Earnings Call: Q4 2018

Jan 30, 2019

Good day, ladies and gentlemen, and welcome to the Tesla Inc. Q4 2018 Financial Results and Q and A Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would like to introduce your host for today's call, Mr. Martin Viecha, Senior Director of Investor Relations. Mr. Viecha, you may begin. Thank you, Sherry, and good afternoon, everyone. Welcome to Tesla's Q4 2018 Q and A webcast. I'm joined today by Elon Musk, JB Straubel, Deepak Ahuja and a number of other executives. Our Q4 results were announced at about 1 p. M. Pacific Time in the update letter we published at the same link as this webcast. During 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. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. But before we jump into Q and A, Elon has some opening remarks. Elon? Thanks, Martin. Last year was definitely the most challenging year in Tesla history, but also the most successful. Thanks to the incredible work of the Tesla team, Model 3 became the best selling premium vehicle in the U. S. For 2018. And in fact, when considering battery electric vehicles, Tesla achieved an 80% market share of U. S. Sales in the last year. I think this point is perhaps not well appreciated. All other electric vehicles combined were 20% of sales in the U. S. In last year. So that's not bad. We also delivered almost as many vehicles last year as we did in all prior years combined, which is tremendous achievement by the Tesla team. The and if you track Tesla vehicle production year over year, cumulative sales and deliveries year over year, it is about the cleanest exponential I've ever seen. We've basically almost doubled our fleet with in every year. Every year, we make as many cars as we did in all of prior years. So this is a very unusual thing to see for especially for a large complex manufactured object. I think it may be the fastest that a complex manufactured object is like a car has grown in history or at least I'm not aware of anything that is faster. Martin, are you here? I'm not sure. I think Model P was a little bit slower, but I'm not 100% sure. Okay. And we expect that exponential to continue. So with the deliveries this year being even in the face of if there's a global recession, we're expecting deliveries this year to be about 50% higher than last year. And there's it could be a lot more than that. But even with tough economic times, to see 50% growth is pretty nutty. With Q4, we achieved GAAP profitability for the Q2 for the first time in company history, and we increased our cash on hand by more than $700,000,000 even after paying debt in the year with a total of $3,700,000,000 in cash. This means we have enough cash to settle our convertible bond that will mature in March. In addition, our operating margin remained strong at 5.7%. Operating margins in the 4th quarter are usually lower in the automotive industry, but this was not the case for Tesla. I think 2019 is going to be an amazing year for Tesla. As I mentioned, we're expecting to increase sales by 50%. Perhaps it could be a lot more than 50%, but I think 50% is a very reasonable number. But that's crazy growth for the automotive industry. I want to note that one of our major priorities this quarter is improving service operations. So really from my side, when I think about what my priorities are this quarter, it's improving service in North America. That's number 1. And we've got some very exciting initiatives we're going to roll out with that with regard to that. We've got to get cars to China and Europe and make sure that we have good logistics for the whole delivery process from factory gate to the customer. That's obviously pretty far from California to get to Europe and China and then get to get the car to customers. So we're working every aspect of that logistics chain. And I think we've I think it's going to be good. I would say at this point, I'm optimistic about being profitable in Q1, Not by a lot, but I'm optimistic about being profitable in Q1 and for all quarters going forward. So let's see. We've opened 27 new store and service locations, bringing out our total locations worldwide to 378. And we increased our mobile service fleet to 411 vehicles. Mobile service fleet is something we can scale up very rapidly because we don't need bricks and mortar. We can get more vehicles, hire people and deploy rapidly. It also actually results in higher customer satisfaction because we can actually send 1 of our service vans to your work or home and fix the car without you having to bring it into the service center or do any paperwork or anything like that. It's really seamless and visible. Customers love it. And we're also increasing the functionality of the Tesla app for service so that instead of having to make an appointment to call and make an appointment, you can just open your Tesla app. Let's say you want to make a service appointment, and it lists the top 10 most frequently requested service items. And you can with a couple of taps, you've made your service appointment. And we're going to make it easier for the car to be picked up and dropped off as well. So if you want if you prefer not to come into the service center at all, you can just request that the car be picked up and delivered. Something that will be so that's already been rolled out, had a big improvement to customer satisfaction that rolled out 2 or 3 weeks ago. But the next thing we want to add is if a car detects something wrong like a flat tire or a drive unit failure, that before the car has even come to a halt, there is a tow truck and a service loader on the way. So car has already notified Tesla emergency services and a service loaner, a tow truck are on their way before your car has even come to a stop. And this will be immense in improving customer happiness. And eventually, you'll just call it and you'll have to tap the center screen to cancel it. So you can cancel it if you want. Precepted, it's like automatically going to happen, just press cancel. We're also improving POTS distribution. So I think we made a strategic error in the past about not having service parts located at our service centers. We had them in parts distribution warehouses, which basically meant it was impossible to have a fast turnaround on servicing a car, because the car would come in, then the parts would be requested, they come to the service center. This would basically even for a very simple repair, it could take days. So we're not we're going to move to stocking all common parts at the service centers, so that it's possible to, in principle, have get your car serviced in 20 minutes or 15 minutes, even if it's a simple matter. I mean, it should be like Jiffy, like 8 minutes or whatever, 8 minutes and a half. It should be like lightning fast. But in order to do that, we have to have the parts located at our service centers. It's going to make sense for our service centers to do basic body work. Or essentially, if all we need to do is replace a front or rear fascia, it makes sense to just pre stock the front and rear fascia in the common colors. So unless you have an unusual color, we can literally replace your fascia in 15, 20 minutes. And there's none of this like weeks at a body shop stuff. Let's see. In terms of new products, with Model Y, we've completed engineering of and signed a Model Y. And the parts are the tooling is going out for production Model Y. 3 quarters of the Model Y is common with the Model 3. So it's a much lower CapEx per vehicle than Model 3, and the risk is also quite low. This is in contrast to Model S versus Model X, where the theory was Model X, we just it's sort of Model X to be like the sort of like the Faberge egg of cars. It's an incredible vehicle and probably one probably nothing like it will ever be made a gain, and maybe it shouldn't. But it is a work of art, it's a special work of art. But the commonality with the Model S is limited. It was only about maybe 30% in common with the Model S, whereas Model Y is, I think, 76% or something like that in common with the Model 3. And we're most likely going to put Model Y production right next to in fact, as part of our main figure factory in Nevada. So it'll just be right there. Batteries and powertrains will come out and go straight into the vehicle. So that also reduces our risk of execution and reduces the cost of having to transfer parts from California to Nevada. It's not a for sure thing, but it's quite likely and that's our default plan. And we expect Model Y will probably be the amount of Model Y will be maybe 50% higher than Model 3, could be even double. As I understand, the midsized SUV segment is the worldwide is the most popular type of vehicle. So we'll probably see higher volume of Y than 3. And earlier this month, we saw the construction of Gigafactory Shanghai. And by the end of this year, we expect to be producing Model 3s using a complete vehicle production line. That's body paint, final assembly, general assembly and module production. So it basically will be it's moving extremely fast. I get like daily updates of progress of the Shanghai Gigafactory. And this factory is going to go up like lightning. So we do feel quite confident at this point, at least for the factors that are in our control, that we can achieve volume production in Shanghai by the end of the year. And that should allow us to get to the 10,000 vehicles a week rate or very close to it by the end of the year. And yes, I think that's it. Okay, great. So we're going to take the first questions from our retail investors who have been submitting their questions on say.com. So the first question that has been submitted has been about service, which I think you already spoke at length about. So let's go to the second question. The second question would be, how are you feeling about demand right now across the product line? Is 500 to 700 units 700,000 units at 42,000 ASP still a realistic annual target for Model 3, even considering Model Y and its impact on demand? And do you continue to see S and X demand of $100,000 annually? My best guess this is just a guess. My best guess for demand of Model 3 Worldwide is something in a strong economy, it's something on the order of 700000 or 800000 units a year. That's my best guess for demand of Model 3 in a strong economy. If the economy goes into a recession, then I think that could be something on the 40% less. But I think even in a recession, worldwide demand is still something in the order of 500,000 for Model 3. For S and X, we did eliminate the 75 kilowatt hour conversion of S and X and to provide more differentiation relative to 3 and then why that's coming out. I think we could see a slight decline in total vehicles, but I think the net cash flow from S and X is likely to be very similar. So probably no major change in net cash flow for S and X. Okay. The next question from Alex is, can you please share an update on full self driving and Tesla Network development? When will customers start to see full self driving features? What's the best case time line for Tesla Network to go live? Sure. Well, we full self driving capability on highway. So from highway on ramp to highway exit, including passing cars and going from one highway interchange to another, the full self driving capability is there. In a few weeks, we'll be pushing an update that will allow the option of removing STOLK confirmed in markets where regulators approve it, which I believe that will be the case in the U. S, for example. And over time, we think probably all regulators will approve it. But we kept talking from there just to make sure that we took care of like any strange corner cases. And it's really quite sublime if you have storm to turn off and like the car goes from higher on ramp, pass to slower cars, change it takes an interchange and then takes the exit and then comes to a stop after the exit. So that's it's really quite profound to have that experience. Then the next part of full stop driving would really be to is traffic lights is hard. So stop streets are pretty easy, because you can essentially geocode those and it's easy to recognize stop signs. Traffic lights and intersections will be the next really tricky one. And then navigating complex parking lots and like sort of like underground in a mall parking lot with a lot of traffic and pedestrians and it's on multiple levels, that kind of thing is where things get tricky. With the release of enhanced or advanced summon, you'll see the first indications of the car being able to navigate complex parking lots. And that's also coming up fairly soon, probably next month. And in development mode, the car does all of the things that I just mentioned in development mode. It recognizes traffic lights and stop signs and basically all the functionality into buffer mode. It's really just a question of getting the reliability of recognizing traffic lights to several 9s. Like it's I guess like, I don't know, 98% good right now, but we need it to be like 99.999. They're really extremely reliable. So I mean, in a nutshell, when do we think that the capability will be there for when it will be when will we think it's safe for full self driving? It's probably towards the end of this year. And then it's up to regulators to decide when they want to improve that. Okay. Let's go to the next question, which is, if and when will Tesla switch Model S and X to 2,170 battery cells? What percent range improvement do you expect? We have no plans to switch S and X to 2,170 and can't comment on future product developments. Okay. So maybe we'll take the last question from retail investors, which was where will Tesla Semi and Model Y be produced? Can you share a time line on expected production ramp of these products? As mentioned earlier, the Model Y, we think, most likely will be produced at Gigafactory. That's unless we encounter some obstacle. That's the default plan that we're proceeding towards. And it's fast, low risk and relatively low CapEx. In terms of the I mean, probably there's like initial production of Model Y in very low volume early next year. But then it always takes time to ramp up any production system, and that's difficult to predict the shape of that ESCO. So we feel confident in saying like, well, there will be volume production model wide by the end of next year. But in between the beginning of next year with low volume, it always starts with very low and it grows exponentially from beginning of last year and it makes you difficult to break that ramp. So that's our expectation for why. For semi, we're I don't know if you want to comment on that. I want to start next year as well. But the first units will be is it Jerome? Well, first units will be for our own usage. So it depends how many trucks we use for our own usage to move the parts and the vehicle to different locations, and then we'll start delivering to outside customers. Yes. Sounds good. And then the Tesla pickup truck, we might be ready to unveil that this summer. It will be something quite unique, not like anything else. Okay, fantastic. So, operator, we can start taking questions from participants on the call. Thank you. Our first question comes from Ryan Brinkman with JPMorgan. Great. Thanks for taking my question. I see in the letter the amount that you have spent on land for Gigafactory Shanghai and the classification operating cash flows. Is there any guidance can provide us in terms of how to think about CapEx for this facility going forward? And can you discuss the source of funds for the project? I think you've spoken in the past about the potential to raise debt locally in China. Is that still your thinking? And what kind of terms might you be able to raise that capital? Thanks. Yes. Deepak here. You're right, that the purchase of the land is a 50 year lease with the government of China. So it's not CapEx, but it's operating lease that shows up as cash flow from operations. However, the CapEx that we will invest is our equipment, and we fully own it. So that will show up as capital expenditures. The plan, as we have indicated in the letter, is still to get funding for majority of that capital spending from local China banks. And we expect pretty attractive rates based on the dialogue we've had and there's a lot of interest and we hope to finalize that and then share the details at that point. Yes. I mean, as a ballpark figure, probably it's something about something in the order of $500,000,000 in CapEx to get to the 3,000 vehicle rates in Shanghai, ballpark figure. And as Yves was saying, we're being offered very competitive debt financing in China, really extremely compelling interest rates. And so we do not expect that to be a capital drain on the company. Yes. These are the biggest banks in the world. And for them, $500,000,000 is not a large amount of money in the scheme of things. Our next question comes from Gene Munster with Loop Ventures. Sorry, I just want to say something like that's perhaps if you're in the automotive industry, you understand how significant this is, but maybe it's not as obvious to everyone. Tesla has the 1st wholly owned manufacturing facility in China, of any automotive company. So this is profound, And we're very appreciative of the Chinese government allowing us to do this. I think it is symbolic of them wanting to open the market and play and fair rules for everyone. I would say like a note of appreciation for the Chinese government in allowing us to do that. It's a very significant thing. Good afternoon. The question I have is related to Waymo and the autonomous driving opportunity. Morgan Stanley recently valued Waymo at $175,000,000,000 And my question is, what do they have that you don't have? And separately so what do they have that you don't have? And then separately, how important is autonomy in Tesla story longer term? Is this nice to have? Is it really about EVs and renewable energy? Or is the autonomy kind of one of the foundational parts of the story longer term? The fundamental goodness of Tesla, so like the why of Tesla, the relevance, what's the point of Tesla comes down to 2 things, acceleration of sustainable energy and autonomy. Acceleration of sustainable energy is absolutely fundamental because this is an existential risk for humanity. So obviously, that is by far and away the most important thing, But also very important is autonomy. This has the potential to save millions of lives, tens of millions of serious opponent injuries and give people their time back so that they don't have to drive. They can if you're on the roads, you can spend doing time doing things that you enjoy instead of in terrible traffic. So it's extremely important. We feel confident about our technical strategy. And I think we have an advantage that no one else has, which is that we have at this point somewhere in the order of 300,000 vehicles on the roads with a 360 degree camera sensor suite, radar, ultrasonics, always connected, uploads, essentially video clips with the customer's permission when there's an intervention. So in fact, we have a massive training fleet. Our the miles of training that we have, if you add everyone else up combined, they're probably 5% at being generous of the miles that Tesla has. And this difference is increasing. A year from now, we'll probably go certainly if you go 18 months from now, we'll probably have a 1,000,000 vehicles on the road with and every time the customers drive the car, they're training the systems to be better. I'm just not sure how anyone competes with that. Thank you. Okay. No follow-up question. Okay. Let's go to the next participant. Thank you. Our next question is from Colin Rusch with Oppenheimer. Thanks so much. Can you talk a little bit about the geographic dispersion for the guidance for 2019, where you're expecting the Model 3s to sell through as well as the other models? Well, I think we did actually. Yes. That's clear in our letter. Correct. We indicated in Q1, we will start delivering Model 3s in Europe and China. And we also shared a chart showing the potential market size for midsized premium sedans in North America, Europe and Asia, suggesting those markets could be even bigger. So I think that gives a good sense of where we'll be and we'll launch the write and drive version at some point to go to the other markets. Yes. Maybe on the order of 350,000 to 500,000 Model 3s, something like that this year. Okay? Okay. And then just in terms of the cost reduction roadmap and rework post factory, can you talk a little bit about your expectation for reducing that in the next couple of quarters and what the order of magnitude is on that in your model internally? Jerome, do you want to answer that? This is Jerome. Well, our manufacturing keeps improving quarter over quarter, actually week over week. We take fewer hours, both here in Fremont or at the Gigafactory to assemble the Model 3 and S and X as well. And then we track the quality very closely. We review that carefully with the engineers and the supply chain and manufacturing teams. And the quality in the field the number of incidents is also improving week over week, every week. So there are fewer and fewer need for cars to be in service, yes? So we'll keep going. There's no end in sight, and we'll try to make sure that the car never breaks down. Yes, I think there's like some confusion about rectification. Like essentially like for the vast majority of Model 3s that come off the line, all that happens is like some slight adjustment of door gaps and panel gaps and that kind of thing, and that's all that's done. There's nothing more than that. Okay. Let's go to the next question, please. Thank you. Our next question comes from Colin Langley with UBS. Great. Thanks for taking my question. Just to follow-up on the comments around you said about $700,000 to $800,000 you think is the normal demand. I mean any color on what price you're expecting that to be? Because I think there's a lot of chatter that demand has already weakened of the midrange at least already in January. I don't know if that's true as well. Yes. I mean, it's more like there are multiple factors at play here. First of all, there's a lot of seasonality to automotive purchases. Most people do not buy a new car in the middle of a blizzard. So January February tend to be seasonally low and then picks up significantly around the early to mid March time frame. Then in the U. S, we obviously had a pull forward of demand from the tax credit. And so there's all those factors. But I feel very confident about Model 3 demand. The customer happiness level with the car is incredible. I think probably the highest of any car in the world right now, I think. I can tell you can tell like basically nobody wants to sell a car. So But the target price point is, I think in the past you mentioned mid-forty thousand. Is that where we're thinking? Or is that still a long term range? Yes. This is really just a guess. So it's not like some huge crystal ball or something. But at volume, I would expect those are totally a guess, I want to be clear. Probably an average of $42,000 probably at that volume level. I'm not certain, but I get it. And just as a follow-up, you commented that you expect China to be on line by the end of the year. But there's a lot of articles that the battery supplier is that you're looking at different battery suppliers still. I mean, do you have a battery supplier? Because it seems kind of close to when production is supposed to start. Well, there's really three things. There's the cell, the module and the pack. We will be making the module and the pack. So it's really just a question of cell supply. And we can essentially use any high energy density 2,170 chemistry. And we expect to be a combination of sales produced at our Gigafactory in Nevada, sales produced in Japan and sales produced locally in China. And we feel confident of the sufficient supply to hit the 3,000 units we have. Okay. Let's go to the next question, please. Our next question comes from Emmanuel Rosner with Deutsche Bank. Hi, good evening, everybody. First, I wanted to ask you about the short range Model 3. What are your latest thoughts in terms of timing of introduction? I think at some point you had in mind to do it in the maybe the first half of this year. And just to clarify, when you sort of talking about the outlook for 2019, the number of deliveries up 50% and then the margin target for Model 3 to get to 25%. Does that assume that you're introducing a lower range, the short range Model 3 at some point during the year? Well, we call it the standard range. But it's maybe short by Tesla standards, but it's long range by other manufacturer standards. So yes, we expect to introduce the standard range Model 3 sometime probably in the middle of this year is a rough guess. And we're working hard to improve our costs of production, our overhead costs or fixed costs, just costs in general. I think this past year, while it's extremely difficult, has driven us to a high level of financial discipline. I think we're way smarter about how we spend money, and we're getting better with each passing week. Yes. And so to be clear, the you expect to reach at some point this year or you're targeting at some point this year 25% gross margin on Model 3 and that's despite introducing the lower end or I guess the standard range Model 3. Is that correct? Yes. Okay. And I guess my follow-up would be on the demand side. So you're talking about 50% increase this year. You said a few times that it could be higher than this. I think you just mentioned in the previous question, 350,000 to 500,000 if I understood well. So what I get what is sort of like what drives the cautious outlook that's in your letter because it feels like it's the it's just basically 4 times the 4th quarter run rate, which would imply sort of 50% for the full year, but not really a lot of growth versus what you just accomplished. So I guess, how do we think about the total demand for 2019, especially if you introduce this, the cheaper version? Well, we need to bring the Shanghai factory online. I think the biggest variable for getting to 500 ks plus a year. Our car is just very expensive going into China. We've got import duties. We've got transport costs. We've got higher cost labor here. And we've never been eligible for any of the EV tax credits. A lot of people precisely look for being sort of dependent on incentives. In fact, we are for company making EVs, we have the least access to incentives. It's pretty crazy because there's so many companies that countries that have put price caps on the EV incentive, which differentially affect Tesla. And in China, which is the biggest market for EVs, we've never had any subsidies or tax incentives for vehicles. So it's difficult. If once a car is made there, it is eligible for that, eligible for that. But that sounds like that's going to be reducing in China in the coming years. But really, bottom line is we need the Shanghai factory to achieve that 10 ks rate and have the cars be affordable. The demand for it's important to appreciate that the demand for Model 3 is insanely high. The inhibitor is affordability. It's just like people literally don't have the money to buy the car. It's got nothing to do with desire. They just don't have enough money in the bank account. If the car can be made more affordable, they will the demand is extraordinary. Okay. Thank you. Let's go to the next question, please. Our next question comes from Pierre Ferragu with New Street Research. Hey, thank you for taking my question. So Deepak, I was wondering, so as you look at 2019, we're all concerned about a potential recession. And I was wondering how you think about it and what you would tell us about what we should expect how we should expect Tesla to react to recession in 2019? How do you manage your volume ramp? How do you manage your pricing? How do you preserve cash? How do you manage your CapEx? If things turn south in 2019? And then I'll have a follow-up on gross margin for Jerome. Yes, it's a very broad question, which is not really just for me to answer. But I think at a highest level, the way we are trying to be prepared for any kind of contingency here is to just continue focusing on cost. And the theme of our conversations here is how do we reduce cost all the time and how do we run our business with a very high level of financial discipline, and Elon alluded to that and so did Jerome, Jerome, I think. And if we do that, we believe that even in some of these scenarios of lower volumes and pricing and tight pricing, we do have a good chance and a good shot of being profitable and generate free cash flow. So that's the best way to manage the business, be frugal. Thanks. I want to be a broken record about this. It's cost, cost, cost, cost because reducing our costs. By the way, while making nuanced improvements to Model 3, I want to emphasize, the product is getting better by slight degrees despite lower cost in hundreds of small ways that you actually wouldn't most people wouldn't notice explicitly, but they wouldn't appreciate subconsciously. And getting those costs down, variable cost and fixed cost is what allows us to lower the price and be financially sustainable and achieve our mission of environmental sustainability. So we have to be absolute salads about this. There's no question. The other aspect of this, Elon, which we've been doing extremely well there is capital efficiency. We have dramatically cut back on capital expense and we're spending it in a very efficient manner. We talk about it in the letter on Model 3 and Gigafactory Shanghai. We talk about it for Model Y. There's just so many learnings that we are incorporating and we just want to repeat what we did with Model 3 and the kind of spending we had for the returns we got. Absolutely. I mean, we're confident that our CapEx per unit of production for Shanghai factory and for Model Y will be less than half of what we did for Model 3. Internally, we think it might be a quarter, but that's probably too good to believe, but it's definitely less than half. Great. Let's go to the next question please. Thanks. Thank you. Our next question comes from David Tamberrino with Goldman Sachs. Great. Thanks for taking the questions tonight. First thing I want to just understand is on what you're seeing from European orders and China orders so far. There's some numbers that get thrown around, but you guys are obviously taking a look at it. How are that order profile shaping up relative to what you saw in the U. S. With the launch of the 3? I mean, it seems good. Our issue actually with Europe and China is how do we get the cars made and on a boat such that it reaches customers before end of quarter and we don't have a massive number of cars on the order. That's our biggest challenge. It's not demand. It's how do we get the cars there fast enough. So like orders above the I think I've seen like 20,000 order levels for Europe and single digit 1000s for China? It's better than that, Elon? Yes, absolutely. And we're not even really trying, I should point out. Our factory is like right now only making cars for China and Europe. That's what it's doing with respect to Model 3. And our whole focus is, okay, how do we get those cars made, get them on a ship as fast as possible, get them shipped as fast as possible to Zeebrugge in Belgium, then get them to or to Drammen in Norway and get those cars to customers as fast as possible. We get them to China as fast as possible. And China, we're also we don't know what's going to happen with the trade negotiations. So it's very important to get those cars, especially to China as soon as possible. We hope the trade negotiations go well, but it's not clear. But we need to get them there while there's sort of a de facto, sort of a truce on the tariff war. And the demand gen is really not one of the things we're thinking about. Okay. Then just lastly on this demand thread. Customer deposit came in again over $100,000,000 Is it possible to give us an update? I know you don't think it's really a relevant number, but I do and I'll explain why. On the reservation count where you were at 450,000, you started delivering. And I ask this because I think we're just all trying to understand how much incremental demand you think there is based on what you see at that lower price points if, say, there's over half of those people that are still waiting for that 35 ks base model to come out, that would be interesting. And I think that's what you're seeing, but I just want to confirm that. So, Deepak, do you want to add? Yes, I mean, I think reservations are not relevant. For us, we are really focused on orders. Now we do have a large reservations backlog still, which tells us that a lot of customers are still waiting for those cars, but I don't think it's appropriate to share the reservations number. Reservations are just like preorders. It's like if you have like some video game come out and it's like a preorder number, but then that's like stops being important once you start shipping the game or product. So yes, as I said earlier, I think my guess is demand is somewhere in the order in a strong economy is on the order of 700,000 or 800,000 units a year from Model 3. And even in a recession, it's probably in the order of 500,000. Okay. Let's go to the next question please. Thank you. Our next question comes from Daniel Ives with Wedbush Securities. Yes, thanks for taking my question. So my question is around Europe. Obviously, with deliveries coming on board in the Q1, maybe what surprised you in terms of demand looks strong, but in terms of what you're seeing out of the region, is it stronger than you expected in certain countries? What do you think is driving that? And maybe you can just talk about the opportunities and challenges in Europe, especially from a delivery logistics perspective. Well, like I said, we're thinking about demand almost 0 right now. It's really getting the part there in time and not having a ton of cars on the order at end of quarter. And then for China getting cars there before there's a potential tariff rise in tariffs. That's really caught my mind, that cost reduction and then improving service in North America. Yes. Right. And just maybe a quick follow-up. Can you just talk about when we look at the Gigafactory build out in China and obviously how important that is, can you maybe just fast forward, let's say, 18 months, 24 months? I mean, how do you envision that as just a competitive advantage versus maybe some other automakers that will be trying to go in your tracks? Thanks. I think it will be quite a significant advantage. I really feel it's quite fundamental to the future of Tesla. And I expect to make several trips to China this year. And I'm working very closely with the team building the factory. We literally get daily updates. So it's a super big deal. And we're only just talking about Phase 1 here. Phase 1 is about 10% of what we think the Gigafactory will ultimately be. So it's a major, major, major deal. And we're getting a lot of support from the Shanghai government, which we're very appreciative of, and the national government. Okay. Let's go to the next question, please. Thank you. Our next question comes from Toni Sacconaghi with Bernstein. Yes, thank you. You've talked repeatedly about the need to drive down costs, which in turn drives the elasticity of demand for cars. And I'm wondering if you can talk about how much of the price differential between the $50,000 Model 3 and the $35,000 Model 3 is structural, meaning that powertrain costs for EVs are just structurally higher than they are for internal combustion engine cars and where you think that difference is today and when that is no longer a factor. So is or maybe said another way, is the bigger driver in getting to lower costs and lower and more affordability on the Model 3, is it really around the powertrain and getting that at parity? Or is it everything else about Tesla not being as efficient as other manufacturers that is causing the higher price right now? And I have a follow-up, please. It's both. It's both the vehicle and both the powertrain. Yes. Yes. I split my time half and half between the Gigafactory and here, and there's opportunities in both. But I think the bigger point is that, yes, there's cost reduction opportunities out, but the bigger point is it's not that our cost is higher than a gas powered or an internal combustion engine. I think what Tony meant is with the battery pack, as in battery pack as well as the powertrain together are more expensive than an engine. That's true. Yes. And how big do you think that delta is today? And when it's do you think of it as being kind of $10,000 $11,000 for that pack plus powertrain for an electric vehicle and maybe $5,000 or $6,000 for an internal combustion engine car? And is that sort of the order of magnitude? And where do you see those getting much more aligned just sort of given the laws of where you think cell and pack costs are going? Well, the thing that's important to bear in mind is that the cost of electricity is quite a bit less than the cost of gasoline, especially in Europe or in California or China, basically almost everywhere except, say, the middle of the United States, the cost of gasoline is very expensive and electricity is far cheaper. The so that factors into the cost of ownership pretty significantly, and it's typically on the order of $50 to $100 a month, depending upon how much somebody drives. So that's a very important thing to consider for an electric car versus a gasoline car. The that said in terms of the initial cost of acquisition, I think it's probably this is just off the top of my head, not a calculated number, probably on the order of 7 ks but trending towards 4 or 5 ks. Okay. That's off the top of my head. Okay. And as you think about 2019, you talked about sort of scenarios for demand and how you plan to roll out the intermediate range and then ultimately the standard range. What is if you do have to make a trade off on volume or profitability during the course of the year, meaning to get the volume you need or you think you can deliver, you have to go to lower margins or vice versa. Where's the trade off? Is are units produced most important to you? Or is delivering the 25% gross margin more important? So if you have a chance to deliver 450,000 or 500,000 cars, but there'll be more standard additions and gross margins will end the year at 20%. Is that are you willing to make that trade off? My guess is it ends up being sort of about the 6 to 1 half dozen the other, where if there's a given amount of free cash flow, you sort of either decide to achieve that with a smaller production or smaller volume cars or at a higher margin or large volume cars at a smaller margin. I think we're towards the second. We'd rather make more cars at a lower margin, But I think it's more or less a flat trade. Okay. Let's go to the next question, please. Thank you. Our next question comes from Maynard with Macquarie. Hi, thank you. Can you just update us on where battery costs are now and where you anticipate they'll be by year end? I'm just trying to gauge how much of a factor this is to lowering cost and sustaining profitability. This is a highly proprietary number. We cannot give it out. I'd like to tell you, but no. We do think we have the best cost in the world. To the best of my knowledge, our costs are better than anyone else right now and they are improving. Okay. And maybe talk about your expectations with the Panasonic Toyota JV and how it might impact you? Was this something that you were made aware of? I talked directly with Tsuga san about this, the Head of Panasonic, and he has showed me that this will have no impact on Tesla. Okay. Thank you very much. Let's go to the next question, please. Thank you. Our next question comes from Dan Galves with Wolfe Research. Hey, guys. Thanks a lot. Do you plan to offer a U. S. Lease product for Model 3 in the U. S? When can we expect it? And can you talk about what percentage of S and X have historically been leased in the U. S? Well, we've been reluctant to introduce the leasing on Model 3 because of its effect on GAAP Financials. So it is worth noting that our demand to date is with 0 leasing. So obviously, leasing is a way to improve demand. But it has it makes our financials look worse. So we're like we're not wanting to excuse that right away. I mean, we'll introduce it sometime later this year probably. I'm not sure what the percentage of lease is for S and X right now. It's around 20%, low 20s and it stayed stable at that level for many, many quarters, which is it feels like the natural demand because we don't do subvention or artificially pump up. Yes, exactly. Our leases are legit. It's usually a small business tax write off is important for the leasing. Okay. Okay. Thanks. And then I have just like 2 quick housekeeping questions. One, is there a restructuring charge that you expect in the Q1? How much is it? And is it included in your expectation of a small profit? Yes, it is included in that. It's difficult to say exactly what that is. At this point, it's roughly around $40,000,000 but that number can vary slightly. Okay. Thanks. And then just the last one is Yes. The last one is, this change in your service parts structure to make things more distributed rather than in the parts warehouses, would that be like a meaningful working capital drag? What's the cash impact of that? No, it's actually we've just been very silly about where we store our parts. So it's actually going to be no change in sort of working capital or not something you would even notice in the financials. It's just being smarter about sending parts directly to service centers, in fact, either directly from our factory here or from our suppliers, and just ship them direct to the service center. Right now, our costs will improve, I think, actually quite a lot because there's been actually quite the current system is quite boneheaded, actually, speaking self referentially. So just being so stopping doing the foolish things will massively improve our service costs, massively improve customer happiness around the world, and it's just fundamentally better all around. I mean, there are some pretty we've been just like super dumb in some of the things we've done where like on one of the trips to China last year, I would always ask, okay, what are we doing wrong? What can we fix? And our China team is great, by the way. They're like, well, do you think we can have spare parts that are made in China just sent directly to our China service centers? Because currently there's a bunch of of parts that are made in China, then sent to a warehouse in New Jersey and then sent back to China. Literally, what was happening. It's super, super nuts stuff. So it's going to get way better. And, yes, it's way better. Okay. Let's go to the next question, please. Thank you. Our next question comes from Ben Kallo with Baird. Hey, great guys. I have one question that's got 4 parts to it. Happy New Year, Owen. So the first part is, so our street numbers are consensus. We've got everything wrong for 6 years or 7 years to go public and there are about $6 in earnings. Talk to us about that if you can. Number 2, Alon, could you talk to us about you talk about I hear you cut some workforce space and exit there at Tesla. I feel like that you have a worry about global economy. Can you talk to us about how you feel about that with your guidance in order in the same order? And then can we talk about maybe sort of third thing for JB, no one's ever going to talk about stationary storage, but we had a whole page on that which looked pretty good to me. And what should we be focusing on that? And what can that add to the bottom line, on top of that $6 this next year? Thank you. I mean, we can't really then talk about consensus and what that means. I think maybe the better approach is we are providing certain guidance here and you and the other analysts need to reflect that in your modeling and that's the best indication from the company of our projections. In all fairness, that's the best way I can think of answering your question here. Yes. Jamey, is there anything you want to say? I mean, I think the letter outlines the predicted growth in the battery storage business, the stationary storage business pretty clearly and that should be included in the projections as well. So I mean we're excited about it, but we can't say much more detail. I mean, our internal projections for stationary storage are closer to 3 gigawatt hours. But some of it's kind of lumpy and may or may not be completed this year. We would have done more in stationary storage last year, except we were sell starved for vehicle production. So we had to convert a bunch of stationary storage lines, battery lines to vehicle battery lines. Otherwise, we would have done quite a bit more in stationary storage. I expect that to grow, I mean, probably twice as fast as automotive, for sure, a long time. We continue to set production records basically every month, so it's growing. And the profitability of the storage business and the gross margin will continue to improve as we keep ramping up production and scale. It's going to be a gigantic business down the road. And the last question was about economy, global economy. Sure. I mean, I do think that the economy moves in cycles and there's clearly significant risk of a recession over the next 12 to 18 months. But I'm confident that Tesla will remain at least slightly profitable even with even if there is a significant recession. And then when and be all the stronger for it when the recession ends. Yes, we have to be relentless about costs in order to make affordable cars and not go bankrupt. That's what our headcount reduction is about. Yes, we have to to be super hardcore about it. It's the only way to make affordable cars. On the SpaceX side, the cost reduction was for a different reason unrelated to SpaceX side is really SpaceX has 2 absolutely insane projects that would normally bankrupt a company, Starship and Starlink. And so SpaceX has to be incredibly spartan with expenditures until those programs reach fruition. Okay. Great. I think that's all we have time for today. Thank you very much for your questions. And Elon would like to have some closing remarks. Yes. So let's see. So Deepak is, well, I'd like to let you make the announcement, but Deepak is going to be retiring from Tesla. And Deepa, I think it's now been you first started Tesla about 11 years ago, right? Been close to that, yes. Yes, almost 11 years. Thank you for your tremendous contribution to Tesla. And it's announcing retirement will not be immediate, but Deepak will continue to be at Tesla for a few more months and will continue to serve as a senior advisor to Tesla for probably years to come hopefully. And we've heard long and hard about who the right person is to take over from Deepak, and that's Zach. And Zach has been with Tesla now 9 years. 9 years. Yes. So Zak, Management and Technology at Wharton undergrad and then worked at Tesla and then spent a couple of years at Harvard Business School, which I actually don't think was necessary, by the way. You told me that when I came back. Yes, exactly. So as Zach said, incredibly talented, has made a huge contribution to Tesla over the years, and also very well known quality to the whole team and has the respect to the whole team. And Zach, I don't know if you'd like to say a few words? Yes, I will. Okay. Savings? Sure. Thank you. Yes. No, first of all, Ilan, thank you very much for the opportunity for me to be here and be here again a second time. I've learned a lot from you and I've been always inspired by you. And I've been also very inspired by the team at Tesla who are incredibly brilliant, very passionate and just amazingly perseverant, the best team I could imagine. So thank you everybody for that. There is no good time to make this change. We felt still this was a good time. It's a new chapter, new year. Tesla has had 2 great quarters of profitability, cash flow. It's on a really solid foundation. And I feel really good about Jack taking over as the CFO. He's proven himself with his many years of experience and many tough challenges that he's worked on and really excited to have Zach take on this role and I'll be here to support him and make sure we are all successful as a company. Yes. Well, thank you, Deepak. Thank you, Elon. So my name is Zach Kirkhorn. Just a brief background on myself. So I joined Tesla just under 9 years ago. We're a super small company with a lot of potential ahead of us, and I was attracted to the mission and the vision of the company. Throughout that time, I've been deep in the operations of every major program of the company, from the Roadster to Model S and X, Model 3, scaling our energy business and more things to come, which we've talked about on the call. I feel we're starting 2019 with a very strong financial foundation. We have enough cash to continue launching new programs and developing new technologies, and we're able to service upcoming debt obligations with our forecasted cash flows. My focus alongside the talented and amazingly passionate team at Tesla is to ensure we continue the terrific momentum on cost management and operational efficiency, which will enable us more enable more access to our products around the world, which is key to achieving the mission of the company. On a personal note, Deepak, a huge thank you to you for your leadership, mentorship and support, and very much looking forward to discussing our progress on future earnings calls. Great. Thank you very much. We'll speak to you in 3 months. Thanks, guys. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.