Good day, ladies and gentlemen, and welcome to the Tesla Q4 and full year 2016 financial results and Q&A webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should look for our operators' assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Evanson of Investor Relations. You may begin.
Thank you, Vicky, and good afternoon, everyone. Welcome to Tesla's fourth quarter and full year 2016 Q&A webcast. I'm joined today by Elon Musk, JB Straubel, Jason Wheeler, and Jon McNeill. Our Q4 results are announced in the update letter at the same link as this webcast. During our call, we will discuss our business outlook and make forward-looking statements. These 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. We'll start today's call with some brief comments by Elon, followed by the Q&A session. During the Q&A, try and limit yourself to one question and one follow-up, please, and press star one now to join the question queue. Okay, Elon, over to you.
Thank you. First of all, I'd like to announce that our CFO, Jason Wheeler, has decided to leave Tesla in April, so that's kind of next month, to pursue opportunities in public policy. Jason will be replaced by Deepak Ahuja, who was Tesla's first CFO and worked for the company for more than seven years before stepping away in 2015. Deepak will formally take over as CFO in early March and with Jason remaining at Tesla through April to ensure a smooth transition. Let's see. Jason, would you like to say anything?
Yeah, sure. First, Elon, you know, thanks for the opportunity.
Thank you.
It's been a great ride, I'm really gonna miss working with all the wonderful people at Tesla. This is an A team, you know, when I walked in the door, I was very passionate about the mission of the company. Today, I'm even more passionate than I was on the day I walked in. I think it's also important to say that, you know, I'm looking to scratch an itch that I've had for many, many years now. I'm gonna go do something in the public sector. I wouldn't have felt comfortable about leaving if we didn't have a really good plug-and-play solution in place for the company. I think with Deepak's history here on the verge of bankruptcy and everything that he's gone through, he's well positioned to take it-
Long time ago.
Long time ago. Long time ago. He's well positioned to take it to the next level of growth, and I've spent a good amount of time with him in the past week, and he's super energized and ready to go. He's a great leader, and I think Tesla's in good hands.
All right. Well, Jason, thank you again for everything you've done.
Absolutely. My pleasure.
All right. Let's see.
Oh.
Yeah.
Oh, I think we're ready for the first question.
Yeah. Let's just start, dive right into questions.
All right, Vicky. First question please.
Our first question comes from the line of Adam Jonas with Morgan Stanley.
First, good luck, Jason, and, congrats, Deepak. Welcome back. Elon, a question for you on Mars. Let's kick it off with Mars, okay?
Really?
Yeah, it has Tesla relevance, though, so just bear with me.
That, I mean, I admire long-term thinking but, you know. Impressive.
Well, numerous reports have suggested the new administration may be in favor of accelerating a mission to send humans to Mars. I'm curious if you think this is accurate in spirit, and if launched, how could this potentially change your balance of time spent between Tesla and SpaceX? Could it potentially change the rationale of keeping Tesla and SpaceX as independent companies? This is a serious question, Elon.
Okay. Well, yeah. When you started out, I was a little curious as to how this would become relevant to Tesla. You know, as I said before, I expect to remain with Tesla essentially, you know, for forever, unless somebody kicks me out. That remains my intention. I've been pursuing the sort of Mars thing at SpaceX, and sustainable energy at Tesla for a long time, simultaneously. I think it's got into a pretty good rhythm. Yeah. I'm, you know, I don't think, I sort of don't think I'm going to change my actions as a result of, you know, an initiative by the administration.
Although I think a Mars initiative would be amazing, and really energize the public, domestically and worldwide, just as the Apollo mission to the Moon did almost half a century ago. That's, yeah, that's like probably the most I can say.
Okay. Thanks.
That's my understanding. Yeah.
Thank you. Thank you. Just to follow up, on insurance, if your cars prove to be as much as 90% safer than other cars on a per mile basis, as I think you've alluded that, you know, as a reasonable target medium term, and if insurance companies only offer your customers, say, like a, you know, piddling 5% discount, you know, versus a comparably priced car. Would you consider offering a service or product like P&C Insurance directly to Tesla owners from your own platform in your own stores? Thanks.
Jon, do you wanna take that?
Hey, Adam, it's Jon. We're actually currently doing that. And we've been doing it quietly. But in Asia in particular when we started this, now the majority of Tesla cars are sold with an insurance product that is customized to Tesla, that takes into account not only this Autopilot safety features, but also the maintenance cost for the car. It's our vision in the future that we'll be able to offer a single price for the car maintenance and insurance in a really compelling offering for the consumer. We're currently doing that today.
This is not to the exclusion of insurance providers, but, I mean, if we, if we find that the insurance providers are not matching the insurance proportionate to the risk of the car, then, you know, if we need to, we will in-source it. I think we'll find that insurance providers do adjust the insurance cost, proportionate to the risk of a Tesla.
No, that's true. That's true. We're doing this with insurance partners today.
Right.
Okay. Thanks a lot.
Thank you.
Our next question comes from the line of David Tamberrino with Goldman Sachs. Your line is now open.
Thanks. Good evening, gentlemen.
Well, afternoon. evening for you, I'm sure. yeah.
Well, it's been a long day for me. It'll be a long night. Curious as to what has changed on your end. Obviously, you made an acquisition. You've hired a individual in manufacturing from last year. Really moving from the Model S and X to the Model 3 ramp that you're looking for in the back half of 2017 here into 2018, you know, how have you gone about the Model 3 development differently versus the Model S and Model X that will really be able to unlock the key to driving production much higher than what your previous ramps have looked like for new products?
Right. The Model 3 is really designed for manufacturing. It's considerably a simpler car than the S or the X. You know, some of these simplifications are obvious. For example, the Model 3 only has one screen, whereas the S and X have two screens and two separate computers powering each screen. The Model 3 has 1.5 km of wiring. The Model S has 3 km of wiring. We simplified the wiring system considerably. You know, a lot of the bells and whistles that are present on an S and an X are not present on a Model 3. We don't have self-presenting door handles, for example, or Falcon Wing doors.
These reduce the risk substantially in the ramp and make it just easier to scale. I think it's gonna be a very compelling car, but it's just a simpler design, and we also understand manufacturing a lot better than we did in the past. We're also able to get usually the A team at the A supplier for Model 3. It's rare that we're not able to get that, whereas for S particularly for S and to some degree for X, you know, when we were trying to get suppliers for Model S, a lot of the top-tier suppliers wouldn't even work with us, wouldn't believe the car, but they thought we'd go bankrupt.
The IHS, I think it's called, they basically, they made a predictor for volume of the Model S, predicted, had an official prediction of 3,000 units lifetime for the Model S. For a lot of the big supplier, particularly the large sort of conglomerate suppliers, they just plug that number into their predictions. They ignore what we say and then they say, "Well, the volume's either too small to count or the hard cost is enormous because the fixed cost must be allocated over such a small volume." Now in fact, we, you know, we're building something in the order of 50,000 Model S's per year.
Having, you know, shown the results of the Model S and the Model X, the interest from suppliers, you know, went from, like, basically getting like the worst team on second-tier suppliers, to getting the best team on first-tier suppliers. It is really a big difference.
Yeah.
Okay, just following up on that, as I think about reduced complexity of the vehicle, understood. From a actual line speed manufacturing perspective for the Model 3, what are you doing differently from the manufacturing process that is going to allow you to drive that ramp in production? I think about 50,000 units, you know, Model S doing on an annual basis. It's good. It's great. You've been making that vehicle for the last 3-4 years.
Right. As opposed to aiming for an annualized rate of 250,000. At 5x that number for Model 3, it's a reasonable question to ask. There's just a lot more automation than there is for S and X. We have the Gigafactory, of course, that's a huge asset for factory, powertrain, power electronics, chargers, and a few other things. That's a huge asset. I've refocused most of Tesla engineering, including design engineering, into designing the factory. I think in the future, the factory will be a more important product than the car itself. I've said this before, our goal is to be the best manufacturer on Earth. This is the real goal.
Don't know if we'll succeed, but I think we're making good progress in that direction. Yeah. One needs to think of the factory as just an enormous product with at least an order of magnitude more complexity than whatever it makes. JB, you have anything to add?
Yeah, I might just add that, you know, we really learned a lot of lessons, especially from the difficult Model X ramp. You know, that's something that's in our recent memory and we fought through it and succeeded. I think in the design of the Model 3 and the systems and the lines that produce it, you know, many of those learnings have been incorporated from the beginning. The amount of complexity in the operations to assemble the car is dramatically reduced. The amount of operations that involve some level of sort of assembly craft, you know, where there's more judgment of the operator, is dramatically reduced, almost eliminated.
A lot of these things that we could identify directly as the bottlenecks that hurt us on the Model X ramp, we've been able to target specifically and reduce or eliminate. That has, though painful, it was a very helpful experience for us to get ready for Model 3.
I do wanna emphasize with production ramps in general that they follow an S-curve. The rate of production is as fast as the slowest component in the vehicle. When you have several thousand unique items, you know, it can only be as fast as the least lucky and worst executing part of Tesla or our suppliers. This is just the way it goes. You're going through a series of constraints. You try to anticipate as many as possible. There are new issues that pop up every week, and we attack them and get them to solve the schedule. Another issue will pop up in the following week. It's schedule Whac-A-Mole.
You know, if we knew what would be late now, we would have attacked it. Some of these things only come to light late in the game. When you have a global supply chain, you inherit a lot of force majeure risk from around the world. Actually, that's one of the things that I think we wanna do is minimize force majeure risk. Because if you inherit, like, every force majeure risk on Earth, then of course things are gonna go wrong because Earth is big. I think we're gonna, you know, increasingly over time, rationalize our supply chain to minimize the force majeure risk. It's very important. Yeah, It's always tricky being a public company, you're reporting on a quarterly basis.
Even small differences in where that exponential part of the S-curve is can make quite a big impact on the quarter 'cause If you imagine date lines moving around an exponential curve, just small changes here and there have quite a big effect. Then things get more predictable as you get to the flat part of the S-curve, the top of the S-curve. That's why it's a lot easier to predict, say, what things would be next year, or the end of this year, as opposed to what they'd be month by month this year.
Understood. Thank you very much, gentlemen.
Great.
Our next question comes from the line of Ryan Brinkman with JP Morgan. Your line is now open.
Great. Thanks for taking my question. Just regarding the explanation in the shareholder letter that you experienced little Autopilot revenue, little new revenue in 4Q. Can you talk about what delayed the software updates into 1Q? Was it the switch from Mobileye in any way? Then talk about how the current capabilities of Autopilot in 1Q in terms of performance and safety, how that's better than maybe what was on offer previously.
Yeah, we had some challenges in the transition from Mobileye to Tesla software running on a GPU. Our original plan was to have a migration strategy where we have Mobileye and Tesla Vision operating at the same time to have a kind of a smooth process. Mobileye refused to do that, so that forced us to respin the board and caused unexpected delays where we had to basically rip their chip from the board and like kind of cross the Rubicon on Tesla Vision. Safety is always our primary concern, so, you know, we could have released Tesla Vision, including Autosteer at high speed, probably three months ago.
I was driving it at high speed personally, three months ago. I think we wanna just have an exhaustive testing process and vetting process before enabling that throughout the fleet. We've been edging our way up there gradually. Now, longitudinal control or Traffic-Aware Cruise Control is at 80 mi an hour, and Autosteer's at 50 mi an hour. I think we should be able to get, you know, both, at least the car, you know, unless testing shows something different, we should be able to get them both to around the maybe 85 mi an hour next month, and be at parity with Hardware 1. Obviously things will only improve from there.
That's great to hear. Just last question on the $500 million cash generation outlook, including growth of non-recourse debt. How much of that relates to, you know, the automotive operations versus SolarCity? Maybe you probably don't want to break it out that way. How are you thinking about the contribution from, like, tax equity funding versus, I, maybe call it, combined, like, Tesla, SolarCity, like, ongoing operations?
Sure, yeah. This is Jason. That commitment that we made when we closed the deal was on the solar side. That's what the $500 million relates to, and that's gonna come from, you know, a number of factors. One of the things we're already starting to see great traction on is a shift away from leasing systems to doing loans and cash sales of systems. We provided some information in the letter about that. That's going well. We've also done that on the vehicle side, is worth noting. The other thing is, as part of the acquisition, we committed to $150 million in synergies. Some of that cash generation is obviously gonna come from going after those synergies. We're on track to go get that.
We've got lots of opportunities on customer acquisition costs. Tesla has a very strong global brand. We've got a great retail footprint. We've got the pieces in place to really drive customer acquisition costs down. Obviously on the manufacturing side as well, we're really thinking through what that's gonna do for us and how we can drive cost savings there as well.
Great. Thanks for that color.
Sure, no problem.
Our next question comes from the line of Joseph Spak with RBC Capital Markets. Your line is now open.
Thanks. First question I guess relates to the delivery guidance, which I know you limited to the first half. As we think about the full year and the back half, is the launch of the Model 3, is there the potential for disruption to S and X? Is that also, you know, one of the factors why you're sort of, you know, decided to sort of guide the way you did?
Go ahead.
Yeah, sure. I think the way we're thinking about that is there's gonna be pretty high error bars on the deliveries that we need for Model 3 in the second half of the year. And I think you wanna describe that well when you talked about the S-curve. We didn't wanna muddy our guidance by doing some kind of a combined number for the year. And, you know, obviously execution on X and the S and execution on getting ready for Model 3 in the first half is what's important. And those are the things that we really wanna point investors to and how we're measuring ourselves.
It's just calculating the area under the curve is tricky when you're in an exponential. It always starts out tiny, and then spools up. Well, it spools up exponentially. Generally people have trouble wrapping their minds around an exponential. The natural tendency is to extrapolate on a straight line. The, you know, it's just that's why it was important to emphasize that this spool up is an exponential. It does get into a linear zone, and then it goes into a logarithm, a log curve. Yeah.
Okay. Then, I guess just to follow on that, I was wondering if you guys would be willing to indicate when you think configuration for the Model 3 would open. Separately also, Elon, you know, there's been a lot of news or noise around unionization at Fremont. I was wondering if you guys could give a little bit of color on your views of potential unionization, and if it did occur, sort of how that changes the cost structure.
Sure. Well, there is obviously quite a strong effort by the UAW to unionize Tesla. Actually got a lot of people at Tesla who have been approached by UAW have expressed concerns about this. There were also a number of claims made by someone who I think is de facto an employee of the UAW, but at Tesla. There's a blog piece I'm hoping to publish next day or two because I wanted to make sure I fully investigated the claims before writing a blog piece. You know, the fact matters over the last few months, Tesla's injury rate is less than half of the industry average, the contrary to allegations made.
The compensation, if you look at somebody who started four years ago, the vesting period for Tesla stock is four years. If you said, what is the outcome for somebody who started four years ago, is by far the highest in the auto industry. There was an allegation that people are underpaid at Tesla, but in fact they are the highest paid in the industry, if you include the equity, which obviously you should include. There are really only disadvantages for someone to say that to want the UAW here. I mean, the track record is worse than every other company. I don't think this is likely to occur.
Okay. Thank you.
Our next question comes from the line of John Murphy with Bank of America.
Good afternoon, guys. This is Aileen Smith on for John. First, in a more high-level question, I realize it's still very early days in terms of the new Trump administration, but with Scott Pruitt now head of the EPA, are you anticipating any changes with respect to the oversight or regulations under CARB and its relationship to the EPA? Elon, is that coming up in your meetings with the Trump team at all, or any of the discussions? How would you respond in the event that regulations and standards or the potential to generate ZEV credits were to be altered?
Sure. Well, it's only come up briefly. My response is that, you know, I think it would be fine to get rid of incentives and subsidies, but that should be uniformly applied to all industries. It would also be wrong to get rid of any sort of government intervention in sustainable energy while retaining it in fossil fuels. That if the principle is to get rid of government intervention, that should be uniformly applied, but unfairly applied. That's the only thing. Those were my comments, but there was no response given. They listened to that and, you know, and that's sort of, you know, that's how I feel.
As I've mentioned on a prior call, the reality actually is that if electric vehicle incentives went away tomorrow, Tesla's competitive position would improve. Part of the reason why GM is able to sell the Volt at the price that they are able to do while on paper making a loss is that their ZEV credits are worth twice as much as they are to Tesla, 'cause they get the full retail value of the ZEV credits, which is worth about $10,000 more to them than it is to Tesla. We get basically $0.50 on the dollar when we can sell the ZEV credits, which is not always.
Last quarter, we were able to sell only a tiny amount of ZEV credits, 'cause the ZEV mandate is just already really weak. Yeah, the irony of getting rid of it would actually improve our competitive position. ZEV credits only apply to 14 states in the U.S., only 14. They don't apply it nationally. Yeah, then things like the federal tax credit for electric vehicles caps out at, I think 200,000 cars. We're not far from that point. Like, basically credits either don't scale to the high volume or they're disadvantageous to Tesla. Yeah.
Even in California, which is our home base, the California legislature put an income cap on anyone who could get a, the California tax credit for EVs, which then excluded a whole bunch of our customers, which I think is counterproductive to the biggest manufacturer and player in California. Why the hell the legislature did that, I do not know. It was harmful to the state.
Okay, great. That's helpful. Then sort of a second question. You guys gave some helpful disclosure in terms of the vehicle order growth for the Model S and the X in the quarter. Can you talk about the order growth for the Model 3? The last measurement that we received on the size of the wait list or the order book was 400,000 ± . Can you talk about how that's grown over the past few quarters? I mean, if we look at the customer deposits on your balance sheet, it actually declined sequentially from 3Q to 4Q. How much, if any of that, is related to the Model 3?
Yeah, sure. This is Jason. It's not related to the Model 3. We still have a number of Signature Series Model X reservations where there was just a higher deposit required for those cars, and we were able to deliver a number of those in Q4. That's the primary driver behind the total reported decrease in the customer deposit decline.
Okay. Can you give any size of the order book for the Model 3 as it stands right now?
We're still in great shape.
Yeah. We don't report that number because people read too much into it. Yeah, exactly. As Jason saying, like, that is really not our concern. Yeah. We anti-sell the Model 3.
We don't wanna make a line longer.
Yeah.
Okay.
Good point.
All right. Thank you very much.
Our next question comes from the line of Colin Langan with UBS. Your line is now open.
Oh, great. Can you, in the press release, you give comments on margins for the first half of the year. Any broad color on how we should think about margins in the second half, particularly as the Model 3 launches? I mean, will that be profitable day one, or is that gonna take some time for that to ramp? Any color there?
For halves, that it will not be profitable on day one, because of that exponential issue that I mentioned. The early Model 3s will be like terribly negative margin, particularly on day one. Literally, when I say literally day one. Because you're starting at a tiny rate as you spool up this giant machine. Like no company on Earth could This is not a function of Tesla, it is, like, physically impossible. You have to get the production rate to some reasonable capacity percentage of the system. Of, you know, if the capacity of the production system is X, until you're at least like half X, your gross margin's gonna be weak.
It's gonna be terrible when you're like an order of magnitude below, or, you know, if you're 10% of X like or less, it's gonna be terrible. Then it'll get really good as you start to approach capacity. Then it gets great. Then as we get to the initial phase of capacity of 5,000 a week, I would expect to see gross margins comparable to that of the S and X.
That's next year that you should get to the 5,000 per week, is that right?
Well, I'm, you know, I feel pretty confident that we should get there by the end of this year to 5,000 a week. Now I do wanna separate this from parts orders. I know a number of our suppliers are listening. It's impossible to keep it I mean, like nothing is a secret these days it seems. You know, it's like major intelligence organizations can't keep a secret. It's like really I don't know who can, honestly. You know, when we place parts orders with our suppliers, you know, we've told them 1,000 a week in July, 2,000 a week in August, and 4,000 a week in September.
These are parts orders, and the parts need to arrive, then need to be turned into a car. The car needs to be delivered to customers. None of these things occur instantaneously. We have what I call like maybe the term paper problem of like, I was a teaching assistant in college, and no matter what date we set the exam paper for, about you know, when the term paper was due, it's, there's always like some number of people that are late. It's just the way it goes. You know, people are sometimes, well, and I'm guilty of this too, like too optimistic about the timing or they get unlucky or something like that.
We have to set these really strict dates, then some number of people are late, but it only has to be 1%, and then we'd have to make those parts manually at great cost or slow down the production rate. When I say great cost, when you make something manually as opposed to through mass production, it can be 10x, 20x, 30 x more than a part that's made that's handmade as opposed to made with high volume production. That's essentially I'm trying to give you like what's the, what's the problem space look like in my head so that you can at least try to model it. I mean, you know what I know.
If I knew which 1% of suppliers it was right now, I would obviously take action. I don't, because, you know, I don't know who's gonna be unlucky. I don't know who's, you know, being overly optimistic. But that's the 1,000, 2,000, 4,000, those are the deadlines we set out for our suppliers for parts delivery, then parts get made into cars need to get delivered. Those are three separate steps.
Great. My last question is just any color on cash burn? I think last time you mentioned that you were confident you wouldn't need a capital raise. Do you still feel that way? I mean, I think it was close to $1 billion in the quarter, and it sounds like CapEx is gonna rise next year. How should we think about the cash burn cadence and the confidence in no capital raise going forward? Thank you.
This is really a question of what's the risk tolerance of the company, or how close to the edge do we wanna go? According to our financial plan, no capital needs to be raised for the Model 3. We get very close to the edge. That's probably not the best thing for shareholders, on a risk-adjusted basis. We're considering a number of options, but I think it probably makes sense to raise capital to reduce risk.
Got it. All right, thank you very much for the color.
Hey, Colin, I just want to add a couple of points there, too. Sure, on the cash statement, you see $1 billion in cash burn, but I don't think that's fully accurate. We had $522 million in CapEx, so we're investing at a very healthy rate ahead of what we need to do for Model 3 and then there were certainly some timing differences. We talked about in our deliveries press release, we had 2,750 cars that we missed delivering them by a couple of days. I think there's a little cross-quarter timing going on there, and it's not indicative of what cash flow from operations is gonna look like in the future.
To circle back to your point and one of the questions from earlier about what's different about Model 3, I thought maybe I'll provide just a little bit more color on costing. This will help you think a little bit about margins on a go-forward basis, too. From the very beginning of the Model 3 program, the costing of the car was front and center and has always been a key part of the conversation and the decisions that have been made. It goes all the way back to first principles as Elon likes to talk about. On a part-by-part basis, we've been looking at what is the value of the commodities in that part, what's a reasonable cost to fabricate the part, and what's a reasonable margin on top of it.
That's been the starting point for costing for everything that's gone into the Model 3. The other thing that's important, and we've talked about this a lot over the past couple of quarters, is just being more efficient with our capital spend. JB's done a fabulous job with this up at the Gigafactory. I don't know if you had a chance to attend the event or not, but the volumetric efficiency there is quite stunning. If you can do more in a smaller footprint, the capital required is less, and the less capital that's required to do things, the less the depreciation load is gonna be on each unit produced once you get to volume production and deliveries. Sorry, I just thought it'd be good to add that additional color to your comments and your questions.
Thank you very much.
It's sort of just applying the rocket equation to manufacturing. You know, essentially, well, the rocket equation is taking its mass efficiency, but, like volumetric efficiency of the factory, as Jason was mentioning, and exit velocity of product from the factory. It kind of distilled down pretty much to just those two things.
Got it. All right, thank you very much.
Our next question comes from the line of Brian Johnson with Barclays. The line is now open.
Yes, good afternoon. Just a few questions about the cash flow and cash CapEx and cash needs. You know, first, you know, I recognize that you're now consolidating in SolarCity, but if you were just to very roughly give us what the old automotive adjusted cash flow was and try to kinda disentangle that from the cash flow coming out of the former SolarCity, you know, what would that roughly look like directionally?
Sure. I think we put in our letter the cash generation was about $70 million. SolarCity was actually a cash generator for the five-week stub period. Some of that was the cash and tax equity deals closing. The way to think about SolarCity on a go-forward basis is prioritizing cash generation /preservation over the near term for that business. I don't anticipate any significant impact on our cash position in future quarters.
Okay. Secondly, the $2 billion-$2.5 billion CapEx guide, net spend. Couple questions. Does that imply that's not a full year 2017 number given that production cadence that you're planning?
Correct. That's between now and the start of production for Model 3.
Okay. Second, can you talk a little bit more about the deferral of cash out for CapEx due to agreements with suppliers or some of those equipment suppliers to defer payments? Just, you know, what are those agreements? Where does that liability show up on the balance sheet? Then, you know, is that hard as soon as they deliver a proof part, does it come due? How does the actual timing of that payment work?
Yeah, sure. Absolutely. I think this is, you know, one of the benefits of having a very successful run over the last couple of years. We have developed a lot of trust with our suppliers. You know, when I started, we asked for, okay, what's our average days payables outstanding, and it was lower than it should be. We've been able to renegotiate payment terms with just about everybody and stretch out those payables. It's not a question of just not paying. It's actually we have trust, and we're renegotiating these contracts with suppliers. I believe we shared this data point last quarter on the call, but for the parts that have been sourced for Model 3 so far, the average payment terms is 59 days.
Cash conversion cycle is something that we care deeply about and we're paying, you know, a lot of attention to. Obviously as we head up this S-curve that we've talked about, working capital is gonna be very important. We're gonna have to keep a good eye on that. To sum it up, we're making great progress in stretching out our payables, and we're doing it in a way that I think is productive and healthy, with the relationships with our suppliers and vendors.
Okay, those deferred capital expenditure payments are actually in the accounts payable or is it in more like an accrued liability line? Just asking.
It depends on if many payments have milestones set to them, so when the piece of equipment is actually installed and up and running. Until you hit that milestone, you won't see a payable.
Okay. Thanks.
Sure.
Our next question comes from the line of Jamie Albertine with Consumer Edge. Your line is now open.
Great, thank you, good afternoon. Let me just add my congratulations to Jason, and best of luck and welcome back to Deepak. If, if I may quickly, you know Elon, you mentioned in response to a ZEV question earlier, the 14 states, or I believe it was, that sort of share the these standards and allow manufacturers to sort of earn credits, buy credits, allow you to sell credits and so forth. Understanding that to the extent that a competitor vehicle is sold in California, it counts toward their quota, if you will, in other states, and that the waiver that allows that might be expiring later this year.
I'm just wondering, number one, if that's correct, if I'm thinking about that the right way, and how that would theoretically impact your business. You've talked about how if sort of these $7,500 federal I know I'm mixing ZEV and GHG and so forth, but you talked about how it could theoretically be a competitive advantage for Tesla. I'm just wondering if you could sort of opine on that.
Well, it's just that in order to scale, like, since the ZEV mandate is so weak, you know, it's like less than 1% or some tiny number of vehicles made in the ZEV states or sold in the ZEV states, we're the only ones who currently make a car in California. I do think California maybe should do a bit more to support its only remaining auto manufacturer if those can be competitive. The, you know, yeah, you know, it's weird that they seem to do more to support non-California companies than Tesla. It's this mandate becomes irrelevant at scale, because like, you know, Tesla will have as many, you know, more ZEV credits than the rest of the U.S. industry combined.
The value of them just drops to a negligible number. Since the mandate is so weak, like the major manufacturers don't really need to sell them either because they make whatever the, you know, puny amount of electric vehicles are, 20,000 cars maybe. We're making, you know, 20x- 30x that number. You know, this is just, they're just not important to that scale because the mandate is too weak.
Yeah, understood. I was just sort of getting at the fact that maybe, you know, if the Bolt sale in California doesn't count toward New York or something, that it's actually it's a weaker, it's tougher for, you know, your competitors than it even is today. That's more what I was alluding to, and I agree with you that the mandate doesn't make a lot of sense.
Yeah, they're just very weak. Yeah, they will have almost no impact on Model 3, like maybe for a few quarters, that's about it.
Okay, great. If I may on the Model 3 quickly, then I'll get back in queue. The vehicle we've seen, is that a pre-production version or is that the fully, you know, the version you plan to fully produce? If not, you know, when could we maybe expect to see the fully sort of finished product? Just to get an idea of, you know, you alluded to at the Gigafactory a couple months ago, there's still some suppliers that you wanna make sure, you know, you're lining up properly to get everything, ready to go for July 1. I'm wondering if, you know, the revealing of the final production-ready version, you know, could be between now and then sort of an additional catalyst.
I'm not sure if it's going to make sense for us to show the final version before we start production or after. The initial cars are going to sort of Founder Series actually go to company employees because I think it's important for us to have a good feedback loop on the product that we're making. And, you know, if there are any issues or, you know, bugs or things that need to be addressed that we can address those before customers experience them. I think, you know, in terms of showing the final version, it's probably at least a few months away, maybe as far as July itself.
It's gonna be pretty close to what I showed at the Model 3 unveiling, but with more polish and refinements and a few more details that are added. It'll be, you know, better than what was unveiled and I guess in some ways it'll be a lot better.
Okay, great. Thank you so much for taking the questions, and best of luck.
Thanks.
Our next question comes from the line of Colin Rusch with Oppenheimer.
Thanks so much. You know, given the dependency on the Model 3 profitability on the Gigafactory, can you talk about timing for full ramp on both the anode and cathode assembly? Then I have a follow-up question on the debt that you drew down in the fourth quarter.
I'm sorry, you mean the full ramp, to what level? To the 35 GWh per year, or?
No, no. This is a modular facility, right? You've got, you know, machines up and running. Just the first tranche of equipment that you've installed, when is that gonna be up and up and running at full capacity?
They're very big modules.
Yeah. They're pretty large increments. Those will be up and running at full capacity for the first instances, you know, within just a few months. We're already in the stages of beginning the second instance of anode and cathode, the electrode assembly. I mean, these are needed for the ramp of Model 3.
You know, kind of done in the second quarter then is what I'm hearing you say.
First module. Module's a confusing term because we actually have a module. The battery pack is divided to cells, modules, and packs.
First instance of the electrode-
First line.
... production.
Line one, if you will, of It, it should be, well, it's, yeah, in the next few months operating.
Yeah, and, you know, that first instance would be, you know, achieving full volume, you know, in the first in Q3.
Okay, great. On the $969 million that you've got in the bucket of debt activities, can you talk about where, you know, just break down where that debt came from and how much borrowing capacity you have entering the year with your current facilities?
Oh, well.
No.
The debt activity just comes from draws on our asset-backed line and our warehouse lines. We've got a lot of cash in transit as we move through the quarters, particularly at the end of the quarters we're making deliveries. We just wanna make sure we have maximum liquidity as we close our quarters.
It's particularly asset light, essentially it, that's almost entirely a finished product in transit to a customer, to a known customer. It's not general corporate debt. It's just like we finished the car, and it's gonna be transported to a customer overseas, and it may take, you know, four to eight weeks to get there.
That's right, that cash has been largely realized.
Yeah. Yeah. Yeah, exactly.
Okay, where How can we think about borrowing capacity at this point on a go-forward basis?
We still had incremental capacity at the end of the quarter. We made some announcements on this. We've increased our warehouse lines, which is a way for us to pull cash forward on our lease portfolios. That's gone from $0 earlier in the year to $300 million, and then we added another $300 million. We've got $600 million in capacity there. Our ABL has gone from $750 million at the beginning of the year to $1 billion - $1.2 billion. As we continue to build assets, you know, we've got this ability to use them to bring cash forward.
That's separate from general borrowing capacity.
Yep, non-recourse debt.
Yeah.
Okay. We'll take the rest of it offline. Thanks, guys.
Our next question comes from the line of Tyler Frank with Robert Baird. Your line is now open.
Hi, guys. Thanks for taking the question. Elon, I guess this is for you. You know, taking a step back and looking at the bigger picture, you'd previously talked about producing 1 million units per year by 2020 and, like, 500,000 units in 2018. How confident are you now in both of those targets? Does anything need to be done from the battery perspective side in order to reach those targets? Would you need to build another Gigafactory prior to hitting 1 million units per year in 2020 or do you think that the current Gigafactory will have enough capacity?
Yeah. Depending upon you're seeing the average pack sizes, but if you say it's somewhere around the 60 kWh - 70 kWh level, then you need, I guess 70 GWh, to get to 1 million units. We think that's the cell level. Then we think the Gigafactory should actually be able to do, yeah, in excess of 100 GWh. That leaves, you know, probably Gigafactory 1 can manage, it can support on there probably 1 million vehicles a year, plus maybe something like 30 GWh or so of storage, depending upon, you know, how fast the storage market grows.
We think the storage market's probably going to grow maybe twice the rate of the automotive business, something like that.
Okay. Are you still on track, do you believe for 1 million vehicles in 2020 and 500,000 in 2018? You know, as a quick follow-up to Model 3, you had previously talked about 20% gross margin on that. When do you think that margin target will be able to be achieved?
Yes. I currently think that we should be able to do 500,000 vehicles next year and 1 million vehicles by 2020. You know, that's that's, yeah. 500,000 vehicles. 500,000 vehicles in total, you know, S, 3, and X combined next year should, I can't really, you know, as far as I, the information I have at my disposal right now, I believe that that is the most likely outcome. With a couple more years, getting to 1 million units, that seems also the most likely outcome. Yeah.
Okay. Just a quick follow-up. Obviously with Jason leaving, you know, it leaves a little bit of breadth, but obviously Deepak is welcome back. I mean, how should we think of this as a permanent situation? You know, how should we be thinking about the CFO position going forward?
Yeah, Deepak has come back in a long-term role, so this is not an interim capacity.
Okay, thank you.
Our next question comes from the line of Rob Cihra with Guggenheim Partners. Your line is now open.
Hi, thank you very much. Just wonder if I could ask a little more about the CapEx. I know you were talking about sort of CapEx up until Model 3, but can you give us any kind of breakout for maybe for even just in percentage terms looking throughout the year, you know, how much CapEx you're thinking for Model 3 versus Gigafactory and versus solar?
Sure. You know, we don't break down, we don't disclose the specifics here, but obviously Gigafactory and Model 3 are gonna be the biggest investments. We've also got CapEx investments in equipment and tooling related to Model 3. Also there's gonna be a piece in CapEx on building out our service and our retail infrastructure as well, and the Supercharger network. It's the usual suspects.
Solar Roof, the Solar Roof tiles.
Yeah. I just like, ask one more. On that Solar Roof tile, I mean, you are looking to start production, I guess, whatever later this year or ramp capacity. I mean, is that a meaningful amount of CapEx for that? Or relatively speaking, is it not?
Relatively speaking, it's not.
Yeah. Yeah, it's pretty modest and, you know.
Well, we were talking sort about whopper, you know, insane numbers for-
Yeah,
Model 3 and Gigafactory.
It will be.
It's they're little cute by comparison.
Yeah. We'll be scaling that in the Tesla Solar Factory. It's helpful that that facility already exists. We don't have to invest in CapEx.
Yeah, that's-
For a new factory or something like this.
Right.
Also, frankly, a lot of the equipment already exists and is already purchased.
It's like-
It's pretty minor.
Yeah.
It will ramp and start scaling at the end of this year.
Single -digit percentage of the Model 3 CapEx.
Yeah.
All right, great. Thank you. If I could just ask a quick follow-up. I think someone started to ask it earlier, but I don't think it was answered, which was just, if you knew when, I'm sure you know. If we knew when you're gonna start opening customer configurations for Model 3.
Probably gonna be pretty close to production. We'll open it internally because, you know, so the first cars will go to Tesla employees and so investors and whatnot and so forth, so that, you know, so we can experience any challenges before customers do. We'll obviously do it internally sooner than we would do it externally. I think it's probably three or four months away.
All right, great. Thank you very much.
Yeah.
Our next question-
Vicky, real quickly, let me interrupt you here. We are on the hour mark. We have a couple more questioners in queue, let's go into the speed round. All right, Vicky, take it away.
Thank you. Our next question is from the line of Jeff Osborne with Cowen and Company. Your line is now open.
Yeah, good afternoon. Appreciate you squeezing me in. Two quick ones. One, was there a solar securitization in the quarter? If so, how large was it? Two, Elon, I believe at the Gigafactory event on January 4th, you mentioned that there was some equipment, stamping tools and whatnot that needed to be put in place in Fremont. I was just curious, A, if those showed up, B, if you can just update us on what needs to be done from just a physical capacity to make the vehicle in July.
Quick answer, no solar securitization in Q4. There is one in Q1.
We're busy building out the stamping facility right now. The open question is not whether the stamping line will be here. It's gonna be here, well in advance of the Model 3. It's like, the question is really how long does it take to work out the bugs in the stamping line? How many iterations does this one have to go through to get it operating smoothly? It'll all be here and it'll be, you know, there'll be a high activity. I'll be personally down there looking at the line as I was when we did the Model S line.
You know, confident that I don't think that's gonna be an issue. There are some long lead stamping tools, the stamping dies, and there's a lot of them. That there's some sort of fairly obscure sounding dies, like there's one die for a seat frame, that, you know, is currently a long lead item. Since we know about it, we're attacking it, that's unlikely to be a schedule driver. The things that are likely to be schedule issues are things that we actually just don't know about today. Anything we know about, we're attacking vigorously.
Great. Thank you.
Okay.
Our next question comes from the line of Charlie Anderson with Dougherty. Your line is now open.
Yeah, thanks for squeezing me in as well. Just a quick one from me on Gigafactory. In the shareholder letter, you talked about Gigafactories 3, 4, and possibly 5. It sounds like you're pretty covered with Gigafactory 1 in terms of the million vehicles, I wonder if you could just speak to the strategy and thinking and timing there. Also if Panasonic would be your partner on those as well. Thanks.
I think we'll reserve, yeah, keep some powder dry for those announcements later this year. There's probably more than enough news for today. I think those announcements will be really quite exciting later this year.
Okay.
All right, thank you. Let's go to the next question.
Our next question comes from the line of Rod Lache with Deutsche Bank. Your line is now open.
Hi, everybody. Was hoping just to get a few more points to calibrate to expected free cash flow break even at the Motors Company. And when you, I guess there's a couple things on this. One is, you mentioned that the CapEx of $2 billion-$2.5 billion is until the Model 3 launch. Could you just give us an idea of what you're expecting for the full year, what the rate would be post-launch of Model 3?
Yeah, right now, like we said earlier, I think we're just focusing on our first half guidance, rather than the second half of the year. There's gonna be lots of exciting things going on in the second half of the year with Solar Roof and Model 3 getting to scale and everything else. We're just focused on that at this point in time.
I mean, there's obviously gonna be a fair bit of incremental investment to go from 5,000 cars a week to 10,000 cars a week, but it's gonna be a lot less than getting to 5,000 cars a week in the first place. We don't know exactly what that's gonna be, except I'm confident it'll be less. Because the first thing we'll try to increase output is, you know, going back to rocket equation, is to increase exit velocity of the line. We don't know exactly where the choke points are gonna be. You know, we try to model it out as carefully as possible, but there'll be things that aren't captured in the model. I think in a lot of cases, we'll simply be able to run the lines faster as opposed to duplicate the line.
That's like, by far the best CapEx maneuver is just make it go faster.
And-
Yeah, I would say it's going from, you know, going from 5,000 to 10,000 is probably. This is a total wild ass guess, so that's the right way to think about it. It's like somewhere between 50%-70% of the cost of the 5,000 line, something like that. If we, you know, get lucky and smart, 50%, it's only half the gain, which obviously is pretty awesome from a CapEx standpoint. I can't imagine it being more than about 70% as much as the original. JB, what do you think?
Yeah, I think that's right. It's maybe helpful to realize that a lot of the infrastructure investments, you know, to get all the way to 10,000 are already complete with Gigafactory in particular.
That's true.
You know, it's not as if, even as if we're starting from scratch to go from 5,000 to 10,000.
That's true. I mean, some things work like, well, you can spend, you know, 10% more, like in a really good case, you can spend 10% more and have twice as much capacity. You're like, "Okay, sure." It's not great in the short term, but it's an obvious a good thing in the long term.
Where there were great efficiencies in the way to lay out, you know, a facility, for instance, as there were at Gigafactory. You know, there, you know, we don't anticipate needing to build much new square footage, for instance, to go all the way to 10,000, even though we would be expanding, you know, the internal production lines while we speed them up and, you know, add new instances of production. The Tesla CapEx would, you know, not be a one-to-one scaling, not even close.
Could you comment on the run rate of OpEx for 2017 for the Motors company or for the whole company?
Sure. I think, the way to think about it is we're gonna continue to drive efficiencies in G&A. We have to do that.
Well, in part because we can't fit people in the building.
Yeah.
It may seem like a silly concern, but like It's really quite difficult.
We have a real volume issue problem. Good constraint to have.
Parking is like one of my biggest nightmares. Like, where do we park everyone? It's like, you know, we can't fit everyone.
Yeah.
We have to make our OpEx better because there's nowhere for people to go.
We're at that stage now where G&A will continue to scale sublinearly with revenue, and we'll continue to always push productivity. Productivity, productivity. Then we'll obviously need to continue to make investments on the sales side. Even in my new ventures, I'll be calling Jon and harassing him about his numbers.
Yeah, well, I should probably point out, like from a demand generation standpoint, like we don't need to make actually any investment for Model 3 in the, you know, probably for the next 12 months. It's actually the delivery of the cars that where the investment is needed. You know, 'cause you can deliver, you know, 3x or 4x as many cars. We don't wanna have 3x or 4x as many delivery centers. How do we make that delivery process more streamlined, less paperwork, less bureaucracy, you know, get people ahead of time with really well-produced instruction videos for how to use their car. Although, of course, the best instruction would be the best thing is like not having instructions.
You'll actually be able to like play all of the instructions needed for your car on your car. If you don't wanna have anywhere, you can just look at that. You can look at your email or get it on the car. There's, you know, the sales is actually demand generation and then delivery of the car. If that's also part of sales, that's the scaling part. Service, where there's something that a practical invention like we were, we increased the design lifetime of the powertrain, to, you know, from roughly 250,000 mi to aspirationally 1 million miles. That should really help with service.
I guess, you know, just still trying to calibrate to this cash flow and cash needs. Maybe a different way to ask this is it reasonable to expect that you would hit for the Motors Company free cash flow breakeven at the 250,000 unit a year level for Model 3, assuming what we know today?
It depends on how quickly we wanna ramp production to go from 5,000 a week to 10,000 a week of Model 3. You know, there could be an argument that, you know, you don't wanna go to cash flow breakeven or positive, because you're essentially, you're losing a lot of sales. When you do, like, you know, when you calculate the present value of future cash flows, then it's like actually not smart to be, in that case, free cash flow positive. You know, maybe you wanna be a little negative at least. Not give up a huge number of sales. We'd be talking I mean, the numbers get just so crazy.
You know, for if a 250,000 units a year, you know, roughly $1 billion a month revenue. You double that and it's $2 billion a month. It's like, man, maybe spending incremental $500 million or more on CapEx would be a pretty smart move if it advances things by two or three months.
Yeah. It just seems like at that level of 250,000 units, you'd be generating probably at least $2 billion of gross profit from Model 3. If you continue this Model X rate, you're at $2.5 billion of gross from that. Even with OpEx of just under $3 billion and CapEx of just under $3 billion, if you add in D&A, it looks like it's pretty close. I understand.
Right.
It sounds like it's within your control.
It's within our control. I mean, like if we were to just level off, we could be cash flow positive right now.
Right. Yeah.
Yeah. Obviously, we're, you know, in the sort of, low to mid-20% on gross margin in the car. At a $10 billion a year run rate, that's, you know, $2 billion-$2.5 billion . You know, we could definitely be profitable and cash flow positive at that level. Then our growth rate would be way slower.
It's kind of, you know, just really like a series of overlapping parallel NPV streams, you know, like obvious way to look at it, I think. Like, you know, by the way, guys, it'd be great to get some feedback. If, if you think we're not making the smart move, please tell us. Like, we'd love to hear feedback. We're definitely not gonna hit the bullseye every time. We're gonna make mistakes, and any kind of feedback from you would be great.
Great. Well, thank you.
All right. Thanks.
Thanks, Rod.
I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Jeff Evanson.
Okay. Thank you, Vicky. Thank you everyone for joining today. Have a lovely evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.