Good day, ladies and gentlemen, and welcome to the Tesla Q1 2017 financial results Q&A call. I would now like to turn the call over to your host, Mr. Jeff Evanson. Mr. Evanson, you may begin.
Thank you, Cherie. Good afternoon, everyone. I'm joined today by Elon Musk, JB Straubel, Deepak Ahuja, Jon McNeill, and Lyndon Rive. Today on our webcast, we'll discuss our Q1 results that are announced in the update letter at the same length as this webcast. During our call, we will discuss our business outlook, make some forward-looking statements. These are all 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. We'll start today's call with some brief remarks from Elon, and then we'll jump right into Q&A. Please do try to limit your questions to yourselves to one question and one follow-up. If you haven't entered the queue already, please press star one now.
With that, I'll turn it over to you, Elon.
Thanks. Yeah, welcome to the call. I'd like to welcome Deepak Ahuja back to Tesla as CFO. Yeah, it's welcome back.
Thank you, Elon. Appreciate that, and I'm really excited to be back.
Cool. All right. Yeah, we'll just go right into Q&A. Overall, I'm very proud of Tesla for our accomplishments in the Q1. I think Q3 is gonna be great, too. Yeah. Overall, I think, you know, we're executing well, and I'm feeling quite optimistic about the future.
All right, Cherie, let's have the first question, please.
Thank you. Our first question comes from Alex Potter with Piper Jaffray.
Hi. Thanks. Been a fair amount of debate recently, both amongst investors, I think, but also within the supply chain, about the segments within the transportation ecosystem that will sort of forever be off limits to Tesla because of physical limitations of electric drivetrain, specifically as it relates to weight and energy density and things of that nature. Presumably, you disagree. I'd be interested in hearing maybe why you disagree, why you think Tesla can compete in those segments, whereas other people think diesel or fuel cells or other options would be better.
You're thinking of things like heavy trucking?
For instance, yeah. I mean, I guess different people draw the line in different areas, but as an example, yes.
Yeah, I mean, I'm not sure what you're saying there. I'm absolutely confident that electric vehicles will occupy every segment without exception. I don't wanna jump the gun on the Tesla Semi Truck, you know, unveiling later this year. It's, I think it's gonna be an incredible product and will defy people's expectations on what an electric truck can do. I really do not see any segment of transport that will not be electric. In fact, I'm highly confident that all transport will go fully electric with the ironic exception of rockets. Yeah.
Okay. Very good.
Easy way around Newton's Third Law.
Right. Okay. I guess maybe one Model 3 question here. I know it's maybe early days, is there any way to gauge sort of what you think the trim and option uptake is gonna look like on the Model 3? Just to give folks an idea of what the pricing and margin profile might look like. Thanks.
I mean, it's really guesswork at this point. If it were to be comparable to what we see with, say, Model S or with what other vehicles in the market experience, it's something like a 20%-22% increment over the base price would be the typical average. Jon, do you have any?
Yeah, I think that's right. That's, you know, we experience a little bit higher than that in Model S. Model S in comparison to Model 3 has more range, has more power, has more cargo, et cetera. We'll be introducing at the start of production. I think we'll be announcing our vehicles as we get closer to the start of production what those vehicle specs will be, but I think 20% is a fair number to use.
Yeah. Actually, just to reemphasize that, I might repeat this a few times on the call. We wanna be super clear that Model 3 is not version three of our car. The Model 3 is essentially a smaller, more affordable version of the Model S with fewer features. The Model S and the Model 3 will be at the same level of technology. If you were to put a version on, say, what I would say we're probably on version four of Model S. Model 3 will also be on version four. You know, if you think of like when Model S first came out, just rear-wheel drive, then we had dual motor all-wheel drive.
We had initial Hardware 1 Autopilot and then Hardware 2 Autopilot. There was a fascia refresh that there's been roughly four versions of Model S, and we're on the fourth version. Model 3 will be also version four. It's a little confusing because one's a letter and the other is a number. Model 3 was supposed to be called the Model E. Ford threatened to sue us. I mean, I thought we were being all clever by calling it the Model 3, actually the joke's on me because it caused confusion.
Right.
-in the marketplace. We're doing our best to clear up that confusion so that people do not think that Model 3 is somehow superior to Model S. Actually, Model S will be better than Model 3, as it should be, because it's a more expensive car.
Okay, good. Yes, very clear. Thanks very much.
We're gonna be a bit of a you know, a broken record on this front. The messaging might get a little annoying, but we really have to be emphatic to clear up an error which, for which I take full responsibility, in naming something that inherently would cause confusion in the marketplace.
Okay. Understood.
Thank you. Our next question comes from Toni Sacconaghi with Bernstein.
Yes, thank you. I was wondering if you could maybe give us an update qualitatively or quantitatively on how investors should think about battery costs. I think your last public statement was that Tesla's battery cost early last year was under $190 per kWh. You know, if we look at Powerwall 2, there's been significant improvement in cost per kW and in density. I think if we try and do the math on Powerwall 2, we still come up with a number that's reasonably high. Maybe you can help us. I think in the past, Elon, you've said that you hope to get to $100 per kWh by 2020.
I recognize that's aspirational, but maybe you can help us a little bit, frame how we should think about battery costs today, what kind of improvement you're seeing from or expect to see with 2170 batteries in vehicles, going forward.
Well, I mean, the current numbers for cost per kilowatt are obviously closely held competitive piece of information. It's just that we do expect to see significant improvements year-over-year as a function of improving the core chemistry of the cell. Reducing the percentage of the cell mass that is inactive, and of course, massive economies of scale and vertical integration at the Gigafactory. These will all take time to bear fruit, but there will be significant over time. Now, with the Powerwall, there are a bunch of other costs in the Powerwall that are more than just the batteries. You've got the cell cost, then you got to integrate the cell into a module.
You got all the cooling systems, the control systems, you know, the safety stuff for, to prevent cell runaway, the enclosure, the modem to communicate to the internet. Then most significantly the power electronics, to take the power from the cells and convert that to AC or DC power that the house can use. JB, is there anything you'd like to add to that?
No, that's a great description. It's a fully integrated product. It's a system, not just, you know, a bunch of cells.
Yeah.
You know, if you maybe try and calculate dollar per kWh cost of the Powerwall, I think you'd find it's extremely competitive against other home energy storage systems. We believe the best. There is a lot of other hardware in there. It's all included, all wrapped together in the Powerwall price. You don't have to piecemeal the system in your house.
Right. We are confident that the Powerwall is the highest quality product and actually at the lowest cost of anything on the market. I'd say that is a good product. I'm sure we'll get pretty happy with it.
Some of the improvement trajectory that you saw in, from Powerwall 1 to Powerwall 2, part of that was made possible by the migration to 2170 cells made at Gigafactory. You know, not all of it, but a large part of it. That is something we're, you know, pleased with and feel is going well.
Okay. Thank you. I was wondering also, you know, your customer deposits, and I recognize there's a lot in that, decline for the second straight quarter, and at least by my math, it appears as though Tesla's new car inventory has increased substantially over the last couple quarters, maybe 3,500 units, or about 50%, even though sort of production and deliveries have been relatively constant. I'm wondering if you are seeing incremental demand pressure on Model X, and particularly Model S. Elon, you underscored that there was confusion in the marketplace. Are these the metrics that are suggesting to you, that there's some confusion in the marketplace? Are you seeing cancellations? 'Cause at least optically, it looks like the book-to-bill is less than one on S and X.
Yeah. Deepak here, a couple of questions that you had. Firstly, just to clarify, our finished vehicle inventory only increased very slightly from end of Q4 to end of Q1. We are using some of that in different ways, and Jon can explain that further. Also to your other question on customer deposits, what I'm seeing is that we had an artificial backlog in our customer deposits of Model Xs. As our production of Model Xs has stabilized and as our mix of Model Xs increased relative to S, we have cleared that. It's nothing unusual from what I'm seeing there. Jon, you wanna add on the-
That's right. The increase in inventory is about split in two. One is, we increased Model X test drive vehicles by about 1,000 over the past quarter. We had prioritized deliveries as we ramped up Model X production, and prioritized getting cars to customers first, and to our stores second. Our stores have finally gotten their test drive fleets. That's what you see in terms of the half of the unit volume increase. The second half is in our service loaners. As our installed fleet has gone up, we wanted to make sure that our owners were getting a service loaner, we will continually increase that, and you'll see that over time. That's not a one-time event.
You'll see as, you know, as we continue to deliver this level of cars per quarter, that we will increase the service loaner fleet proportionally so that we've got the ability to offer a Tesla to our customers.
Yeah. In fact, this will take us, you know, a few months to fully deploy. Our policy for service loaners is that the service loaner fleet will be the very best version of a Tesla that is available. If you have a Model X that comes in for service, the service loaner you will get will be the absolute fully loaded state-of-the-art P100D Ludicrous best Model X that we have. The same for the Model S. It'll be kind of thing where you hope the service takes a long time, because you have the absolute top-of-the-line Tesla as a service loaner.
Elon, just to clarify, the confusion that you believe exists potentially between Model 3 and Model S, that's not being inferred from order patterns, that's being inferred more qualitatively from what you're learning in showrooms? How do you make that assessment of the problem?
No, we have seen some impact of Model S orders as a function of people being confused that Model 3 is the upgrade to Model S. We took action to correct that about a month ago, but that message has not filtered down to all of our customers. There's a lot of people who are under the impression that Model 3 is the upgrade from Model S. In fact, if they want to upgrade, it's just buy the latest Model S. That's the actual upgrade path, not, you know, if you're like say thinking that the upgrade path from an Audi A6 is an Audi A4. It's the, you know, it's not.
It's just a question of correcting that misperception, which I'm confident we'll be able to do in the next several weeks.
Thank you.
Thank you. Our next question comes from Colin Langan with UBS.
Great. Thanks for taking my questions. You've talked about in the past, reinventing the machine that makes the machine. Now that we're getting a little bit closer to the Model 3 launch, any additional color on what steps in automation you're doing for the Model 3 and any rough order of magnitude of how much more automated the Model 3 would be versus a traditional production line?
With Model 3, I think we'll be roughly comparable with the best, high volume, vehicle production lines in the world. Better in some respects, a little worse than others, but roughly comparable. With some further iteration, I think it will probably be a little bit better than the next best automotive production line. Where things will really be a step change, I think beyond any other auto manufacturer will be the Model Y factory. This is both a function of designing the product to be easy to manufacture and easy to automate. As well as designing the factory itself. Model Y, I think we're really becoming a step change.
Model 3 is gonna be at or probably slightly better than I think the next best you know, I think that that's a pretty good outcome. Model Y there'll be nothing close to it, I think, or yeah.
Got it.
Let me just add, as a relative benchmark, you know, against the S and the X.
Yeah
you know, Model 3 is vastly more automated. You know, perhaps that's not the best benchmark to use looking forward, but, you know, it's perhaps, you know, three to four times, you know, more automated than an S or an X, and much simpler to build.
Is that one fifth of the hours per car?
Yep.
It's 5 times the volume, but the same hours per car.
Got it.
Yeah. Compared to S, yeah.
Just follow up. Any color on, you've announced the doubling of the Supercharger network and increasing your dealers. I mean, how should we think about that over the next few years? Is that doubling gonna be enough? You know, how do you see the network needing to expand going forward?
We're expanding the Supercharger network substantially. We made that announcement just recently and you can see the growth plan on our website. That's going to continue to increase dramatically. Do you want to speak to service?
Yeah. Service locations are one that you see increasing in the shareholder letter. You should probably think about service capacity in two ways now. One of the things we've discovered as we've deployed more advanced service techniques into our indoor centers is that a super majority of the cars we repair don't require a lift. That frees us from brick-and-mortar service, we've added substantially now to our mobile service capability, starting first experimenting in the Bay Area and sort of our major markets, we'll be rolling that out throughout the year. We're creating service capacity in two ways, mobile service and fixed service operations. The fixed service operations are becoming much more efficient.
Much higher throughput.
Absolutely. Much higher throughput through worker or through per square foot across, really every metric.
Okay. All right. Thank you for the call.
Yeah.
Thank you. Our next question comes from Adam Jonas with Morgan Stanley.
Hi, everyone. Elon, first question's on CFIUS and Tencent. After acquiring this 5% passive stake in the company, I'm thinking, you know, given the highly sensitive nature of your proprietary tech and computer vision, AI, robotics, et cetera, and all the related infrastructure, I would imagine that the Committee on Foreign Investment in the United States and the Pentagon might be concerned of the idea of a Chinese or potentially Chinese state-backed company going any further than a small passive stake. Am I watching too many Cold War movies here, or is there potential for some sensitivity on the grounds of national security?
Well, I think that, you know, 5% is not that big a deal. I mean, they're not present at board meetings. They don't have any insight into Tesla that's not public.
Yep. As Elon said, this is a passive investment. It doesn't require CFIUS clearance from that point of view.
Okay.
They don't have any access to confidential information or board materials, so it's just a belief and a support of what they think Tesla can achieve.
Okay. Just as a follow-up, Apple has enough net cash, I think, to buy Tesla, like, more than three times over. Is there anything that Apple does or has, besides having more money than they know what to do with, that could be helpful in Tesla's mission to accelerate the transition to shared autonomy and sustainable transport? Could they be the type of firm you could partner with? You know, could you know, is this something you could talk to Tim about?
Yeah, I don't think they wanna have that conversation. I don't we've not heard any indication that they do. Obviously, Apple's a company that makes some great products. Yeah, I mean, I use their phone and the laptop. It's cool.
I appreciate that.
That's what I would say.
Thank you.
Many of which now work here.
You think they're more competitor or more competitor than potential partner? Is that unfair?
I mean, I don't know what they're gonna do on the car front. Yeah, it's not clear.
Thanks, Elon.
Thank you. Our next question comes from Tyler Frank with Robert Baird.
Second question. Can you walk me through what your capital needs are for the Model 3, just to get to production and then to ramp production throughout this year and next year? How confident are you that you might be able to hit that 100,000 unit production target for the Model 3 in this year? Then I have a follow-up after that.
No, I don't think we have indicated. We just said in the letter we'd achieve 5,000 per week at some point.
Yeah
this year and 10,000 at some point next year. We haven't clarified on that.
Yeah. The trick with the when you've got a whole new product and a whole new factory is, trying to predict exactly what that initial portion of the S-curve looks like is extremely difficult. Inevitably, the production starts off slowly, and then you gradually eliminate the constraints, and eventually it starts taking off exponentially. Because of that sort of initial slow ramp that then grows exponentially, a small change in where that lands in a quarter can have quite a big impact on total volume.
It's a lot easier to predict where the upper flat portion of the S-curve is likely to be, but predicting the rapidly changing portions of the S-curve is just, I think, not within the ability of anyone to predict with accuracy.
Got it. Then can you just run us through what the capital needs are to sort of hit that 10,000 unit per week goal, as well as, you know, where the battery factory stands in terms of its current capacity versus its expected total capacity and what the timeline is to get to that total capacity mark?
We feel pretty good overall about the capital needs, and our ability to fund that, to achieve that 10,000 per week capacity.
With internal.
Yeah, with internal, right. Exactly. Our own resources and the cash that we generate in our business as we ramp up, Model 3 volumes. Overall, JB can speak up more to that in terms of the cell capacity, that's all lined up to come in, come online just ahead of our needs on the vehicle side as well as on the energy storage side.
We initially, you know, forecast about 35 GW hours of cell capacity and 50 GW hours of pack capacity and, you know, we anticipate to, you know, surpass that cell capacity in 2018. You know, that's going well. With the increasing, you know, improvements in the production, you know, density and speed at the Gigafactory, we actually, you know, ultimately believe, and I think we've said this before, that we can fit substantially more capacity than 35 GW hours at Gigafactory 1.
Yeah. I mean, we said publicly that we think, cell output capacity at Gigafactory 1 is likely to exceed 100 gigawatt hours.
Yeah.
Over time. Yeah.
The end state of 35 is really, you know, a sort of a passing point at this stage.
Yeah.
we'll continue on from there.
Yeah.
Right. Okay. Elon, you had previously pulled out a target of 1 million cars per year by 2020. Do you still think that's achievable? What needs to take place in order to get there?
Yeah. I do. I think we need to come out with the Model Y, sometime in 2020, or aspirationally late 2019. I think that among units is quite likely combined, yeah. Probably maybe more.
Thank you.
Thank you. Our next question comes from David Tamberrino with Goldman Sachs.
Well, great. Thank you. Good afternoon. Wanted to first just ask about the order rate for the S and the X in the quarter, and also get some color on your deliveries from a regional perspective. I believe there was an expiration of electric vehicle tax credit in Hong Kong. Just wondering if that created any pull forward or incremental demand in the quarter, and if there's any air pocket to orders and deliveries for the Q3, seeing that you maintained your 47,000 to 57 or 50,000 1H delivery guidance.
Yeah. I mean, there was some pull forward demand in Hong Kong. That's one city on Earth, you know. We don't think it's gonna impact our ability to achieve our delivery target for Q2 .
The order rate growth for the quarter?
Well, you know, I think we feel pretty good about achieving the sort of the 100K, roughly 100K, total for the year for S and X combined. You know, that's where we kinda wanna be. The manufacturing system and the supply chain is all sort of set up for that level. You know, it's a continue to be surprised by how sort of frankly naive people are, a lot of people are about production and supply chain. You know, as though there's some like easy way to increase production, it's truly not. Any given production system, you design it for an optimal output, and then you aim to improve efficiency, reliability, quality, and so forth at that output.
The S and X system, as we said last year, was designed for 100,000 units. Now initially to get to that rate, we had to use a lot of overtime, a lot of expediting, and that affected our gross margin on the car. Now, sort of at steady state, we're kind of the top part of that S-curve that we were targeting. Now our focus for S and X is improving production efficiency, continuing to improve quality and.
Material costs.
Yeah, material costs and so forth, and to get the automotive gross margin S and X to the 30% level that we've been aspiring to for a while.
Understood. That's on the production side. My question was just on what the order rates and demand was looking like from what you're seeing on your customer base. Historically, you've given or provided, you know, very helpful color on what the year-over-year or quarter-over-quarter order growth rate has been on the S and the X. I think it's a meaningful metric for what demand looks like for those vehicles and for your products. That's okay. Understood.
I don't think it's meaningful. It. Like, we're gonna produce 100,000 units or, you know, approximately. All that matters is the demand. Is there gonna be demand for 100,000 units? I believe there will be. Well, there is.
There's certainly sufficient demand for the guidance we've given for the H1.
Yeah.
Understood. Just on the SolarCity side, you know, looked like a pretty good gross margin quarter. Wanted to understand, I know how much of that was from the shift further into the cash loan versus the PPA lease, and how much was that? Was it more associated with the ramping of the Gigafactory and production of the cells?
Well, it was primarily seasonality. We had more production happening in the Northern Hemisphere and some of the PPA leases and how we recognize revenue. Also it was we had some, you know, $14 million sale of energy credits that helped us. The credit sale happen every quarter, but we had the full quarter of it, which we didn't have in our half quarter of SolarCity sales, financials in our Tesla income statement.
We've also seen an increase in the cash flow, which does improve the margin as well.
Yes, that does help the margin as well. Yes.
I'm sorry to ask one more, but that was a bit inaudible. Could you repeat that, Lyndon?
Yeah, we have seen an increase in the cash and loan business.
Thank you.
The goal is to get to the majority cash and loan by the end of the year.
Correct.
Just to be clear, for SolarCity, the objective is to get to majority cash and loan by the end of the year.
We expect the solar margins to stay, very healthy for the rest of the year and grow, with time.
Understood. Thank you very much.
Thank you. Our next question comes from Martin Viecha with Redburn.
Hi, this is Martin from Redburn. I wanted to ask about the TED Talk that you've had a few days ago, where you talked about Level 5 maybe in the next two years. I was wondering that it's probably gonna change radically the design of the car inside and, you know, whether you foresee this in the next two years that the interior design would change quite dramatically.
I don't think we're gonna see a dramatic change in interior design. There may be, you know, an option where that you have club seating instead of everyone facing forward, but I wouldn't call that radical. Yeah. Just turn the seats around.
Okay.
I'm not sure how much people will actually wanna do that. The sensor hardware and compute power required for at least Level 4, current Level 5 autonomy has been in every Tesla produced since October of last year, approximately. It's a matter of upgrading the software and we can achieve Level 5. And if it does turn out that we need to upgrade the compute power, it's designed to be easy to upgrade. Like, you know, basically access it through the glove box and a more powerful computer. We don't think it will be, but if it is, that's pretty easy to do.
The important thing to appreciate is that the sensor hardware and wiring harness that's necessary for full autonomy, which, you know, essentially having the eight cameras, the radar and the ultrasonics, that's in place. Like the, with each passing release, the car's autonomy level will improve. You know, we had a bit of a dip obviously because of the unexpectedly rapid transition away from Mobileye, where, you know, we'd expected to have the Mobileye chip on the board as a transition, but Mobileye refused to allow that. We had to basically recreate all the Mobileye functionality in about six months, which we did.
Okay. The other follow-up question that I had was on the Model Y. You mentioned that the Model 3 production line will be probably as fast or a bit faster than the fastest production line in the world, and Model Y will be a genuine step change. Does that mean that the Model Y will be made on a different platform than the Model 3?
It will be, yeah, different platform. I mean, I think I gave-
Okay.
I think I gave this example before. It's just one example, but the wiring harness on Model S is about 3 kilometers in length. The wiring harness on Model 3 is one and a half kilometers in length. The wiring harness on Model Y will be 100 meters.
Okay.
wiring harness. Really a wiring harness is basically a flex harness with a high data rate bus. You can put everything on a higher data rate bus that isn't, you know, a CAN bus where your data rate is massively constrained. We'll also make changes to the vestigial voltage, so about everything's 12 volts, which is a pretty absurd number, really. It's wrong for everything.
Got it. Thank you very much.
Sure.
Thank you. Our next question comes from Brian Johnson with Barclays.
Yes, I have a couple questions, a housekeeping one and then sort of a, kind of where are you kind of question for Elon. On the housekeeping, your order delivery announcements at the end of the quarter, excuse me, delivery announcements. You used to talk about deliveries to end customers. This quarter, it was just deliveries to customers. Is there any change in distribution channels potentially using resellers in some markets that that's meant to communicate?
No, it is, it's the same thing. It's consistent. We are delivering to end individual customers.
Okay. Second, a couple years ago, when the stock was at $200, in answer to one of my questions, Elon, you outlined a scenario where you could get to $700 billion in market cap. That's about where Apple was at the time. You know, we're two years later, you're obviously close to the Model 3 launch. You know, how are you looking at that?
Well, now, I mean, I want to preface this by, of course, this, I could be completely delusional, but I think I see a clear path to that outcome.
Okay. Anything else in terms of other businesses or volume or still pretty much on that track?
The set of steps necessary to achieve that outcome seem pretty obvious. Heavily involve Tesla getting incredibly good at the machine that builds the machine. Which involves, by the way, a tremendous amount of software, right? It's not just a bunch of robots that are sitting there. It's the programming of the robots and how they interact and it's far more complex than the software in the car. I mean, I think this is just gonna be a very difficult thing for other manufacturers to copy. I would not know what to do if I were in that position.
Okay, just one quick question. Why pickup trucks? Why semis before pickup trucks?
Well, they're not gonna be that widely separated in time. I think part of it is we do wanna show that electric transport can do even the most heavy-duty things in the world. It's I think it's pretty obvious we could do a pickup truck, but it's not obvious to a lot of people that you could do a heavy-duty semi. Just being able to kind of hit the corners of the box of capability, it's a helpful thing to do. Yeah.
Okay.
Maybe a related point, but a disproportionate amount of petroleum is actually burned by a small number of trucks.
Yeah, exactly.
Just because of the high utilization, the high miles per vehicle, and, you know, they really lend themselves, I think, well to electrification.
Yeah, exactly. Every semi, I mean, there's probably 10 times as much hydrocarbon saved for a semi as for a pickup truck.
Okay, thanks.
Thank you. Our next question comes from Rod Lache with Deutsche Bank.
Hi, everybody. A couple remaining questions. Just one is, since the Model 3 is maybe two or three months away, could you just give us a sense of what some of the most critical outstanding items are that are gonna gate the commercial launch timing? Now that there are actual physical test vehicles on the road, are there any significant changes happening?
Well, actually, it seems to be We're not really seeing any significant changes we need to go with Model 3. It's coming in as expected, as the designs and simulations predicted. It's been, you know, pretty close to the bullseye. I'm not aware of anything that would affect our prior statements about the volume target.
There's nothing outstanding, you know, vis-à-vis tooling deliveries or things like that you're still viewing as a critical item, with some uncertainty?
There's plenty of things with uncertainty, I don't know anything that would threaten, starting production in July and, you know, and exceeding 5,000 units a week by the end of the year.
Okay, great.
There may be some other costs stuff, but I just don't know of what that is today.
Got it. Just switching gears to China. Obviously domestic production is presumably very important to your success in that region. China recently suggested that they may relax the rules for foreign ownership or that they intend to relax the rules for foreign ownership. I was wondering if you could just update us on where you stand [Non-English content] the growth plans there, and are the rules for ownership, is that one of the gating factors?
Well, I don't think this is quite the right timing to make any announcements on that front. I would expect us to define our plans more clearly by end of this year with respect to China production.
Okay, great.
Um-
Just lastly.
I would I think it's good timing that I mean, the China rule changes are good timing.
Got it. Just lastly, unless there's a pretty huge Q2 for CapEx, it appears that you're tracking at less than that $2 billion number that you had articulated of capital spending pre-launch of Model 3. Is that a function of savings, contractual timing, or is that a capacity issue? Just some thoughts on how we should be thinking about the capital spending relative to your prior targets.
Yeah, it's not too far from it, Rod, sorry. We have significant CapEx in Q2, and it's all in a big lump sum or with a big peak, given how much equipment is being installed and then tested. Often our CapEx payments happen, and a big chunk of the final payments happen after the equipment's installed, it's tested, and then we have fairly good customer payment terms. In many cases it's 90 days. It's just a matter of that process and time and paying. We feel very comfortable in terms of how that is happening, the spend and the installation and overall readiness for Model 3.
Yeah, I mean, if anyone comes on a tour of the factory, it's really insane how much equipment is arriving and getting installed and being brought online. Well, I mean, I'm used to seeing a lot of intense equipment. That blows my mind. It's like, wow. I think you can also get a kind of a visual sense for the improvement in manufacturing technology between S and X and Model 3. You can just go look at it and say, like, Yep, that's obviously better.
Okay. Thank you. Our next question comes from Colin Rusch with Oppenheimer.
Thanks so much. Can you give us an update on the volume of cathode and anode that's being produced and shipped from the Gigafactory at this point?
I'm not gonna get into specifics, but it's a lot. I mean, it's, yeah, vast amounts. Are you alluding to materials, potential material supply constraints, or I'm not sure where are you going here?
You know, I'm just trying to get a sense of the ramp at this point, on the cathode and the anode, at the Gigafactory.
ramping very rapidly in 2170 cells production. We're not really seeing anything standing in the way of that.
Yeah, I completely agree. You know, we're basically, you know, tracking slightly ahead of where we need to be on vehicles, but that's sort of as was planned.
Yeah.
We don't wanna be too far ahead or else we'd have a, you know, a pretty massive inventory, you know, issue showing up. We run it, you know, in batches, and we run at high rates and then pause and, you know, validate the throughputs. Yeah, it's where we expect it to be.
Okay. That's super helpful.
I'd like to express a note of appreciation to Panasonic, you know, partner on the cell front. You know, they're really, the new partnership's working really well, and they're doing great stuff.
Okay. Shifting gears to the purchase accounting adjustments related to SolarCity, can we just get a sense of the nature of that? It looked like you were gonna go through a series of complex assessments over the course of the year with the SolarCity acquisition. Just wanna understand what that $100 million charge was and how we should think about those decisions getting made going forward.
Yeah. I'm not sure. Yeah, the $100 million is the change quarter-over-quarter that you're referring to. In Q4, this is arcane purchase accounting. There was a gain on our purchase of SolarCity, and that was not there in Q1, and there was some revaluation of assets of SolarCity that was linked to that purchase. Out of that was a $100 million walk.
Okay. I'll take the rest of it offline. Thanks a lot, guys.
Yep.
Thank you. Our next question comes from Ryan Brinkman with J.P. Morgan.
Great. Thanks for taking my question. You know, what do you think are likely to prove the biggest challenges or bottlenecks in ramping production to 5,000 vehicles per week by some point in 2017? How confident are you in your ability to overcome those challenges? The shareholder letter also mentions a run rate of, I think, 10,000 or approaching 10,000 per week in 2018, which would maybe seem to indicate some kind of an annual run rate of 500,000 or so Model 3s. Given you're also tracking kind of 100,000 Ss and Xs, do you think that type of production can be handled out of the Fremont facility, or does your plan assume production in another facility as well?
All of that production is intended to be out of the Gigafactory 1 and Fremont. We believe that that can all be handled here. As far as specific constraints on Model 3, I just don't know of anything that really stands out. We've gone to great pains with the Model 3 to design it for manufacturing and to not have, you know, all sorts of bells and whistles and special features that like, for example, like with Model X. Model X became kind of like a technology bandwagon of every cool thing you can imagine all at once. It's like everything all at once. That is a terrible strategy.
You really wanna, you know, start off simple and then add things over time. That was, you know, some hubris and real low confidence there. With Model 3, it's the opposite. We're designed to be easy to make. We've got, I think a much better supply chain in place, where we've got the A team from the A suppliers. We didn't have that for the Model X or the Model S. As far as we know, there are no issues. That strategy appears to be paying off. There could be something that we've missed that we just don't know about right now.
Okay. You mentioned production in the Gigafactory. I know you're doing some component assembly there for the Model 3, you know, given that it is on track to be the world's largest factory or maybe even the world's largest building.
Yeah.
Is it such a stretch to think that you might be able to produce vehicles in that facility?
Well, just in terms of making battery cells, modules, packs, motors and power electronics, just on that basis, then of course, the Powerwall, the Powerpack. On that basis alone, it was expected to be the largest building in the world, of any kind. I mean, you could put three Pentagons, more than three Pentagons in the building. Four Pentagons? I don't know, a lot, just in the Gigafactory. It's really difficult to appreciate the magnitude of the structure unless you actually visit it, there's room to expand.
Okay, thank you.
Thank you. Our next question comes from John Murphy with Bank of America.
Good afternoon. I just wanted to follow up on the CapEx topic. I mean, you guys did kind of fade down your expectation for, you know, CapEx ahead of or in conjunction with the Model 3 launch from $2 billion- $2.5 billion- $2 billion. The, you know, the spend this quarter was, you know, relatively, you know, low, at least relative to what, you know, the run rate implied. I'm just curious, is there some level of capital efficiency that you're coming across? I mean, could you possibly be significantly below this $2 billion number, you know, ahead of the launch or into the launch?
We're always trying to be capital efficient. That is the underlying theme of every step we take. Clearly some of that is part of it. I think overall we'll be, you know, again, because of this massive scale of payments, whether it's last week of June or first week of July, how many hundreds of millions we end up paying, it's hard to be precise. It's almost like an S-curve of capital spend that we are going through here. I don't think it's any indication of, you know, anything else except timing at the highest level, beyond the capital efficiency that we are continually working on.
Okay. A second question. I mean, residuals seem to keep performing better than you were expecting. Is there any opportunity to potentially lower monthly lease payments to drive higher, you know, unit volume demand going forward?
Actually, I think we, you know, one of the traps that the auto industry has gotten into in the past is having unrealistic residuals and then finding that they're upside down, particularly when a recession came along. We wanna be very conscious about falling into that trap. Yeah, we don't wanna do that.
Okay, great. Thank you.
It's reiterating an advantage that our cars have that cars in the past have not had, no other car has, is that the software keeps getting better. Functionality, we keep adding more and more functionality to the car, even though the hardware stayed the same. If the Model S, if you bought a Model S four years ago, it's way better than when you bought it. That really makes a difference for residuals.
Thank you. Our next question comes from Jamie Albertine with Consumer Edge.
Great. Thank you and good afternoon. On the semi-truck, just very quickly, if I could ask, is the attractiveness of that, you know, sort of vertical that you could sell sort of in bulk, you know, to fewer customers, so more vehicles per customer. Given your partnerships in the past, you know, would you envision partnering with a manufacturer on that side of the business, or would this be more akin to, you know, your sort of go it alone strategy on the auto side?
We're manufacturing that ourselves and most of that semi is actually made out of Model 3 parts, by the way. It's actually using a bunch of Model 3 motors. Revealing too much about the future of it. We're able to use a very high volume vehicle and then combine several motors to have something that I think is actually have a very good gross margin. Like it's, that's just not something that any, that other, you know, it's like you can't do that with like traditional trucks. It essentially allows us to have a very compelling product that has a low unit cost.
Yeah. The incremental complexity of building that is much less than it might seem.
Yeah. Yeah. Exactly.
Because of all the reasons that you're talking about.
Yeah. Exactly.
Are we right to think about that, though, as a contractual sort of opportunity, right? I mean, you go to sort of a handful of fleet operators, and you could sell sort of more vehicles per customer. Is that the right way to think about it?
That is how it would occur. Yeah. It tends to be much more of a straightforward economic decision for the fleet operators. They just look at it and say cost per, you know, per ton, per mile or kilometer. It's like, if it's better, they'll just buy a huge number, and if it's worse, they won't buy hardly any. We're confident it'll be better.
Okay. Great. Then if I just may follow up on the demand questions that were asked earlier. Wondering, as you're getting more used vehicles back into the pipeline, is there any data to support that you're using those vehicles to attract a potentially new customer to the brand? Or alternatively, is there data that would suggest that perhaps it could be cannibalizing some of the newer vehicles? Sorry to dwell on demand, I just wanted to see if there was anything given now we're a few years on and you're getting a lot of vehicles back off lease, presumably, you know, if there's any indication there one way or the other.
I think it's still early days. It's still relatively low numbers, but the indication is that we're introducing a new customer to Tesla at those lower price points.
Yeah. Exactly. The demand actually increases really exponentially as price drops. At one point when we looked at it, I don't know, I think we were looking at the right numbers, but the demand at the Model 3 price point appeared to be somewhere between 30 and 70 times higher than at the Model S price point. Well, I mean, look at it like, there's 100,000 premium sedans sold in the U.S. every year.
I think we're about a third of that. There are 17 million vehicles in total sold. Premium sedans are like nothing, less than 1% of the market.
Half a percent.
A 7 Series customer for your brand new and a 5 Series customer for your sort of used is maybe the right way to think about it. Is that fair?
A 3 Series customer for the used as well. Yeah.
Okay. Understood. Well, thank you so much for the question. Taking the questions.
Yep.
It is interesting to consider the magnitude of this was really maybe underappreciated. Like just consider 17 million cars, light and trucks sold in the U.S. per year, of which only 100,000 are premium sedans. We have a 1/3 market share. If we can replicate that in other segments, the results are obvious.
Okay, before we go on to the next question, I want to do just a time check here. We're at the hour mark. We have five more analysts that want to ask questions. Do you want to go on for a little bit longer, Elon?
Yeah, we can go a little bit longer.
Okay. Cherie, let's take the next question, please.
Thank you. Our next question comes from Brad Erickson with Pacific Crest Securities.
Hi. Thanks for taking my question. Elon, I think a couple of years ago you'd said you could envision at some point stepping away from Tesla as CEO anyways towards the end of the decade as Model 3 kind of got up and running. As you were, you know, likely to be pursuing a lot of these adjacent opportunities, clearly a lot still there on the horizon, but now with some more of these opportunities being a part of Tesla's business, does that change your view of staying actively in place with Tesla longer into the future?
Well, let me just be clear. I intend to be actively involved with Tesla for the rest of my life. You know, hopefully stopping before I get, you know, or too crazy, I don't know. Essentially for, you know, for as long as I can positively contribute to Tesla, I intend to have a significant involvement with Tesla. You know, that doesn't mean I should be CEO. It's like, you know, I think my main, the, like, most valuable thing I can contribute is kind of product design and technology. That's my forte. That's what I like doing. Yes, that's what I would imagine doing in the sort of very long term.
Okay. Cherie, let's go to the next question, please.
Thank you. Our next question comes from Jeff Osborne with Cowen and Company.
Yeah, good evening, and thanks for squeezing me in. I have just two questions. One, Elon, at the TED Talks and I think a couple tweets you had talked about adding three Gigafactories. Just following up to Tyler Frank's question on CapEx needs. Can you just talk about, you know, what your ultimate vision of Tesla over the next few years, Model Y factory, truck factories, truck service centers, three Gigafactories, China expansion? Is all of that gonna be funded with internal cash, or do you see partnerships funding, you know, despite the low margins that the battery industry has? I'm just trying to get a sense of what your ultimate vision will cost.
Right. In sort of incremental dilution along the way. It's hard to say. I mean, there's. I'm sure there will be some sort of funding rounds that happen in the future. It's kind of a trade-off between how fast do we wanna grow versus, you know, like, we can grow slower with no dilution, really. For sure, or we could grow at a moderate pace with no dilution. We could grow at a fast pace with some dilution, or we could grow at a very fast pace with a high level of dilution.
10x growth in three years sounds pretty fast to me, but maybe not to you.
Yeah, you know, you have to look and say, going from when we went from the Roadster to the Model S, we went from making around 500 units a year to making 20,000 units a year. That's a hell of a growth, you know, up by a factor of 40.
Got it. Maybe just out of the interest of time, the second question I had is just on, it would be helpful, you know, given that there's hundreds of thousands of people that have put a deposit on the Model 3, can you just update us on what the cumulative U.S. vehicles sold that you have relative to the 200,000 number to get that $7,500 tax credit? You mentioned, you know, elasticity of demand at certain price points, and certainly there's a large contingent of people that put a deposit that, you know, unfortunately won't get that benefit.
It'd be nice to just be able to track that metric as the Model 3 launches in the coming months, we can, you know, see which folks will get that and, you know, what the impact to demand is for those that don't.
I think most people are gonna be able to get it that have put down a deposit. You know, and it doesn't. Yeah, it sort of the credit rolls off. It just, it's not like a complete cliff. The credit rolls off over time. And we are prioritizing U.S. production, which also helps us to keep things simple. It's, we're not making many versions of the car for many different countries. Yeah, so I mean, I think provided somebody's, you know, I don't know. My guess is probably most people down a deposit would be able to get the full tax credit.
Is there a way you could just give us what the cumulative numbers thus far in the U.S., you know, quarter to date or, sorry, inception to date?
No. Here's the problem. If we do that, then people run off and make all sorts of conclusions based on that really have that are not predictive of the future. Because, you know, you can't test drive a Model 3. If you come into our stores and wanna buy a Model 3, we invite you to buy a Model S and X instead. We anti-sell the Model 3. Our net reservations continues to climb week after week. No advertising, anti-selling, nothing to test drive, just deliveries every week.
Got it. Thanks so much.
All right.
Maybe worth like clarifying that on the, under the present regime, the federal income, the tax credits on the car continue even after we hit the 200,000 limit, and they continue for several quarters, but at a slightly lower depleting scale. It's going to be beneficial for customers even beyond the 200,000 mark.
Yeah, absolutely. I should perhaps touch again on this whole notion of, you know, it was all like, over the years, there's been all these sort of irritating articles that's like Tesla survives because of like government subsidies and tax credits driving crazy. Here's what those fools don't realize. If Tesla is not alone in the car industry. All those things would be material if we were the only car company in existence. We are not. There are many car companies. What matters is whether we have a relative advantage in the market. In fact, the incentives give us a relative disadvantage. This is, it Tesla succeeded in spite of the incentives, not because of them. These incentives have limited lifetime and a limited scale.
Like, for example, the federal tax credit, and then that caps out at the 10K. The CARB credits, which the CARB rules are relatively weak. you know, we can sell There are some quarters where we can't even sell CARB credits. And when we can, it's, you know, maybe $0.50 on the dollar or something like that. Whereas the other car companies get to fully absorb the value of the CARB credit. that, for example, gives GM roughly somewhere like $7,000-$10,000 advantage over Tesla for their, the Chevy Volt. that's why, like, you know, like, why we're like, well, GM appears to be losing $10,000 a car on the Volt. No, they're not.
They're making it up in CARB credits. They get the full retail value of the CARB credit, whereas we get the wholesale value when we're lucky. The CARB credits are only effective at approximate of about 20,000-30,000 vehicles a year. That's why you'll see, mark my words, it's not gonna be any higher than that for the Chevy Bolt. That's, you know, on the order of 25,000 units a year or, you know, one-tenth of our initial production rate for the Model 3 or one-twentieth of what Model 3 will be next year. Tesla's competitive advantage improves as the incentives go away.
This continues to be something that is not well understood. Hopefully, I didn't mention that the those Nevada tax credits, which, you know, with the for the Gigafactory, it makes it sound like we got a $1.3 billion check from the state of Nevada. We did not. Those tax credits are made up. The vast majority of it is just sales and use tax abatement on equipment in the Gigafactory. Taxes that otherwise wouldn't have been there because there was just a bunch of rocks there before. You don't get a lot of taxes from rocks. That's why it was essentially a no-lose proposition for the state.
And in order for us to actually earn $1.3 billion in tax credits for the Gigafactory, we have to generate over the course of 20 years about $100 billion in output from the Gigafactory. Yeah, it's worth about, like, 1%. No one, no one looked a gift horse in the mouth, and we appreciate it, and that's nice. But this is obviously 1% is not the difference between success and failure of the factory. A lot of articles write it in the past tense. Tesla received $1.3 billion. No, we haven't. We did not receive that. If somebody wants to send us that, great, we'll take it. But, I mean, looking at the bank balance, don't see it there.
That's because it's just sales and use tax payment over 20 years. The more Net, the key takeaway is that Tesla's competitive advantage improves with scale. It doesn't get worse.
Okay. Thanks, Elon. Let's go to the next question, please.
Thank you. Our next question comes from Joseph Spak with RBC Capital Markets.
Thanks. Just a quick one on service. You know, by our math, if you look at the cumulative number of vehicles you've delivered, and the amount of stores and service stations delivered over are something around 700 per, I guess, station. I realize you're adding some more of these mobile units. I just wanted to know bigger picture, how you think about coverage in a more steady state or at least at, you know, a half a million unit rate. What is the right level of coverage needed for the larger fleet?
I think, rather than thinking about store or service center locations, we think about it in terms of mobile units and lifts. We are building larger service centers over time that have more lifts. Our initial service centers, it might've had two or three lifts. We're building now service centers with 40- 60, sometimes 80 lifts. There's a density within the service centers, but the mobile, the mobile capability expands that, expands that quite greatly. I think a lot of people do incorrect analysis to take cars and service divided by locations, because it, you know, the locations vary so widely. That's essentially how we're thinking about capacity and planning capacity.
As Deepak mentioned earlier, our throughputs and efficiency are getting much better over time, and we'll continue to improve those. It's our goal to stay ahead of the installed base capacity, so we're providing great service. Really, the Model 3 has been designed for high reliability and as Elon has said many times, the best service is no service at all.
Exactly. Our aspiration would be, we make zero service revenue 'cause the car never breaks.
Absolutely. Our service centers are sort of like the old Maytag repairman.
Right.
Yeah.
Thank you.
Thank you. Our next question comes from Robert Cihra with Guggenheim Partners.
Hi. Thank you very much. Two quick ones, I guess, if I could. One just on energy. Your megawatt hours declined sequentially, which has seemed surprising, thinking demand's well above supply still at this stage. When we could expect any more meaningful ramp there? Separately on automotive, given that you seem to be in the mood to talk about future unveils, which is great, any chance I could push that by asking about the future urban transport bus?
Sure.
refer to it as. The reason I ask is because that one seems a lot less about the product and more about just a completely different model for transportation and requiring full autonomy and that sort of thing. I mean, is that the kind of thing you're thinking three years from now or 10 years from now or anything in between? Thank you very much.
Sure. The, you know, with respect to the battery stuff, it's a little lumpy right now because we, you know, had a big installation in Q4 with Southern California Edison. We had a bit of a gap between the Powerwall 1 and Powerwall 2. We should start to see that correcting in Q2, Q3, and in particularly towards the end of this year, I would expect quite a dramatic ramp in storage deployment, like really dramatic.
Yeah. It's worth pointing out that we do still have a significant backlog in Powerwall demand. You know, we're building capacity to address that and ramping it. You know, we had a few, you know, challenges in parts of the supply chain as we've been ramping that throughout the quarter, the Q1. Those are freeing up, and we're seeing the production rates improve week on week. Yeah, it's not indicative of demand. It's really, you know, our challenges with ramping the new products.
Yeah. like I said, I feel like really good about quite dramatic quarter-over-quarter increases. I think well, for every quarter I can imagine in the future, it's gonna be really dramatic increases in stationary storage output. It'll grow faster than the car volume, and the car volume is growing pretty fast.
Okay. The bus?
On the bus, yeah. You know, having given a bit more thought to it, I don't know if the bus thing, if that's actually gonna be something that makes sense in a shared, fully autonomous environment. Because, you know, if you have a shared, if it costs very little, like it costs less than a bus ticket to have make use of a shared autonomy fleet to go wherever you want, point to point, well, why wouldn't you just use that? I don't know. I don't know if the bus thing. It does help with density to some degree.
You know, you could basically have something like a higher density Model X or something like that's got, say, 10 or 12 seats in it. Would you want more than that? I don't know. When you factor tunnels in, you know, the ground tunnels, as you might. The density, urban density and traffic, I think, can be fully alleviated with tunnels. It's more like the tunnel thing, we talked about a bit about that at TED. Interestingly, like the commentary out afterwards was, as far as the critics or the critical commentary was, there's a group that thinks that the whole sort of automated tunnel with electric skating, or basically like the tunnel thing.
There's a group that says it's obvious, and there's a group that says it's impossible. I would like those two groups to meet. You know, sort of like there's a group that is like the Flat Earth Society and the Hollow Earth Research Society. I think they should meet too. Have a debate.
Cherie, why don't we take the last question, please?
Thank you. Our final question comes from Charlie Anderson with Dougherty & Co.
Thanks for sneaking me in. I wonder, you mentioned anti-selling before of the Model 3. Is there a level of production where you flip from anti-selling to selling? Thanks.
Well, I don't know, maybe later this year. Probably not for the next six to nine months.
Thanks so much.
All right. Thank you, everyone, for joining us today. Have a great day.
All right. Thanks.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may all disconnect, and have a wonderful day.