are obviously new technologies with the high hardness kind of armored exoskeleton. This has never been done before. So there'll probably be some challenges along the way. Obviously something that's extremely high hardness and difficult to scratch or dent is also difficult to form.
1:04:43Elon MuskSo there's manufacturing challenges there. That's why it's so planar. Although it also looks good, I think from a planar standpoint.
1:04:55Elon MuskYeah, if all goes well, we will be able to do some cybertruck deliveries towards the end of next year. Yeah. So it's difficult to predict. I'd say there's probably a lot of deliveries in 22 and some deliveries towards the end of next year if things go well.
1:05:18AnalystOkay. And now I'm trying to get a sense of how next year is going to look like. So if I look at your production capacity at the end of this year, it's going to be almost 850,000 units on an annualized basis.
1:05:33AnalystAnd you're going to increase capacity in Shanghai open. Berlin, you say today you would open Austin as well. So you're probably going to end the year above a million units.
1:05:45AnalystAnd so, so am I right thinking next year we should expect you to deliver like somewhere like between 840,000 and 1 million cars during the year.
1:05:58Elon MuskYeah, go ahead.
1:06:02Zachary Kirkhorn (CFO)Yeah, we'll provide guidance on 2021 after next earnings call.
1:06:08Elon MuskI mean it's in that vicinity. Yeah, you're not far off.
1:06:17AnalystThank you.
1:06:18OperatorThank you. Thank you. Our next question will come from Dan Levy with Credit Suisse. Please go ahead.
1:06:26AnalystHi, good evening. Thank you. Just wanted to start with a question on the quarter. Zach, maybe you could give us a sense of where directionally model Y and China Model 3 gross margin was in the quarter relative to Fremont Model 3 and then just a little more color on the gross margin in the quarter.
1:06:45AnalystWas this just purely a function of higher volume or was there also FSD revenues just puts and takes on the gross margin in the quarter?
1:06:53Tesla ExecutiveSure. On your question about fsd, there was a small amount of deferred revenue released. It's not particularly material in the the $10 million range for the quarter. With respect to product margins, what we're seeing across the board is just continued reduction in cost really across every product.
1:07:15Tesla ExecutiveShanghai continues to make good progress there. Model Y cost is also coming down quite quickly as we ramp that. But we've guided in the past that Model Y cost should be roughly equivalent to the Model 3 built in Fremont.
1:07:29Tesla ExecutiveCost, cost, it's not quite there and it's also a bit of a moving Target As Model 3 Fremont cost comes down. Model Y also has to come down with that.
1:07:37Tesla ExecutiveBut we're generally seeing strength in Shanghai margins, strength in Model Y margins and not too far off of it, we're seeing strength in Model 3, Fremont and SNX margins.
1:07:50Tesla ExecutiveSo overall for the quarter, I think it was quite a good story for the products.
1:07:55AnalystGreat, great, thanks. And then this is a follow up. I wanted to ask about your strategy in Europe and I think your strategy generally has been you cut costs.
1:08:06AnalystSo that allows you to cut price and you can generate the extra volume. And I think that's what we're seeing in China, the use of lfp. That's a good example.
1:08:15AnalystSo once you ramp in Berlin, what's a reasonable expectation of what pricing might look like in Europe and how flexible are you going to be on pricing, you know, to generate incremental reg credits.
1:08:28AnalystSo you know, margins out of the gate that are a little low but you know, that are then used for the reg credits that, you know, help to offset that.
1:08:40Tesla ExecutiveYeah, but what I think I would say generally to the question is, I mean, we've been in a position for some time now where we are prioritizing where in the world we send our product production.
1:08:52Tesla ExecutiveAnd you know, there's different factors to that depending upon when different product changes are made, what the logistics routing looks like, different things going on in different markets. But we are in a position where we need to prioritize.
1:09:08Tesla ExecutiveI mean, what we're trying to do as fast as we possibly can is get production up higher so that we're not in a position of needing to prioritize again.
1:09:19Tesla ExecutiveThere are. Yeah, I think that gets at the sentiment of your question.
1:09:26Investor RelationsOkay, let's go to the next question, please.
1:09:28OperatorOur next question will come from Gene Munster with Loop Ventures. Please go ahead.
1:09:34Tesla Executive (Energy)Good evening.
1:09:34AnalystQuestion on the semi. Elon, if you could just walk us through the development of Mega Chargers platooning and maybe just how you think about autonomy for Tesla semi and what it's how you envision it impacting the broader trucking industry beyond just ev.
1:09:51Elon MuskWell, actually. Jerome, do you want to answer that?
1:09:55AnalystYeah.
1:09:56Elon MuskWe continue the development of the semi and in particular Mega Chargers. We realized that 350 kilowatt or so that we might be looking for cars is not going to be enough for semi.
1:10:11Elon MuskSo we're looking for something much more powerful than that that can achieve essentially charging as fast the semi as during a break.
1:10:34Elon MuskDuring your driving time so that you can drive until the next break. Yeah. So there is no usable or efficient time wasted for charging the semi. That's the goal.
1:10:50Elon MuskWe're working with other parties to make sure that there is a standard infrastructure that will be able to be deployed for all customers. Yeah, probably all I can say at this point.
1:11:05Elon MuskYeah, we're not working on. Sorry, go ahead. We're not working in isolation. Yeah, we're trying to. We have to invent it because it doesn't exist, you know, but we're trying to invent something that could be helpful for everybody.
1:11:22Elon MuskYeah. Just a note on the sort of semi. The semite does consume a lot of cells. So it's call it four to six times more than a passenger vehicle, maybe call it 5,5ish times.
1:11:37Elon MuskSo if we are cell constrained, it is. It's difficult to ramp up the semi because there's no cells. So we need to solve the cell constraint before ramping semi to significant volume.
1:11:49Elon MuskThat's the only real constraint on semi progress. And we found over and over again we just kept running into cell production limitations. And then we're just taking things out of one pocket and putting them in another.
1:12:07Elon MuskSo we just need more cells so that we can do more stationary storage, more vehicles, more vehicle lines. We need more cells.
1:12:20AnalystSo makes sense a question. Just as you think about, you know, you've talked about Robo taxi and how you think that's going to impact kind
1:12:29Tesla Executive (Energy)of humans moving around.
1:12:30AnalystHow do you think about semi impacting freight longer term? I mean, is this something that is nice to have and a complement to all of your tech in new markets or do you think that this could be a material business?
1:12:46Elon MuskI think it's very material, for sure. I mean, really long term. All transport will go autonomous. Yeah. Horses are already autonomous, but all transport will go autonomous. Yeah. So including semi.
1:13:07Elon MuskSo it'll be pretty significant. The technology that we're putting in semi is identical to what we're putting in the other vehicles. Yeah, it's just bigger and more motors.
1:13:22AnalystYep.
1:13:24Investor RelationsThank you. Let's go to the next.
1:13:27OperatorOur next question will come from Ben Callo with Baird. Please go ahead.
1:13:31AnalystHey, thanks for taking my question, Elon. What do you think the biggest structural issue is with the, let's call it old school OEMs, or one or two of the structural issues for them not getting their act together and catching up with you?
1:13:50AnalystAnd then you mentioned what we want the world to look like ahead of us. What do you envision that is like just Tesla or Tesla and Rivian or. Thanks.
1:14:08Elon MuskWell, I do think there will be other car companies. I don't think we're going to be the only one. So, I mean, the thing is that what other car companies do, even in the auto segment, is quite a small subset of what Tesla does.
1:14:25Elon MuskSo Tesla, we design and build, we're very vertically integrated. So we're designing and building so much more of the car than other OEMs who will largely go to the traditional supply base and like catalog engineering, you know, so it's not very adventurous.
1:14:49Elon MuskAnd basically it ends up like all the products end up looking the same because they're going to the same suppliers. So I mean, to the degree that you inherit legacy components, you inherit the legacy.
1:15:01Elon MuskThe limitations in cost structure. And so you kind of need to make new ingredients, new parts, and then you need, then there's no machine to make those parts and you have to make the machine that makes the parts.
1:15:13Elon MuskSo Tesla is like, we probably, we might be an order of magnitude more vertically integrated than other car companies. And if we're not now, we certainly will be. And then we also, we also have to create our sales and service and distribution system in something on the report.
1:15:35Elon Musk40 countries. At some point it will be over 100 countries. Whereas the other car companies do not own their sales and service and distribution. So they kind of assemble parts from a supply base and then hand them to a dealer base.
1:15:57Elon MuskSo it's just like, it's not just. It's like comparing Tesla to a car company. Like just comparing just really one facet or dimension of Tesla. We're like maybe 10% in common.
1:16:11Elon MuskWith other car companies.
1:16:17Investor RelationsThank you. Let's go to the last question, please.
1:16:20OperatorAnd our final question today will come from Philippe Houchois with Jeffrey. Please go ahead.
1:16:26AnalystYes, thank you for taking my questions. I've got two.
1:16:29Elon MuskThe first one for me is try
1:16:31Analystto understand your business model for stationary storage. Have your thoughts on it. I mean, there are two broad directions for me. One is selling hardware, which is a bit of a cost plus business.
1:16:42AnalystAnd I'm just wondering if there's an opportunity where Tesla could actually share into the savings that utilities in particular could be able to achieve in like grid stabilization. The information I was able to get on your business in Australia a few years ago suggests that given the savings that are achieved, your hardware could have been sold at a higher price.
1:17:02AnalystI'm just wondering if you have shared views on where the business model is going.
1:17:08Elon MuskYeah, I think you're probably right about that. RJ and Zach, what do you guys think?
1:17:14Tesla Executive (Energy)Yeah, I mean we're already seeing this in Australia where we're seeing behind the meter aggregation that is providing grid services back to the grid, which effectively reduces the price to the customer and reduces the prices for the grid operator.
1:17:27Tesla Executive (Energy)So you're seeing this trend happening across the globe. It's going to be at the residential level as well as the wholesale level. So you know, Megapack on one end and then Powerwall on the other side.
1:17:37Tesla Executive (Energy)Those two working together in tandem. And the software layer on top of it, Autobidder being that, that really is going to help make the grid more efficient using the hardware, platform and software together.
1:17:48Tesla ExecutiveAnd just a point of clarification like that, the large power plant in large battery power plant in Australia, like we continue to operate that power plant and generate revenue in the market.
1:18:00Tesla ExecutiveSo whether we could have sold it for more or less, like we're continuing to make money off of that power plant.
1:18:07AnalystOkay, thank you. And the follow up question I had was during the battery day you talked about this cell vehicle integration approach. Very interesting. And when I look at think about looks like this means that the skateboard design that Tesla pioneered and many of your followers are using is going to become obsolete.
1:18:28AnalystOr am I not thinking about it the right way?
1:18:32Elon MuskIt will be obsolete long term. Yes, but I mean, yes,
1:18:41AnalystI mean,
1:18:41Elon Muskseveral years from now. It's not like existing cars stop having value. It's just that if you have a structural pack where the pack is contributing structural value to the car because of the composite honeycomb effect of sheer transfer between an upper and lower plate, then.
1:19:06Elon MuskAnd anything that doesn't do that is going to have to have duplicate hardware. It's going to weigh more, it's going to cost more. And then the same goes for the front and rear castings.
1:19:21Elon MuskWe're trying to make the car like you'd make a toy if you had a toy model car. It's got to be real cheap and look great. How would you make that?
1:19:32Elon MuskYour cast? That's how it's done. It would be absurd to make it up of tiny little pieces of stamped metal joined in complex ways. So it's sort of a natural thing to do.
1:19:44Elon MuskAnd then the same goes for using the energy storage, the battery, as a structure, which is done for aircraft wings and for rockets. The early rockets and aircraft, they had a separate error shell from the the propellant tanks or fuel tanks.
1:20:02Elon MuskAnd then they realized that doesn't make sense. And you've got to integrate. You've got to have your fuel tank in wing shape. You've got to have your propellant tanks in the shape of the body of the rocket.
1:20:13Elon MuskFor example, you don't want to put a box on a box, basically, so, you know, which over many years made it basically uncompetitive to have an aircraft that has separate fuel tanks from the wing.
1:20:33Elon MuskThe wings need to be fuel tanks. But I wouldn't think of this as like an overnight transition. It's several years. But then, like I said, over time, it just won't be competitive to have a different architecture, in my opinion.
1:20:49Investor RelationsThank you very much. Unfortunately, this is all the time we have for the Q and A today.
1:20:54Elon MuskAppreciate all your great questions, and we'll
1:20:56Investor Relationsspeak to you again in about three months. Thank you. Goodbye.
1:21:00AnalystThank you.
1:21:02OperatorLadies and gentlemen, this concludes today's conference call. Thank you for your participation.