Good day, ladies and gentlemen, and welcome to the Tesla Motors, Inc. Third Quarter 2016 Financial Results Q&A Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press the star then the zero on your touch-tone telephone. I would now like to introduce your host for today's conference, Mr. Jeff Evanson. Sir, you may begin.
Thank you, Chanel, good afternoon, everyone. Welcome to Tesla's 3rd Quarter 2016 Q&A webcast. I'm joined today by Elon Musk, JB Straubel, Jason Wheeler, and Jon McNeill. Our Q3 results are announced in the update letter at the same link as this webcast. During our call today, we'll 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 will start today's call with some brief comments by Elon and Jason, followed by your questions and answers. During the Q&A, please try to limit yourselves to 1 question and 1 follow-up.
If you wanna log into the Q&A queue, please do so now by pressing star one. Elon, I'll pass it over to you.
All right. Thank you. My comments will be brief because I think it's really what I would have to say is captured in the earnings letter. The obviously the main thing is that we're able to have our best quarter ever, achieve full GAAP profitability. Moreover, I think we are headed to have a great fourth quarter as well. One of the, you know, criticisms I've seen out there is that perhaps Q3 was, I mean, at the expense of Q4. This is not true. We currently believe that Q4 will be profitable excluding non-cash stock-based expenses.
I think there's actually a chance that we'll be profitable even including stock and non-cash stock-based expenses. It's just a chance. It's not a promise, but I think we've got a shot at actually being profitable even taking stock-based expenses into account. It's very exciting. I think very proud of the Tesla team for executing so well on Q3 and going into Q4 and beyond. Yeah, it's been great. Definitely one of the best moments ever in Tesla, I think. Jason?
Cool. Thanks, Elon. Just a couple points I wanted to hit on real quickly before we jump into Q&A. One is I just want to point out the prudent financial management that we've been able to accomplish over the last several quarters. An example here is back in 2015, we were spending $400 million a quarter on CapEx. We've averaged about $250 million a quarter in 2016. That will change as Model 3 starts to ramp up in Q4, but we are focusing on making sure that every dollar we spend is in its highest and best use. From a gross margin perspective, if you look at automotive gross margin and excludes ZEV-credit revenue, we had 140 basis point improvement quarter-over-quarter. Lots of different factors there.
1, obviously, the increase in volume helps on the labor and overhead front. Secondly, our reliability continues to get better and better. Big change in Model X over the last 12 months as we highlighted in the letter, and continued improvements in batteries and drive units across both vehicles. Another source of gross margin improvement is supplier sourcing and the wind down of our commitments on prototype parts for Model X. Third point on financial management, you can see our OpEx is growing sub-linear to revenue. The operating leverage that we've been talking about through the course of the year is starting to kick in.
To put some real numbers around that, GAAP revenue is up 81% quarter-over-quarter, 145% year-over-year, and yet GAAP OpEx was only up 7% quarter-over-quarter and 33% year-over-year. Second thing I wanna talk for just a couple minutes about is what we've done to the capital structure and our sources of liquidity. As you may have read in the letter, we paid down $600 million in debt within the quarter, most notably $422 million of conversions on our 2018 converts, de-risking the balance sheet in the future. In addition to that, we were able to sign a $300 million warehouse line, which gives us more leasing capacity at great terms. The terms on that vehicle are less than 2%.
Also, we managed to get an 80% increase with our largest North America leasing partner in the quarter, and we're also on task to sign up a new leasing partner in Q4. Generally, I'd just like to point out that our access to capital markets and our sources of liquidity is as strong as it's ever been.
Yeah. In fact, just to highlight one point of what Jason is saying. The our vehicle gross margin increased Q2 - Q3. One of the other things I've seen out there is that, like, somehow we achieved these numbers as a result of widespread discounting. That is absolutely false. The discounts. There were a few discounts that, you know, you know, but there were few and far between, and that has been absolutely shut down to zero. So, you can see that in the fact that the vehicle profitability, per-vehicle profitability increased even excluding ZEV credits from Q2 to Q3.
All right, Chanel, I think we're ready for the first question.
Our first question comes from the line of Colin Langan of UBS. Your line is now open.
Oh, great. Thanks for taking my question. I mean, it looks like a very strong free cash flow quarter, but when I look through the balance sheet, there seems to be a pretty large increase in accounts payable and accrued liabilities that seems to have helped. How should we think about that, you know, going into Q4? Does some of that unwind? Were there any changes to buyer terms in the quarter? Is that just consistent with the ramp of production?
Sure, yeah, great question, this is Jason. Yeah, there was definitely an increase in payables, and I think that'll start to unwind a little bit in Q4. A lot of that is just natural. If you look at production, I believe it increased 37% quarter-over-quarter, there's naturally gonna be more parts coming into the factory. I think some of that is just in the course of business. The other thing that I think is worth pointing out on the cash flow statement is receivables. We had a lot of deliveries right at the end of the quarter, we weren't able to collect all of our receivables. We ended up with a fairly large receivable balance on cars that were delivered in that last 10 days or so.
Well, definitely also worth emphasizing that. I mean, it's a first approximation, you expect payables to increase by 37% if production does. You have to net out against receivables. When you do that, I think it's not really not a material situation.
Yeah. We are actively looking to increase terms with suppliers. I think as our production has been more predictable, suppliers have been much more open to that conversation.
In fact, thanks for making that point, Jason. I think it's worth emphasizing that for Model 3. The Model 3 system is designed, the whole manufacturing supply chain system is designed so that the faster Model 3 production grows, the faster Tesla's cash balance grows. The terms that we're getting from suppliers are significantly better, you know, almost 60 days as compared to about 40-45 days for S and X. The Model 3 production and logistics is way faster. The car spends much less time in the factory, and we're working on ways to expedite delivery of the vehicles to the end customer, which we can do when we have scale.
We don't have to just wait for a ship to go somewhere. We can fill up the whole ship and just have the ship go whenever we want. The net effect is that instead of growth being a capital consumer, growth is a capital producer.
Got it.
Fundamental.
The other question I had is, you know, profit in Q4 without ZEV credits. It actually sounds like without even the stock comp possibly. Yet production's about flat. Model X mix is gonna get a little worse. OpEx guidance sort of implies that's up sequentially. What are the key drivers that are actually gonna get you to profitability? I think if you take out the ZEV credit, it would have probably been still a loss in this quarter.
Well, we expect gross margin to increase. I mean, that's a huge factor. For some points that we've made before, like we're using very few prototype parts or low volume tooling parts. We're not paying for crazy amounts of expediting. There are a bunch of design improvements, design cost downs. I actually either value neutral to the customer. In some case, actually cost might be better. We have the P100D. One of the things that, you know, the 100 kWh car pack was only in limited production towards the end of last quarter. It'll be in a pretty significant portion of the mix this quarter. Yeah. Yeah.
I think one additional thing is the reliability of the cars continues to get better, so our warranty costs are decreasing as well.
Yeah.
That's a key driver for us, not only from the cost side, but from the demand side. We're growing demand in market given the reliability of the vehicles.
Yeah, I mean, you know, the reliability improvement is massive.
It is. The visits to service for Model X through the course of the year have declined 92%, which is just a fantastic result both from the manufacturing side and the vehicle reliability teams have been working hard to achieve that, and we're gonna continue to improve against that.
Yeah.
All good, Colin?
Thanks, bye.
All right. Chanel, let's go to the next question, please.
Thank you. Our next question comes from the line of Brian Johnson of Barclays. Your line is now open.
Yes, good afternoon. Just wanna go in a little bit on the regulatory credits. A couple things. You know, first, clearly with your delivery numbers, the California and the other CARB states are buying more Teslas. Yet last quarter, you talked about the value of those plummeting, and we shouldn't really expect much. So kinda, obviously you're generating more, but a couple questions. What's happened in the marketplace for those credits? I know even under GAAP, you don't list that as a balance sheet asset, but if we were to think about the quarterly generation of credits as well as the credits on your in effect in your car bank that can be monetized in the future, how would we think about those?
Well, unfortunately, as I've said on record before, the CARB, their credit mandate is incredibly weak and needs to be fixed. When you have a weak mandate, obviously the value of those credits decline considerably. There are some quarters where we simply cannot even find a buyer for credit. When we can find a buyer, it's typically $0.50 on the dollar for the ZEV credit. Yeah. Obviously, ZEV credits only apply to, you know, roughly half of our market in the U.S., maybe slightly above half. It doesn't apply to Asia or Europe or Canada or Mexico, anywhere else. You know, it's there. It's, and I think CARB really should be doing more. It's unfortunate that they're not.
I need to sort of maybe write a longer blog piece that is sort of going through this because Tesla's sometimes criticized for, you know, relying on kind of tax credits and that kind of thing. People really misunderstand this. What matters is what does Tesla receive relative to its competitors, not what does Tesla receive in the absolute. Our competitors, you know, maybe worth noting, maybe you would consider this to be a risk or something that is, you know, problematic for us. Our competitors monetize ZEV credits at $1.00 on the dollar. We monetize them at $0.50 on the dollar where we can get it.
That means if you have, let's say, you know, I mean, it depends on the scenario, but, if you have, you know, let's say 3 ZEV credits, for an EV, that would ostensibly be worth $5,000 each, so that would be $15,000. When, say, GM or somebody sells an EV, they get $15,000. When Tesla sells an EV, we get half that.
Right. They have an internal marketplace.
It's not we who are being subsidized, but our competitors.
Just a follow-up.
Now, the interesting thing is that there is a limit to our disadvantage. Because the damn credit thing is so weak, it only goes so far. It only applies to certain states. What you will see our competitors do is they will limit their production, and they will only sell in ZEV states or almost entirely in ZEV states. That doesn't scale. That will take them to maybe 40 or 50 thousand units a year, best case, but we're talking about doing 500 thousand units a year.
Go ahead.
Which means at high volume, we no longer suffer the disadvantage of the credit regime. This is wholly misunderstood.
That help, Brian?
And were there-
Our strength increases-
Yeah, just a quick follow-up on GHG credits. Were there any?
Say again, Brian?
Just a follow-up. Were there GHG or other CAFE credits, and how did they compare to prior quarters?
Those are mouse nuts.
Okay, thanks.
All right.
Thank you.
Let's go to the next question, please.
Our next question comes from the line from Colin Rusch of Oppenheimer.
Thanks so much. Can we just look at the shipment numbers? You know, a quarter ago, you were guiding to roughly 80,000 vehicles a year, and now 3 months later, we're down at 75,000. Can you just walk us through the factors that are impacting that lower shipment number? Or delivery number, I should say.
I think this has really gone over in the last quarter's call, is that we had severe problems getting to rate in the first half of the year. You know, rate being an average of roughly 2,000 cars a week. Just a lot of things broken in our production system. I personally probably took a year off my life or more, camping out in the Fremont factory, solving that along with a number of other members of the Tesla team, went through bloody hell in the first half of this year. We got out of that basically around mid-June. The result is achieving a weekly production target of roughly 2,000 cars a week.
Maybe I can take that offline. The second question for me is really about absorption with, you know, nearly 40% increase in deliveries. Can you guys break out the impact on gross margin to absorption? It would seem that that would be a meaningful number at this point.
What are you talking about?
Factory absorption.
Like, do you mean like fixed costs versus?
Yeah, fixed costs on the factory and how that flows through the depreciation line.
Sure. I mean, the way to think about that is, I think Elon actually just covered it in his last answer. We had capacitized the factory and had the factory to actually produce many more cars in the first half of the year, we fell short of that. Now we're at the rate that we had planned to be at early in the year, our absorption is about what we'd expect it to be. I think what you're seeing now from an absorption perspective, as it's related to gross margin, is a good steady state rate.
Okay. I was just looking for a quarter-over-quarter number in terms of the contribution margin.
Yeah, we typically don't break down all the different factors within gross margin.
Okay. Thanks a lot, guys.
Sure. No problem.
Thank you. Our next question comes to the line of Ryan Brinkman of JP Morgan. Your line is now open.
Great. Thanks for taking my question. Can you talk about the drivers of the substantially less than expected capital expenditures in the quarter and the reduction to the full-year CapEx guide? Should we think about this as being more about the push out or delay of certain activities that give rise to CapEx? Or is it more that you're on schedule with those activities but doing them in a thriftier way or some sort of combination of these factors?
One of the things that we found is way better with the Model 3 program than Model X and Model S is that our equipment suppliers are willing to work with us on payment terms and we're being able to back-end load and in fact, post-production load a huge amount of the CapEx. That just turned out a lot better than we expected. But we've not taken any action that would cause the Model 3 timeline to be extended in any way.
Okay.
We're still highly confident of reaching volume production in the second half of next year.
Yeah. If I might chime into that a tiny bit as well. You know, we also are continuing to improve the capital efficiency per unit of the production lines. Especially over the last, you know, few months, we've put a huge amount of engineering attention into, you know, really focusing on that problem, and we're seeing results. I think we'll continue to see, you know, incremental improvements, you know, all the way from things like the battery cells all the way up to the vehicle itself.
Okay. The follow-up to that is just, you know, in regards to the amended Form S-4 that you filed a couple weeks back, there was some changed language in there from, you know, Tesla's currently planning to raise additional funds by the end of the year to now stating that you expect adequate liquidity through the, at least the end of the year, I think it says. What was the primary change, would you say? Does it relate to this CapEx issue that we're talking about here, or to higher earnings or to another factor?
I think it covers all of those. We've gotten really good at capital efficiency. JB, who was just speaking, has done a great job of that up at Gigafactory in particular. I think we're just executing very well. We met our internal targets for Q3. You see what happened on the cash flow statement. I think it's operational execution as well as capital efficiency.
Great. Thanks a lot.
One thing that's worth mentioning, I would take this with a grain of salt, not like it's You know, I like, sometimes I'll say things which I think are sort of speculation or my best guess, they're not then separate from a promise. Our current plan, our current financial plan does not require any capital raise for Model 3 at all. Now that's different from saying whether we should raise capital or not to account for uncertainty, to have a larger buffer, and to sort of de-risk the business.
Then we also feel pretty good having examined the SolarCity financials that, you know, it looks like SolarCity will actually be, at least neutral, but perhaps a cash contributor in the fourth quarter, in a small way. Again, Do not take this to the bank. This is not a promise. This is like, this is what appears to be the case. Contingent upon shareholder approval, we expect SolarCity to be somewhere between neutral and a cash contributor in the fourth quarter. Yeah, I mean, things are looking good. Yeah, you know, so it's not to say that, you know, there could be some darkness ahead, but they look really quite good right now.
It seems like we probably won't want to do a capital raise even in Q1. I'm not saying we won't, but we're probably not. Yeah, just overall looking quite promising.
Yeah. The other thing I would just add on top of that is just go back to some of the comments I made at the beginning of the call about our other sources of liquidity, and the capital markets are open to us. As our asset base grows, our ability to monetize those assets increases. We've got our ABL line. We've got the $300 million warehouse line. We've got those things, and we've also been able to line up a bunch of incremental capacity on the leasing side.
Over the course of the quarter as well.
That's definitely a piece of it.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Emmanuel Rosner of CLSA. Your line is now open.
Good afternoon. I have a couple of questions on your recent announcement around autonomous driving. I guess the first one is on hardware and then the second one on software. On hardware, it seems like, at least from the outside where we're sitting, it seems like, just recently you were indicating you will be de-emphasizing the vision approach to ADAS and autonomous driving. Now it seems the latest hardware seems largely based on vision. I was curious, you know, what was the thought process there?
Still within hardware, how do you acquire confidence that the hardware you're putting in cars today, will still be adequate to take you all the way to full autonomy when it's, you know, only based, I mean, largely based on, on vision?
Yeah. First of all, I would separate what Tesla says from some supplier of ours dishing bullshit. The blog that I wrote was very clear that radar is moving from a supplemental to also a primary sensor. It's not to the exclusion of vision, but it's also a primary sensor. Vision is still the main thing. Radar, instead of merely being like a cross-check against vision, is really when done well, and we're very confident at this point that it can be done this way, can be a primary sensor such that you can take actions based on radar information alone. You can also take actions based on just vision alone.
You know, much as a person might take action based on whether you hear something or you see something, but you don't need to both hear it and see it. There's no, you know, I would feel high confident that the 8-camera solution with the 12 Ultrasonics and a forward radar and the computing power that we now have on board is capable of full autonomy at a significantly greater than a human. There are obviously skeptics out there. Well, I suggest that they do not bet against us.
Okay. On the software side, I guess a lot of the players involved in developing autonomous solutions seem to think that a big input for autonomous driving, especially higher levels of autonomy is sort of a map, a live, you know, updated map. There was not a lot of new information on the most recent, you know, announcement on this. What are Tesla's plans for this part of the solution?
You mean-
I think we're getting into like technical questions that are not really related to this quarter, so, we'll have to pass.
Yeah.
All right.
Stay tuned for product announcements as they come out.
Got it.
Okay. Thanks, Emmanuel.
Thank you. Our next question comes from the line of John Murphy of Bank of America Merrill Lynch. Your line is now open.
Good afternoon, guys. Just a somewhat of a redundant follow-up question here, but I really just wanna make sure I get this right. I mean, as you're looking at R&D and CapEx, I mean, those are two items that as we're looking at, you know, a very significant product launch next year are kind of running, you know, at very, very low levels. I'm just curious, as you're talking about this.
Yeah.
Do you think that Well, I mean, no, they're not that low, but I mean, relative to what we would expect on a, on a product ahead of a product launch, do you think that R&D at absolute levels can stay here and support the Model 3 launch and everything else you're working on or will that need to go up? Also similarly, I mean, this CapEx number of $1 billion plus in the fourth quarter really is a significant step up. I mean, is that really just too high a number and you guys really are running significantly lower than this $2.25 billion, lower than the $1.8 billion, maybe something significantly lower and really finding, you know, a massive amount of efficiency here?
I'm just really trying to understand what these levels are gonna be because they are very impressive to date.
Yeah. Yeah, sure. I could take the R&D piece. I imagine that R&D will continue to go up.
Not, like, not in giant ways.
Not in giant ways.
Yeah. Moderate increases in R&D is to be expected, but not some big sort of, you know, step change.
Yeah. Yeah. Exactly. On the SG&A side, that's where we're really finding a lot of operating leverage. On the capital front, again, I think there's just continued opportunities for us to optimize this. There's a whole new kind of paradigm of thinking that we're going through, and it's breaking through conventional norms such as to add a step change in capacity, you have to add a step change in capital. That's not true. You can always optimize things. You can make things faster. It can be more efficient. You can use floor space better. I think it's some of this thinking, which Elon has talked a lot about, is really getting baked into our capital plans.
Yeah, I mean, maybe it seems low relative to the traditional industry, but I guess if we're comparing to, you know, what we've done in our past, even if we just look at the S-
Yeah, it feels like a lot of money to us.
Yeah, the S program was actually, you know, quite a lot lower R&D and lower CapEx than this. It feels like a huge amount of money.
Sure.
I mean, you guys really are running at a run rate that is half of what you or less than half of what you were originally talking about for the year on a run rate basis. I'm just trying to understand if that's something that is more realistic or we should expect a real big step up in the fourth quarter.
If you go back to actually our guidance at the beginning of the year on the OpEx side, I believe our initial guidance was 25% year-over-year, and we bumped that up to 30% year-over-year.
I'm sorry, I meant on CapEx.
On CapEx, our original guidance at the beginning of the year was $1.5 billion. When we made the initial announcement to bring forward production of 500,000 vehicles into 2018, we bumped it up. I think now we're just getting smarter about that, and that's why we brought that guidance back down.
Yeah.
In the letter this quarter.
We're probably-
Up at six.
We're probably just too conservative on our capital projections. It's turned out to be we can do this, with less capital than anticipated.
Got it. Just one follow-up on mix. I mean, these 100 kWh models, I mean, it sounds like, you know, in some ways you may have underestimated the high end of the market, which is a good thing. I mean, as we think about that as a percent of mix going forward, I mean, you know, do you really think there's a tremendous opportunity for that to be a material part of the mix?
Yes. It's one of my, I mean, right now there are, like, three things that are top priorities for me. Obviously, Model 3, achieving rate and schedule on Model 3, rate, schedule, and cost on Model 3 is top. Then it's advancing the Autopilot software, that Autopilot to self-driving software. Then it's the 100 kWh, trying to ramp up the 100 kWh production rate. I receive daily updates on the 100 kWh production. After this call, I'm gonna be on the 100 kWh production line, because the demand is high and we just need to satisfy that demand.
It Okay. It just seems like that almost might be more important as far as profitability and cash flow in the near term than the Model 3.
Well, definitely in the near term. I mean, 100%.
Even over time. Okay. Thank you.
Yeah. Yeah. Yeah. It's a super big deal. Seven days a week I get an update on the 100 kWh progress on the production ramp for that.
Thank you.
Thank you. Our next question comes from the line of Ben Kallo of Baird. Your line is now open.
Hey, Elon. If I can ask a question about SolarCity. You know, one of the things when I cover SolarCity and you guys bought SolarCity, you know, my initial reaction was to be negative on it. You know, I've one of the things I've worried about with the transaction, if you guys acquiring them or merging, is the Buffalo deal, and it just being a cash cow. I was relieved when I saw Panasonic step in. Can you talk any more about that? Maybe in the same question, you know, I saw this the slide deck yesterday about how their business model is changing from lease to more cash sales or loan sales. What do you expect going forward?
Maybe that's Jason, from a cash flow basis. I know you said, you know, Q4 or they'd said that, but can this be cash accretive to the business next year? Thanks. I have one follow-up.
I think, I expect SolarCity to be approximately cash neutral, all things considered, next year. Yeah. It does depend on how fast we ramp up production in Buffalo. By the way, I think previously in your question you said cash cow. I think you maybe meant to say cash vacuum. We do, in your question. That's not what I'm saying it is. We do think it's important to have tight control over the production of the solar panels in order to have a beautiful solar roof product, we've got to be able to iterate rapidly and have them made exactly the way we want them, so that they have very high efficiency cells, at the lowest cost.
That's our objective. Just as we've been able to achieve that in partnership with Panasonic on the battery front. We have the best cell at the lowest price. That's a really good place to be, and we're confident we can achieve that same outcome in solar. While also creating a solar roof product that is better than a normal roof. Looks better than a normal roof.
Yeah.
Now the market opportunity, as I mentioned before, that there's like if somebody's just installed a roof and the house is new, it's not gonna make sense for them to go re-roof the house. It makes more sense to have something that's solar panels that are added to the roof. For someone that is building a house or where the roof is nearing its expiry date, then the solar roof is the right option. The nice thing is you don't really cannibalize one over the, you know, one from the other. They're two separate markets. You'll, I think you will be quite pleasantly surprised by what we debut on Friday.
It's exceeded my expectations. Yeah, but I don't wanna jump the gun on that. You should really see what we unveil on Friday. I think it's really great.
One more maybe big picture, I'll probably get made fun of this for asking, but, you know, stakeholders, you know, I watch, you know, the work you're doing with SpaceX and you know, the statement you said about, you know, the reason you wanna make money is for your work on interplanetary transport. How do you judge a Tesla shareholder versus a Tesla car holder? How do you delineate between, you know, where you give value versus, you know, the different stakeholders in the whole group there?
I don't really think about it like that. It's really just we wanna make products that people love and then, you know, make enough money out from that to be able to develop new products. That's it really. It's just how, you know, there's like so few products, like how many products can you buy that you really love? It's so rare. I think if you, if you do something like that, people, you know, will buy them. They'll pay, and they'll pay a premium for something that they love, of course. Yeah. Then I think it ends up being a good outcome for shareholders, because the whole purpose of any company existing is to make compelling products and services.
Sometimes people lose sight of why companies should even exist.
Like for example, would you scale back the growth of SolarCity even though it's the greater good for the environment to be more cash flow positive, I guess, is a good way to look at it?
I don't think You know, we have to look at this in long term and, it, you know, if SolarCity is, losing lots of money, then that's not good for the long term. That investors will not support such a situation. You know, and I think there may be some, you know, intermediate slowdowns, but this is actually an eye towards, ultimately, moving way faster.
Oh, yeah. Got it. Got it. Thank you, Elon.
Thank you. Our next question comes from the line of Jamie Albertine of Consumer Edge. Your line is now open.
Great. Thank you. Good afternoon. I wanted to ask a question, if I may, on battery costs and particularly just kind of an update on the Gigafactory and the impact of the Gigafactory on battery costs. It seems as we're getting closer to the opening, that while there is some improvement sort of going on in the background in terms of efficiencies of the battery cell production process and also the trade secrets that you're working on between generation to generation of cell production, you know, that at least 30% benefit from the Gigafactory. You know, how should that filter into the model, let's say over the course of the next kind of 6 - 8 months, between now and maybe when you start to talk more about, you know, Model 3 production? Thanks.
Well, I'm not sure we wanna give a detailed glide slope on this, but we're still, you know, very confident on the progress against the milestones we talked about previously. We're still confident that we'll have the best cell cost in the world when we start production. I think those are really the most important metrics. You know, in long term, we see, you know, ongoing opportunities to keep driving that down as we, you know, add innovation into the manufacturing process and keep increasing scale.
Just to confirm, when you're still expecting to sort of begin production on the Gigafactory itself, and then just a quick product question. As it relates to what you've done with the Model S and the 100 kW battery pack, you know, thinking about a fully loaded, optimized Model 3, which obviously is a smaller vehicle, you know, is there a potential to see range, you know, again, this is not a price-sensitive question, but at the high end of the Model 3 side, is there potential to see range, you know, extend significantly further than what we're seeing with the S and X? Thanks.
Well, maybe to your first question, I mean, we're still generally on track as we stated with the Gigafactory schedule and production. There's equipment, you know, being installed and being commissioned as we speak. You know, there's a fairly extensive process of bringing that equipment online, you know, starting up pilot production, validating the pilot production. I mean, that's exactly what we're in the middle of.
Continuing to ramp up through the end of this year. We feel good about where that's at, and we feel that, you know, we're definitely on schedule for production for Model 3.
Great. Thank you.
Thank you. Our next question comes from the line of Adam Jonas of Morgan Stanley. Your line is now open.
Hi, just one question about the Autopilot software development. As you guys are putting the hardware and the software and learning capabilities in the entire fleet of incremental production, you're gonna have lots and lots of very rich data that is gonna be brought to you for analysis and processing and learning.
I guess the question is, you know, when, Elon, would you say would be the earliest reasonable opportunity for you, and perhaps backed by the scientific community and your own community in your company, to make the case, make a strong case to the regulators with the empirical data, as you get it and analyze it, of the safety of the vehicles, even if not in a fully autonomous application, but even the semi-autonomous, so that you can bring more visibility and transparency to the urgent need to address the spiraling deaths and injury on our roads? Thanks.
Yeah. Well, I should say we do work actually very, very closely on a daily basis, and have for a long time with NHTSA and other regulatory agencies around the world. I mean, really at a very detailed level. They're certainly aware of kind of the nitty-gritty. As I've said before, it's, we already see a significant improvement in safety with the semi-autonomous features.
What, you know, what's sort of less visible to the outside is, are all the cases where the, you know, well version one of Autopilot actually did a lot to mitigate the accident, so that the impact velocity was, went from being potentially fatal or severe injury to a customer stepped out and walked away. There are many of those, which provides a much more statistically significant sample set than the fatalities, 'cause the fatalities are extremely rare. You need really, you know, a billion miles or more to try to achieve a statistically significant conclusion on fatalities.
As our fleet grows, and it's growing rapidly, the number of semi-autonomous miles grows, you know, to the point where I think we're now starting to approach 1.5 million, almost 1.5 million miles per -day of Autopilot in all kinds of road conditions and weather and throughout the world. The more time that goes by, the more miles we accumulate, the stronger the argument gets, both the confidence intervals tighten, and it becomes clearer and clearer. I'm really quite optimistic about where, you know, where things are and where they're headed on that front. I think they're headed to a good place.
Okay, thanks.
Thank you. Our next question comes from the line of Jeff Osborne of Cowen & Company. Your line is now open.
Yeah, good afternoon. Just 2 questions on my end. 1, how do we think about the cadence of CapEx? Should it, in 2017, should it persist at a continued rate in the first half of 2017 up until the Model 3 launch at a similar run rate as you're seeing here in Q4? What's the thought process there?
You will see it ramp up in Q1 and Q2, as you expect, as we get closer to production. Then a lot of the payments come after we start production, so in Q3, Q4. There'll be obviously expenditures on new vehicle development. You can expect it to, you know, to ramp up a fair bit over time. But you know, to stand by what I said earlier, which is I, you know, currently if we did not go out and raise a bunch of money, our current plan says we don't need to raise any money. It gets, you know, a little scary, on, in terms of how much capital we have in the bank relative to our sales volume.
You know, it does, but at least currently, so it's raised capital, something that's nice to have, not a necessity. Maybe it's a smart move to de-risk things and all that. Just looking at the bigger picture, taking into account also that we're designing the three program to be a cash generator, that the faster the three grows, the stronger our cash position. I don't think you need to worry too much about CapEx, you know, it being like a, you know, a dilute of events or something like that.
Yeah. Just so it's clear, what Elon's talking about is a step up from our Q3 levels.
Yeah
Q4.
Do you care to throw a number out there for CapEx for 2017 at this point, or do you think of it kind of flattish, but front-end loaded?
No.
On 2017 versus 2016? Too early for that?
It'll definitely be higher in 2017 than 2016, for sure.
Yeah. Okay.
Yeah.
Then, around CapEx as well, any thoughts on kind of partner commitments to Gigafactory? What's the trend there? Then also, I might have missed it, but what's the reservation count for Model 3? I missed that in the release that was there.
I mean, we see very strong supplier commitments on Model 3. Yeah, we don't see any deficit in supply commitments there. They're very strong. Every, you know, this is the most interesting vehicle program, maybe the most interesting product program in the world. Suppliers really wanna be part of something like this. As for 3, the 3 deposit number, this is not something we comment on, and not something that is a figure of merit in any way. We, you know, we do no promotion of Model 3. We don't advertise, well, we don't advertise in general, but we don't Like, how often do you see me mentioning the Model 3? You know.
Like, I think people sometimes forget, like, that, you know, all we did for the Model 3 was have our webcast. There was no advertising, no guerrilla marketing campaign. You know, just like sent out a few tweets like, "Hey, there's gonna be a webcast," and like, a lot of people decided they wanted to place a deposit for the car, which is cool. Yeah, we didn't wanna get people too distracted from today's product in favor of tomorrow's product. Then when somebody comes into our store to buy a Model 3, we say, "Well, you know, why don't you buy a Model S or an X instead of 3?" You sell the 3. You know. Sold a lot of people ordered the 3, but whatever.
Yeah, that's p lus, the 3, you know, like, we're basically sold out the first year of production, so first 12 months of production or thereabout. What's the point of trying to sell the 13th month of production with no variable 3 had gains we had there in doing so.
Perfect. Thanks so much for all the details. Appreciate it, guys.
All right.
Thank you. Our next question comes from the line of David Tamberrino of Goldman Sachs. Your line is now open.
Yeah. Hi, thank you. Just wanna circle back on a couple of things said earlier. First, on the Autopilot, you mentioned that you work very closely with NHTSA. I'm wondering what your take is on the push from the recent document, the Federal Automated Vehicles Policy, that really is looking for data sharing among OEMs. I think you're probably clearly in the lead with vehicles on the road and miles per day of data that you're aggregating. Wondering what your take is on potentially opening that up and sharing with some of your competitors.
I mean, we'd be happy to share information with our competitors that would help improve safety. Happy to do so.
Interesting. The second one is really just on the cost side. You think about a traditional OEM and their supplier relationships. There's, you know, typically annual price downs ranging in the 1%-3% range, sometimes more for more commoditized products, and you're very vertically integrated. I wonder how you think about internal price downs and gaining economies of scale for, you know, the Model 3 and what you're really looking to achieve from an operational efficiency standpoint on an annual basis with the parts that you have going into your vehicles.
I mean, Model 3 efficiency as a whole, that really is a quantum change in productivity, like really crazy. I mentioned this before, but, you know, as we go to high volumes, the What really matters is the factory, the machine that designs the machine, or the machine that creates the machine is, comes actually of greater significance, but much greater significance than the machine itself. That's where we have most of our engineering team working on. You know, we our sort of internal code name for the factory machine that builds the machine is the Alien Dreadnought. So if, you know, the point at which our factory looks like an Alien Dreadnought, then we know it's probably right.
We think with Model 3, we'll be Alien Dreadnought version 0.5, approximately. It'll take us about another year or so, I don't know, summer 2018 to actually get to Alien Dreadnought version 1.
I'm a little bit hazy on quantifying crazy. Is there any rule of thumb that you can point to with what you're looking to achieve, at least in terms of bringing the cost down from a component level from the S to the 3, you know, not even thinking about the X, given the increasing complexity that was involved with the vehicle?
Well, I mean, it's a rough approximation. Things need to be about half.
Okay.
You know, that's not You know, it's not like everything's half. Some things are way less than half the cost, and some things are more than half the cost, but on average, about half.
Predominantly internally sourced?
Well, depends on how you consider the value chain, yeah, I guess arguably it's majority internally sourced. There's still a huge number of suppliers. The thing that happens when you once you start making, you know, almost all major subsystems internally, your supplier count actually grows dramatically. You have far more suppliers, not far fewer. They're at the component level, not at the major subsystem level.
Yeah. Just the one thing I'd add to that too, regardless of whether it's internally sourced or sourced from the supplier, the way to think about cost, and it just goes all the way back to first principles. What's the value of the commodities in the parts? What does it cost to reasonably turn those commodities into a usable part? What's reasonable labor and overhead? That's how we think about all material cost decisions, internal or external.
Yeah. I mean, the long-term aspiration, for the machine that builds the machine of, you know, factory Alien Dreadnought thing, is the long-term aspiration limit of physics. Yeah, I may call it like limit of physics manufacturing.
I think.
Appreciate the-
Maybe move on to the next question? Thanks.
Our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is now open.
Thanks. I wanted to ask a question on leasing. I know you pointed out that the percent of vehicles that are subject to the RVG this period, I think, declined by 4 points. I don't know whether this was coincidental or not, but it looks like the direct lease percentage also went up by about 4 points. You know, as you dwindle down the RVGs, are you planning that the ultimate lease rate is somewhere in that, you know, low to mid 30 range?
There's a bunch of different levers here. One that's worth pointing out, and we haven't talked a lot about is we've put out some very compelling loan products in the marketplace.
Working with partners, yeah.
Yeah. Through partners.
Yeah.
Yeah, through partners. You know, of course, we always wanna continue to do that, and we're always looking for ways where we can provide compelling and useful financing programs for our consumers, whether that's a lease through a partner, whether that's a loan through a partner, or whether we leverage our own balance sheet in the case of a direct lease, we'll do that too. Really, it's about the consumer experience. If we can use other folks' capital for that, great. If we use our capital for it, that's fine, too, and we're willing to make those decisions.
Okay. Just back on autonomous, maybe to ask Adam's question a little bit different way. I know you, Elon, you talked about a cross-country trip in 2017. In terms of turning it on for the consumer, I think in the past, you said you need about 6 billion miles traveled for regulatory approval. If I just do some crude math, you know, based on your delivery timeline, that seems like at some point in 2018, you'll get there, you know, maybe it's a year or so later if you believe consensus deliveries. You know, if you put aside the regulatory issues, is that roughly the timeframe you think it's ready for the consumer?
Yeah. I think there's the timeframe that we think it's ready and then the timeframe that regulators will approve. 'Cause we've got to present the data to them. They've got to think about it. They've got to, you know, render a verdict and that can sometimes be a long process, and it varies, can vary quite a bit by jurisdiction. I think we may see some jurisdictions giving the okay a lot sooner than others. But when you think about, like, the global average fatalities, it's sort of somewhere around 60. One fatality every 60 million miles on a global basis. You know, if you're at 6 billion miles, you're 100 times the, you know, what the fatality is per mile.
Well, I mean, it'd be like, you know, Yeah. You really start to get quite statistically significant at that point, and can make quite a strong argument, I believe at that point, that it would be, you know, morally wrong not to allow autonomous driving.
Thank you.
Okay. We're coming up on the hour mark. We have one other analyst on the call, then we have some journalists we definitely wanna hear from as well. You wanna go a little bit over an hour here, Elon?
Sure, sure.
Sounds good. All right. Chanelle, let's have the next question, please.
Okay. Our next question comes from the line of Charlie Anderson of Dougherty & Company. Your line is now open.
Thank you. I'll just ask one question. There was a reference to the Tesla Network and, you know, the ability to buy self-driving today. I wonder, Elon, if you could talk to me philosophically about how you're viewing Tesla Network. Is it something that will generate income for Tesla to help develop future products, et cetera, you know, at a, at a reasonable gross margin? Is it something that you'll use, you know, more for market share gain, help people offset the price of the car long term? Thanks.
Okay, got it. All right. Sorry, just talking to Jason for a second there. I think it's a bit of both really. You know, this would be something that would be a significant offset on the cost of ownership of a car, and then a revenue generator for Tesla as well. Obviously, the majority of the economics would go to the owner of the car. You know, sometimes it's been characterized as, you know, Tesla versus Uber or Lyft or something like that. It's not Tesla versus Uber, it's the people versus Uber.
All right, Charlie.
Thanks so much.
Okay.
Thank you. Our next question comes from the line of Daniel Sparks of The Motley Fool. Your line is now open.
Hi, thanks for including us in the call. I just wanted to get a little perspective on, I noticed in the shareholder letter the narrative kind of shifted. In Q2, you guys were saying that you're aiming for volume production toward the end of 2017, but now the letter is saying you're looking for volume deliveries in the second half of 2017. Am I just reading into this too much or does that reflect a greater confidence on management's part or?
I think our confidence has been practically the same. Obviously, as time goes by, there's some amount of the uncertainty is collapsed. I guess you could kind of call that confidence, but it's, yeah, it's looking good for production volume second half of 2017. As always, I really want to remind people that, you know, a car consists of several thousand unique items. We can only go as fast as the slowest item. You know, so what we're trying to do in advance of Model 3 production is to increase the scope of Tesla's internal capabilities so that we're internally capable of making almost anything. It's kind of like reserve troops.
You don't know exactly where they'll be needed, but you know you know, it's a good idea to have them, and so that we can minimize the degree which a single supplier can stop the entire production line.
Okay, great. As Model S and Model X, you know, with higher levels of sales, recently, higher levels of deliveries, as Model 3 approaches, do you feel confident in these levels, as Model 3 approaches? I know that, you know, we haven't talked too much about 2017, just kind of speaking as far as trajectory for those deliveries go and how we could think about it.
Yeah, I mean, another thing we want to emphasize is the production ramp tends to look like it is exponential or ultimately it's an S curve. Exponential goes to linear then goes to log. It's very difficult to predict exactly what, you know, where that beginning part of the exponential in the S curve fits in between quarterly reporting. The shift of even a few weeks one way or the other can have quite a dramatic effect on what it looks like in that quarter, but that's not indicative of the future. You know, we're kind of telling you what we're giving you the best assessment we have short of having a crystal ball.
I think things will look very good exiting 2017, but it'll be complicated and bumpy and dealing with a lot of unexpected issues in the beginning of the Model 3 production, Q3, Q4. Q3 particularly is very uncertain because it's the beginning of an exponential. It gets a bit more, and so it gets a bit clearer in Q4 and starts to be really crisp in say in the Q1, Q2 timeframe of 2018.
All right, great. Thank you.
Thank you. Our next question comes from the line of Tim Higgins of WSJ. Your line is now open.
Hi, thanks for making time. I appreciate it. Just to go back to the capital issue. I hear you saying you don't need to raise capital this year, and I hear that you probably won't do it in the first quarter of next year. What about next year in general? Should we look at that as a second half or a first half event? You wanna raise capital in the first half of next year even if you don't need it?
I think we cannot make, actually, I don't think it's legal for us to make specific predictions of certainty with respect to, you know, doing an equity raise or something like that. You know, it's just really exactly what I said before, which is, our current projections, and we should all be taking it with a grain of salt. Current projections say we don't need to go out and raise much equity. There could be unexpected negative things that occur. There could be some, you know, global macroeconomic slowdown. There could be that, like, you know, who knows what could happen. There may be value in de-risking the business and just having higher capital reserves. We're not ready to make that decision yet.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Phil LeBeau of CNBC. Your line is now open.
Hi, Elon. Quick question. In your shareholder letter, you guys mentioned that you're continuing to explore possibilities for expanding production to Asia and Europe. As you start to look at the production ramp and expanding your facilities in Fremont, do you have a timeframe for when you might make a decision in terms of, I think this is when we'll probably make some kind of a decision about another production facility, whether it's in China, whether it's in Europe, wherever it might be, somewhere beyond Fremont?
Right now, we're really focused on Gigafactory 1 and Model 3, spending very little time on, you know, facilities outside of Fremont, California, and Sparks, Nevada. It's really hard to say at this point, except to say it's pretty obvious that long-term, you wanna have your production close to your consumption, so you don't have massive logistics costs transporting cars halfway around the world. Yeah, that's, you know. I think we're probably not ready to talk about that now, and we just don't have a fully formed idea now. Probably end up talking about that next year.
Great. Thank you.
All right, thanks.
Thank you. I'm showing no further questions on the phone lines at this time.
All right. Thanks a lot, Chanelle. Thank you everyone for joining us today.
All right. Thanks, everyone.
Bye-bye.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.