Good day, ladies and gentlemen, and welcome to the Tesla, Inc. conference call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. I would now like to introduce the host for today's call, Shanna Hendriks. Please go ahead.
Thank you, Patrick, and good afternoon, everyone. This is Shanna Hendriks, Head of Communications for Tesla, Inc.. Welcome to the call with Elon Musk, Tesla's Chairman, CEO, and Chief Product Architect, for a question and answer session regarding today's announcement. The press release for the announcement is available at www.teslamotors.com/press, and a webcast of this Q&A is available on the Tesla website as well. Today's call is for your questions, but we'd like to keep it to about 45 minutes. Elon will begin with a few brief remarks, then we'll conduct the Q&A session live. Please press star one if you would like to ask a question. During the course of this call, we may discuss our business outlook and make forward-looking statements. Such statements are predictions based on management's current expectations.
Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10-K filed with the SEC. Such forward-looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements. Excuse me, I'll turn it over to Elon.
Thank you. I know a lot of people were wondering what today's announcement was going to be about. A lot of people were thinking, well, are we going to announce something revolutionary about service or some huge expansion of Supercharger or maybe something else that's pretty amazing, that's right under your nose if you're driving a Model S. We will make those announcements, but not today. We're going to put out a new announcement probably every week or two from here on out. Today's talk is really about financing. It's about trying to figure out how we combine the best of ownership and leasing. We're really thinking there's got to be some better way than the traditional approach. That's what we were able to do working with Wells Fargo and U.S. Bank.
Bank was to come up with something where essentially net of the tax credit, you can buy a Model S for no money down net of the tax credit and around $500 a month. It can actually be less than that depending upon what sort of tax deductions and what time savings you gain. I think that really makes it affordable to a much broader audience than people currently think is the case. I know that when we did this with SolarCity, when we transitioned from a purchase model to a finance model, it had a tremendous effect on customer adoption, and I anticipate a similar effect with Tesla. In addition to addressing this sort of question of affordability, we also wanted to address this longer-term question of residual value or peace of mind in buying an electric car.
A lot of people think, well, what's going to happen to an electric car? Is the battery going to depreciate much faster than they expect? There's a lot of uncertainty. We wanted to eliminate that uncertainty, and we thought the best way to eliminate that uncertainty was to say, okay, we will match the residual value and guarantee the residual value of the Model S proportionate to that of a Mercedes-Benz S-Class, which is made by our partner and investor, Daimler. That's an iconic car. It's one of the most respected premium sedans in the world. You're guaranteed to be on par in terms of residual value with one of the best cars in the world. Not only is Tesla standing behind that, but I'm personally standing behind that to illustrate the level of confidence I have in the long-term value of a Model S.
Really, the goal there is to give customers complete peace of mind. You do not have to worry about buying a car. To match the convenience of a lease, you can just give us the car back after three years, and we'll just take it and either trade it in for another Model S or we'll give you cash. You have all the convenience of a lease, but all the value of ownership, because unlike a lease, you're not obligated to give us back the car for that amount. You are welcome to retain it. If the car has greater value than that, which I think it will, you have the option to hang on to it if you'd like. It gives you the right to give it back to us, but not the obligation.
We really tried to figure out what's the best possible thing that we could give. If we were a customer out there, what's the thing that we would want? That's what we're trying to construct here. There may be some continued refinements over time as we try to make it even better, but I think we've got something pretty great. I'm really excited about how people will respond to it. With that, we can jump to questions.
Our first question comes from Damon Lavrinc from Wired. Your line is open.
Thank you. I was hoping to get a rough estimate on what we're looking at as far as a monthly payment is concerned. I realize that the partnership between the two banks is going to-
consume some of that initial cost? What are we looking at as far as monthly payments are concerned?
Yeah, absolutely. It's always important to look at net out-of-pocket. That's the thing that really matters. This is where electric vehicles really shine because the cost of electricity is maybe 10%-20% that of gasoline per mile. If this is your daily driver, that's where it really comes into play. The savings in gasoline per month, plus in other factors like getting oil changes, smog checks, filters changed, brake pads changed. On the Model S, for example, you never need to change the brake pads because most of the braking is done regeneratively with the electric motor. There are actually huge savings that one experiences there. By having a monthly payment, you actually really do see that difference. Whereas if you acquire the car, you still see that difference, but it's over a longer period of time.
Effectively, your net cost of ownership is maybe $500 or $600 a month. In fact, in some circumstances can be quite a bit less than that. I should mention, we have a calculator on our website that you can then customize as a consumer and say, "Okay, well, this applies to me, or this doesn't apply to me," and just basically adjust it to what your actual circumstances are and get a very accurate number for what the true net out-of-pocket cost is per month for a Model S. We try to make it such that you can just answer the questions, how do you conduct your car ownership experience, and get a personalized number that applies to you.
Thank you. Our next question comes from Dana Hull from San Jose Mercury. Your line is open.
Yes. Hi. Thanks for taking my question. What kind of credit score do you need to qualify for this lease? Can existing reservation holders convert their reservation to the lease model?
The credit score information is something that's proprietary to the banks. You do need to consider that quite a good credit, I know, for the best terms. We see certainly a majority of our customers, and I think perhaps the super majority, qualifying for these loans.
Unfortunately, this does not apply to prior purchases of the car. Because of the residual value guarantee, it only applies on a go-forward basis. If we were to apply it retroactively, it would affect the accounting in past quarters.
This is applied on a go-forward basis. I should mention that our expectation is that the residual value for all Model S's is in excess of what we're guaranteeing.
The guarantee is really just there to give people peace of mind. Our expectation is that the value of the car will actually be in excess of that number. All cars.
Okay, thanks.
Our next question comes from Nichola Groom from Reuters. Your line is open.
Hi, thank you. I was wondering if you could just say why this was important to do. You have always had a lengthy reservation list for your Model S, and there seems to be plenty of demand for it without this financing product. Why was this important to do?
Well, it's true, we do have plenty of demand for the car, even without a finance product. As much as possible, I'd like to broaden the affordability of the car. It has always been my goal from the beginning of the company to try to make mass market cars. I wish we could have done a mass market affordable car as our first car. It simply wasn't possible because it's going to take us at least three major iterations of the technology to get there. However, by providing a compelling financing solution for Model S, we're helping to broaden the access of customers to the car, and I think that's a good thing. That's really our goal.
This announcement is about improving affordability, about giving people peace of mind, and about giving people the whole convenience factor of just being able to give us back the car for a known amount of money in the future. I think it's the right thing to do, and I do expect that demand will respond accordingly. We have quite a big factory, so we've got a lot of room to grow.
Thank you. Our next question comes from Joe White from The Wall Street Journal. Your line is open.
Hi. Just quickly, this looks like the kind of product that most other luxury car brands are already offering. I'm curious, what happens if I decide I want to keep the car? What do I do? I keep paying on it? What happens?
Yeah, I think you've hit on a key differentiator, which is that with what we're talking about here is you have the right to put the car back to Tesla at a known price, which is the same percentage of residual value of a Mercedes-Benz S-Class, but not the obligation. In contrast to a lease, if you want to buy the car at the end of that lease, you have to pay that amount, because you don't actually own the car. In our case, you can either get the preset amount, which is equivalent to the residual value of the lease, or you get to keep the car if it has greater value. I think it will have greater value. That is beneficial to the end customer.
Well, if I make three years' worth of lease payments, I can just keep the car?
Yeah. you keep the car and you continue paying the-
Cost.
It's not a lease per se. It's a financing essentially over five years.
Sure.
you'd continue paying your financing payments for the next couple of years, at which point you would have paid off the loan and you would fully own the car. That's essentially what would happen. like you said, you have the right at the three-year point-
to put the car back to us for a known amount of money, or to retain it, pay off the remaining amount, and own the car.
Okay. I don't want to overstay my time, but I just want to play that back to you. Basically, I'm signing up for what amounts to a five-year loan. At year three, if for whatever reason I want to sell the car back to you, I can do that, or I can just keep paying, or?
That's correct.
Okay.
You're essentially building equity in the car. It is a loan that you can collapse at any point as well. That gives you additional flexibility. This is a loan where you could sell the car, pay off your remaining principal at any given point in the five years, and be done. You're not locked in like a lease.
Mm-hmm. Okay. All right. Thanks.
Great. All right, thanks.
Our next question comes from Jim Motavalli from Car Talk. Your line is open.
Yeah, Elon, you had mentioned at the beginning that this is somewhat based on the SolarCity model, and I believe you're Chairman of SolarCity, run by your cousin.
Right.
Is it true that in SolarCity, I believe you don't actually pay anything up front for the lease cost. If you could just talk a little bit about how that model, how successful it's been, and how that led to this model for Tesla.
Yes
Do you want to disclose your net worth since that seems to be public?
Of course, I'd like nothing better than disclosing my net worth. What we found at SolarCity was really pretty interesting. Essentially, the product that a customer received at the end of the day was the same. They got solar panels on their house for a particular power output. However, when we approach them and say, "Would you like to buy this system?" Some of these are fairly expensive, might be $50,000 or $60,000. People will look at that and say, "Well, I don't know if I want to make that investment," or, "I don't happen to have the cash handy." It was just a harder thing to get them to bite upon. We tell them that, "Look, this has got a payback period of five years.
Within five years, you've paid it back, then it's going to keep generating electricity from there onwards." We would compare that to having, say, a CD at the bank, where somebody's earning maybe 2%, and this would be like having a CD that earns 20%, guaranteed by the utility. Yet still people, they'd be reluctant. It was a difficult thing to get them to fork out sort of $50,000 in that case. We changed the model to one where we take care of the financing, then it's a much simpler approach when we say, "Look, what's your utility bill? With no money down, after the solar system is installed, your total cost of electricity goes down every month.
Essentially, you get more money in your pocket every month just by installing solar, you have the environmental benefits as well." That was vastly more appealing to people, even though it was essentially the same product at the end of the day. In that case, SolarCity worked with a number of banks, including U.S. Bank, to provide that to people in a very seamless way, the company's growth took off in a tremendous way. We increased sales severalfold. It was very positive. Going to the net worth question, well, if you went to look at some of the assessments that are out there by Forbes or Fortune or whatever, they're, I suppose, not too far off. There's certainly significant assets besides Tesla, from which I can cover the guarantee that I'm making.
That's what I mean when I'm saying I'm putting my money where my mouth is to say that no matter what happens, people should feel confident that the residual value of their car will remain what we're committing to here. I'm essentially making myself personally liable for that, because I believe so strongly in the quality of the product and the long-term value of the Model S.
Didn't Forbes say $11 billion?
If they did say $11 billion, they're being a bit too generous. I'm not familiar with that number. That sounds a bit high.
Okay.
Any last questions there?
No, I think that's it.
Okay, thanks.
Our next question comes from Kyle Sabott from AOL Autos. Your line is open.
I was wondering what your expected lease penetration's going to be for Model S.
Sure. Well, for our financing product, we're expecting a pretty high percentage. I would say probably a majority of our customers will end up taking this approach. That's what I'd recommend as the way to go for customers, and I'm guessing probably at least half, maybe more.
U.S. only.
Pardon me? Sorry, this is with respect to the U.S. We'll be trying to figure out something for Canada as well. For Europe and Asia as we get to those markets.
Thank you. Our next question comes from Jacob Brown from Source Interlink Media. Your line is open.
Hi. I was just wondering what the interest rate for financing through Wells Fargo or U.S. Bank would be for a well-qualified customer.
It's just under 3%, so like 2.95, I think is what we're talking about.
All right. Thank you very much.
Thanks.
Our next question comes from Julia Pyper from ClimateWire. Your line is open.
Hi there. Thanks for the call. I wondered if you could say how many orders you have on the books right now, and if you can say anything about number of cancellations you've had.
Well, this call is really about the financing. I can say, as I said before, we certainly don't have a demand problem. We expect to sell about as many cars as we can efficiently make.
Maybe on that, could you address sort of delaying the Model X and how you expect to put out this volume of cars?
That's not for today's conference call.
Okay, thanks very much.
All right.
Our next question comes from Phil LeBeau from CNBC. Your line is open.
Quick question. You mentioned that you're personally standing behind this offer. Is that some kind of a guarantee separate from your word? In other words, a financial guarantee that if somebody says to you, "Listen, I'm not happy after three years." I know you have the guarantee in there in terms of the residual value being equal to the S-Class. But is there something more behind that wording in that?
No. I don't think I could express it more clearly, which is that no matter what happens to Tesla, obviously I think Tesla's going to have a very bright future. There are some people out there who I think are pessimistic for reasons I don't entirely understand. Even in that circumstance, I will stand by the residual value of Tesla cannot, with all of the assets at my disposal.
Thank you.
Our next question comes from Mark Rogowsky from Forbes. Your line is open.
What's the residual value on an S-Class right now after three years?
Sure. Yeah. According to the Automotive Lease Guide, which is the sort of industry authority on leasing residual values, it is currently 43% after three years.
Okay. You mentioned a five-year loan.
Sorry. Just because at the risk of being overly precise.
Yeah
Essentially, if you take the trailing 12 months and average the trailing 12 months for a Mercedes-Benz S550 in Automotive Lease Guide, which is the industry standard guide, it stands 43%. That may be too much detail, but anyway.
No problem. Precision is good. You mentioned a five-year lease, but the example on the web calculator uses a 66-month loan. That seems to be five and a half years if we're being precise. Is that the actual loan term that we're sort of working with, or does it really depend on what you negotiate with the bank?
You get to give us the car back after 36 months. We're taking the best elements of a lease, which is the ability to just return a car after three years with no hassle, and best elements of financing. It is a five-and-a-half year loan, after which you would have paid off all the principal. However, at the three-year point, you can just say, "Hey, I want to get a new Model S," or, "I want to get a different car," and you can just give us back the car and be done with it.
Do you guys think that if the cars are worth more at that point, you'd be willing to pay more for them, or are you not looking that far ahead yet? In other words, let's say that the car is worth 50% of the price paid, so it's worth $40,000 instead of $30,000. Will you help people capture that value, or are they going to have to go private party to do that?
We will. If the residual value is higher than that, and we think it will, we will pay the market rate.
Okay. Great. Thanks a lot.
Yeah, it should be thought of as no less than.
Thank you.
Thank you.
Our next question comes from David Baker from "San Francisco Chronicle." Your line is open.
Having the press conference here, I wondered if you could just sort of walk us through the process from the very beginning and use someone in California as an example in terms of the state and federal incentives that are available here. If I'm a California customer, I'm interested in going with this model, do I actually have to put any money down? How exactly does this work?
Sure. I encourage people to go and check it out on our website, which has gone live, and has sort of the calculator and you can sort of figure it all out. Essentially, in California, you get, in addition to the $7,500 federal tax credit, there's a $2,500 state tax credit, and several other states also have a state credit. Let's say you bought a Model S, including options, that was $70,000 or something like that. You would have the tax credits in California, state and federal, would amount to $10,000.
You'd have $3,000 left over from the tax credits. I'm not sure what the exact monthly payment would be for a vehicle like that, but I think it'd be something in the sort of $500 or $600 a month range. It could actually be a fair bit less than that, depending upon how you value your time or how much gasoline you use, because we're talking about net out-of-pocket, which is, I think, really what matters to consumers. It would work out, I think, really well. You could essentially own a Model S for no money down net of the tax credits and around $500 or $600 a month in California.
You'd still be putting money down, though, because the tax credits only come in at a particular time, right? You still have to front the money, don't you?
Yeah. There is some time delay, which can vary from three months to a year sort of thing, depending upon when you buy the car versus when tax time is.
Actually, I think the California one's immediate. Sorry, the California one's immediate. The federal one is at tax time.
Got it. Okay. Thanks.
All right, you're welcome.
Our next question comes from Jacob Brown from Source Interlink Media. Your line is open.
I was just wondering what you meant by you were personally guaranteeing the value of the car and basically, yeah, that was pretty much my big question. How are you guaranteeing it, and how can you make that kind of promise?
Essentially, Tesla is the sort of first backstop on the guarantee. Tesla's essentially saying that the value will be proportionate to that of a really awesome car, which is the Mercedes-Benz S-Class. Then for those who still have any doubt remaining in a worst-case scenario, because I know there's some people out there that are still quite pessimistic about the future of electric cars and Tesla. I think that is increasingly changing, at least with respect to Tesla, that perception. Nonetheless, to give people complete peace of mind, I'm personally standing behind that residual value. Even if Tesla isn't able to honor it, I will personally do so.
Okay, you're willing to put your own money into it or your own investments into it to guarantee that for some odd reason, if electric car values tank in the next five years, that no way's going to be on the hook about it?
Exactly.
Okay.
That's what I mean by putting my money where my mouth is. Obviously, I feel very confident about the future. In fact, I think the residual value is going to be excellent. What we've seen with the Tesla Roadster, which was our first product, is that we've seen very good residual values.
Yeah.
We do have some confidence as a function of what we've seen there.
Okay, if the customer doesn't want to give the car back, or the value of the car completely inflates because everybody wants a Model S, you're telling me that you don't have to give the car back for the 43% of the residual value?
That's exactly right. That's part of what I mean by combining the best elements of financing and leasing or ownership and leasing, is you as the consumer have the right, but not the obligation to give the car back for a particular amount. It's your car. It's a one-way thing that's in the favor of the consumer. We try to construct essentially the most consumer-friendly financing product in existence. That's our goal here.
I'm sorry, one last question. Is there any way to find out how good your credit has to be to get this kind of financing?
I think the banks are somewhat sensitive to these requirements. You have to have a good credit rating, but what we've seen is a pretty substantial percentage, a super majority of our customers that have applied have been approved. I think most people who apply will be approved for the best outcome, and then in some cases, they might say, "Okay, well, there needs to be a slightly higher down payment," or something like that. We're going to keep working with the banks to make them increasingly comfortable over time to increase the approval rating. From what we've seen thus far, because we've been running this as sort of a, I wouldn't say secret, but as a quiet trial program. In our quiet sort of trial program, we've seen a super majority of people accepted.
Because if.
Sorry, go ahead.
If you're financing a car, you're probably not going to have quite the net income that you would to be able to buy the car outright. Is this going to bring a lower-income buyer into Tesla?
Yeah, I think this is going to fundamentally improve the affordability of the car. Yes, this is what we're trying to do, is we're trying to make the car more broadly affordable to people. We're going to keep working it to make it better and better in that regard. Yeah.
Thank you.
Our next question comes from Michael Bettencourt from The Globe and Mail. Your line is open.
Hi, yes, this is a program. I'm interested if there's timing already in place in terms of when it might be expanding to Canada and other countries, when a similar program might be expanding up north.
Sure. Well, we've got it organized, obviously, for the United States, our next priority is Canada. We work with Scotiabank in Canada, we'll probably be working with a few other banks. Actually, I can give you a tiny point of trivia. I actually once did a summer internship for the chairman's office of the Bank of Nova Scotia in Toronto about a zillion years ago. I don't know if any of the guys there remember me.
Well, they should give you a better rate then
It was a very interesting time. I worked for a guy named Peter Nicholson at the time. He went on to be the chief economic advisor of Canada. He's a great guy. Anyway, whatever, it's totally random. The larger point is that we're going to work with Scotiabank and others to bring this to Canada really soon. As soon as we can manage, hopefully within a matter of a few months.
Thank you.
Great. I don't want to cut this off, but we're running out of time, so we're just going to take one more question.
Our last question comes from Matt DeBord from Southern California Public Radio. Your line is open.
Hi, Elon. Let me keep it short. You guys aren't currently doing any of your own financing, right? I should probably know this. Is that the case?
Yeah, we do not have a captive finance arm like the big car companies. Yeah, we don't have that.
Do you anticipate that in the future, given that you may have taken the first step toward that by putting your considerable net worth behind this deal?
I think we could see something like that in the future. It won't be in the near term. It could be there in the long term. Right now, the cost of financing from the big banks is incredibly competitive. It's not something that we could, I think, match with an internal system in the near term. Maybe in the long term.
lastly, is there a reason why you don't understand the pessimism out there even though it may be meager in nature?
Well, I could probably hazard some guesses. Generally, the nature of the pessimism doesn't seem to be based on fundamentals, but more on the idea that, well, there hasn't been a new car company startup that was successful since Chrysler, and that was 90 years ago. Generally, when people come and do the due diligence and actually visit our factory and see the cars being made or talk to customers or drive our car, as soon as they appreciate the actual product and really do the research on the fundamentals of the company, then that seems to have quite a profound effect and really changes the perception substantially. We try to encourage people to do that as often as possible. Yeah.
Okay, thanks.
Thanks.
Great. Thank you all for joining today. We really appreciate it, and look forward to speaking more in the future.
Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.