Earnings Call: Q4 2017

Feb 7, 2018

Good day, ladies and gentlemen, and welcome to the Tesla Inc. 4th Quarter 2017 Financial Results Q and A Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. I would now like to turn the call over to Senior Director of Investor Relations, Mr. Martin Viecha. Please go ahead, sir. Thank you, Andrew, and good afternoon, everyone. Welcome to Tesla's Q4 2017 Q and A webcast. I'm joined today by Elon Musk, JB Straubel, Deepak Haruja and Doug Field is on the line. Our 4Q results were announced at about 1 p. M. Pacific Time in the update letter we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Before we jump to Q and A, Elon would like to have some opening remarks. Elon? All right. Thank you. So 2017 was obviously a big year for Tesla. We launched the Model 3, which is our 1st mass production vehicle. And it's a huge step change for Tesla. A lot of challenges, but I think we made tremendous progress on that front. We also designed and installed and got into operation the world's largest battery in Australia, the largest battery by a significant margin. And that battery is exceeding its performance target significantly. We also unveiled the Tesla Semi, which is a super heavy duty truck maximum load semi truck and the next gen Roadster, which we believe will exceed gasoline, sports cars on every dimension. And we also achieved record production and deliveries of Model S and X. And overall, I think, while there were challenges associated with Model 3 ramp. We're in a deeper level of hell than we expected. So a few levels deeper than we'd like to be, but swiftly exiting anything. And so it was really, I think, on balance today, a phenomenal year. And I'd like to thank everyone at Tesla who should be very proud of the work they've done. This is incredibly difficult. I'd like to thank everyone for their hard work and contribution to 2017 being a really great year for Tesla. I also want to thank our suppliers, particularly those involved in Model 3, as they've shared the very difficult struggle we've had in ramping up production, and they've really spent the midnight oil, spent weekends and taking a lot of risks and suffered alongside us in the challenges associated with the ramp. So I thank them for supporting us through the cycle time with Model 3. As well as our customers and Model 3 reservation holders, you're going to love your cars, and we're working to get them to you as quickly as we possibly can. As for Model 3 production, we continue to make significant progress every day, and we're targeting a weekly production rate of 2,500 vehicles by the end of March and 5,000 by the end of Q2. And as we'll talk about or you see in the letter, the quarter over quarter production of Model 3 is rising exponentially. So I hope we'll that people think that if we can send a roadster to the asteroid belt, we can probably solve Model 3 production. It's just a matter of time. So and really, the error bars on the timing are really quite small in the grand scheme of things. So 2018 is likely to be a very big year for us. At some point in 2018, we expect to begin generating positive quarterly operating income on a sustained basis after hitting $5,000 per week of Model 3 production. And I am cautiously optimistic that we will be GAAP profitable. It's not certain, but it's I'm cautiously optimistic that we will actually be GAAP profitable with no asterisk. Thank you, Elon. Andrew, let's go to the first question. Certainly. I'm showing we have a question from the line of Rod Lachie with Deutsche Bank. Your line is now open. Hi, everybody. Thanks for taking my question. Congratulations on the launch yesterday. Wanted to just ask a couple of questions. One is just to get a little bit more color from you on Model 3, what the production run rate is at the moment. Maybe if you can just provide us with a little bit more color on where the challenges are at this point. On the last call, you talked about, I think, 2 of the 4 zones at Gigafactory that were still kind of an issue and manual operation, have those been resolved? And once you get to 2,500, is the ramp to 5,000, does that just merely involve increasing line speeds? Sure. I'll try to give you as much color as possible. I'm reminded of I think it may have been Churchill's line about sausage. If you like sausage and respect the law, you should watch neither being made. And to some degree, that is true of a production ramp. So I wouldn't read too much into the day to day battles of this or that. But I'll give you the color, but don't read too much into it. So yes, there are 4 zones in module production. Module production is fundamentally the limiting factor on Model 3 output, which is ironic since battery modules really should be the thing we're best at. I think in part, we were probably a little overconfident, a little complacent in thinking that this is something we know and understand and put a lot of attention on other things, not and just got too comfortable with our ability to do battery modules since we've been doing that since the start of the company. And of the 4 zones, 2 of them which are subcontracted to over the production systems are subcontracted to other companies, flat out didn't work, it turns out. Like, I mean, we promised they would work and that just didn't work. So we had to do what would normally be maybe an 18 month development cycle for a production system of that scale and complexity and try to do that in basically 6 months, maybe a little 6 to 9 months. And we've tackled that on multiple levels. So we have a design that is nearing completion for a new automated system for Zone 12 that is being led by our Tesla Groman team. It's an excellent design. All the other work that they've done has been has performed to spec. And we expect a single Tesla at Grom line to be equivalent to 3, if not 4 of the current lines that we have and be smaller, which has made it kind of amazing. And then we have what we call a semi automatic line, which is a series of small automated stations manned by people. And they've actually been remarkably effective. It's actually renewed my faith in humanity that the rapid evolution of progress and the ability of people to adapt rapidly has is quite remarkable. Our semi automatic our sort of semi manual semi automatic line is exceeding all 3 of the automatic lines right now. So and that's something that we're able to scale quite rapidly. I mean, J. V, is there additional color you'd like to on that? Sure. That's a great summary of it. I think much has been made about the manual production of modules, but it's really not very accurate. These are, as Elon said, semi auto lines where we have people that are moving materials perhaps between the machines that are actually performing the operations. But there is still a degree of automation doing the operation. Right. It's not artisanal. Exactly. And this is what has been ramping quite effectively in the last in the first half of the first part of this year. So we're continuing to expand that, those semi auto lines and that is effectively bridging the gap as we redesign the full automation and bring that online. Yes. And it's pretty difficult. Actually, I think it's probably worth providing some tours for investors that are interested. So you can see firsthand. I think a lot of it is like if you see it firsthand, you will understand exactly what's going on. And so I think that's range for some new tours for investors that are interested, because I think you can really get a feel for what it is. Otherwise, it's just some words that are kind of hard to put hard to imagine. I also just want to add, I think it's fair to say that this maybe degree of complacency that happened at the end of last year has been pretty thoroughly replaced by an intense focus from a huge portion of the Tesla team. And there are a lot of different initiatives and teams, whole teams targeted at this area. So I mean, as Elon opened with, it's not a question of if we will get to the production rate, it's just a question of the matter of time. Yes, absolutely. If I could just clarify, what's the run rate now with semi automation and when are you expecting the fully automated line to come on? Well, it's probably a level of granularity that is not productive to dive into in terms of exactly what is coming from which operation. But we do expect the new automated lines to be landing and starting up at the Gigafactory in just the next well, landing in sight within this quarter. Yes. We expect the new automated lines to arrive next month in March. And then it's already it's been it's working in Germany. So there's got to be it's got to be disassembled, brought over to the Gig factory and reassembled and then brought into operation at the Gig factory. So it's not a question of whether it works or not. It's just a question of disassembly, transport and reassembly. So that's yes. And so we expect to alleviate that constraint. That with alleviating that constraint, that's what gets us to roughly 2,000 to 2,500 per week production rate. The next constraint would be material convenience at our Fremont vehicle plant. And so there's a very sophisticated automated parts convenience system. So we think it's probably the most sophisticated in the world, at least we're not aware of one that is more so. And the software for that is quite complex. So that will be the next constraint on production to get to 5,000 is the conveyance system in Fremont. So that also appears to be on track. So we feel like the error bars around the unit volume predictions are getting smaller with each passing week. All right. And our next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open. Thanks everyone. I also want to add my congrats for the launch yesterday. That Twin Falcon landing was probably the sickest thing I've ever seen in my life. First question is for Deepak, totally nutty. Deepak, a question for you. Given the negative trade cycle, your negative working cap, some of the modeling analysts are doing kind of simulating when you get to $2,500 or $5,000 or maybe somewhere in between that, that some of the arrangements you made with your suppliers who have been very helpful, that you might temporarily run enough negative working capital to even have operating cash flow exceed CapEx. Is that something that's possible or again, I know there's execution behind that clearly, but is that something out of question, slightly even? I mean, we're going to look at it from a full quarter perspective. The negative working cycle is amplified by the rate at which we ramp our production. Given our present plans of getting to 5,000 by end of Q2, it's a fairly gradual it's exponential from where we started, but it's not going to create a situation where our cash flow from operations will exceed CapEx. Okay. Thanks for confirming that. And just as a follow-up, Elon, your kind of compensation long term compensation plan obviously got a lot of attention and raised some questions, however, long term from now on succession. Just wanted to ask, do you see your successor as CEO of Tesla, someone currently within the company right now or from outside the company and kind of how do you see that? Thanks. I mean, there's no active search going on or there's not even or active or passive search going on for a new CEO. It sounds like I expect to remain CEO for the foreseeable future. But at some point, if there's somebody really spectacular inside or outside of the company who could take on that role and who'd want to have that title in that role and that would be fine with me and I would focus on our product development, which is design and engineering, which is what I like doing best. So but there are no plans to make change at the time. Okay. Next question, please. All right. Our next question comes from the line of Tyler Frank with Baird. Your line is now open, sir. Thanks for taking the question, guys. I guess, Elon, bigger picture and looking out a few years, you had mentioned a couple of quarters ago that the 1,000,000 car target for 2020 was still there and that you would need to introduce the Model Y by then. How do we connect from where we are today to getting into 1,000,000 units a year? And what should we look for this year in terms of ramping production or building a facility for the Model Y? We are going to make some capital investments towards the end of this year related to Model Y. Don't want to drop the gun on those, but I think we've got a good plan. I'm pretty excited about the how we're designing Model Y. It's really taking a lot of lessons learned from Model 3 and saying how do we design something to be easy to manufacture instead of how to manufacture or difficult really. So I think it's going to be I really think it's going to be pretty great and pretty scalable for the Model Y. But yes, we are going as you suspect, need to make some capital investments in the second half of this year, really late Q3, Q4 for Model Y. And but I think we want to wait until wait probably 3 to 6 months before announcing any definitive plans on production location and the details associated with that. Is that 1,000,000 unit target still in play? Yes. Perfect. And then just one quick follow-up. How should we think about the Tesla Semi investments needed there? And what do you guys think you can hit from an annual run rate in the next, let's say, 2 to 4 years? Well, the big difference between 2 4 years. I've said I think of EMEA a few years ago, I think TELs is going to kind of grow at an average of roughly 50% a year, which is a crazy average growth rate for a company manufacturing complex product at scale. So 2 versus 4 is a huge difference. But if you say like and it's much easier to predict, sometimes these productions, they look like an S curve where you have an initial exponential, which the exponential appears if those people naturally can extrapolate on a straight line basis, an exponential always appears the predictions are conservative in the beginning, and then the exponential takes off, then it becomes linear and then it becomes logarithmic. So it's easier to predict far easier to predict the endpoint or the steady state of the S curve than anywhere on that exponential or log curve. Curve. So if you say 4 years, I think 100,000 units a year is a reasonable expectation, Maybe more, but that's the right roughly the right number, I think. For the Tesla Semi? Yes. Perfect. Yes. I think we might be able to exceed the specs that we unveiled last year, too, which is pretty exciting. And there's like speculation that we might not meet them. I think we're going to exceed them. So, and I made this comment before. It's a cruel thing I gloss over these comments, but I would really take these to heart. The competitive strength of Tesla long term is not going to be the car. It's going to be the factory. We're going to productize the factory. And really, this is a lesson that is kind of obvious in history because the Model T wasn't the product. It was River Rouge. The Model T was a very simple car. Anybody could have made that car, but not anyone could make River And that's really what will ultimately what will be Tesla's long term competitive advantage. We'll have a great one of great products, a great design, a great entering the product itself in the vehicles and autonomy and all that sort of stuff. But the factory is going to be the product that has the long term sustained competitive advantage, in my opinion. Okay. Next question please. And our next question comes from the line of David Tamberrino with Goldman Sachs. Your line is now open. Great. Thank you. Elon, on your autonomous vehicle strategy, why do you believe that your current hardware set of only camera plus radar is going to be able to get you to fully validate the autonomous vehicle system? Most every competitor has noted that the redundancy from LiDAR hardware to given the robustness of the 3 d point cloud and the data it's generated. What are they missing in their software stack and their algorithms that Tesla is able to obtain from just the camera and plus radar? Further, what would be your response if the regulatory body required that level of redundancy is really needed from an incremental LiDAR hardware? Yes. Well, first of all, I should say, there's actually 3 sensor systems. There are cameras, including redundant forward cameras. There's the forward radar and there's the ultrasonics for near field. So the 3rd is also the 3rd set is also for near field stuff just as it is for humans. But I think it's pretty obvious that the ROAD system is geared towards passive optical. We have to solve passive optical image recognition extremely well in order to be able to drive in any given environment and a changing environment. We must solve passive optical image recognition. We must solve it extremely well. At the point in which you have solved it extremely well, what is the point in having active optical, meaning LIDAR, which does not which cannot read signs? It's just giving you in my view, it is a crutch that will drive companies to a local maximum that they will find very difficult to get out of. If you take the hard path of a sophisticated neural net that's capable of advanced image recognition, then I think you achieve the global maximum. And we combine that with increasingly sophisticated radar. And if you're going to pick active proton generator, doing so in 400 to 700 nanometer wavelength is pretty silly since you're getting that passively. You would want to do active photon generation in the radar frequencies of approximately around 4 millimeters because that is occlusion penetrating. And you can essentially see through snow, rain, dust, fog, anything. So it's just I find it quite puzzling that companies would choose to do active photon an active photon system in the wrong wavelength. They're going to get a whole bunch of expensive equipment, most of which makes the car sort of expensive, ugly and unnecessary. And I think they will find themselves at a competitive disadvantage. Now perhaps I am wrong, in which case I'll look like a fool. But I am quite certain that I'm not. Understood. And as a follow-up, if I may, can we talk about the trajectory for the Model S and X margins? 3Q 'seventeen, I think the company was saying you're in the low 20 percent range. I think it took another step down for the report today. So I'm assuming it's probably at 20%. What's the path to recovery from here? And can you frame us through how you're going to get to that margin expansion? We feel very good about the recovery of S and X gross margin to in 2018 to a level which we have seen in the past. And it's a combination of a variety of things. It's increasing the mix of the larger batteries, the higher option content. And then also we have a very good and a robust manufacturing cost reduction roadmap. We will achieve a lot of manufacturing efficiencies, which continue to occur on S and X. So we feel really good about it. Yes. Our internal plan, whether we meet this or not, I don't know. But I think we will. Our internal plan calls for somewhere around a 30% to 32% cash gross margin on X by the end of the year and probably 25%, maybe 26% GAAP gross margin on S and X towards the end of this year. And then Model 3, maybe not by the end of this year, but not far behind it. Right. And this is, as Elon said, internal roadmap. An internal plan, things sometimes get delayed. They don't work out exactly. But I think you get a sense that we feel really good about the improvement that's ahead. Yes. We have a clear path to that goal. Okay. Next question, please. Our next question comes from the line of Ramesh Shah with Nomura. Your line is now open. Yes. Thank you. It sounds like from the letter that you could do more than $100,000 S and X in 2018, but you're constrained by the 18650s. And I'm just curious, what would it take to see the 2,170 cells in these vehicles? Well, this is JB. It's something we've of course contemplated, but it's quite a large change to the architecture of the module and the battery pack overall. And while the 18,650 supply is somewhat of a cap at about 100 ks units per year, even just a few months ago, we didn't feel that expanding and making some long term bets on expanding that supply with Panasonic in Japan was really the right risk. It's something we could consider, but right now, we're pretty happy with that balance and it matches our other production capabilities and our other investments. Yes. It's also like for any given complex manufacturer item, in order to go past the target capacity, you really need to move the whole supply chain in cadence. So you really have to then shift everything to say, okay, if you want to make 20% more S and X, everyone has to make 20% more. There have to be investments in new lines or it's going to require over time, which negatively affects gross margins. We kind of design the manufacturing machine for a particular rate and then you either have to redesign the machine or go redline. And so I think we feel pretty good about the $100,000 a year for S and X. And we want to focus on just improving the efficiency of production. Okay. Yes, it makes sense. And keeping the focus on Model 3. I mean that's really where the majority of the effort is. Okay. The other thing you guys mentioned was upcoming autonomous coast drive, which we're really looking forward to. Could you give a little bit more color on time frame when something like that would be available for customers? Yes. So we actually I mean to address this, but because obviously, I missed the mark on that front. Our focus is very much on Model 3 production, so everything else can take a second place to that. But the we could have done the coast to coast drive, but it would have required too much specialized code to effectively game it or make it somewhat brittle in that it would work one particular route but not be a general solution. So other people would be able to repeat it, but if it's just not any other route, which is not really a true solution. I am pretty excited about how much progress we're making on the neural net front. And it's a little it's also one of those things that's kind of exponential, where the progress doesn't seem like it doesn't seem like much progress, it doesn't seem like much progress, then suddenly, wow. That's been my observation generally with AI stuff. And you look at something like what Google DeepMind did with AlphaGo, went from not being able to beat even a pretty good Go player to suddenly it could beat the European champion, then it could beat the world champion, then it could thrash the world champion, then it could thrash everyone simultaneously. Then they made Alpha 0, which could thrash AlphaGo. And where just learning against itself was better than all the world's human experts. It's going to kind of be like that for self driving. It will say like, well, this is a lane driver, lane driver, like, okay, that's a pretty good driver. Like, holy cow, this driver is good. It will be like that. I mean timing wise, I think we could probably do a coast to coast drive in 3 months, 6 months at the outside. And then is it available for customers immediately or is there a lag? Yes, that would be something that's available for customers. Okay. Thank you. We want to take a moment. Yes, sure. Yes. Thank you very much. Next question please. Our next question comes from the line of Ryan Brinkman with JPMorgan. Your line is now open. Hi, good afternoon. Thanks for taking my question. As you put solutions in place 1 by 1 to unclog Model 3 production bottlenecks in Fremont or at the battery module line in Reno, Are you finding that the ultimate solution is more or less expensive to implement than your original plans, which called for 25% gross margin on the vehicle? Do you feel any differently now about the cost to manufacture the Model 3 or its gross margin potential versus prior to the start of production last July? I think we feel good about that. I think we're probably able to exceed that next year, probably. Like our understanding of manufacturing has improved dramatically. We can think of a huge number of ways to make it far better, far more efficient. I'm really excited about how much we're learning about manufacturing. That's why I said I think long term strength of Tesla will be the manufacturing by essentially productizing the Gigafactory, which is like the world's biggest product basically, mega nuclear echarcare look pretty small by comparison. Maybe just to add to that, I mean, the product, bill and materials cost and the embedded labor cost is I think that's where there's opportunities. And we are simplifying and we're finding ways to improve the design incrementally as we go through the ramp. If there's some small increases in CapEx, that doesn't directly it will be overwhelmed by the improvements in simplicity and some cost savings in the product itself. Yes. I think one of my things, we feel really optimistic about the long term potential for gross margin on Model 3, especially Model Y. Yes. We haven't seen anything that significantly changes our view. That's very helpful. And then just for yes. And then for my follow-up, I see the guidance in the letter about the quarterly operating income turning positive at some point in 2018. That's great. I'm just curious what your thoughts are with regard to when you also might generate free cash flow. Is that less of a medium term focus as you prefer to invest operating cash flows from the Model 3 into the semi truck, Roadster and Model Y? Yes. We could see positive cash flow, like I think pretty significant positive cash flow probably in like Q3, which is like 4 or 5 months from now. But we think it makes sense to invest in Model Y. Yes. Future growth of our energy products. Future products. Future growth of that. So Yes. The opportunities we see are we see really good opportunities there. Yes. It makes good business case and business sense to invest. Yes. Super bullish on me. In fact, I can't emphasize it enough. And what I find sort of interesting is that like the our competitors, well, the car industry thinks they're really good at manufacturing and actually they are quite good at manufacturing, but they just don't realize just how much potential there is for improvement. It's way more than they think. I went through this math thing on a prior earnings call, but like it sounds like some of the like the fastest car factories produce a car maybe every 25 seconds. It sounds fast, but if you think of a 5 meter long car, including gap, a 4.5 meter car with a half meter gap or something, That's only 0.2 meters per second. Like grandma with a walker can exceed the speed of the fastest production line on earth. So really not that fast. Walking speed is 1 meter per second, so 5 times faster than the fastest production line on earth. That's interesting. Why do I at least be jogging speed? I mean, in the limit, companies should start caring about the aero drag in the factory, which that's maybe around 20 or 30 miles an hour or 30 kilometers an hour, 40 kilometers an hour. It's like stuff should be moving at that speed. Okay. Thank you very much. Let's go to the next question. All right. And our next question comes from the line of Toni Sacconaghi with Bernstein. Your line is now open. Yes, thank you. You commented in the shareholder letter that capital expenditures for 2018 were expected to be a bit higher than 2017. I'm wondering if you could tell us what exactly is in that, call it, roughly $3,500,000,000 Are you going to get to full like 10,000 car per week capacity? Is that in the $3,500,000,000 What will Gigafactory production be? And in the slightly more than 3 point $4,000,000,000 is that also including the investments, Elon, that you mentioned on Model Y. So where exactly is this level of capital spending going to take us in 2018? And I have a follow-up, please. Sure. I mean, our biggest a very high level sort of breakdown, our biggest investment is obviously in the Model 3. And that includes completion of the payments that we still have to make on the capacity we are putting in place now, as well as significant investment in required upfront for the next phase of Model 3 production to 10,000 plus per week. So that's, I would say overall more than 50%, way more than 50% is Model 3. And the rest is all the many other things we talked about, whether it's energy storage, whether it's Primarily, why on energy storage. Right. And then our infrastructures, stores, service centers, we want to significantly increase the service capacity. We're going to significantly increase our supercharging capacity. So all of those pieces then add up to the total spend. Yes. But just to give some sort of flavor for optimism on Model Y front, I mean, I think Model Y, I think we might aim for something like maybe capacity of 1,000,000 units a year, something like that, just for Model Y alone. And I think we'll be able to do that for CapEx that is less than the Model 3 CapEx at the $500,000 So probably I think we can probably improve CapEx by a factor of 2. It's not a promise, but that's my gut feel on Model Y CapEx. Just to give you a flavor for my level of optimism on improvements to the manufacturing front. Thank you. That's helpful. I'm just so is the $3,500,000,000 and the greater than 50% to Model 3, is that going to complete all the required equipment to get us to 10,000 a week at the end of the year? Or are we still going to have incremental capital expenditures? And then separately on my second question, around Model 3 gross margins, I think you had said that you expected them to be breakeven this quarter. Obviously, volume was lower and so you didn't get there. But for next quarter, you're suggesting that they're going to be negative, again, despite the fact that I think Q1 volumes are much higher than what you would have anticipated originally for Q4 when you thought that margins would be breakeven. So can you help reconcile the apparent enthusiasm you have about the gross margin trajectory with the fact that your guidance around gross margins in the near term actually appears more cautious than it was. Can you hear us? Yes. I can hear you. Thank you. Yes, no worries. Yes, to sort of finish off your first part of the question, no, we will still have further investments in 10,000 per week capacity of Model 3 happening next year as all of that will be concluded next year. There's always a lag in our cash outflow and while we continue to test the equipment and verify it. So that will continue in 2019. And then in terms of the Model 3 gross margin, our expectations earlier were of a much steeper ramp than what we are projecting here. We were targeting, as you well know, at one point, hitting 5,000 by the end of 2017, and now that's 6 months later. So that's lower ramp. We just know we'll have inefficiencies. We have the full capacity for the depreciation of all that equipment and the operating costs are hitting, while we're not producing as many cars. It's actually pretty simple. Yes. And it's only temporary. It doesn't imply anything fundamental. Yes, exactly. The problem is like when you've got a machine where most of that machine, I mean, overall production and supply chain machine, is at a 5,000 unit capacity, but then 10% or 15% of it isn't, then you've got this massive load on a small on a way smaller production volume. Then as that production volume as you fix the remaining 10% or fifteen percent of the production machine, you're able to get to that hog production and then things improve dramatically. Right. It's sort of like having a car that's operating at a fraction of its let's use a gasoline analogy. We've got a 4 cylinder car operating on 1 cylinder. It's like, okay, so great. Once all cylinders are good, then it's machines work. It's just like a big machine, essentially. Our next question comes from the line of Philippe Houchois with Jefferies. Your line is now open. Yes, good afternoon. Thanks for taking the question. I have a slightly non related to earnings. About the electric truck, the semi. In the past, Mr. Musk, you have spoken about supercapacitors as a way of generating energy and or storing energy. And particularly in the application of heavy trucks, I would expect that the surge of energy in slowing down or breaking in the truck would be too much for battery to absorb. Are you considering industrially viable? Yes. I mean, ages ago, I was going to do basically applied physical and control science degree, PhD in capacitors. So that's I'm a big fan of capacitors. I just don't think I think that the lithium ion chemistry is so good at this point that capacitors will not be needed. There's a certain power to energy ratio. And once you have a huge amount of energy, which is needed for range, then you automatically have the power you need for absorbing for being able to do rapid acceleration and braking. Yes. It's maybe not intuitive, this is JP, but the power to energy demand on the battery in the heavy truck is actually generally less than in our sort of performance vehicles. It's definitely less also in most cases than even the high rate of discharge energy products. So as Elon said, you have a lot of energy, so you end up with a lot of power, actually more than you need. Yes. And the way the chemistry works is that you're able to actually extract for short periods of time extract very high power from lithium ion cells as you sort of have ion migration right on the surface. And then the sustained power for lithium ion is considerably less than the power over, say, the course of several seconds or a minute. But the several seconds power of lithium ion is remarkably good because you're essentially using ion migration from the outer surface. It's like if you have a parking lot, all the cars in the front of the parking lot can just exit. But once you start getting cars from deep in the parking lot, it takes a lot for them to wind their way out. Thank you. Thank you very much. Let's go to the next question. Our next question comes from the line of Brian Johnson with Barclays. Your line is now open. Yes. I'd like to talk follow-up a little bit on the first question around some of the manufacturing roadblocks as well as the comment about building a machine to build the machine, which I believe was the title of a 1990 MIT book about Toyota. Could you maybe give us some more discussion really on the managerial culture, the process level, how you would benchmark yourself, for example, against the Toyota factory, which seems to be able to launch new product in about 3 or 4 months to ramp up? Or at the other extreme, because I know Mr. Field came from there, kind of what Foxconn does and its goal to replace humans. But in particular, you talk about the managerial processes, not so much the robots you're putting into place. Well, I'm pretty sure Toyota cannot ramp up any new product in 3 months. In fact, I'm about 100% certain about that. Deepak spent many years at Ford before joining Tesla. Yes. I mean, generally, companies including Toyota that take anywhere from 6 months to a year when they come up with an all new product. And then all new is like that's a tech, like they're both, it's not really technology that changes from not that much. It's a major platform. So it's not all new as a Model S or an X that we've done. So it is longer. Right. They're not part of many new technologies. Yes. Okay. But within that then, what are the differences now in the way you're going to be managing the factory? The most fundamental difference is thinking about the factory as really as a product, as a quite vertically integrated product. It's treating it as more of an engineering and a technical problem as well instead of Right, which is the Toyota production system. Yes, we don't think so. I think that generally it's more of an optimized operational problem, being extremely lean and really managing the flows of materials and the supply chain. They're great at it. But this is, I think, a different approach, looking at it really from a deep technical lens in terms of automation, robotics, process. Yes. Imagine like if the Model S was a the way you design a Model S, design a factory like it's a car, You still have a lot of workers, you still have a lot of people. I mean, just like with Model S, say, we have a large service organization that's scheduled maintenance, there's things that break, there are crashes that need to be repaired, there's the technology upgrades. But you don't actually ship people with the Model S. That would be weird. It's not like tiny people in the car. So we expect that the Tesla factory really has people a lot of people around the factory with very few people in it. I also think that the degree with which we have this is Doug the degree with which we have product development and manufacturing development integrated is unique. And Model 3 already is a dramatically simpler car to build than the Model S and even many people in operations who have worked their career in volume manufacturers say the Model 3 is a huge step forward from anything that they've built. So as we go forward, Elon mentioned Model Y, a big part of our manufacturing capability is going to come from how simple we make our products. You may have wondered how do you manage the people in the interim? Yes, it's actually coming from Foxconn. Yes, you're at Apple and then Apple. Yes. The model at Foxconn was very different, where very quick product ramps and very high scale was achieved through manual processing of also what is fundamentally a product whose simplicity is orders of magnitude below ours. And iPad is less complicated than our center screen in many ways. So, it's a very different order of magnitude in terms of the kind of product you're building. And it's extremely manual because that is the way that you have to ramp very quickly and then end the life of a product and bring up a new one. Okay, thanks. Actually, one thing we forgot to mention is John McNeil, who is heading up our sales and service group, is departing the company. We wish him well in his future career. And going forward, I will be having the sales and service report directly to me. There are no plans to search for a replacement. Our next question comes from the line of John Murphy with Bank of America. Your line is now open. Good afternoon. Shockingly, I want to follow-up on the production of the Model 3. So it seems like that's going to remain the hot topic here. Do you have enough experience with production of the Model 3 outside of the issues you're facing in the Gigafactory that you're confident once those problems are solved, you can get up and running? Or is there sort of a contingency here that once you get that worked out, you'll be ramping up in Fremont and there might be some other hurdles that are discovered. I'm just trying to understand if there's so many incremental kinks that might come in the production process as you ramp up. And then also as we think about the step from 5000 to 10000, is that something that can be done inside the Fremont factory? It sounds like you're confident that your density is much higher than what even Toyota and GM were producing out there potentially on capacity. But just curious how those 2 questions? Yes. There's really there are only 2 things that I'm aware of that are constraints in production of any significance, the module being the most significant and then the parts convenience, basically the automated convenience that brings parts to the line. So the way that the Fremont factory is set up is that there's actually on the ground floor, we actually created 2 levels. The bottom level is all parts convenience. So parts coming from a warehouse where the parts are sort of automatically stored and then being and then are transferred to an automated conveyance system all the way to the line on the conveyance system being on the ground floor and then raised up to the line, which is actually on kind of an artificial mezzanine. And I think we can get 10,000 vehicles a week out of Fremont without a significant without creating really any new buildings of significance in the existing space. We will need to bring up the South Paint shop, which is what we actually were using for S and X paint. And so we upgraded North Paint to do S and X and 3. But with relatively small CapEx, way less than we spent on North Main, we're comfortable we can bring South Main up to achieve the approximately 600,000 vehicle per year rate to combine 100,000 S and X, 500,003, which would be 20%, 30% more than Toyota and GM produced in the same facilities. And we're a lot more vertically integrated as well. Literally and figuratively, right? Just as we think about that though, Elon, is that sort of an asymptotic limit in that plant? Or based on what you're really talking about, could you get more out of that plant? Or as we look at the Model Y and this 1,000,000 units capacity, we're definitively looking at a new facility? I'm pretty excited about the Model Y stuff, and I think I want to present that in a more cohesive fashion. And it's probably not the next innings call, but close to 6 months from now. But I'm really excited about the Model Y manufacturing and the design for manufacturing. Like essentially how do we design out all the pain that we're currently going through? We do not want to experience it again. This is really a lot of pain. I would emphasize the pain level is extremely high. I mean, as in the factory as in the game factory on Thanksgiving Day, as were many other Tesla people. It's like it's hardcore, okay, 7 days a week, they're on vacation. So we don't want to repeat that. Okay. And then if I The material flow delivery that Elon mentioned, as we develop very high density and velocity lines, the limit starts to become how we get material to that line. We'll solve that for the Model 3 line, but eventually within Fremont, the limit to production may be how many trucks we can get in, how quickly of material in order to build cars. You use Hyperloop for that. Yes. Actually, we are looking at building tunnels using a boring company or something, because we have, for example, our seats production is at a separate building on Page. And we have a bunch of trucks moving seats back and forth between the primary Fremont production and the seat factory. And we actually get constrained on how many trucks can we dock at the dock and undock at the seat factory, which is only I don't know, half a mile or a mile away from the vehicle plant. So it'd be pretty easy to just have a tunnel to do an automated convenience from seats to the factory. And I mean the things we can do where we can build subsystems and then transport subsystems to Fremont, these things get increasingly difficult, but they're all doable. But I can see a path where we get to, say, 600,000 Model 3 production and 100,000 S and X, so maybe 700,000 dollars We should be like almost 50% more than GM and Toyota got out of the plant. I think that seems achievable. It's impressive. Can I just sneak one in for Deepak? I apologize, Steve. You did a great job with working capital in the quarter. I mean, I think some of us might kind of throw stones and say it might not be repeatable, but you did it and you got the cash in the door. So it's done and it was like, got some pretty good work here. How repeatable do you think the benefit from working capital is going forward? I mean, is this really just the benefit of negative working capital and as you ramp up, you'll get this cash inflow? And then also as we look at the customer deposits and the ZEV credits, those were 2, I think, apparently large cash inflows. I mean, how repeatable do you think those are in the future as well? Yes. Some of those are not repeatable. We significantly reduced the finished goods inventory of S and X in Q4, which will not repeat itself going forward. And that was a huge impact to our working capital. Customer deposits may not be as well as you pointed out. However, as the Model 3 RAM continues, the negative working capital needs for that, which essentially creates extra cash for us, will be repeatable. And we'll continue to keep very tight controls on our accounts receivables and everything else we do to manage cash to make sure we are being efficient. Okay. Thank you very much. Thank you very much. Unfortunately, we're not going to be able to get to everybody, but maybe one last question, please. Our last question comes from the line of James Alberty with Consumer Edge. Your line is now open. Great. Thank you and appreciate you sneaking me in. A topic doesn't get asked, I think a lot or as much as it should, but we believe is maybe one of the reasons why the Model S and X demand remains so high after many years of production and sort of the over the air updatability of these vehicles. I'm just wondering, it had been several quarters ago, kind of pre Model 3 questions, we are hearing more about software you were rolling out to existing customers. Just wondering if you can give us some color on what level of uptake you're seeing. And I would imagine we're not seeing that in the upfront Model S and X margins, but potentially those are vehicles that are earning assets for you in the future of customer ownership. So if you could kind of talk a little bit about what trends you're seeing there or elaborate a little bit on that, that would be helpful. I think probably the biggest item is, as we get the software right, people upgrading to full self driving capability of S and X. And anything with hardware 2, which is the 3rd of the 8 cameras, more advanced ultrasonics and improved compute capability. I think we're capable of the full self driving. The full self driving, the hardware 2 step is also capable of doing easy swap out of the computer. So it turns out we need additional computing capability to meet the regulatory standards for self driving, particularly if it's we think with current computer hardware, we can get to better than human, but the standard for regulators may be that you need to be 5 times better than human or something like that. But we believe that is solvable purely with compute hardware. And it would be a relatively minor expense to do that. So I think probably it's that biggest opportunity. And along the same lines, not all customers take our enhanced autopilot too. And as people hear more, we can see an uptick on that. So but it's all around autopilot to your point. Yes, exactly. And that's certainly the sort of semi automated driving definitely doesn't require any hardware upgrades and that's $5,000 that's essentially a software product with 0 cost 0 module cost and so it's 100% margin. And then when full self driving is available, we think probably that's more than a $3,000 increment, maybe $5,000 increment or something like that. Is there any data you can provide us though today in terms of the percentage of consumers that are upgrading or opting in just to get a sense of kind of the order of magnitude that that what that business could look like over time? Yes. Well, not many people are opting in at this time. But it's full stop driving since it doesn't actually work. Essentially, some people are buying an option on it working in the future. Right. So it's a very like just single digit or great like trailer. There's also the as I mentioned in prior, we expect to operate kind of a shared autonomy fleet, where it sounds like kind of like a combination of Uber, OrLyft and Airbnb, I guess, where you can opt to have your car enter a shared fleet or not. And then Tesla can also operate its own fleet in places where there's not enough people sharing their vehicles. So that's a pretty significant opportunity. Understood. Thank you again. Okay. I think that's unfortunately all the time we have today. Appreciate all your great questions and we look forward to talking to you in the next quarter. Thank you very much and goodbye. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.