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Earnings Call: Q2 2018

Aug 1, 2018

Operator 1

Good day, ladies and gentlemen, and welcome to the Tesla Q2 2018 financial results and Q&A webcast call. 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Mr. Martin Viecha, Senior Director of Investor Relations. Mr. Viecha, you may begin.

Martin Viecha
Senior Director of Investor Relations, Tesla

Thank you very much, Shiree. Good afternoon, everyone. Welcome to Tesla's second quarter 2018 Q&A webcast. I'm joined today by Elon Musk, J.B. Straubel, Deepak Ahuja, Robin Ren, our Head of Sales, Jerome Guillen, our VP of Trucks, and we also have our Autopilot team with us here. Andrej Karpathy, Director of AI, Stuart Bowers, our VP of Engineering, and Peter Bannon, our Director of Silicon Engineering. Our Q2 results were announced at about 1:00 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. Please press star one now if you would like to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon?

Elon Musk
CEO, Tesla

Hi, thank you for joining. First of all, I'd like to say we're incredibly proud of the Tesla team for producing 7,000 Model 3, Model S, and Model X vehicles in the last week of June. That was an amazing effort. It's an honor to work with such a great team to produce that incredible result. It's mind-blowing. We continued to achieve 5,000 Model 3s per week or 7,000 combined, S, X, and 3, multiple weeks in July, showing that we're able to do this on a sustained basis and we expect to, in the absence of force majeure or some very unexpected event, be able to achieve an average of 5,000 Model 3s or above for Q3 and 2,000 Model S, X's or above per week for Q3 as well. Essentially, 7,000 cars a week plus on average for Q3.

That's an amazing jump from only a year ago, we were producing 2,000 vehicles a week. It's really a mind-blowing report for a manufacturing company. Yeah, it's incredible work by the team to do that. Many late nights, weekends, extreme amounts of effort, and lots of smart ideas. It's amazing. One of the results you're seeing is that the Model 3 market share has surpassed all competitor premium mid-size sedan volumes. Model 3 market share is now a majority, or in July, it was a majority of all premium sedans. That trend is, we think, likely to continue. We do not think it will stop there. I have Robin Ren here, who's our worldwide head of sales, to talk about some of the interesting elements that we're seeing in terms of cars that people are trading in, the sales and demand trends. It's looking really positive.

We're also getting great feedback on Model 3 from our customers, and we're now delivering the performance dual motor and all-wheel drive versions. The Model 3 reviews are outstanding. Really couldn't ask for better reviews from some of the toughest critics in the world. The thing that we're really finding is that the more Model 3s we deliver to the field, it's actually causing viral growth of our sales. We deliver a Model 3 to somebody, they love it, they tell all their friends. Actually, really, our customers are our primary sales force. They love their car and take their friends for a drive, and that's the thing that fundamentally drives our sales. Not everyone has a friend who has a Model 3, obviously, so we need to get the cars out there for test drives.

As it is right now, not even all stores in North America have Model 3s for test drives. We prioritize getting cars to customers, but we're soon going to have Model 3s available for test drives in all stores, and both the performance version and the rear wheel drive version. A lot of people, they will not buy a car until they test drive it, which is not unreasonable. Although on Sunday, when I delivered it, we did testing out direct delivery, which I think is definitely the future, direct delivery from factory to a customer's home or work or wherever they are. The guy who bought it had never actually even sat in a Model 3. I was like, "Wow, okay." I said, "Well, how do you feel about the car now that you have it and you've driven it?" He's like, "I love it.

It's amazing." Yeah, it just seems to be really well received. Yeah. At an approximate rate of 7,000 cars a week, we believe we can be sustainably profitable from Q3 onwards. We're going to try to raise that rate of Model 3 production steadily in the coming quarters and try to get to the 10,000 cars a week number as soon as we can. What we've found, as we've spent a lot of time debugging a wide range of manufacturing issues, that the potential for our existing lines to be able to produce far more cars is much greater than expected. That by simplifying production lines, by speeding them up, by, in some cases, having things being done manual instead of automatic, and in other cases, having it be done automatic instead of manual, we've been able to achieve dramatic improvements to the output of existing lines.

Which means that our CapEx, going from 5,000 cars a week to 10,000 cars a week is a tiny fraction. CapEx going from five to 10 is a tiny fraction of the CapEx needed to go from zero to 5,000 Model 3s. This is, I think, very good news for capital efficiency of the company. We're going to transfer them out, that's going to inform future mass-market vehicles that we produce. From an operating plan standpoint, from Q3 onwards, I really want to emphasize, our goal is to be profitable and cash flow positive for every quarter, going forward. Obviously, if there's a big recession or there's a severe force majeure event that interrupts our supply chain, that's not always possible.

We're confident that provided the economy is roughly where it is today or reasonably good and there's not a big force majeure event, that I feel comfortable achieving a GAAP income positive and cash flow positive quarter every quarter from here on out. As you said, there may be occasional quarters where we pay back a big loan or something, where there may be just because we paid back a big loan. Absent that, it would be cash flow positive. Once again, I thank the Tesla team for the incredible work and our customers for their support. Without the great people we have at Tesla and the customers who put their faith in us by buying our product, we would not be here today. Yeah, I've really never been more excited about the future of Tesla.

We have a super exciting set of products to bring out in the future. Yeah. Sorry if I sound a little tired. I've been working like crazy in the body shop lately, but it's really going great. I'm super excited. Yeah. Good. Some good people. A number of the executive team here in particular, I asked the three key leaders of the Tesla Autopilot team to be here. Maybe I can go from here to see if the Autopilot leaders at Tesla could introduce themselves and say a bit about what you're working on and what you're excited about in the future. Sorry to put you guys on the spot and everything, but I think we're making pretty radical advances in the core software technology and the vision of neural net.

Then very importantly, the Tesla self-driving chip technology that we've been working on for three years is finally coming to fruition. Peter Bannon's going to talk a lot about that. It's a plug-in replacement for the existing computer and enables an order of magnitude improvement in operations per second or frames per second, is the way to think about it. We think it's really the key to Tesla full vehicle autonomy. Like I said, we designed it to be really easy to replace. I'll let Pete talk about that. We'll start with Stuart, Andrej, and then Pete.

Stuart Bowers
VP of Engineering, Tesla

Okay. Hi, I'm Stuart.

Elon Musk
CEO, Tesla

You have to talk loud, by the way.

Stuart Bowers
VP of Engineering, Tesla

Yeah, I'll talk extra loud. I'm Stuart. Yeah, joined the team relatively recently. Incredibly excited to kind of see the foundation the team has built up until this point and to be building on top of that right now. Right now, a lot of the focus is on Autopilot V9, which is our sort of on-ramp to off-ramp solution that's going to automatically attempt to change lanes, understand what lane the car is in, understand the route the user wants to travel, and take that route for the user, and ultimately hand back control to that user, which is kind of safe and controlled.

Elon Musk
CEO, Tesla

Integrate navigation. You navigate from one place, you say like By the way, a little tip for if you're driving Model S or X or 3, is if you just tap Nav, the Navigate button, and just drag down, it will automatically navigate you to home or work, depending upon where you are. That's a pretty cool feature.

Stuart Bowers
VP of Engineering, Tesla

Sure.

Elon Musk
CEO, Tesla

Yeah.

Stuart Bowers
VP of Engineering, Tesla

Yeah, that's a lot of focus right now. We're also kind of digging in on some new safety features. I think probably the thing which is most exciting for me coming into the team is just seeing the foundations being built out over the last two years. I think Andrej will talk a lot about some of the perception and vision work we've done there, including data engine. That has sort of allowed us to build on top of that very, very quickly, and I think we're also starting to see a new set of safety features that really only make sense in this world where we have this extremely high understanding of what's happening around the vehicle.

I think when I sort of think about what gets me excited when I come into work, it's one, starting to introduce real aspects of kind of like not just making the commute, kind of reducing the drudgery or kind of the risk of commuting, but also really making it a little bit fun. The second is dramatically improving safety, in a way that you really can only do once you have this very nuanced understanding of the world around you through perception.

Elon Musk
CEO, Tesla

Cool.

Andrej Karpathy
Director of AI, Tesla

Yeah. Hello, everyone. My name is Andrej Karpathy, and I'm the Director of AI here at Tesla. In particular, I lead the vision team, which is responsible for turning the video stream that we receive from all the cameras in the vehicle into an understanding of what is around us and around the vehicle. I've worked with neural networks for about 10 years, mostly as a PhD student at Stanford and as a research scientist at OpenAI. What I'm really excited about is really building out this infrastructure for computer vision that underlies all the neural network training; trying to get those networks to work extremely well and make that a really good foundation on top of which we build out all the features of the Autopilot, like the features associated with the V9 release that's going to come up, and that Stuart has mentioned.

Peter Bannon
Director of Silicon Engineering, Tesla

Oh, hi, this is Peter Bannon. My team is-

Elon Musk
CEO, Tesla

Pete, yeah. Talk loudly. Yes.

Peter Bannon
Director of Silicon Engineering, Tesla

My team's leading currently the Hardware 3 development. The chips are up and working, and we have drop-in replacements for S, X, and 3. All have been driven in the field. They support the current networks running today in the car at full frame rates with a lot of idle cycles to spare. I think we're all really excited about what Andrej and his team will be able to do with this hardware in the future. I think one little anecdotal story was I gave a talk to his team on Hardware 3 last month explaining how it worked and what it was capable of. Afterwards, one of the researchers came up to me and he was really excited, and he said, "This is so exciting." As a hardware designer, having excited software developers is the best.

Elon Musk
CEO, Tesla

Yeah.

Peter Bannon
Director of Silicon Engineering, Tesla

It's a really fun place to work because I do get to work with my two primary customers, Stuart and Andrej, and making them happy is pretty fun.

Elon Musk
CEO, Tesla

Yeah. Actually, Pete, some people know about your background, but not everyone does. Pete's a super humble guy, but it'd be great just yeah, talk about the stuff you've done before.

Peter Bannon
Director of Silicon Engineering, Tesla

Let's see. I started working designing computers in a Digital Equipment Corporation in 1984, back when they were refrigerator sized, and have been working on smaller and smaller designs ever since. I was an Intel fellow working on Itanium for a little while, then I was VP of architecture and verification at P.A. Semi, which was acquired at Apple. I led the design of the first ARM 32-bit processor that went into the iPhone 5. I built the team that designed the first ARM 64-bit processor in the world, which went into the iPhone 5s. Then I worked on performance modeling and performance improvements at Apple for eight years. Then two years ago, I came to Tesla and designed the neural network accelerator that's part of Hardware 3 and helped architect the rest of the Hardware 3 solution that will be in the car next year.

Elon Musk
CEO, Tesla

Yeah. Maybe worth articulating some of the details with the design principles that explain why the Tesla AI chip or AI computer essentially for the car is able to achieve an order of magnitude better processing than anything else that exists.

Peter Bannon
Director of Silicon Engineering, Tesla

Sure.

Elon Musk
CEO, Tesla

Yeah.

Peter Bannon
Director of Silicon Engineering, Tesla

Two years ago when I joined Tesla, we did a survey of all of the solutions that were out there for running neural networks, including GPUs. We went and talked to other people at ARM that were building embedded solutions for running neural networks. Pretty much everywhere we looked, if somebody had a hammer, whether it was a CPU or a GPU or whatever, they were adding something to accelerate neural networks. Nobody was doing a bottoms-up design from scratch, which is what we elected to do.

We had the benefit of having the insight into seeing what Tesla's neural networks looked like back then and having projections of what they would look like into the future. We were able to leverage all of that knowledge and our willingness to totally commit to that style of computing to produce a design that's dramatically more efficient and has dramatically more performance than what you can buy today.

Elon Musk
CEO, Tesla

Cool, thanks. Essentially, the key is to be able to run the neural net at a fundamental, at a bare metal level so that you actually, it's essentially doing the calculations in the circuits itself and not in some sort of emulation mode, which is how a GPU or CPU would operate. You want to do basically a massive amount of localized matrix multiplication with the memory right there. It's a huge number of very simple complications with the memory needed to store the results of those complications right next to the circuits that are doing the matrix calculations. The net effect is an order of magnitude improvement in the frames per second. Our current hardware, which I'm a big fan of Nvidia, they do great stuff, but using a GPU, fundamentally it's an emulation mode. Then you also get choked on the bus.

The transfer between the GPU and the CPU ends up being one of the constraints of the system. The net effect is we're able to, with the Tesla computer. We've been in semi-stealth mode basically for the last two to three years on this, but I think it's probably time to let the cat out of the bag because that cat's kind of coming out of the bag anyway. It's a incredible job by Pete and his team to create this, one of the world's most advanced inference computer designed specifically for autonomous operation. As a rough sort of figure of merit, whereas the current Nvidia-based hardware can do 200 frames a second, this is able to do over 2,000 frames a second and with full redundancy and failover.

It's an amazing design. We're going to be looking to increase the size of our chip team and our investment in that as quickly as possible. I think we've got some of the best aces in the world, I think we want to build on that even more. It costs the same as our current hardware. We anticipated that they would have to do this replacement, which is why we made it easy to switch out the computer. That's all that needs to be done. They can take out one computer and plug in the next. That's it. All the connectors are compatible, you get an order of magnitude more processing, and you can run all the cameras at full frame rate, full resolution, with a complex neural net. It's super kickass. Thank you for doing that.

Peter Bannon
Director of Silicon Engineering, Tesla

You're welcome.

Elon Musk
CEO, Tesla

Thanks for making the nets and thanks for making the software. Basically, I wanted to introduce three of the key people at Tesla that are doing this. I have huge respect and admiration for you guys and it's because of what you and your team is doing that Tesla will be successful in this arena. Thank you.

Martin Viecha
Senior Director of Investor Relations, Tesla

Thank you, Elon. Shiree, let's go to the first question.

Operator 2

Thank you. Our first question comes from Toni Sacconaghi with Bernstein.

Toni Sacconaghi
Analyst, Bernstein

Yes, thank you. I have one question and one follow-up, please. Just on gross margins, it looks like S and X gross margins were up maybe 500 basis points sequentially, and I'm wondering maybe you can articulate what drove that. More importantly, it looks like you're calling for Model 3 gross margins to go from about maybe 3% this quarter to 15% next quarter. That's about a $6,000 cost out per car, and I'm wondering if you can maybe help us understand what sort of the forces that drive that kind of improvement in a relatively short time frame.

Elon Musk
CEO, Tesla

Absolutely. First of all, I'd like to apologize for being impolite on the prior call. Honestly, I think there's really no excuse for bad manners. I was kind of violating my own rule in that regard. There are reasons for it, in that I'd gotten no sleep and been working sort of current 110-hour, 120-hour weeks. Nonetheless, there's still no excuse. My apologies for not being polite on the prior call.

Toni Sacconaghi
Analyst, Bernstein

I appreciate that. Thank you.

Elon Musk
CEO, Tesla

Let's see. With respect to gross margin, I'll touch on that and then hand the rest to Deepak. Certainly, when spooling up to a production line, there are tremendous amount of inefficiencies. There's a lot of hurry up and wait, where some parts of the production line move well, one part doesn't, and you have associates waiting around with nothing to do. There are parts that we thought were right, it turns out they weren't right, and we've got to send them back to the supplier. It's just like the whole sort of giant machine kind of just needs to lurch into a high pace. There's a lot of lurching, which is very inefficient because you end up having super high labor cost per car. It just takes time to sort of spool up this giant machine.

Basically, a production system is like a giant cybernetic collective. It moves as fast as the slowest part. As we address those slow parts and as we improve efficiency, then grow gross margin and sort of profitability per car just improve dramatically. That's sort of at a high level. Deepak, do you want to add to that?

Deepak Ahuja
CFO, Tesla

No, Elon, you described it extremely well. Just to sort of summarize, this was a major milestone for us in Q2, that the gross margin of Model 3 turned slightly positive. We feel really good about the path ahead. As Elon said, it's driven predominantly by manufacturing cost efficiencies. The labor hours that we use to produce each car becomes less. The initial ramp-up costs that we have that are one-time, those inefficiencies disappear. Our fixed costs that are there, that gets leveraged to a higher volume. All of that.

Elon Musk
CEO, Tesla

Actually, a thing that can also happen is that if it turns out that, say, a production part was either designed wrong or built wrong or there's something wrong with it, then on a kind of on an emergency basis, we have to go with low volume tooling, which can be produced quickly. A part produced off of low volume tooling can easily be 10 times more than a part produced off of production tooling. This one you can have. Sometimes it gets really nutty. If you've got to machine something out of a block, and it's either that or going to make a car, then the cost of using low volume, cost of producing low volume tooling can be really nutty.

Deepak Ahuja
CFO, Tesla

Yeah. That journey just continues. As we stabilize and grow production from these levels, we achieve even more efficiencies. Q3 also benefits with somewhat improved mix, as we're going to sell more all-wheel drive and performance cars. In the long run, as we continue to achieve those efficiencies and costs, our gross margins will continue to increase.

Elon Musk
CEO, Tesla

Yeah. I don't know if this trend will continue. We're trying to give you essentially all the information that at least we know of, we're seeing roughly half of all customers choose the dual motor all-wheel drive option-

Deepak Ahuja
CFO, Tesla

Yeah

Elon Musk
CEO, Tesla

which is actually quite a good positive surprise.

Deepak Ahuja
CFO, Tesla

Yeah. It's been heartening to see that mix in terms of what customers want. Robin can probably add more to that.

Robin Ren
Head of Sales, Tesla

Yeah. Starting from end of June, when we opened the configurator, and invited the existing reservation holders, we saw tremendous excitement and response from our customers. As Deepak just mentioned, we actually see more orders for the all-wheel drive dual motor car and performance cars combined than the rear wheel drive cars.

Elon Musk
CEO, Tesla

Yeah. We don't want to say, like, this should be assumed to be a continued thing. It's just the thing we are seeing now.

Robin Ren
Head of Sales, Tesla

Yes.

Elon Musk
CEO, Tesla

Yeah.

Robin Ren
Head of Sales, Tesla

Correct.

Elon Musk
CEO, Tesla

Yeah.

Robin Ren
Head of Sales, Tesla

Another thing I want to point out is that since we opened the configurator to the general public in early July, we are seeing an increased demand coming from people who do not currently hold a reservation. I think that's something that we found super exciting, because these are the people who actually had no idea about Model 3, and they heard about Model 3 as available to order. Many of them requested test drives, and since early July, we have over 60,000 test drive requests in the U.S. alone. These people come into our stores, do the test drive, and they become super excited, and they decide to order the car. We believe that the strong demand coming from, especially the non-reservation holders, is going to dramatically increase as we increase our test drive population.

To give you an example, three weeks ago, we had only eight stores having test drive cars. To Elon's point earlier, now we have over 90 stores having test drive cars.

Deepak Ahuja
CFO, Tesla

Okay.

Elon Musk
CEO, Tesla

It's worth mentioning, just an interesting little bit of information that Robin was telling me. I'd rather just also commend Robin doing a great job running worldwide sales.

Robin Ren
Head of Sales, Tesla

Oh, thank you.

Elon Musk
CEO, Tesla

Thanks taking on this role and the awesome work done in China was really some next-level stuff. Robin was born and raised in Shanghai, and along with Tom and Grayson, as well as our team in China, has been sort of instrumental in establishing the Tesla China factory, and making sure that gets done right, and have a great relationship with the government. It's nice work in that regard. Some of the things people don't expect, like what are the top five trade-in cars for Model 3?

Robin Ren
Head of Sales, Tesla

Yeah, this is very interesting. We looked at what people who are buying Model 3 cars in the United States, what cars they're trading in. What we found is, through this year, from January to July, the top five non-Tesla cars people are trading in to get into a Model 3, they are Toyota Prius, BMW 3 Series, Honda Accord, Honda Civic, and Nissan Leaf.

Elon Musk
CEO, Tesla

They're really surprising.

Robin Ren
Head of Sales, Tesla

Yeah.

Elon Musk
CEO, Tesla

Yeah.

Robin Ren
Head of Sales, Tesla

They are surprising because they are not the traditional premium sedans. Actually, many of them are the mainstream mid-size sedans.

Elon Musk
CEO, Tesla

Right. We're obviously, at this point, not yet selling a $35,000 car, this is promising for the future. All right, cool. Next question.

Operator 1

Thank you. Our next question comes from Joseph Spak with RBC Capital Markets.

Joseph Spak
Analyst, RBC Capital Markets

Good afternoon, thanks. Maybe we could tackle some of the commentary about the Gigafactory coming in China. When you first announced the Gigafactory 1, I think you said that was going to be about a $5 billion investment. You mentioned some volume numbers associated with what you think could be in China. We do some extrapolation, it looks like maybe 15 gigawatt hours of initial capacity. I'm wondering if you could also do a linear extrapolation on the cost you think you need for that factory.

Elon Musk
CEO, Tesla

Sure. I would also like to apologize for being impolite on the last call with you. That was not right, and I hope you accept my apologies.

Joseph Spak
Analyst, RBC Capital Markets

Thanks.

Elon Musk
CEO, Tesla

With respect to Gigafactory CapEx, I think we've learned a tremendous amount with Gigafactory 1, we're confident that we can do the Gigafactory in China for a lot less. I think it's probably closer to, this is just a guess, but probably closer to $2 billion. That would be at a higher, that would be sort of at the 250,000 vehicle per year rate. I think we can be a lot more efficient with CapEx. That would include at least a battery module and pack production, a body shop, paint shop and general assembly. Might even be less than that, but that's about the right number for that. Then cell production is something we need to still figure out with respect to the Shanghai factory. JB, would you like to add to that?

JB Straubel
CTO, Tesla

Yeah. I'd agree with all that. We found a surprising number of ways to improve efficiency and speed, and density as well at Gigafactory 1, all those lessons will absolutely be shared with Gigafactory 3. The teams are already, of course, beginning to collaborate and start to figure out ways to do this more efficiently and with less CapEx than last time. Yeah.

Elon Musk
CEO, Tesla

Yeah. I think we could, like less than half would be a good estimate and maybe a lot less than half, but not more than half would be a fair estimate for CapEx to get to that 250,000 level. We just learned a tremendous amount about manufacturing. It's definitely burned out a lot of neurons. Man.

JB Straubel
CTO, Tesla

Sure

Elon Musk
CEO, Tesla

It's like next level. On the plus side.

We really know a lot about volume manufacturing at this point.

JB Straubel
CTO, Tesla

There are so many specific examples, but even in just recent weeks and months, we've found certain areas of production that have been very capital intensive that we've been able to speed up with almost no additional CapEx by maybe 20%, even 25% or 30%.

Elon Musk
CEO, Tesla

Yeah. It's very crazy.

JB Straubel
CTO, Tesla

Just by-

Elon Musk
CEO, Tesla

Including on the cell production.

JB Straubel
CTO, Tesla

Yeah. Just by challenging some of the initial assumptions, the specifications, tweaking the controls-

Elon Musk
CEO, Tesla

Yeah

JB Straubel
CTO, Tesla

and software.

Elon Musk
CEO, Tesla

yeah, what really matters, what actually doesn't matter. Things we think matter.

JB Straubel
CTO, Tesla

Yep

Elon Musk
CEO, Tesla

some of it actually ends up not mattering at all.

JB Straubel
CTO, Tesla

That's with basically zero CapEx. As you start to add.

Elon Musk
CEO, Tesla

Yeah

JB Straubel
CTO, Tesla

very tactical, strategic CapEx to the existing lines.

Elon Musk
CEO, Tesla

Yeah

JB Straubel
CTO, Tesla

That's how we can get to something close to double, or beyond with a really, really small increment.

Elon Musk
CEO, Tesla

Yeah. That was one of the.

Keys to success on the Model 3 production was the GA4 thing, which was led by Jerome. Jerome also was key in doing the sort of zone 1 and 2 assembly order lines, which were critical because we had just fundamental failure, and especially in zone 2 of battery module production. Thank you, Jerome. That was, in terms of like pulling some pretty incredible rabbits out of the hat, that was amazing.

Jerome Guillen
VP of Trucks, Tesla

Thank you.

Elon Musk
CEO, Tesla

People make fun about our tent, but by the way, our tent is amazing. People who say tent build like that, it's like some sort of, it's like telling me to buy at REI or something like that to go camping. This is a tent that is actually commonly used as a permanent structure. That is a giant thing that is very commonly used as a permanent structure. We just had to come up with a creative solution, because GA3 was not going to be able to make the rate. We had to come up with some ideas, and perhaps you may tell people how that all transpired. It's interesting to learn.

Jerome Guillen
VP of Trucks, Tesla

Yeah. Thank you. It was a fun project, actually.

Elon Musk
CEO, Tesla

Yeah.

Jerome Guillen
VP of Trucks, Tesla

Not only it's producing good results, but a lot of people contributed from different engineering groups and had a lot of fun in the process.

Elon Musk
CEO, Tesla

We even had some of the people on the legal team building cars.

Jerome Guillen
VP of Trucks, Tesla

They-

Elon Musk
CEO, Tesla

That's cool. It's great. There's something viscerally satisfying about building a car.

Jerome Guillen
VP of Trucks, Tesla

We just wanted to create an assembly line that would be very easy and very straightforward. It's a straight line.

Elon Musk
CEO, Tesla

Yeah.

Jerome Guillen
VP of Trucks, Tesla

Very simple. Car enters at one point and it's finished at the other end. Very simple access on all sides. Very simple tooling that we reused for most of Actually, nearly all of it is systems and tools that we discarded from previous S and X or from Model 3.

Elon Musk
CEO, Tesla

Especially Model 3. The problem is we have two weeks to solve this problem, which is quite the impossible.

Jerome Guillen
VP of Trucks, Tesla

Yeah.

Elon Musk
CEO, Tesla

We actually didn't have time to order new equipment because it would've taken too long to arrive. We took the conveyors that we'd discarded from the GA3 line, which didn't work, or was way too complex to actually do our parts.

Jerome Guillen
VP of Trucks, Tesla

We simplified-

Elon Musk
CEO, Tesla

Yeah

Jerome Guillen
VP of Trucks, Tesla

Repurposed them, make them sturdy for what was needed and-

Elon Musk
CEO, Tesla

Well, I thought a really cool idea was putting them on the 1% grade.

Jerome Guillen
VP of Trucks, Tesla

Yeah.

Elon Musk
CEO, Tesla

Technically, the conveyors for parts delivery to GA3 were not graded to be able to move something as heavy as a car. We made it downhill and on a 1% downward grade. Put the car at the top, then you can actually overcome the-

Jerome Guillen
VP of Trucks, Tesla

Gravity helps.

Elon Musk
CEO, Tesla

Yeah, gravity. Exactly. With Newton on your side, you can accomplish a lot.

Jerome Guillen
VP of Trucks, Tesla

Yeah. Just pushing the car. Yeah.

Elon Musk
CEO, Tesla

Exactly.

Jerome Guillen
VP of Trucks, Tesla

No. Something that I'm particularly happy about is that we installed the quality team at the end of the line, and we wanted to have at least as high standards on this new line as in the other one. Because it is so simple and straightforward, they can run very quickly to any point in the line if there is any potential concern, and address very quickly. There's no maze to move around or identify where something happened. The quality of the cars that come out of this structure is at least as good. We make all the performance cars on this particular line, and they seem to be doing quite well. This is a very pleasant surprise, and the associates seems to be very happy and engaged in that particular area.

This may be a model of how we may want to start general assembly for future vehicles. At least to start. We can always add further automation and complexity.

Elon Musk
CEO, Tesla

Something that's counterintuitive is that this actually has a fully considered fewer labor hours per car than the GA3 system. Just to elaborate on what Jerome was saying, when we have parts delivery to GA4, the truck literally just backs up to the side of the line, where there's a door in the tent. Then that is used to unload parts from suppliers directly to where they're needed on the line, so there's no intermediate system. Whereas for GA3, they're unloaded, they're put in a warehouse, then they're repackaged from the warehouse into these totes. We actually have 220 people, something like that, across all shifts, whose only job it was to repackage parts from the boxes that came from suppliers to these totes that go into the lifters, that go up into GA3.

That's literally all they do, is move things from one box to another box, and we don't need that at all on GA4.

Jerome Guillen
VP of Trucks, Tesla

All gone.

Elon Musk
CEO, Tesla

All gone, yeah. There's a tremendous amount of, so we have 24/7 robotics technicians that are constantly trying to make the machines have uptime. That's very expensive. When you think about not having to maintain all these robotic systems, that's a big cost savings as well. Now we're gradually adding simple automation into GA4 to make it easier to build a car, and that are labor-saving devices. It's already at an efficiency level greater than GA3, which is pretty impressive.

Jerome Guillen
VP of Trucks, Tesla

Yep.

Elon Musk
CEO, Tesla

Joe, do you have a follow-up question?

Operator 1

Our next question comes from Jamie Albertine with Consumer Edge.

Jamie Albertine
Analyst, Consumer Edge Research

Good afternoon. Thank you for taking my question. Appreciate all the color you've been providing. I wanted to dig a little bit deeper, though, in terms of capital spending plans. Considering the growth you've identified in China with the Model Y, we believe also in the EU, it's been discussed about a factory there, how do you plan to fund all of this growth without going back to the capital markets to raise funds? Can you verify for us whether or not there is a notice from a regulator that would prevent you from raising outside capital? Thanks.

Elon Musk
CEO, Tesla

We'll not be raising any equity at any point. At least, I have no expectation of doing so, do not plan to do so. For China, I think our default plan will be to use essentially a loan from the local banks in China, and fund the Gigafactory in Shanghai with local debt, essentially. We certainly could raise money, but I think we don't need to. Yeah. I think it is better discipline not to.

Jerome Guillen
VP of Trucks, Tesla

Yeah, we are executing on an operating plan that keeps us sufficiently self-funded, despite our CapEx needs and our debts maturing, and still keep a very healthy balance on our balance sheet.

Elon Musk
CEO, Tesla

Yeah. Our default plan is we start paying off our debts. I don't mean [refining] them, I mean paying them off. For example, there's a convert that's coming due soon, a couple hundred million, then there's a $900 million one in February or something like that. We expect to pay that off with internally generated cash flow.

Jerome Guillen
VP of Trucks, Tesla

Still have a healthy cash balance.

Elon Musk
CEO, Tesla

Yeah. To answer the other question, there is no such notice from a regulator. Yeah. I'm not sure what you're talking about, there is no such notice from a regulator.

Jamie Albertine
Analyst, Consumer Edge Research

Very good. Thank you very much.

Elon Musk
CEO, Tesla

Let's go to the next question, please.

Operator 1

Thank you. Our next question comes from George Galliers with Evercore.

Martin Viecha
Senior Director of Investor Relations, Tesla

Hi, George.

Hey, George.

Okay, let's go to the next one.

Operator 1

Thank you. Our next question comes from Adam Jonas with Morgan Stanley.

Adam Jonas
Analyst, Morgan Stanley

Hey, everybody. There's so much love and respect for colleagues and Wall Street analysts on this call. It is lifting my spirits, what can I say? I got two questions. The first is for the Autopilot team. There's an argument that a fully autonomous car is essentially like a terminator that is programmed to save lives in highly complex terrestrial environments, and that this same technology, with a few tweaks, has some pretty obvious military capability. Do you see any risk that U.S. companies will ultimately not be allowed to operate weapons-grade AI-based technology in a market like China and vice versa?

Elon Musk
CEO, Tesla

Well, this has never come up. I wouldn't call it weapons-grade. It's just like the car is just trying to drive. If anything, the autonomous cars will be pretty easy to bully because they'll be optimizing so much for avoiding collision. That'll be more of a challenge than anything else is, as soon as somebody sees that the car is autonomous, they know they can cut them off and the car's going to be doing what it can to avoid a collision. That'll actually be probably a bigger challenge than anything else. We've not encountered anything of the nature of what you're saying.

Adam Jonas
Analyst, Morgan Stanley

You don't see autonomous cars as a potential germination or training grounds for things that would have a national security or military interest? Okay. May I follow up, Elon? My last question, who do you think would be a more formidable competitor over time, BMW or Amazon?

Elon Musk
CEO, Tesla

For Tesla?

Adam Jonas
Analyst, Morgan Stanley

For Tesla.

Elon Musk
CEO, Tesla

Man, I don't think either of them are likely. As far as I know, I'm going to be pretty shocked if Amazon got in the car business. I think BMW has great engineering, and it's good to see that they're making some investments in electrification. Hopefully, they do more of that. I'm not sure where they stand on autonomy. It's not on our radar from an autonomy standpoint.

Adam Jonas
Analyst, Morgan Stanley

Thanks a lot.

Martin Viecha
Senior Director of Investor Relations, Tesla

Okay, let's go to the next question.

Operator 1

Thank you. Our next question comes from Pierre Ferragu with New Street Research.

Pierre Ferragu
Analyst, New Street Research

Thank you for having me, Elon. I wanted to make sure we understand well how you stop burning cash for going forward in coming quarters. My understanding is that an important moving part here, probably the most important one, is the positive impact of the ramp of the Model 3 on your working capital. I did some quick math on the quarter, and I see your payables increased by $430 million, while your receivables didn't move much, which makes sense because you get paid on the spot and you pay your suppliers only on a 60-day notice or more. If I divide that by the number of incremental cars you've been producing in the quarter, I get you that $23,000 per car.

Of course, my question is whether this is a good way to think about it which means that going forward, when you move into Q3 and Q4, every additional car, every additional Model 3 you're going to produce, you're going to bump up payables by something in the region of $20,000, and that's going to be the main driver getting you to break even and to stop burning cash.

Deepak Ahuja
CFO, Tesla

Pierre, Deepak here. There are many factors. Clearly, the working capital benefit of the difference in the payable terms versus collecting cash is one of them. Also, it's our gross margin improvement on the business. It's the higher volumes and the higher gross margins resulting in higher gross profit. I'm stating the obvious here on Model 3. Our S and X volumes are increasing, too, in the second half. That's going to help us significantly. All of our other businesses are improving their profitability. While our OpEx is staying essentially flat, massive leverage in the business. When you combine all of that's what is giving us the cash flow from operations to fund the rest of our business and grow cash. I'm stating the obvious, but just sort of summarizing the whole point. Yeah.

Martin Viecha
Senior Director of Investor Relations, Tesla

Okay.

Pierre Ferragu
Analyst, New Street Research

In terms of order of magnitude. Sorry, go ahead.

Elon Musk
CEO, Tesla

Sorry, what was the question?

Martin Viecha
Senior Director of Investor Relations, Tesla

Sorry, can you repeat the follow-up?

Pierre Ferragu
Analyst, New Street Research

$20,000. Yes.

Martin Viecha
Senior Director of Investor Relations, Tesla

Sorry, Pierre, can you repeat the follow-up?

Pierre Ferragu
Analyst, New Street Research

My follow-up was on, in terms of order of magnitude, does like $20,000 per car of payables boost over a 60-day period, does that sound like something that makes sense, or am I missing other moving parts?

Deepak Ahuja
CFO, Tesla

Yeah, that's rough order of magnitude correct. Yeah.

Pierre Ferragu
Analyst, New Street Research

Excellent. Thank you.

Martin Viecha
Senior Director of Investor Relations, Tesla

Let's go to the next question.

Operator 1

Thank you. Our next question comes from Romit Shah with Nomura Instinet.

Romit Shah
Analyst, Nomura Instinet

Thanks very much. I guess my question is for the Autopilot team. We've been looking forward to this fully autonomous coast-to-coast drive. Elon, I think you've said on previous calls, if I can paraphrase, that the team's been focused on developing a Full Self-Driving suite that would work basically on all different kinds of road conditions. I'm just curious, what's holding back that capability today to go coast to coast? Are we closer now that you've strengthened the compute technology?

Elon Musk
CEO, Tesla

Yeah. We can do a coast-to-coast drive, especially if we pick a specific route and then write code to really make that route work, we could do a coast-to-coast route drive, but that would be kind of gaming the system. I think it's really important for the Autopilot team to be focused on fundamental safety of the existing features. The focus is really massively on safety of existing features. There's an advanced dev build that can do things like recognize traffic lights and stop signs and make hard right turns and that kind of thing. It's not at the safety level that conserves okay for release. Really, we want many nines of reliability for anything that's released to end customers. I don't want to take the team off that until we feel like we've really done everything plus we can for the core functionality.

I mean, Stuart, do you want to add that?

Stuart Bowers
VP of Engineering, Tesla

Yeah. I think the big thing I'd say is that when Elon. To reiterate Elon's point, there's no question you can build a demo around this stuff. The challenge right now for the team is just increasing the safety and utility of Autopilot to over a quarter million cars we have today and pushing more out after that. I think when we look forward to what the next 6 to 12 months look like, it's taking those same kind of features we've been working on, probably deploying them in the form of active safety features. That's a thing we can do already, is to understand, use this rich understanding of the environment to actually try to keep you safer, to either beep or brake.

Also, of course, one huge advantage that we have is we can understand what humans actually did in these vehicles and test our software to make sure that we would have made decisions that were similar, if not safer. That's going to be a huge part of what we do over the next probably two quarters.

Elon Musk
CEO, Tesla

That said, we might be able to pull off a coast-to-coast demo before the end of the year. Really, right now, the super heads-down focus on the Version 9 software release, which has got a number of really cool things in it, and hoping to get that out to early access program in about four weeks, and then broadly in September. That's the hardcore focus right now, and that'll certainly include some significant advancements in autonomy. Once that's out and stable, I think that could be a good time to work on the coast-to-coast drive.

Romit Shah
Analyst, Nomura Instinet

I don't know if you guys have shared what attach rates are for Autopilot. Just as my follow-up, I guess I'm curious what you can do to increase the number of cars that have that functionality. It would seem like the effect to auto margins and cash flows could be pretty positive.

Elon Musk
CEO, Tesla

I think it's extremely powerful once people are comfortable using the technology and see just how much utility it brings. I think that is a very significant potential for margin gain in the future, but it's contingent on that functionality really making a difference. I think we will really start to see some of the breakthrough stuff in about a month or so.

Martin Viecha
Senior Director of Investor Relations, Tesla

Let's go to the next question.

Romit Shah
Analyst, Nomura Instinet

Thank you.

Operator 1

Thank you. Our next question comes from John Murphy with Bank of America.

John Murphy
Analyst, Bank of America

Good afternoon. Just a first question. Is it fair to assume the GA4 in the tent is now essentially permanent? If so, is this potentially a new model for capacity and capacity additions that might be much more capital efficient over time?

Elon Musk
CEO, Tesla

What do you think, Stan?

Speaker 24

It's permanent for now.

Elon Musk
CEO, Tesla

Yeah.

Speaker 24

Yeah, unless or until we come up with something different or better. Personally, I think it's a good model to start assembly of any product.

Elon Musk
CEO, Tesla

Yeah.

Speaker 24

There's a lot of flexibility, then we can build and iterate over it, yeah.

Elon Musk
CEO, Tesla

It's definitely demonstrated the necessity of mother invention, when you have to do something quickly then you just don't have time to spend a lot of capital, it forces you to be capital efficient.

Speaker 24

Yeah. It taught us a lot of lessons on how to be capital efficient in the general assembly area. In that sense, those lessons will carry forward, John.

Elon Musk
CEO, Tesla

Yeah. I think still, by and large, we'll be aiming for steel frame buildings. To be clear, it's not like this is going to just become tents everywhere. Yeah.

Stuart Bowers
VP of Engineering, Tesla

The tent itself might be a little bit of a distraction from actually the focus of what's happening inside.

Elon Musk
CEO, Tesla

Yeah, inside it. Exactly.

Stuart Bowers
VP of Engineering, Tesla

That's a similar methodology that we kind of reverted back to then moved forward from in the module where we simplified then did a very linear, intuitive process that was a bit more manual then have automated and scaled that up as we understand it and get good control of it. I think that's a lesson that we're taking to heart broadly across other things that we're going to do in the future, it's an efficient way to scale up.

John Murphy
Analyst, Bank of America

Is that replication of that simplicity why you think Shanghai could be that much less costly that then Model Y capacity might be that much less costly to add?

Elon Musk
CEO, Tesla

Yeah. Model Y is a sort of whole separate thing, it's definitely one of the elements that convinced us that we can scale up quickly at low CapEx in Shanghai. We would do an improved version of GA4, then we've also figured out how to make the paint shop a lot simpler general assembly a lot simpler. ASP is cool. I'm headed back out to the-

JB Straubel
CTO, Tesla

Body shop

Elon Musk
CEO, Tesla

the body shop, again, making the body shop a lot simpler.

JB Straubel
CTO, Tesla

Making a lot simpler.

Elon Musk
CEO, Tesla

Yeah. We can really simplify the body shop. Man. Wow. There's a lot that we can They're really easier to improve, like design from manufacturing, and changing some of the joining approaches that we use, and actually making the car lighter, cheaper, and better. Actually safer. Although it's ridiculously safe already, but yeah.

JB Straubel
CTO, Tesla

Maybe one other point, just to follow up quickly.

Elon Musk
CEO, Tesla

Whoa. Yeah.

JB Straubel
CTO, Tesla

I think some people have taken this as like a walk back from automation, which is not really accurate either.

Elon Musk
CEO, Tesla

Yeah. Exactly.

JB Straubel
CTO, Tesla

This is basically a more thoughtful and focused way to apply automation to the actual issues that matter most.

Elon Musk
CEO, Tesla

Yes. Well said. Actually, it's really worth emphasizing JB's point here. Yeah. Worth saying again.

JB Straubel
CTO, Tesla

Yeah. It's not an overall reduction in automation. It is a focusing of our efforts on automating the processes and the value add processes that matter the most. I think we got maybe a little bit distracted on this first round, automating a lot of things that added complexity-

Elon Musk
CEO, Tesla

Yeah

JB Straubel
CTO, Tesla

that didn't necessarily speed up and-

Elon Musk
CEO, Tesla

Way too fancy

JB Straubel
CTO, Tesla

We can

Elon Musk
CEO, Tesla

Like-

JB Straubel
CTO, Tesla

Yeah.

Elon Musk
CEO, Tesla

Start simple, get fancy later. Don't start fancy. Fancy is going to bite you in the ass.

JB Straubel
CTO, Tesla

It's not as if we're like reverting to the dark ages of all manual everything. That's not at all the case.

Elon Musk
CEO, Tesla

Yeah. Gigafactory is.

JB Straubel
CTO, Tesla

Massively automated.

Elon Musk
CEO, Tesla

Massively automated. It's pretty crazy.

JB Straubel
CTO, Tesla

Yeah

Elon Musk
CEO, Tesla

The body production is also heavily automated, with almost entirely robots. It's a mixture of people and automation. There's so much that goes into producing a car, going from raw metal and plastic and glass to an actual finished car. Yeah, as JB was saying, the vast majority of that is highly automated.

John Murphy
Analyst, Bank of America

Okay. If I can sneak in one quick follow-up. When we look at the grosses on the Model 3, you're saying 15% in three Q, 20% in four Q, and I think the ultimate target is 25%. What are the average transaction prices you guys are assuming? It sounds like it'll be a bit higher earlier, but is that 25% gross ultimately still built around the low 40,000 ATP?

Elon Musk
CEO, Tesla

Yes.

John Murphy
Analyst, Bank of America

Okay.

Elon Musk
CEO, Tesla

The simple answer is yes.

Deepak Ahuja
CFO, Tesla

It'll be lower ASPs than what we have today, clearly. We are having a richer mix of all-wheel drive, as Elon alluded to earlier, so that's going to help. Yeah, 25% is still the target that we have ahead of us.

Elon Musk
CEO, Tesla

Highly confident that it may not be Q1, but I'd be shocked if it's not Q2, that we get to 25%.

John Murphy
Analyst, Bank of America

Great. Thank you very much.

Deepak Ahuja
CFO, Tesla

Thank you. Let's go to the next question.

Operator 1

Thank you. Our next question comes from Alexander Haissl with Berenberg.

Alexander Haissl
Analyst, Berenberg

Good evening, everyone. Thanks for taking my question. I would like to come back to the point made on the manufacturing efficiencies. I mean, overall, the two main challenges for Tesla, but also for the rest of the industry, is the manufacturing part, which has been overcome by a lot of companies already, with the second one being the technology part. My question is, how would you describe the learning curve of the manufacturing process versus technology, and what is really the pace of advancement you're making? It looks like on the manufacturing side, the curve that you have meaningfully accelerated here. Thank you.

Elon Musk
CEO, Tesla

Well, I don't really know actually how others do it, to be totally frank. I just know that the way we are doing it, and I'm told that this is how others do it, and we are able to find ways to make it much better.

JB Straubel
CTO, Tesla

I guess

Elon Musk
CEO, Tesla

I don't know what the delta would be, though

JB Straubel
CTO, Tesla

We also don't really, I think, differentiate it quite the way maybe you're implying. Technology and manufacturing are sort of one and the same in many cases, and we're treating a lot of the manufacturing problems as a technology problem.

Elon Musk
CEO, Tesla

Yeah, exactly.

JB Straubel
CTO, Tesla

Applying our design teams, our technology teams, if you want to call them that, to solving those issues. I think the learning curves, in some ways, are quite similar.

Elon Musk
CEO, Tesla

Yeah. In fact, it's amazing how much of production is actually software.

JB Straubel
CTO, Tesla

Yeah.

Elon Musk
CEO, Tesla

We're really quite good at software relative to other car companies, and manufacturing at volume is mostly a software problem. I think that is not well appreciated.

JB Straubel
CTO, Tesla

I think maybe one other lesson learned is that it's obviously not the best approach or best efficiency to outsource some of that development.

Elon Musk
CEO, Tesla

Yeah. Definitely.

JB Straubel
CTO, Tesla

Some of the areas that we struggled the most through the Model 3 ramp were those where we had perhaps less visibility and less control and less direct kind of skin in the game on how those production lines were designed and built.

Elon Musk
CEO, Tesla

These are cases where we engaged with companies that were supposed to be world-class experts in automotive production, and we just assumed that their stuff would work, but it didn't.

JB Straubel
CTO, Tesla

Yeah. That learning curve often involves Tesla coming directly in, understanding the process intimately, simplifying it, and then essentially doing our own design or changes to the lines that were built. I think that's a key learning point that we've taken, and I think the way that we can do this a lot more efficiently in the future is kind of doing that approach from the start.

Elon Musk
CEO, Tesla

Yeah. Just having that very rapid iteration between design and production is incredibly helpful. We now understand, for example, what are the rate limiters and what makes it hard to produce factory modules. We came up with a new design that achieves the same outcome. It's actually lighter, better, cheaper, and we'll be introducing that around the end of this year. Probably reach full production of that in Q1 or something. That will make the car lighter, better, and cheaper, and achieve higher rates. That line is under construction and will be active in about six months.

JB Straubel
CTO, Tesla

Yeah. We did this somewhat the first time around, now there's, I think, even more exciting understanding of the value of having those, as Elon said, having the design engineers just working intimately with automation and line engineers, simplifying the process as they're designing the product.

Elon Musk
CEO, Tesla

Yeah. Because we were sort of desperate to try to get the production working, we actually took the design engineering team and had to work in the factory and work on production. It's given them tremendous insight into how they need to change the designs in the future to make it easier to produce. Because you feel the pain directly.

JB Straubel
CTO, Tesla

Exactly.

Elon Musk
CEO, Tesla

Yeah. Once you feel the pain, you're like, "Okay, I-

JB Straubel
CTO, Tesla

Won't do it again.

Elon Musk
CEO, Tesla

I didn't realize I was torturing people with my terrible design. Now I know.

Martin Viecha
Senior Director of Investor Relations, Tesla

Great. Let's go to the next question, please.

Operator 1

Thank you. Our next question comes from Ben Kallo with Baird.

Ben Kallo
Analyst, Baird

Hold on. [Carol L sunglasses].

Martin Viecha
Senior Director of Investor Relations, Tesla

Hello?

Ben Kallo
Analyst, Baird

Douglas Adams.

Elon Musk
CEO, Tesla

Sorry about that.

Ben Kallo
Analyst, Baird

Can we do more Douglas Adams.

Elon Musk
CEO, Tesla

Sure

Ben Kallo
Analyst, Baird

Less everything else on.

Elon Musk
CEO, Tesla

More Douglas Adams? Sure. He's one of my favorite authors.

Ben Kallo
Analyst, Baird

My too. Deepak, so after July here, how close are you to cash flow positive?

Deepak Ahuja
CFO, Tesla

Sorry, your question is, after July, how close are we to cash flow positive?

Ben Kallo
Analyst, Baird

Yeah, you have July under the books here. How close are you to

Deepak Ahuja
CFO, Tesla

Yeah. Well, we don't have, with all this fund one, we don't have July results done, it doesn't matter exactly where we are in the month of July. What really matters is over the quarter, because it depends on deliveries, depends on production, many factors. We will be significantly cash flow positive for the quarter. I think that's what really matters.

Elon Musk
CEO, Tesla

It's like the logic question is like, do we have a low balance in the bank? The answer is no.

Deepak Ahuja
CFO, Tesla

Moving on.

Elon Musk
CEO, Tesla

We're not in any kind of cash shortage at all.

Deepak Ahuja
CFO, Tesla

Right. Yeah, if that's the answer, yeah.

Elon Musk
CEO, Tesla

Yeah.

Deepak Ahuja
CFO, Tesla

That's the simple answer.

Elon Musk
CEO, Tesla

Are we running low on money? The answer is no.

Ben Kallo
Analyst, Baird

Well, no, that's not the question.

Elon Musk
CEO, Tesla

Okay.

Ben Kallo
Analyst, Baird

It's just, as you're here and you're selling your higher priced cars for a better margin, how does the third quarter look for what you said, for being cash flow positive?

Elon Musk
CEO, Tesla

Oh, yeah. I'd say highly confident of being cash flow positive and being GAAP profitable in Q3.

Deepak Ahuja
CFO, Tesla

We're sitting here today saying that based on what our expectation is, yes.

Elon Musk
CEO, Tesla

Based on everything we know at the end of July, it's one month in.

Deepak Ahuja
CFO, Tesla

Yeah.

Elon Musk
CEO, Tesla

We're highly confident of being cash flow positive and GAAP profitable in Q3 and Q4. There could be a force majeure event, like earthquake, touch wood, but something like that, or massive recession all of a sudden. In the absence of that.

Deepak Ahuja
CFO, Tesla

Yeah

Elon Musk
CEO, Tesla

of really unusual.

Deepak Ahuja
CFO, Tesla

It's pretty straightforward, actually

Elon Musk
CEO, Tesla

Yeah, macro events, yeah.

Ben Kallo
Analyst, Baird

Thanks, guys.

Martin Viecha
Senior Director of Investor Relations, Tesla

Great. Thank you very much. Let's go to our journalist questions.

Operator 1

Thank you. Our next question comes from Tim Higgins with The Wall Street Journal.

Tim Higgins
Reporter, The Wall Street Journal

Hi. Thanks for the call. Question for you, do you still plan to make a total of 1 million vehicles in the calendar year of 2020?

Elon Musk
CEO, Tesla

I think so. Yeah. If it's not 1 million, it's going to be pretty close. I'd say if it's not 1 million, it's probably at least 750 or something like that, in 2020. We're aiming for 1 million in 2020, but somewhere between half a million and 1 million seems pretty likely.

Tim Higgins
Reporter, The Wall Street Journal

Where do you get the capacity to do that?

Elon Musk
CEO, Tesla

There's a place called Shanghai.

Tim Higgins
Reporter, The Wall Street Journal

Okay. Shanghai will be important for that.

Elon Musk
CEO, Tesla

Yeah

Tim Higgins
Reporter, The Wall Street Journal

goal? Yeah, okay. Where does the Model Y?

Elon Musk
CEO, Tesla

Yeah. I think so. I think we can do over half a million vehicles. Well, actually, probably more like 600,000 vehicles.

Tim Higgins
Reporter, The Wall Street Journal

Right

Elon Musk
CEO, Tesla

with current Giga and Fremont. If you throw 100, 200, maybe more, couple hundred K from Shanghai. We're probably going to do more than 600K with that for three months and Giga, Nevada. That's why I think we have a shot at 1 million, but somewhere there was seven or 800K seems pretty likely given the current, what we know today.

Tim Higgins
Reporter, The Wall Street Journal

Have you made any decisions on we're going to make the Model Y? Maybe would you like to tell me?

Elon Musk
CEO, Tesla

Not yet.

Tim Higgins
Reporter, The Wall Street Journal

You expect to announce it this year, though?

Elon Musk
CEO, Tesla

Maybe.

Martin Viecha
Senior Director of Investor Relations, Tesla

Cool. Let's go to the next question, please.

Elon Musk
CEO, Tesla

Thank you.

Operator 1

Thank you. Our next-

Elon Musk
CEO, Tesla

You know what? I should say, we are hoping to identify a Gigafactory location in Europe before the end of this year. It's not for sure, but we are hoping to do that before the end of the year.

Tim Higgins
Reporter, The Wall Street Journal

Got you.

Operator 1

Thank you. Our next question comes from Zachary Shahan with CleanTechnica.

Zachary Shahan
Analyst, CleanTechnica

Hello. First of all, thanks for the recent retweet, Elon. I was really impressed with the Model 3 after owning a Model S, I'm really impressed how much you've developed since the early days. My first question was about conquest sales, actually. Right before the call, we published an article that Camry sales were down 22% year-over-year. Prius sales were down 23% year-over-year. We're very curious how much you're pulling from these other cars, other segments. It sounds like you sort of answered that question at the beginning, but can you give anything in terms of what percentage those top five are in terms of trade-in sales and how broad you're pooling? I know you pool from pickup trucks, from sports cars. Can you speak a little more about the diversity you're pulling from?

Elon Musk
CEO, Tesla

Actually, what we have right now is just the top five. I'm still not sure what the allocation is between top five, where it goes beyond top five. We just sort of out of curiosity asked for the top five breakdown. It's just interesting that people are trading up into a Tesla, so they're choosing to spend more money on a Tesla than their current car just based on the trade-in values. I mean, a Civic is a very inexpensive car compared to particularly the Model 3 today. That's still promising from market access standpoint. Of course, long term, we're going to do the Model Y and the compact SUV. We're going to do the pickup truck, the Semi, the next generation Roadster. I mean, we're going to lots of awesome ideas.

Probably the biggest limiter on our growth is how fast can we grow battery production. Especially cell production and the whole cell supply chain, I think will be the fundamental determinant of Tesla's growth.

Zachary Shahan
Analyst, CleanTechnica

And regarding the-

Elon Musk
CEO, Tesla

We're super fired up to do this. I think they're all super cool. I know Jerome's favorite is the Semi, that's pretty wicked, obviously.

Jerome Guillen
VP of Trucks, Tesla

Love it.

Elon Musk
CEO, Tesla

Yeah, it's pretty, it's great. What we have available, we've actually made significant improvements to the design since the unveiling that we had, and it's really even better than what we talked about. Probably my personal favorite for the next part is pickup truck. I think we just do an amazing pickup truck. The Model Y compact SUV, probably the most popular car category in the world. That's obviously going to sell pretty well. A lot of cool things. Of course, Tesla Energy. We're kind of cell-starved for Powerwall right now. We actually had to artificially limit the number of Powerwalls because we don't have enough cells. We're solving for that very rapidly, and we expect to ramp up Powerwall and Powerpack production substantially later this year and early next. As well as getting-

Zachary Shahan
Analyst, CleanTechnica

Regarding-

Elon Musk
CEO, Tesla

As well as ramping up retrofit solar and the Solar Roof. We now have several hundred homes with Solar Roof on them, and that's going well. It takes a while to just confirm that the Solar Roof is going to last for 30 years and all the details work out. We're working with first responders to make sure it's safe in the event of a fire and that kind of thing. It's quite a long validation program for a roof, which is going to last for 30, 40, 50 years. We also expect to ramp that up next year out of Gigafactory 2 in Buffalo. That's going to be super exciting. The product-

Zachary Shahan
Analyst, CleanTechnica

Regarding the Model-

Elon Musk
CEO, Tesla

I think if there's a company with a better product roadmap, I'd like to know what it is, because we got some super awesome stuff coming. Yeah.

Zachary Shahan
Analyst, CleanTechnica

Regarding the Model Y, there's been a lot of questioning if you're going to have the same process as with Model 3 with reservations, if you're going to shorten the reservation timeline, or if you're going to have a different process this time around.

Elon Musk
CEO, Tesla

We haven't made a final decision on that.

Zachary Shahan
Analyst, CleanTechnica

A last question then. Regarding the daily production, we've been seeing a sort of a rise and fall with the daily production of the Model 3, as you incorporate new performance or white seats. Can you speak at all, we always like to get the technical side of what you're doing there.

Elon Musk
CEO, Tesla

Oh, yeah.

Zachary Shahan
Analyst, CleanTechnica

Can you speak at all about what the bottlenecks are right now that you're working through and how we can picture ourselves in the factory there with you?

Elon Musk
CEO, Tesla

All right. Actually, one of the things I love about your writing is that you really care about getting the details right and you really understand things well, which is awesome. I have to be careful I don't have a soundbite, that is then for those that don't have a nuanced appreciation of the situation, that soundbite then becomes front page news, and it's like, "Nope, that's not what I meant.

Zachary Shahan
Analyst, CleanTechnica

Yeah.

Elon Musk
CEO, Tesla

Yeah, exactly. I'm like, "Oh, man.

Zachary Shahan
Analyst, CleanTechnica

Yeah

Elon Musk
CEO, Tesla

shooting myself in the foot there. Right now, the biggest constraint on production, again, please people will not make a federal case out of this because it's going to get solved in a matter of a week or two, is body production. That's why, you can certainly tell what am I personally working on, if that's going to be a bottleneck of the company, most likely. Producing Model 3 bodies. We've made good progress in the last few weeks. In fact, I was just told that we were able to achieve our first 24-hour period where we made over 800 Model 3 bodies, which is pretty great. Sorry. We need to make sure, okay, how do we sustain that 800 plus per day rate? Then paint's doing great.

Zachary Shahan
Analyst, CleanTechnica

Okay.

Elon Musk
CEO, Tesla

GA's doing great.

Zachary Shahan
Analyst, CleanTechnica

Thanks.

Elon Musk
CEO, Tesla

Yeah, it's good.

Zachary Shahan
Analyst, CleanTechnica

Yeah. I've got like a 42nd question, but I'll just end it with a quick request. Years ago, you were-

Martin Viecha
Senior Director of Investor Relations, Tesla

Jerome, we have time for one more.

Elon Musk
CEO, Tesla

Sorry. Go ahead.

Zachary Shahan
Analyst, CleanTechnica

Years ago, you warned about a coming short tsunami, and it seemed obvious it was coming, but the shorts didn't really seem to recognize it, and then sort of attacked you, trolled you for months. Finally, it came. You again warned very honestly, I think very directly, that there's going to be an epic short squeeze. I think the whole community has a little request. Don't let the trolls get you down. Don't feed the trolls too much. We do like it when you tease the trolls a bit. Use your judgment. Thanks a lot for what you're doing.

Elon Musk
CEO, Tesla

All right. Well, thank you for your in-depth coverage of clean energy technology.

Martin Viecha
Senior Director of Investor Relations, Tesla

Thank you very much. The very last question comes from Galileo Russell, who represents the retail shareholders.

Galileo Russell
Analyst, Retail Shareholders

Congrats on an awesome quarter. Really proud to be a Tesla shareholder with the Model 3 ramping to 5,000 a week. I think you may have touched on this, but I'm curious, will Tesla ever produce vehicles at Gigafactory 1, maybe the Semi? I'm curious on any manufacturing synergy between the Semi and the Model 3.

Elon Musk
CEO, Tesla

Oh, wow. Interesting questions. You always come up with really interesting questions. Really interesting questions that I cannot actually The first one, it gets so much attention where we put production. I can't answer any, like, where we're going to put production questions. Will the Semi use a bunch of Model 3 technology? The answer is yes. Jerome, I don't know if you want to elaborate on that, or up to you.

Jerome Guillen
VP of Trucks, Tesla

You can already see in the prototype that we've got virtually a lot of the Model 3 components, the screen-

Elon Musk
CEO, Tesla

Yeah

Deepak Ahuja
CFO, Tesla

the door handles, as much as possible.

Elon Musk
CEO, Tesla

Motors.

Deepak Ahuja
CFO, Tesla

Yeah. The motors, yeah.

Elon Musk
CEO, Tesla

Yeah.

Deepak Ahuja
CFO, Tesla

In the prototype. A lot of the cell technologies. There are some changes, and I'd rather not.

Elon Musk
CEO, Tesla

Yeah

Deepak Ahuja
CFO, Tesla

say them in public. Yeah. Obviously, it's going to be better than what we showed last year.

Elon Musk
CEO, Tesla

Yeah.

Deepak Ahuja
CFO, Tesla

There's a lot of improvements. Yeah.

Galileo Russell
Analyst, Retail Shareholders

Okay, hopefully you can talk more about this. With the battery project, with PG&E that was recently announced, I'm wondering if you could elaborate how you're prioritizing battery pack between auto and energy storage, because it seems like you ramped auto battery packs to 20 gigawatt hours in the past 12 months, but are only guiding for about one gigawatt hour of Tesla Energy installation in the next year. I'm wondering why is Tesla Energy, given its supply constraint, why not ramp that supply to 10 gigawatts? It seems like the guidance is a little low there.

Elon Musk
CEO, Tesla

Yeah.

Deepak Ahuja
CFO, Tesla

Yeah. As Elon suggested earlier, essentially it makes sense for us to prioritize Model 3. We are adding a ton of cell capacity, and JB can talk more about it, that will enable us to dramatically ramp our energy storage business as well in the coming quarters.

JB Straubel
CTO, Tesla

Yeah. You kind of mentioned only one gigawatt hour. That's a big number in that business, and it's maybe on the order of 300% what we did the prior year. We're still aiming at maybe another three to four x growth for 2019.

Elon Musk
CEO, Tesla

Yeah. At scale, these are insane growth levels.

JB Straubel
CTO, Tesla

Crazy growth rate. This is faster, actually.

Elon Musk
CEO, Tesla

Yeah. It's not like shipping software. This is like you actually need to build a lot of atoms.

JB Straubel
CTO, Tesla

No offense to the software people.

Elon Musk
CEO, Tesla

Yeah. No, what I mean, once you build software, you can obviously have lots of copies. When it's a lot of really complicated atoms, man.

JB Straubel
CTO, Tesla

Maybe specifically also to the cell limitation question. I think this has been mentioned before, but we also do use some other vendors.

Elon Musk
CEO, Tesla

Oh, yeah.

JB Straubel
CTO, Tesla

Other than Panasonic.

Elon Musk
CEO, Tesla

Yeah. Through Samsung and LG and, yeah.

JB Straubel
CTO, Tesla

Exactly. In our energy products. I've heard people feel like this is kind of a zero-sum game or something with Model 3, but that is not the case.

Elon Musk
CEO, Tesla

It's a partial sum game.

JB Straubel
CTO, Tesla

We do have the ability.

Elon Musk
CEO, Tesla

We did shut down a Powerwall cell line in favor of Model 3s, to be totally honest. We kind of had to do that. We're adding new cell lines and we'll be able to address that issue very soon.

Deepak Ahuja
CFO, Tesla

I think to put it in perspective, we are still tripling our storage.

Elon Musk
CEO, Tesla

These are mad growth numbers.

Deepak Ahuja
CFO, Tesla

Compared to last year.

JB Straubel
CTO, Tesla

Yeah.

Elon Musk
CEO, Tesla

Mad.

Deepak Ahuja
CFO, Tesla

It's one thing to produce, but it's also another thing to install and deploy.

Elon Musk
CEO, Tesla

Yeah, exactly.

Deepak Ahuja
CFO, Tesla

You need the infrastructure and the people to do that. It's massive scaling. There's very few companies grow at that rate.

Elon Musk
CEO, Tesla

One of the biggest challenges, there needs to be a lot more electricians. We actually have an electrician training program. We're going to actually have to train people who've never been electricians before to be electricians, because otherwise there's not enough electrician capacity in the United States and most places of the world to install Powerwalls.

JB Straubel
CTO, Tesla

Yeah.

Elon Musk
CEO, Tesla

It's like we have to actually literally train electricians, and it takes two years, basically, before somebody is certified to be an electrician. We're just sort of like, okay, we obviously can't grow faster than the rates of number of electricians who can physically install Powerwall. That's one limitation.

JB Straubel
CTO, Tesla

That PG&E project you mentioned is incredibly exciting one.

Elon Musk
CEO, Tesla

Yeah

JB Straubel
CTO, Tesla

is indicative.

Elon Musk
CEO, Tesla

That's awesome, actually.

JB Straubel
CTO, Tesla

of the growth rate.

Elon Musk
CEO, Tesla

Gigawatt-hours.

Galileo Russell
Analyst, Retail Shareholders

Yeah, can you elaborate on that?

JB Straubel
CTO, Tesla

I can't say too much.

Elon Musk
CEO, Tesla

I hope I haven't said anything that's like Wait, no.

JB Straubel
CTO, Tesla

I mean, it is over a gigawatt hour.

Elon Musk
CEO, Tesla

Yeah, a gigawatt hour. That's public, right?

JB Straubel
CTO, Tesla

Fully considered.

Elon Musk
CEO, Tesla

Okay.

JB Straubel
CTO, Tesla

It is now.

Elon Musk
CEO, Tesla

Okay.

JB Straubel
CTO, Tesla

And-

Elon Musk
CEO, Tesla

Oh, okay.

JB Straubel
CTO, Tesla

Just to give you a sense, it took us five years of growing that business to get to a gigawatt hour cumulative deployed.

Elon Musk
CEO, Tesla

Many people have said a gigawatt hour is an impossible number for lithium ion.

JB Straubel
CTO, Tesla

Yeah.

Elon Musk
CEO, Tesla

That's a Yeah.

JB Straubel
CTO, Tesla

The car business is still much bigger, as we said here today, but the growth rate on energy is faster.

Elon Musk
CEO, Tesla

Yeah, if you extrapolate energy growth rate, it Well, obviously, if you extrapolate anything, when it triples per year, pretty soon it becomes the size of the universe, but long term, we would expect the energy business to catch up to the auto business in size.

Galileo Russell
Analyst, Retail Shareholders

Nice. Lastly, I'm really curious, Elon, do you have any part of the business that shareholders should be asking or thinking more about? Or what do you wish would've been asked on the call?

Elon Musk
CEO, Tesla

Good question. We're trying to anticipate the questions that are on people's minds. That's why we have the Giga Leakers and the Autopilot team here, and much of the executive team of Tesla here, to try to be proactive in that regard. I'm trying to think if there's anything. I think we really covered a lot.

Galileo Russell
Analyst, Retail Shareholders

Yeah.

Elon Musk
CEO, Tesla

Yeah.

Galileo Russell
Analyst, Retail Shareholders

Just a very last thing.

Elon Musk
CEO, Tesla

Okay. Your very last thing. Go ahead.

Galileo Russell
Analyst, Retail Shareholders

Yeah. Sorry, one last thing. The new fiscal engineering strategy of profits and cash flow, you saying that'll last in perpetuity sort of caught me by surprise personally. I'm curious if there's any trade-off to growth with that new strategy or sort of what's the rationale behind the scenes, because this seems like the biggest change in Tesla's financial engineering strategy since the IPO.

Elon Musk
CEO, Tesla

Bringing cash flow positive and GAAP positive doesn't mean we're rolling in money. There's definitely going to be cases where we're just barely cash flow positive or barely profitable in some quarters in the future. It's been a long time, it's almost 15 years now. I think we're at a scale where the amount of time that it takes to actually scale up and do things, we're big enough where we actually can spend money efficiently to make things grow faster. We've kind of hit scale with volume production of cars and I think this is probably the right thing to do, is to be sort of essentially self-funding on a go-forward basis, apart from selective situations where there's, say, some temporary debt for construction of a gigafactory in China or Europe or something like that.

Apart from that, essentially, I don't think we're constraining growth in any significant way by adopting the strategy-

Galileo Russell
Analyst, Retail Shareholders

Okay

Elon Musk
CEO, Tesla

at this point. It would've been true in times past, but I think it is no longer the case. Yeah.

Deepak Ahuja
CFO, Tesla

Okay, I think that's all the time.

Galileo Russell
Analyst, Retail Shareholders

Awesome. Thank you so much.

Deepak Ahuja
CFO, Tesla

Thank you very much. Unfortunately, that's I think all the time we have today.

Elon Musk
CEO, Tesla

All right.

Deepak Ahuja
CFO, Tesla

Appreciate all your questions and looking forward to speak to you next quarter.

Elon Musk
CEO, Tesla

Great.

Operator 2

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect, and have a wonderful day.