Earnings Call: Q1 2018

May 2, 2018

Good day, ladies and gentlemen, and welcome to the Tesla Q1 2018 Financial Results and Q&A and 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 0 on your touchtone telephone. As a reminder, this conference may be recorded. I would now like to introduce your host for today's call, Mr. Martin Viecha, Senior Director of Investor Relations. Sir, you may begin. Thank you, Sheri, and good afternoon, everyone. Welcome to Tesla's first quarter 2018 Q&A webcast. I'm joined today by Elon Musk, J.B. Straubel, Deepak Ahuja, and Doug Field. Our Q1 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. Before jumping into Q&A, Elon has some opening remarks. Elon? Hi. I think our letter says most of it, but I think we're gonna spend extra time on Q&A and try to answer as many questions as possible. I think we should be able to answer. We're gonna go as long as there are good questions to answer. The thing I'm most excited about is the rapid increase in output. We've got, just in the last 24 hours at Gigafactory, managed to achieve a sustained rate of over 3,000 packs per day. Sorry, per week. Actually reached a peak hour, with, if extrapolated outward, would be a rate of over 5,000 cars per week. obviously you cannot take a peak hour and assume every hour is as good as the peak. If you can achieve it even once in an hour, then with continued refinement of the system and improved operational uptime of the machinery, it means that you can achieve that sustained rate with more refinement. You spend essentially a month or two improving the operational uptime and the system as a whole will be able to do over, you know, well over 5,000, I think. What, I mean, what's interesting is that at least in the case of pack production, we were able to do this with minimal CapEx. I think in general, our understanding of production is improving dramatically, exponentially in fact. We are seeing ways to achieve improved volume with dramatically less CapEx by simplifying the production line by really engaging all of our associates, no matter how junior, in improving the way the parts are made. It's amazing how everybody's got good ideas, just need to solicit those ideas and implement them. Then making ongoing design improvements so that when we discover that something is not well-designed for manufacturing, that we very quickly change that part design and introduce that into the flow. One of the things we've also found is that there's some things that are very well suited to manual operation, and some things that are very well suited to automated operation, and the two should not be confused. I should be clear that the vast majority of the Tesla production system is automated. As I mentioned in a tweet, a few months ago, we did go too far on the automation front and automated some pretty silly things. One example would be, we had this was just sort of ironically bullish. We had these fiberglass mats on the top of the battery pack. They're basically like they're basically fluff. So, we try to automate the placement and bonding of fluff to the top of the battery pack, which is ridiculous. Like, so we had Flufferbot, which was really an incredibly difficult machine to make work. Machines are not good at picking up pieces of fluff. Human hands are way better at doing that. So we had a super complicated machine using a vision system to try to put a piece of fluff on the battery pack. Then I said, one of the questions I asked was, "Do we actually need that?" We tested a car with and without and found that there was no change in the noise volume in the cabin. We actually had a part that was unnecessary. That, of course, the line kept breaking down because Flufferbot would frequently just fail to pick up the fluff or put it in, like, a random location. That was one of the silliest things I found. We're also, and this still remains to be fixed, but in a lot of cases, we're overgeneralizing the design. For example, the current battery pack has a port for the front drive units, which we then put a blanking plate, a sealed blanking plate on. Essentially, we punch a hole in it, then put a blanking plate over the hole, and do that for all rear drive unit cars, which is kinda crazy. We've added cost, we've added a manufacturing step, added a failure mode, for something that is unnecessary. That is, you know, that is something that's an example of something that's changed. Anyway, the net result is we've had a radical improvement in production. Battery pack production went from taking 7 hours to make a pack 3 weeks ago to under 17 minutes now. Just to show that, like, really radical improvements are indeed possible. We also saw enormous improvement in zone 4 of module production. This I should point out is a fully automated zone. And we're able to also achieve a sustained rate of 3,000 vehicles a week. We're actually slightly ahead in battery module and pack production than expected. With some work at the Fremont vehicle plant, primarily in the general assembly area, I'm confident we will very soon exceed the 3,000 mark in Fremont. We're already there in the body shop, which is also almost entirely automated, where we weld up the body. There we're already capable of over 3,000 cars a week. General assembly, with some improvements, which will include a reduction, some reduction at least I should say temporary reduction in automation, in a few places, we should be over 3,000. I'm feeling really good about the Tesla production of Model 3. I'm very proud of the work that the team has done. It's been a like amazing amount of hard work and sacrifice by some very talented people to achieve this outcome. It's worth noting the, you see a chart in the Model 3 market share versus competitors in midsize premium sedans. We are almost the best-selling sedan in the U.S. in this category as of April, and we will certainly be there in May. That's something really odd. I mean, be there in May and then really be there later this year. In the third quarter, it will I mean, I think the there's a good chance Model 3 gets maybe close to majority market share of midsize premium sedans. 40%, 30%-40% seems likely and maybe a majority market share later this year. This is coming from a standing start against a lot of established brands who have far more sales outlets than we do. This is very encouraging. Let's see. Yeah, as the letter says, I'm feeling quite confident about achieving GAAP income and positive cash flow in Q3. This is not obviously a certainty, but it does appear quite likely in my view. We are gonna conduct a sort of a reorganization, restructuring of the company this month. Make sure we're well set up to achieve that goal. In particular, the number of sort of third-party contracting companies that we're using has really gotten out of control. We're gonna, yeah, scrub the barnacles on that, on that front. It's pretty crazy. We've got barnacles on barnacles. That's gonna be a lot of barnacle removal. All right. Any Guys wanna make any comments? Thank you, Elon. All right. Sherry, let's go to the first question. Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then 1 key on your touchtone telephone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Brian Johnson with Barclays. Yes, good afternoon. wanna talk a little bit about, some of the You know, first of all, if we talk about sort of all relate to the production ramp. If we talk about 5,000 per week run rate, is that assuming 7/24, or at what point do you think you get to sort of 5-day, 2-shift operation? Well, first of all, I think a 5-day, 2-shift operation is a ridiculous way to operate because that would be a very poor use of CapEx. Nor is it the way that we have operated in for most of Tesla. The module production, you know, cell module and factory pack production, and powertrain production have always operated on a 24/7 basis. The exception has been general assembly, which is operated on typically 2 to 3 shifts. You know, sort of a 5-6-day, 20-hour shift. Paint, which is operated on kind of a 6-day basis. I think it just makes sense to operate the whole company on the same basis. A majority of Tesla production has operated on a 24/7 basis since we started production. Yeah. I mean, this is JB. I can chime in. Yeah. You know, as Elon said, it's really makes great use of the CapEx and the lines. Yeah we did it starting way back with the beginning of Model S. Aligning everything to the same shift schedule makes it so much more efficient because we don't have the seesaw of inventory. Yeah inter-line inventory between the different shops. Exactly. One of the key things to improving the capital efficiency of the system is reducing work in process. If the shifts are not aligned, then you have to build up inventory in kind of a storage warehouse. Right. Yeah. It's, so it's pretty foolish to actually operate on a 5-day, 2-shift thing anyway. Yeah, it's You know, this is sort of the we're using the chip fab approach to capital efficiency. It's gonna called AWS. It's not Amazon Web Services, so we're unsure what it's called. Like, there's something called. Alternating. Alternate work whatever. Week. Yeah. Alternate workweek? Yeah. I think where people, like, people work, like, 3 long days and then 4 long days alternately, something like that. Multiple crews rather than just using overtime on weekends is important. Yeah. Yeah, exactly. Right. Right. It seems like just doing the math. It's not like one person working 24 hours a day, seven days a week. There are, you know, like, four or five shifts. Yeah. If I just do the math, that would seem, at 5,000, to get you to takt time of 2 minutes. I go back to some of the prior conversations. I mean, my understanding is best in class is sort of 50 seconds to 1 minute, and I thought the whole going faster than Grandma Walker was actually targeted at blowing past that. Sounds like you're sort of 2x the takt time of other factories. The number you're referring to is actually general, the general assembly. Vehicles per minute. Yeah. Yeah, yeah. It's general assembly number, not other stuff. You may have also not taken into account, you know, you know, so-called OEE or the actual uptime of the line which tends to make the takt time a little faster than, you know, the perfect takt time is. Okay. Yeah. So on a personal- If they say it, like, it takes a minute, then that would mean it's, like, over a 7-day, 24-hour workweek. We could also just say, like, sure, we did, you know, our peak pack production today was 32 packs in an hour. We're under a minute, under 2 minutes a pack and rising from there. Yeah. Okay. As Elon alluded, you know, the numbers go up rapidly as we go to the sub-assemblies that are in higher unit quantity per car. Yeah. 4x per module, and then, you know, we have, you know, smaller sub-assemblies still that are, you know, factors of 10 or 20, even higher than that. Yeah. However, that said, I do believe that the path to manufacturing efficiency is velocity and density. That is absolutely what we'll be working on. Rather than just trying to, you know, spend $billions on duplicating a factory, if you can make Like, if 2 companies are competing and one has to double its CapEx in order to double production, and the other one can, with minor CapEx, can just speed up the line by double, it's a game over. Right. In the meantime, the line's going to, I think what you're saying, some starts, some stops to get to the 5,000 per week. Yeah, you can't, like, you can't have, like, 0 maintenance time and 0, you know. Like, you have to do equipment upgrades. You have to do, you know, ongoing maintenance. You, you can't just have it be operating at peak rates 24/7. Okay, thanks. Thank you. Our next question comes from Rod Lache with Deutsche Bank. Hi, everybody. Just wanted to follow along on that line of questions. To the extent that you're adding humans in certain automated processes. Can you just help us interpret the extent to which these changes affect the economics on Model 3 and, you know, to the extent that you've done some competitive analysis, all of these efforts in the Tesla production system, how do you stack up competitively against other OEMs in terms of labor hours per vehicle or depreciation per vehicle? I'll say some, so a few things then I have Deepak can elaborate. Let's see. The thing that I've noticed is if you have a really complicated machine, like the Flufferbot that I was talking about earlier, in order to keep it operating, you have to have done a ton of maintenance engineering. You have, like, basically pretty expensive, you know, or maintenance engineers that have to maintain the thing and fix it, like, basically 7 days a week, 24 hours a day. The cost of a maintenance engineer may not be incorporated directly into, or may not be fully incorporated directly into gross margin, but it's nonetheless a cost that far exceeds the labor cost of simply placing the fluff on the battery pack, which as it turns out, was unnecessary. I think actually I do not see this having a material long-term impact on our costs. I actually see most likely our costs will decrease. Fully considered costs of producing the vehicles will decrease by getting rid of production stations that are really poorly suited to robotics because of the very expensive cost of robot technicians. Rod, we are very CapEx efficient overall. Let me just start from that point. If we look at, our depreciation cost on a per unit basis at steady run rate of 5,000 or so, cars per week, we are, in my mind, well below a lot of our, maybe most of our competitors. We're below $2,000, per unit depreciation-. cost. Overall, clearly there is some impact, as we have indicated in the letter, from the additional labor we've added. It's temporary, and our expectation fully is a lot of this labor will come out once we stabilize production and then figure out smart ways of automating where it makes sense. Okay. Thanks for that. Just secondly, your comments in your letter on the advances in batteries were interesting. Could you give us some insight into how we can translate that into cost per kilowatt hour or some metric in terms of the gains that you're making? That's something, I mean, every data point, Rod, that we look at internally suggests that we are best in class. We're best. There's not a class. Yes, we're the best. Sorry. Best in a class of one. Yeah. Yeah. Yeah. I think directionally, Rod, you know, I mean, it's helpful to understand the different commodities and the trends that we're pursuing in the batteries. You know, being on a path to reduce cobalt usage, for instance, has been something we've been working on for literally several years now. You know, this has been extremely helpful in the overall cost per kilowatt hour, you know, especially, you know, with recent commodity price movements. I think, you know, we can't really be quantitative, but that directionally is a pretty good trend. Yeah. We think we can get the cobalt to almost nothing. Okay, great. Thank you. Thank you very much. Let's have the next question, please. Thank you. Our next question comes from Adam Jonas with Morgan Stanley. Thanks. Elon, you repeatedly said, I think in recent weeks, that you do not need to issue equity capital at Tesla. I think many investors on this call would say it's better to raise capital when you don't need to. I guess the first question is. I disagree. Yeah, you may not need to, but do you want to? No. Don't want to. I specifically don't want to. Perfect. Okay. My follow-up, Elon, is, you know, your cars produce currently a large amount of data, and SpaceX gets into the satellite broadband business next year. Some argue that SpaceX. Uh, well- Yeah. At all, yeah. Okay. Not next year. Talk to me. It's probably three years. Okay. Okay, three years. Yeah. Thank you for that. Some argue that SpaceX could offer Tesla a resilient cyber secure pipe for this precious vehicle data and a potential competitive advantage. Elon, is, isn't bandwidth an obvious domain for collaboration between Tesla and SpaceX one day? I mean, it might be. There's lots of interesting things you could do. Car's got a lot of computing power, and it's connected, you know, to the cell networks and Wi-Fi and everything. We could still be connected to a LEO internet constellation. I haven't really thought about it, but probably there is. Thanks. Cool. Thank you. Let's go to the next question, please. Thank you. Our next question comes from David Tamberrino with Goldman Sachs. Great. Thanks for taking our questions. Elon, you talked about the downtime on the Model 3. You're gonna take 2 planned periods this quarter. One's already occurred, the other is gonna occur later in the quarter. You know, what specifically have you addressed in Fremont so far, and what are you planning to address a little bit later? Are those the lone kind of remaining bottlenecks for you to get to the 5K within the Fremont plant? Well, the Tesla production system at this point is vast. We literally have the 2 biggest factories on Earth between the Gigafactory and Fremont. Giga's still slightly smaller than Fremont. I think, well, maybe just, yeah, slightly smaller, but it'll soon be bigger than Fremont. Fremont's, like, the 2nd biggest building of any kind by footprint. It's just like this. To fully answer that question is a complex one. I feel very confident about our ability to get to 5K, you know, very soon, sustained rate at Giga. Getting to, essentially getting to 5,000 battery packs and motors and you know, power inverters and chargers and that kind of thing, which is all done at Giga by the end of next month. You know, body production, no problem. General Assembly is probably our biggest risk. I'm really focusing on, personally on that a lot in the next in this coming month. Our paint shop is smooth. Second biggest risk after General Assembly. These are all quite manageable. It's like, it's not like huge brain surgery to get these things right. It's a lot of work. Like I said, it's a lot of time and hard work. It's very doable. You know, it's, whereas it's really quite straightforward. It's, like, not, like a fundamental impediment here. In many cases, we've seen huge gains through software. Software that's in the car, software that controls the automation and connects to our central system. Yeah. In many cases, it's not even hardware upgrades that create substantial increases in velocity. Yeah. Exactly. Doug makes a good point here. I think that the product, the production, a really great production system is primarily a software problem. There's no one in the auto industry that is remotely as good as Tesla at software as Tesla. I mean, Tesla is way better at software than any other car company. If it is what I'm saying is true, that the biggest challenge in a production system is software, we are in a good position. Okay. Maybe taking my next question in a different direction. What is your timeline for launching the Model Y, and have you begun to spend for this, or that only begin to start hitting the P&L from an R&D and a CapEx perspective in 2019? It will only start to become significant in 2019. Okay. All of the CapEx spend for this year is associated with Fremont Model 3 Gigafactory? No, no. Wait, please take me literally. I said it will only start to become significant next year. It's not zero right now, but it's not a big number. It's not a big number relative to our revenue. In the early days of product development, anyway, there's not much CapEx. Yeah. later as you're committed to equipment and equipment starts to come in-house. Yeah. Although it is remarkable, like, although the amount of money spent in the beginning is really quite low, at the beginning of a development program, decisions made at the beginning of development program have massive implications for future CapEx. It is better to spend a bit more time making the right design decisions and really thinking through the producibility of a product before racing ahead with CapEx decisions. There's no question we could have made the Model 3 much easier to produce than we have. Model Y, I think Model Y is gonna be a manufacturing revolution, that it will be I think incredible from a manufacturing standpoint because we do not wanna go through this pain again. Yeah. Thank you very much. Let's go to the next question. Thank you. Our next question comes from Romit Shah with Nomura Instinet. Yeah. I just wanted to clarify the gross margin comments related to Model 3 that you put in the letter. You said a couple things. You said, you know, over the medium term, Model 3 gross margins would be below the target of 25%. You also said that in Q3 and Q4, that those gross margins would be highly positive. I'm just trying to understand what's possible for Model 3 gross margins by the end of the year. Could we get to a number that's close to 20%? I mean, what I'd say is that progressively each quarter we will be getting better. Yes. The answer is yeah. It'll come down to, you know, what other economics come into play from currencies to commodities and how much more cost we take out from labor. I don't wanna give you a specific number, but we'll be close to it. It's like Yeah, exactly. If not, it's Yeah, exactly. Very close to 20%. Could be slightly below, could be slightly above. Okay, fair enough. Elon, can I just ask you about? Oh, yeah. Sorry, just going a little further forward than to Q4. We're very confident of a 25% gross margin long term. Thanks for clarifying that. Yeah, we feel very good about that as well. for next year, 25%. Yeah is definitely what we expect. When you say medium term, you're talking 2018? Yeah, exactly. That's why it's important to clarify what these things mean. You know, Q4 is when we expect to be under, you know, under or about 20%. By the middle of next year, 25% gross margin should be where we are. We'll obviously try to get to the high twenties by the end of next year. Okay. Maybe 30. Okay. As a follow-up, could you just comment on Jim Keller's departure, you know, highly respected chip architect. You know, what does it say, if anything, about the development of Tesla's custom silicon and Autopilot? Thank you. Well, Jim's a great guy. This is sort of a dream he wanted to pursue for a long time, which is to kind of redesign how server architecture works. You know, it's not something that I find all that interesting, but it's something that Jim, it's been a sort of personal dream of Jim's to do, and that's why he went, you know, went to Intel. The, you know, the Tesla, the actual design of the Tesla hardware is primarily by Pete Bannon, though I should be clear, like the lead designer of that is Pete Bannon, who is still with Tesla. Then of course, Andrej Karpathy is head of our AI team. We don't plan to hire a replacement for Jim's position. Great. Thank you very much. Let's go to the next question. Thank you. Our next question comes from Toni Sacconaghi with Bernstein. Yes, thank you. I think you had said last quarter that once you got to 5,000 units, you felt that you could get to 25% gross margins on Model 3. That feels like at least a 6 or 9-month delay relative to what you thought a quarter ago. I'm trying to understand what the key drivers are. Is it really the labor for capital substitution? I don't think currency sequentially has changed much. I understand it can be a headwind, but I think relative to when you made those statements, it hasn't changed. Perhaps you can help us understand what has changed in terms of the gross margin ramp for Model 3 relative to what you thought before. I have a follow-up, please. Yeah, it's along the lines of what we said in the letter. If we look at the combination of the recently imposed tariff Section 232 and countervailing duties, plus commodity price increases, as well as the weaker dollar, that is adding significant material cost. Temporarily, we are using more labor. When you combine those two, that's what led to our guidance. Certainly the material, the labor cost piece we will address, and that'll come out. Yeah, I mean, we're talking about a 3%-5% difference. Yeah. Like, you know. It's something that we'll solve like within a, you know, three to six months later. Like, it's not like it's like some, you know, let me make a federal case out of it. Okay. Then separately, what, if anything, are you taking out in terms of your lowered CapEx projection for this year? Specifically, you know, in spending less than $3 billion, where does that take you in terms of both battery and production capacity for the Model 3? Yeah. We're just being much more smarter in many cases. As Elon said, we are not just spending money on automation. We're first looking at the problem, simplifying it, and that's looked, that's helped us reduce our CapEx on Model 3. And then we are also being critical about how we grow our infrastructure, and line it up with our growth in our business. We, we feel that these are the right decisions, and there is still room for us to reduce it further if we wish to. We are leaving ourselves some discretion here to go spend money where needed. Where specifically will you be in terms of. Excuse me. You're next. capital requirements? Next. Next. Boring bonehead questions are not cool. Next. Thank you. Our next question comes from Joseph Spak with RBC Capital Markets. Thank you. The first question is related to the Model 3 reservations, and I was just wondering if you could give us a gauge as maybe some of the impact that the news has had. Like, of the reservations that actually opened and made available at Configure, can you let us know, like, what percentage have actually taken this step to Configure? We're gonna go to you too. Sorry. These questions are so dry they're killing me. Thank you. Our next question is from Galileo Russell with HyperChange. Hey, great quarter. Thanks for having me on the call to represent retail investors. I was wondering, with Waymo's plans to launch an autonomous taxi service in limited markets this year, if you could give us an update on the Tesla Network and any details surrounding the launch date or geographic rollout. Thanks. Sure. Thank you for an interesting question. The long-term goal where things are obviously evolving towards is a shared electric autonomy model. In order for this to obviously for the whole sort of system to work, you know, you need all the pieces in place. You need to have full autonomy, level 4 or 5, whatever you wanna call it. You know, obviously a lot of cars on the road, and then build the software infrastructure behind that to enable shared autonomy, so to enable people to share their cars and be able to offer their cars as effectively kind of a robo-Lyft or robo-Uber. You know, sort of like combination of like, I guess, Uber, Lyft, and Airbnb type of thing, where you can own your car and have 100% usage of autonomous electric car. You can say it's available generally to anyone who wants to use it when you're not using it. You can recall it at will. You can restrict usage to only friends and family or only users who are 5-star. Like, this is like the obvious thing that's gonna happen. In order for that to be in place, we have to obviously solve full autonomy. You know, we're making really good progress on that front. I believe that the current production of the vehicles that we're currently producing are capable of full autonomy, with the only thing that would really be like, might be needed or maybe is probably needed is a computer upgrade to have more processing power for the vision neural net. That's a plug-in replacement, a thing that can be done quite easily. So I think we're really well-positioned and building the right foundation for a, you know, having millions, ultimately tens of millions of shared, autonomous electric vehicles. You know, which you can, like I said, decide not to share if you don't want to. Specifically on the timing. On the timing, though, do you have any details about or when we could even expect to learn more about the timing of this service? The hardest thing to predict about the timing is regulatory approval. You know, there's the thing that's tricky with autonomous vehicles is that autonomy doesn't reduce the accident rate or fatality rate to 0. It improves it substantially. The reality is that, you know, even though, you know, we think autonomy, even current autonomy reduces the probability of a death by 50%, which would be incredible 'cause it's like if applied, you know, broadly there's over 1 million, I think 1.2 million automotive deaths per year. How many do you read about? Basically none of them. But if it's an autonomous situation, it's headline news. The media fails to mention that actually, they shouldn't really be writing the story. They should be writing a story about how autonomous cars are really safe. That's not the story that people wanna click on. They write inflammatory headlines that are fundamentally misleading to the readers. That's really outrageous. This will be true even if electric cars were or, sorry, if autonomous cars were 10 times safer, so instead of 1 million deaths, you had 100,000 deaths, there's still gonna be, you know, people who will still sue and say, "Hey, you're responsible for the death here." And it's like, well, the 90% of people who didn't die are not suing. You know, they're not They're still alive. They just don't know it. So we gotta deal with that. Then obviously regulators respond to public pressure and the press. If the press is hounding the regulators and the public is laboring on misapprehension that Autonomy is less safe because of that misleading press, then this is where I find the things to the challenge of predicting it to be very difficult. And yeah, it's really incredibly irresponsible of any journalist with integrity to write an article that would lead people to believe that Tesla Autonomy is less safe because people might actually turn it off and then die. So anyway, I'm really upset by this. Yeah, really interesting answer. Thank you. If I could kind of say from a technical standpoint, I think we'll probably be ready by the end of next year. Awesome. One more quick thing on production capacity and speed of the Fremont line, 'cause this is something you mention a lot it seems. In the last quarterly conference call, you mentioned the max capacity was 700,000 cars for Fremont or somewhere around there, and that was S, X, and 3. We recently got a report from Reuters saying that Model Y production would start in November 2019 at Fremont. I'm just kinda curious with the Semi and the Model Y launching next year, like, where are you actually planning on assembling these vehicles? The Reuters report is based on nothing. Like, I don't even know where that came from. We will not be starting production of Model Y at the end of next year. I would say it's probably or, you know, closer to 24 months from now. 2020 is a more likely prospect for Model Y. Or, you know, early 2020. The production location for Model Y has not been decided. We're really crowded here at Fremont. I don't know where we'd put the Model Y production. It's difficult to imagine that. I, we just could not fit the Model Y production at Fremont. We are jammed to the gills here. One thing I know for sure, it's not here. It is crazy packed and we're, yeah. Yeah. okay. Yeah, we'll try to figure out what the optimal location is for Model Y production, but it's not here. Not here at Fremont. Okay. I'm not an expert in battery pack technology, but it seems that a lot of people are speculating that the specs for the Semi truck, even I believe the CEO of Daimler said it breaks the laws of physics. Ha. Is this just a linear- He doesn't know much about physics. I know him. Yeah, so- I'd be happy to engage in a physics discussion with him. Um- -studied physics in college. Yeah, my question is that just a linear improvement in your battery technology, or is there some sort of new breakthrough or different platform that the Semi and Roadster are gonna be built on? Like, I mean, even if we didn't improve our battery technology at all, we could achieve a 500-mile range truck. At all. We're gonna do better than 500 miles. Yeah, this is JB. I think the key point is it doesn't require some dramatic breakthrough. There's a fundamental misunderstanding, I think, of what the current technology in our existing products can actually do. Yeah. You know, maybe that's just the misunderstanding of, you know, sort of the current status of the technology versus, you know, others in the industry. That could be where some of that's coming from. If they're benchmarking sort of the best battery pack they can buy, you know, from a supplier- Yeah mapping that Exactly to what the Semi could do, it doesn't solve. Right. I think that's maybe where some of it's coming from. We, I mean, we basically have what we need in-house and understand how to do those specs today or better, as Elon said. We could do a 500-mile range Semi today. I think the actual production unit will be above 600-mile range. Awesome. Great stuff. I'm also wondering, are you guys gonna let Porsche beat you to market with a 350 kWh Supercharger? 'Cause I know you've mentioned. We'll keep going if the questions are not boring. Yeah, I can keep going. Yeah, it's cool. Yeah. These are very interesting. The 350 kW charger from Porsche, they had mentioned they're rolling that out. On the last call, JB seemed to indicate that you guys were sort of gonna keep the status quo with your Supercharger technology. Elon, I know you've mentioned that there is a Supercharger V3. I'm just trying to get some clarity on whether you will be improving your Supercharger technology or not, and if there is a V3. We're definitely gonna be improving our Supercharger technology. The thing about a 350 kilowatt charger is it doesn't actually make a ton of sense. Unless you've got a monster battery pack, or have a like a crazy high C-rate, in which case your energy density is gonna be poor. It's kinda cockamamie. Yeah, we think maybe 200 On a per car. I don't know if they meant 350 kilowatts for a single car. You're gonna frag the battery pack if you do that. There's no You cannot charge a high energy battery pack at that rate, unless it's a, you know, very high kilowatt-hour battery pack. Something along the Yeah, I think, you know, maybe like 200-250 maybe. Yeah, I mean, that's definitely a sort of power level that we've discussed and explored. Some of it also comes down to an optimization around, you know, utility versus cost and trade-offs in the car itself. You kinda hinted at that, Elon, but, you know, there is a trade-off fundamentally between charge speed and essentially range or cost of battery. Yeah. You know, we look at that pretty carefully. You know, we understand the trade-off and we could design cells in a pack that could charge at, you know, faster than, you know, 300, 400 kilowatts, but it's not a very useful trade-off to the customer. That's. Yeah. Most people don't understand the difference between energy and power even, really. Yeah. Energy, you know, obviously, energy is essentially amounts to range, and then power is kind of like your peak acceleration, basically. You know, the rate at which you consume energy. Really it's more important to have long range than it is to have a super fast charge time. You can sort of think about this in the devices that you use. Like, would you rather have a cell phone that lasted 2 hours but had, it could charge in 5 minutes or 10 minutes, let's say, but it only lasted 2 hours? Would you like a cell phone that lasts 2 days and maybe it takes 1 hour to charge? Thank you. Our next- Yeah. We'll keep going until I answer the questions on our slope while they're, while they're interesting. I have a couple more. For the Superchargers, I know you guys are not trying to profit off of Tesla owners with that infrastructure, but would you ever open that up to other automakers and try and generate revenue from that system? We've always said that this is not intended to be a walled garden, and we're happy to support other automakers and let them use our Supercharger stations. They would just need to pay, you know, the, you know, share the costs proportionate to their vehicle usage, and they would need to be able to accept our, you know, our charge rate or at least and our connector or at least have an adapter to our connector. So this is something we're very open to, but so far none of the other car makers have wanted to do this. It's like not because of opposition from us. This is not a walled garden, you know, kind of make a moat bullshit. Okay. Maybe could you clarify what's the strategy? Like it seems like that would be a very strong moat to have this network you guys have been building globally for years. You know, why open it up and why is that not a moat? Sorry. Can you repeat the question? I'm just wondering why that isn't a moat because, you know, as a long-term investor, I feel like the charging infrastructure you guys have built would take years and millions of dollars for another brand to replicate. I'm just curious about the strategic thinking behind opening that up versus keeping it closed. First of all, I think moats are lame. I mean, they're like nice in sort of a quaint, vestigial way. If your only defense against like invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness. For any given company, if the rate of innovation, let's say like, you know, competitors, maybe they come out with something new every 6 years, we're maybe every 2 to 3 years. If our innovation is, let's say, twice that of any given competitor, this is true of generally, of companies in any industry. Whichever company has the highest rate of innovation, unless that company is actively killed by its competitors in some way that's nefarious or shoots itself in the foot, it will at some point exceed those competitors. This was obvious that this would occur with Amazon and Walmart because Walmart's rate of innovation was negligible, and Amazon's was very high. The outcome was obvious a long time ago. In terms of the Megacharger, I noticed you guys are gonna be selling energy at a fixed price for those truck customers. I'm wondering what the philosophy is there. Is it also you're gonna operate that at cost and reduce that energy price or are you thinking of that as a revenue stream for the company? We haven't really talked about any of that and haven't finalized, frankly, any of that. You know, we want to make sure that there's a, you know, a very seamless and easy, you know, system to operate, you know, trucks wherever they need to go. You know, some customers may elect to, you know, to work with us on, you know, the whole system or parts of it. I think there's a lot of different ways that that can be solved. I mean, for sure with commercial trucking, like a heavy-duty Semi, economics are fundamental to that situation. They're not making decisions based on aesthetics or, you know, consumer-related things. You know, we Like we made our Semi, we try to make our Semi kind of cool and sexy just 'cause we think that that's a good thing to do, not because it affects the buying decision of our customers in a meaningful way. It doesn't really move the needle. We have this like laughable lawsuit recently from some company ironically called Nikola. It's like Nikola is suing Tesla. That's hilarious. Fate loves irony. They're like suing us because the way the trucks look, which is absurd. Nobody's buying a Semi truck because the way it looks, or because it's got like a wraparound windshield or whatever. Please. The economics are incredibly important. We have to make sure that the Superchargers or Megachargers, whatever we call them, for the trucks are set up in a way that they have very low cost electricity. I mean, one maybe slightly related point to that that I think is super exciting about this is, you know, the potential to link up renewable energy generation at a very fixed and also very affordable cost, you know, to power future trucking fleets. You know, ultimately, that can, you know, can give customers an incredibly, you know, deterministic cost per mile, that will not change with the price of petroleum over, you know, decades, which is really an interesting proposition for a trucking customer. You know, that's something that, you know, we're pretty excited about. Yeah. Exactly. I have one last one. It's really worth emphasizing that for trucking companies, like, if the cost of diesel, you know, goes up a few cents, it just like destroys their business. Yeah. Whereas with the Megacharger situation, combining, you know, having basically a solar battery-powered Megacharger, we have, they have constant costs and we know what they are. We bake them in. It's predictable. Yeah, it's predictable. Lower cost per mile than a diesel truck. You know, fundamentally it's like what is the cost per mile, per kilometer of cargo? That drives the commercial trucking market. If you have the ugliest truck in the world, then still would be victorious. Yeah. Yeah. Building on that, do you have any thoughts on how the trucking market could change or potentially grow if you guys are actually able to deliver on dramatic cost reduction, especially with things like platooning? I think it will take away quite a bit of revenue from railway because the reason rail is able to be competitive is they're effectively just platooning with lots of rail cars, and you need only a small crew to operate the train. However, trains don't go everywhere, you have to like have a truck deliver things to the train rail spur and then picks up, pick it up, you know, and then at the destination, a truck's got to pick it up from the rail spur over there. You still have trucks plus train plus transfer. I think platooning of trucks will quite dramatically affect the rail industry in a negative way. Okay, last one, I promise. On Tesla Energy, I assume that you guys are basically supply constrained, not demand constrained on that side of the business. I'm wondering how you're prioritizing residential versus utility scale, and in particular, how is this successful project in South Australia sort of changed the industry's perception of what batteries can do? Yeah, I think it's had quite a profound effect. The, you know, South Australia took a chance on doing the world's biggest battery, and it's worked out really well. If you read the articles, it's worked out far beyond their expectations, because the battery's able to respond at the millisecond level far faster than any hydrocarbon plant. It's value in grid stabilization is much greater actually than even a gas turbine plant, which can normally respond quite fast. It, you know, it's kind of like if you get in a Tesla and you have that instant acceleration, it feels like you like have almost like a mind meld with the car. It's just like the car is you. That same rapid response is true of the battery pack. The customers the utilities that we've worked with thus far really love the battery pack, and I feel confident that we'll be able to announce a deal at the gigawatt hour scale within a matter of months. 1,000 megawatts. 1,000 megawatt hours per, those are normally gigawatts. Yeah. Maybe just to the first part of your question also, you know, it is absolutely accurate that we are still, you know, there's more than enough demand, and we are still building out of our demand backlog and actually increasing it slightly. You know, and, you know, we're trying to, you know, do our best to prioritize, you know, customers between, you know, residential Powerwall and utility and commercial. You know, I'd say our longer-term strategy is to, you know, you know, shift a little bit of our focus and really catch up on our Powerwall demand backlog, which is too long right now. We know people are waiting too long. That's, I think that's generally the direction we're trying to take that. You know, Model 3 has taken a lot of focus in the last few quarters and, you know, that trend is gonna be reversing in the second half of the year. Awesome. Thank you guys so much. Really appreciate the time. Keep up the awesome work. Very welcome. Thanks for the great questions. Let's go to the next question, please. Thank you. Our next question comes from Phil LeBeau with CNBC. Hi, Elon. Question on the Tesla Semi. Can you give us some perspective in terms of how many reservations you guys have now and where you guys are in the plan for developing it and rolling out the first model? My apologies. Sorry. We're just discussing something internally. Could you repeat that question? With the Tesla Semi, how many reservations do you guys now have approximately, and where are you in the process as far as the development and the rollout of the first model in terms of timeline, when you guys expect that to happen, et cetera? I actually don't know how many reservations we have for the Semi. About 2,000. About 2,000? I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort. You know, sales orders for the Semi are, like, opportunistic, really companies approaching us. You know, it's just not something we really think about much. Our focus is on the Model 3. We need to get that to above 5,000 a week, at a good margin. We need to become a profitable company. That is a good criticism that has been leveled at Tesla, an accurate one. It's high time we became profitable. You know, and the truth is, like, you're not a real company until you are, frankly. That's our focus right now. You know, we've got an awesome product roadmap. The Tesla Semi is one of those things. You know, I think we've got a really good idea for the Model Y is gonna be amazing. Really excited about that. Tesla Cybertruck's gonna be great. You know, the product roadmap, I mean, we have, like, way more cool things than we know what to do. Like, the idea is, idea generation far exceeds the ability to execute it, we just need to stay focused and not divide our attention on too many products at one time. A follow-up. Given the fact that you're already packed to the gills in Fremont, when will you make a decision regarding a second manufacturing facility? That's probably later this year. It has to be later this year. I'm not sure of an exact time, but I don't know, maybe next quarter, but not later than fourth quarter for Model Y. We also expect to announce the location of a Tesla Gigafactory in China soon. Will that second factory, when you announce it, will it be in North America or is that gonna be in China? Well, I just said it's in China. The Gigafactory is there, but the second manufacturing plant will be in China as well? Sorry. I mean, yeah. Also, I'm sorry. In the future, all Gigafactories will include vehicle production. Right now we've got vehicle production and battery production. Like, battery production and motor and power electronics and charger production are at Giga and then we've got our Fremont car factory. Future Gigafactories will all incorporate vehicle production. Got it. Thank you. Yeah. Excited by the fact that we're appreciative, very appreciative of the fact that the government of China has announced that they will be allowing full ownership of manufacturing facilities in China. We'd just like to express a word of appreciation to the Chinese government in that regard. I should also, Robin, is there anything that you'd like to say or anything? Well, we are in good discussion with the government, so we'll announce something when we're ready. Robin Ren's here with me. Robin is managing worldwide sales for Tesla right now. He was born and raised in China. Won the Physics Olympiad. That is sort of cool. We will talk more about I think the next earnings call or next We'll have a lot more to say about that in the future. Our next question comes from Jamie Albertine with Consumer Edge. Okay. If I can be brief, I wanted to ask, you know, given the coverage that you've received, you know, as it relates to these high-profile accidents, you know, one of the things we like most about your company is you have the most miles tested and continue to test daily from an Autopilot perspective. Can you give us any color from what you're seeing in your data as it relates to the confidence that your consumers have in the Autopilot functionality, whether they've used it more or less frequently in their existing vehicles, or whether they've opted to purchase the functionality more or less in lieu of these accidents? 'Cause we're really trying to get a sense of, you know, consumer, sort of, you know, the ability for or the likelihood of consumers to adopt this technology over time. This would be very helpful. Thanks. We do see a steady increase in the percentage of miles driven with using Autopilot. As we roll out more functionality, as we make it better, we see a steady increase. You know, I think for cause Autopilot, something on the order of, a third of highway miles, maybe closer, maybe a half in some cases are, in some regions are on Autopilot. Of course, when there's, like, negative news in the press, then that dips. I was like, "Okay, this is not good," because people are reading things in the press that cause them to use Autopilot less, and that makes it dangerous for our customers, and that's not cool. That's why I get upset. We'd get accused of blaming the victim. I was like, "Look, we're not blaming the victim here, but, it is important that people not be under the wrong impression. The statistics are unequivocal. Autopilot improve safety, no question. In fact, one thing I was gonna mention, or almost forgot to mention is that we'll be publishing our safety statistics on a quarterly basis. Wonderful. That people know exactly what Autopilot safety is. Is it getting better? Is it getting worse? It's like, one of the common misimpressions is that when there is, say, a serious accident, on Autopilot. -for some reason think that, or some of the articles think that it's because the driver thought the car was fully autonomous and it, and it wasn't, and we somehow misled them into thinking it was fully autonomous. It is the opposite case. When there is a serious accident, it is almost always, in fact, maybe always the case that it is an experienced user. And the issue is what more one of complacency, like they just get, they get too used to it. That, that tends to be more of an issue. It's not, it's not a lack of understanding of the, of what Autopilot can do. thinking they know more about Autopilot than they do, like quite a significant understanding of it. Less maybe less. Just to clarify, Elon, you've had 2 accidents spaced out pretty far. You've had dips during those periods when the accidents occurred. To clarify your comments, you're seeing increasing usage, and you've weathered those dips based on where we are today. That is correct. Wonderful. Thank you so much. Thank you. Thank you. Our next question comes from Ben Kallo with Baird. Elon. I remember the Barron's story. I don't know if it was fake news or not, when you hung up on him about your battery costs. I don't want to ask a mundane question, I think it's important because one of your stakeholders are shareholders right now. So far, we've had a couple pushouts in production. Is there a way that you can update us when you get to that 3,000 number or 4,000 number per week? I mean, you're active on Twitter. Can you just let us know because we're going to have a big vacuum here, there's a lot of news flow out there that takes volatility into the stock. It makes it hard for people to own, even though you have a lot of believers out there. Even though we're being myopic right now, I think it's very important to get those kind of updates. I think that's my question. Can you give us an update when you get to 3,000 or 4,000 per week on the Model 3? Yeah. Actually, you know, Tesla is such a leaky sieve of information that I think it's the news will leak pretty quickly. Also people track registrations very closely. At most, any information that we provide would be a week or two in advance of what will become public knowledge just due to vehicle registrations and shipments that are tracked very carefully. Really the pros, like, people get too focused on, like, what's happening in the space of a few weeks or a few months. This is, you know, it's an old maxim of investing. You should not be focused on short-term things. You should be focused on long-term things. I understand. We have no interest in satisfying the desires of day traders. Like, couldn't care less. Please sell our stock and don't buy it. I completely understand your frustration and I'm frustrated too on how myopic we are right now. They also say that, you know, great years are made out of quarters, and great decades are made out of years. Everyone's short-term focused in some ways. Volatility has a way of shaking people out, even that are strong and wanna be there. That's okay. Anything you can do to help in the near term on that, I think is helpful for the stock. That's it. I mean, I think that if people are concerned about volatility, they should definitely not buy our stock. I am not here to convince you to buy our stock. Do not buy it if volatility is scary. There you go. Okay, let's go to our last question now. Thank you. Our last question comes from Alex Potter with Piper Jaffray. Hi, guys. Thanks a lot. Not sure if this is gonna be a hard question to answer. You mentioned Model 3 market share versus the 3 Series and others in that segment. To what extent do you think Model 3 is, I guess, changing the denominator, making that segment larger as a class versus what it used to be? I think it will probably increase the, the total number of sedans purchased. Yeah. Yeah, I think so. You think you're pulling, you know, ex-Accord buyers and Camry buyers into that class? Yeah, we. As an example. Yeah, we know it's because of the trade-ins. We see quite a wide range of cars, including, it's like people that are trading in the cars are not, they're not necessarily owners of a you know, a C-Class or an Audi A4 or a 3 Series. We saw signs of it even with Model S. Even with Model S. It's true. With Model 3, it's gonna be even more prominent. Yeah, yeah. Exactly. I think, like, also once we get to, like, the shared autonomy, you know, ride-hailing thing, which, you know, could be as soon as the end of next year, well, that's when it's technically ready, not long after that, I would expect some jurisdictions to give regulatory approval. The effective cost of ownership of a Model 3 or Tesla drops dramatically because you can share that car with others. Okay. Very interesting. Last one. You mentioned earlier, you think the Model Y production is going to be a true sort of production revolution. If you had to do the Model 3 over again, there are some things that you would have changed, and you hope to incorporate those learnings into the Model Y. What specifically would you do? Or what specifically do you plan to do? Well, I think let's save that for another time. like, we'll talk about that when we unveil the Model Y. It's really gonna be dramatically better. The design and production system, I think really will be next level. Okay. Look forward to it. Yeah. Sounds good. Thank you. All right. Thanks a lot. Thanks, everyone. Appreciate the good questions. This is unfortunately all the time we have. Thank you very much. Speak to you next quarter. Thank you very much. Goodbye. 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.