Good day, ladies and gentlemen, and welcome to the Tesla Motors first quarter 2016 financial results Q&A conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at this time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Evanson. Mr. Evanson, you may begin.
Thank you, Cherie, good afternoon, everyone. Welcome to Tesla's first quarter 2016 Q&A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO, JB Straubel, our CTO, CFO Jason Wheeler, and Jon McNeill, President of Global Sales, Service and Delivery. Our Q1 results are announced in the update letter at the same link as this webcast. As usual, this letter includes GAAP and non-GAAP financial information and reconciliations between the two. 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 recently filed Form 10-K at the SEC website. We're going to start today's call with some comments by Elon, followed by the question-and-answer period.
During the Q&A time, please try and limit yourselves to one question and one follow-up. We can give everyone a chance to ask a question. While Elon is making his remarks, if you haven't done so, go ahead and please press star one now to get into the queue to ask a question. Elon, I'll turn it over to you.
All right. Thank you. I think the most important point here that we wanna make is that we're advancing the Q3, so the Model 3, build plan, substantially. Just overall, the overall volume plan, with Tesla, aiming to get to the half million unit per year run rate in 2018 instead of 2020. This is based off of the tremendous demand we see for the Model 3, which I think is actually a fraction of the ultimate demand when people fully understand what the car is capable of and are able to do a test drive. This is probably the biggest change strategically.
I think Tesla is gonna be hell-bent on becoming the best manufacturer on Earth. You know, thus far, I think we've done a good job on design and technology of our products. The Model S and X, I think, are generally regarded by very critical judges as technologically the most advanced cars in the world. You know, I think we've done well in that respect. The key thing we need to achieve in the future is to also be the leader in manufacturing. We take manufacturing very seriously at Tesla.
It's the thing that we need to obviously solve if we're going to scale and scale rapidly and make the cars more affordable. That, that's like I really wanna sort of send a message out there to those, you know, to the best manufacturing people in the world, we want you to come join our company. That is gonna be the primary focus of Tesla, is how do we get super good at making large, complex objects? That, that's the I think the most salient point. It's easy to get wrapped up in, like, a bunch of short-term issues, but I think in terms of what matters for the future, I think that's the most significant thing.
Overall, on the short-term stuff, our quarter-over-quarter stuff I think has improved quite significantly. Obviously, Model X production increased by a factor of five from Q4 to Q1. And we continue to make huge strides in volume and quality of the vehicle. And I'm personally spending an enormous amount of time on the production line. My desk is at the end of the production line. I have a sleeping bag in a conference room adjacent to the production line, which I use quite frequently. The whole team is super focused on achieving rate and quality and at the target cost. That's, you know, I feel very confident in us achieving that goal. With the increase in ramp, we do feel comfortable affirming the 89,000 deliveries this year.
That's, yeah, I think it's just the rate of improvement with each passing day is very significant. Listen, finally, I'd like to sort of thank Greg Reichow, who was our head of production, for tremendous contribution over the last five years. Greg is, you know, contrary to some media reports, Greg is still at Tesla. He's still with the company, and he's helping with the transition to sort of some new leadership. We have some, I think, exciting announcements coming in the next, possibly in the next few weeks, about additions to the Tesla management team on the production side.
I feel like I'm feeling really excited about where things are headed in that direction. All right. With that, let's go to questions.
Thank you. Our first question comes from Jamie Albertine of Stifel.
Great. Thank you so much, Christine. Elon, thank you for that introduction. You know, there's no doubt you have an incredible undertaking in front of you. Can you help us understand some of the key obstacles and how we should consider those obstacles between now and your anticipated launch of the Model 3 in late 2017? Whether it's sort of P&L adjustments that we need to make along the way, but can you just help us sort of choreograph, you know, how that's going to take place?
Sure. You know, with the Model 3, as I mentioned on the last earnings call, we're really trying to take a lot of lessons learned from Model X, where Model X, we put a lot of bells and whistles on Model X and a lot of advanced technologies that weren't necessary for version one of the vehicle. But with Model 3, we're being incredibly rigorous about ensuring that we don't have anything that isn't really necessary to make a very compelling version one of the car. We also have a much tighter feedback loop between design engineering, manufacturing engineering, and production.
No element of Model 3 can be approved unless manufacturing has said that this is easy to manufacture, and that the risk associated with manufacturing it is low. There are many ways to skin a cat, and it's remarkable how you can achieve the same objective with a hugely varying degree of difficulty. You can sort of take the analogy of, say, if you wanted to kill a fly. You can kill a fly with a thermonuclear weapon, you can with a MOAB, with a cruise missile, with a machine gun, or a fly swatter. The end result is the same, but the difficulty is considerably more significant from one to the other, and the collateral damage is considerably more significant.
Having production be really fundamental to the design of Model 3, I think is very important, and then making sure we're not adding extraneous features to the 3 that aren't necessary to achieve the production volume is also extremely important.
I'm gonna go into, at the risk of this being misinterpreted, and probably there will be some number of articles that do, I think it's worth explaining sort of how manufacturing a complex object with several thousand unique components actually works, and what dates are relevant, you know, in order to achieve volume production of a car, a new car with several thousand unique items, you actually have to set a target date internally and with suppliers that is quite aggressive, and that is a date that is taken, that has to be taken seriously. Like the date, because I'm sure this will leak. You know, it's hard to keep a secret, really.
The date we are setting with suppliers to get to a volume production capability with the Model 3 is July 1st next year. Now, will we actually be able to achieve volume production on July 1st next year? Of course not. The reason is that even if 99% of the internally produced items and supplier items are available on July 1st, we still cannot produce the car because you cannot produce a car that is missing 1% of its components. Nonetheless, we need to both internally and with suppliers take that date seriously, and there need to be some penalties for anyone, internally or externally, who does not meet that timeframe.
This has to be the case 'cause there's just no way that you have several thousand components, all of whom make it on a particular date. The reality is that the volume production will then be some number of months later as we solve the supply chain and internal production issues. It is a bit of a confusing thing, and it does create some churn 'cause people are like, "Well, what's the real date?" It's like, you have to take the July 1st date seriously in order for some date a few months later or some number of months later to actually be the real date. Yeah, that's actually how it has to work.
In order for us to be kind of achieving volume production of Model 3 by late 2017, we actually have to set a date of mid-2017 and really hold people's feet to the fire internally and externally to achieve an actual volume production date of late 2017. You know, as a rough guess, I would say we would aim to produce 100,000 to 200,000 Model 3s in the second half of next year. That's my expectation right now. That's the thing.
Now what I would say to anyone that is thinking about ordering a Model 3, now is a good time to actually place your reservation or place your order, because you don't have to worry about placing your order and receiving it, you know, five years from now. If you place your order now, there's a high probability you will actually receive your car in 2018. I'd really recommend that anyone who wants to receive their car in 2018, place their order very soon.
Thank you, Elon. Thank you. If I may, as a follow-up, can you give us some reference as to, you know, again, most generously you would think if you said end of fourth quarter, or sorry, you said fourth quarter of 2017, so the six months at its most generous calculation, how did that compare with the volume production agreed date for the Model X, just as an example. How does this flow with your cash needs as you've articulated? It seems you've walked back a little bit from the prior quarter's discussion around cash flow positive and no need for capital markets raise. It seems like there may be a need here. If you could just articulate how the two fit together, that'd be helpful. Thanks.
It's always tempting for people to reason by analogy instead of first principles. That would be the mistake of assuming that anything to do with the Model X production has bearing on Model 3. They're very different programs with completely different approaches. I would not try to extrapolate from that any more than it would've made sense to extrapolate from the Roadster when we were making 600 cars a year to 20,000 cars a year with the Model S. In the Roadster case, we went from making 600 cars a year in 2010, where Lotus made the body and chassis, we made the powertrain, and we did final assembly. It was a far simpler car than the Model S.
We told people we were going to do 20,000, you know, get to a run rate of 20,000 cars a year with the Model S, despite it being a vastly more complicated car, and a car where we made the whole car, not just the powertrain. If you were to extrapolate from the Roadster experience, you would be completely wrong about the Model S outcome, and many people were. That's why, it's, I would say Model X is not relevant. As far as the increased capital raise, well, obviously, if you double, you know, your, your planned volume, you can't expect the capital to stay the same. I think our capital efficiency will actually improve on a per car basis, but obviously it can't stay the same.
Thank you so much.
Thank you.
Operator, let's go to the next question.
Our next question comes from Colin Langan of UBS.
Oh, great. Thanks for taking my questions. Just to kind of follow up, you know, you've had issues with the Model X, there's management changes. What gives you the confidence of the 500,000? That's a pretty amazing jump into next year. You know, what kind of gives that conviction that that's gonna be possible by 2020?
You mean by 2018?
Yeah, 2018, yeah.
Well, I first of all, I think we've got an excellent team at Tesla in production, and we're adding world-class aces in production with each passing week. It is a huge advantage to have the most, I mean, what I think is fair to say is probably the most compelling product program in the world with the Model 3. I'm not sure what would be more compelling, at least I think that there's a good argument that Model 3 is the most compelling program on Earth, from a manufacturing standpoint. Our ability to recruit top manufacturing talent to the most compelling product on Earth is very strong. We find the response to be extremely good when we call people up.
Based on the rate at which we're adding world-class manufacturing expertise, and some of the things that I know we're gonna announce in the future, I feel highly confident that Model 3's gonna be well executed as a program. Yeah, that's. Do you want to add something, JB?
Yeah, if I might just add, I mean, you mentioned this briefly before, but the design of the vehicle, you know, lends itself to high-volume production very efficiently. I think that's.
Yeah. It's designed for manufacturing.
Absolutely.
Yeah.
That's something that we're doing, you know, even today. Those designs are, you know, firming up. This is something, you know, happening far, far ahead of time. A second point would be the quality and the motivation of the suppliers involved in the program.
Yeah.
is the best ever.
Massively increased. Yeah. I mean, every supplier wants to be in this program.
Got it. If I could just ask a follow-up. I mean, obviously, cost is gonna be an important factor when Model 3 launches. I think you've indicated that your battery costs with pack are now under $190 per kilowatt hour. How do you think that compares to the industry? Where do you think it'll be by the time the Model 3 is launching, since that launch is being pulled forward?
We're trying to comment on an individual component costs. That stuff's fairly proprietary. That's kind of like giving away our playbook. I think it's pretty obvious that we will exceed anyone else in the world in scale economies with the Gigafactory, and we're very confident in Panasonic's ability to execute on that front. I just don't know anyone who, in terms of intrinsic costs, is going to be close to what the Gigafactory can produce on a cost-per-kilowatt-hour basis.
In color, when we think the 190, how much like a CAGR of decline until the Gigafactory is supposed to be another 30% once that's online?
Yeah, that next question.
Thank you very much.
Yes, we'll go to the next question then. Thanks.
Thank you. Our next question comes from Colin Rusch of Oppenheimer.
Thanks so much. You know, as you look at this accelerated plan for production, what can we expect on OpEx spending to support all of those cars coming out a lot faster than you'd previously expected?
Yeah, this is Jason. I think, you know, we updated our guidance on OpEx for the year a little bit in the letter. We had talked about 20% last year and moving that range to 20%-25% for 2016. There's obviously gonna need to be more OpEx at this. However, at the same time, you see how we improved quarter-over-quarter in terms of OpEx. We were down $12 million from Q4, down 3%. There's a renewed focus in the halls here at Tesla on making sure that we are managing costs extremely effectively, and all of our employees get that and are contributing to that.
I think it's, like, our sort of operating leverage means sort of fixed costs relative to our, you know, variable costs is gonna improve dramatically as you get volume up.
Absolutely. We talked a little bit about this on the call last quarter. The potential for operating leverage is massive, with production scaling.
Great. Elon, what do you need to see to move your desk out of the factory? It's kind of a dramatic thing to talk about, having your factory and your sleeping bag there. Obviously, there were some things you were concerned about, but what are you gonna wanna see to go back to a different location?
Yeah, I mean, my desk has frequently been in the factory, so this is not some, you know, new thing. On the Model S ramp, my desk was also in the middle of the factory, at the side of the body line, for a year. I move my desk around to wherever the most important place is for the company. I, you know, I'll sort of maintain a desk there, you know, over time to sort of come and check in on things. I mean, I suspect, probably by the end of this quarter, most of my time will not be spent on the factory floor.
Thank you. Our next question comes from Patrick Archambault of Goldman Sachs.
All right. Thank you. Good afternoon. You know, just so getting back to the, you know, capital requirement for the expanded, you know, Model 3 production, appreciate the guidance that you've provided for this year. From a CapEx perspective, that's helpful. I don't know, maybe this is a question for Jason. I mean, can you share with us maybe what a total capital cost estimate might look like for the Model 3 program now that you've got a handle on what your volume's gonna be or what you want to produce to?
Yeah, a couple things there. One, we've provided some breadcrumbs. Like, we updated our CapEx guidance. We had guided at $1.5 billion last quarter, and we think it'll probably be 50% higher than that for 2016 into 2017.
1.5.
What?
1.5.
1.5. Into 2017, you know, we're not gonna, we're not gonna talk about that right now. The other thing to pay attention to is our CapEx for this quarter was $216 million, which was a 47% decrease over Q4. A little bit of that is what we talked about last quarter, where a lot of the big investments for Model X had already been made. Also, we're just really focusing, as Elon has said, on capital efficiency and making sure that we're investing in the highest and best uses of cash. I think those principles are what's going to guide the Model 3 program.
Yeah, I mean, look, that's a good starting point to work with for us. I mean, we appreciate the update for this year. You know, maybe the way to take the question is just to kind of understand when the peak spending periods are gonna be. If you're launching through middle of next year, you know, is it kind of a good idea to maybe extend the amount of capital you see spending kind of in the balance of the three quarters through the second half of next year? You know, clearly with the launch, that tapers off. Is that a right way to think about it? You know, second to that, I would probably ask the same question just on the R&D front.
You know, when do those costs spike, you know, in the timeframe of that program?
Sure. I think you're thinking about it the right way, the way you've laid it out, and you can kind of use Model X and Model S, and the ramp of capital for those programs as a way to think about Model 3. On the R&D piece of it, that is a big driver behind our updating of our range, to 20%-25% OpEx in 2016. We'll start to see a little bit of that in the second half of this year, and then certainly some more into the first half of 2017.
Got it. If I can squeeze in one last one, just on the sourcing, is this changing your strategy of, you know, working with suppliers? I mean, you've done a lot in-house for all your products so far, but obviously this is a very different, you know, kind of volume number you're talking about. Are you thinking about changing the level of vertical integration and, you know, how does that work into sort of the ongoing capital requirements for this program?
No, I think we're actually gonna increase the amount of vertical integration that we have. I think it's very important for us to have the ability to produce almost any part on the car at will, because it alleviates risk with suppliers where, you know, you're going back to that, like, where if 2% of suppliers aren't ready, we can't make the car. Having the ability internally to adapt and make that 2% of parts internally, is really massively reduces risk associated with the production ramp. That I think is a very important thing.
Now once, if we get to steady state and maybe we talk to a supplier and they can do a very efficient job of making that part, we have no problem transitioning it from insource to outsource. You know, our goal is not to insource for the sake of insourcing, but rather to insource, if we think that it has meaningful improvement on schedule or cost or quality. I mean, one of the challenges we face is that for a lot of the supply chain, they're impedance matched to the timeframe of the big OEMs, Tesla just moves a lot faster than the big OEMs.
If they're impedance matched to a typical 10 or, sorry, a six-year development cycle, and we're on a two or three-year development cycle, it just doesn't connect properly. Some suppliers can handle that and some can't.
Certainly seems to limit some of the people you could work with. Thanks for the clarification.
Thank you. Our next question comes from Brian Johnston with Barclays.
Yes, good evening, afternoon. I just wanna talk a little bit about maybe some of the milestones that you see in terms of this accelerated development and launch of the scale-up of the Model 3. You know, first, it looked like in the proxy that the alpha prototype was completed as of when it was filed a few weeks ago. Few questions. One. When do you kind of expect the beta prototype to be achieved? When do you think you'll have firm specs for both your internal parts operations and for your external suppliers? In terms of the capital, two other questions, kind of when would you see raising capital, if at all, to meet this?
Finally, given the volume of trade-off decisions you're talking about making between manufacturing, design, engineering, do you see any role for a COO type similar to what you have at SpaceX to accomplish this timeline?
Okay, that's like 17 questions in one.
You can send us the project plan.
Well, from an engineering standpoint, we're already almost complete with the design of Model 3. In fact, the prototype that was driving at the Model 3 event at the end of March was actually using the production drivetrain. I think, you know, we feel pretty good about engineering completion of the last items, probably within, you know, 6- 8 weeks, or about. With sort of completing final release for tooling no later than the end of June, that sort of leaves roughly nine months for the tools to be manufactured, which I think is an achievable timeframe, basically at some suppliers, but it's an achievable timeframe.
I mean, you can create a human baby in nine months, you can pretty much make a tool in nine months. That's our expectation. We wanna have parts of production tooling starting in April next year. We've got three months of validation for a nominal start of volume production in July. Again, it's a nominal start, and it's a date that we internally need to take seriously and that suppliers need to take seriously, but it is one where inevitably there will be some small number of items that cause slippage that, such that the actual date of reaching volume production is some number of months after that. This is simply in the nature of things, it's unavoidable.
If you, if you could tell me what those parts would be, we'd be able to take action now. You know, it's easier to what these things are in hindsight, but not in advance. Sometimes they are things you don't expect to be a problem. You know, there's, Tesla's a large complex business that's, you know, you know, at, I think, you know I don't wanna comment on too specifically on senior exec hires.
Okay. I guess, does this imply a similar accelerated schedule for the Gigafactory, which always seemed tied to the 2020 half-million unit goal?
It does. Yeah. JB, do you have anything to add?
Yeah, we've I mean, as we've discussed previously, this is a small part of why the Gigafactory was, you know, we accelerated some of our plans there. You know, we're still on track to have first cell production starting at the end of this year, so that we'll be able to, you know, ramp up, you know, to match the Model 3 schedule as well.
I again, I sort of wanna emphasize some comments that I made earlier in the earnings call, which is Tesla is really hell-bent on being the world's best at manufacturing. Like, this is a big deal. And I think it's the right thing to do because what we're trying to do is get as many electric cars on the road as possible. And what's the limiting factor? Well, it's production. Like, how can we scale and scale efficiently? We need to figure out how to be the world's best at manufacturing. That's what we're gonna be hell-bent on doing.
Okay, thanks.
Thank you. Our next question comes from Adam Jonas of Morgan Stanley.
Hey, Elon. On our math, your combined fleet of Model S and X are driving more than 3 million miles a day. In just one day, your cars do about 2x the distance that Google's done in the entire history of their self-driving car project. While your cars aren't exactly sensor-encrusted Christmas trees with tens of thousands of dollars of equipment like a retrofitted Google car, it's still a lot of miles. I was just wondering if you could explain to the investment community what kind of advantage this gives Tesla in the race for sustainable transport and accident-free driving in some commercial or financial terms, if you could. Thanks. Even engineering terms.
I mean, I think you pretty much asked the question and then answered it. The, I mean, data is everything really when you're trying to solve the autonomous transport problem. Having millions of miles per day of data accumulating, and then as the fleet grows, that grows proportionate to the fleet is incredibly helpful. I mean, I think really, and particularly as you go to say, you know, kind of in long term kind of fully autonomous driving, which I think is gonna That, I mean, that's gonna require quite a lot of regulatory oversight.
And I think in order for regulators to be comfortable approving that, they're gonna wanna see a very large amount of data, like maybe billions of miles, showing that the car is unequivocally safer in autonomous mode, compared to manual mode, in a wide range of circumstances in countries all around the world with different rules of the road and ways of behavior. Yes, it'll have to be something statistically significant, like billions of miles.
Okay. Well, that actually, Elon, leads to my follow-up, which is, you know, once, high volumes of statistical data for your autonomous miles are collected and analyzed, I can't help but get out of my mind, I have this image of you and some CEOs of other auto companies and CEOs of other software and tech hardware firms, testifying in Congress about the urgent need to replace these dangerous, purely human-driven cars on the road with available, affordable, and proven, even L2, L3 technology or semi-autonomous that's ready for introduction to, dramatically improve the epidemic of traffic fatalities and as like a national public health and safety priority. Am I crazy, Elon, about kind of that type of, that role for people in your position to play, you know, armed with the data empirically?
If I'm not crazy, then how soon do you think it would take for tech firms like you to have a sufficient quantity and quality of data to be able to make such a scientifically proven case? Thanks.
Well, I wanna be clear, like, I mean, Tesla will argue for autonomous driving, but we're not gonna argue against manual driving. I believe people should have the freedom to choose to do what they wanna do. Yeah, sometimes those things are dangerous, but, you know, but freedom is important. If people wanna drive, even if it's dangerous, they should be allowed to drive, in my view. Then the autonomous safety systems should be in there so that, such that even if you're in manual mode, the car will still aid you in avoiding an accident.
Okay, great. Thanks.
Thank you. Our next question comes from Joe Spak with RBC Capital Markets.
Thanks. Good afternoon, everyone. Also wanted to focus on adjusting the gigafactory plans. I believe originally you indicated about 15 GWh per year were earmarked for energy. With Model 3 demand, you know, clearly robust and likely more robust than you originally planned, I'm wondering if that moves some of those Tesla Energy ambitions to the back burner. Does it accelerate, you know, the need for a second gigafactory or maybe perhaps you found a way to squeeze more out of the existing one?
Well, I think the simplest answer is that, you know, we have a lot more capacity at that site than the initial, you know, 35 GWh to, and 15 GWh that we discussed.
That's part of why we've, you know, so aggressively made sure that we have extra land and extra space around the site so that we can continue to expand. You know, we won't need to rob from Tesla Energy plans in order to meet the Model 3 schedule. We definitely have, you know, a way to solve both.
Are you willing to provide an update to those initial targets?
Not yet. Maybe in one or two earnings calls from now, I think we'll be able to provide shed more light on that. Yeah, as JB was saying, we're gonna make sure that Tesla Energy is not constrained by vehicle needs. That the growth rate of Tesla Energy is on a percentage rate, is still gonna be far greater than the growth rate in cars.
Okay, thank you.
Thank you. Our next question comes from Ryan Brinkman of JP Morgan.
Great. Thanks for taking my question. You know, we can all now see with the Model 3 pre-orders that you are entirely correct that there is tons of demand for the car, just like you've been saying all along. I think about a month ago, when you started tweeting those pre-orders, right? The investor and parts supplier confidence in your ability to ramp to 500,000 units, rightfully skyrocketed. With that said, you know, from a supply perspective, you have sometimes had difficulty in achieving delivery targets because of issues and smoothly increasing capacity and assembly, and you've shown a strong preference for emphasizing quality over quantity.
Is there anything that's changed on the supply side of the equation that should also be confidence instilling, maybe, I don't know, lessons learned from the launch of the Model X or some other factor that should give confidence in your ability to be at a 200,000-400,000 unit annual run rate of Model 3 production, you know, approximately 14 months from now?
Yeah. Again, I wanna emphasize that the July 1 date is not a date that will actually be met. That it is an impossible date. However, it is a date we need to hold ourselves to internally, and we need to hold suppliers to. It is an impossible date, because there's six, you know, six, 7,000 unique components in the Model 3, and that would assume that all of them arrive on time. Just like, you know, if, like, a college term paper, there are always late term papers, but you still have to have a deadline, and it needs to be real, and one with consequences if the deadline is not met.
It absolutely will not You know, the probability of occurring is incredibly low of actually achieving it on July 1, but nonetheless, it is a date we have to take seriously. I explained that with, you know, some risk of this being misinterpreted, but hopefully, people will, you know, appreciate that I'm trying to explain how it, it needs to work and kind of has to work that way. There's no other way to do it.
The things that, you know, help us get there are designing Model 3 for manufacturing with engineering, manufacturing engineering and production and supply chain all in a very close loop, and making sure that we design the car to be easy to make, that we iterate with suppliers and ask them how if we've given them a design that's easy to make or one that's hard to make, or how do we make it, how do we reduce risk and improve it and make it easier to build? This is really fundamentally different from S and X. You know, the S was the first car we really designed ourselves, and it was all about just trying to make the car work in the first place.
X was basically built off of the Model S platform, but then even more complicated, so unfortunately even harder to make. The Model 3 is the first car Tesla's creating that is designed to be easy to make. This is really a fundamental difference. I mentioned also, increasing the scope of our in-house abilities so that, if there's a supplier that isn't able to deliver on time, we can scramble fast and produce that component in-house.
Okay, that's helpful. Thank you.
Great.
Thank you. Our next question comes from John Murphy with Bank of America.
Good afternoon. Just a first question on the capital needs. I mean, it looks like there's a little over $400 million left on the ABL, and given the pre-orders, you know, or the reservations for the Model 3, it seems like you'll have at least another $400 million flowing in the second quarter. Just curious, I mean, as you look at that kind of cash potential or liquidity and potential inflow, do you really think you need to do a capital raise this year, or could you get by with those sources of cash?
Well, I don't think we wanna rely too much on customer reservation money as a source of capital. Maybe there is, you know, a buffer or something, but it's not as a primary source of capital. Yeah, I mean, I think it's gonna make sense for us to raise some amount of money, some combination of equity and debt, and make sure the company has a good buffer of, you know, cash on hand. You know, it's just, I think it's important for de-risking the company.
Okay.
Yeah.
Yep.
This is Jason. The only thing I'd add to that is we did draw $430 million on the ABL this quarter. A lot of that was we had a large amount of cash in transit at the end of the quarter. Our deliveries were a little bit back-end loaded. As those cars were delivered in early April, we were able to pay a significant portion of that back.
I think most people are familiar with the asset-backed line, but it's important to say, like, why is that different from, like, general debt? The, you know, unlike other automotive companies, Tesla doesn't ship to dealers. We ship to customers. We build the cars to order, the car is complete, and it's going to a known customer. Really the only risk associated with that is if, like, the ship sinks or something, or the, you know, the truck that's carrying the cars crashes. The ABL is, the asset-backed line is basically finished goods in transit to known customers. It's, it's not like general corporate debt. The, it's, I think, more appropriately thought of as a slight increase in cost of goods sold.
Okay, that's helpful. If I could just ask one follow-up from another question, I mean, as you look at the ramp with suppliers, is there any recourse to suppliers that don't meet, you know, sort of that start of production next year or any point of the production schedule? Is there, is it really just you cancel the business and move on to another supplier?
We'll be asking for firm commitments from suppliers to meet that timeframe. I'm meeting personally with the team from that supplier who is gonna execute on the task, so that I have not just the commitment of the CEO or general manager of that supplier, but the actual team that will execute on the product. We wanna confirm that we feel confident in the actual team. Basically what we're asking for the A team from the A supplier, and a commitment from that A team that they intend to work harder than they ever have on any other program. If they are willing to do that, then we work together, otherwise not.
Recourse if they miss targets?
Yes. Along the way, we will be assessing progress and our confidence level that suppliers will meet the July 1 target. If it looks like they will not, we'll have a conversation with them. If our comfort level drops below a certain level, we will that they will not be a supplier to Tesla.
Okay. Great. Thank you.
Yeah.
Thank you. Our next question comes from Rod Lache with Deutsche Bank.
Hi, everybody. Couple questions. One, distribution and franchise laws in the U.S. have always seemed like they're an issue that they're gonna need to be dealt with at some point. Does this trajectory force the issue, or is this something that you can accommodate even with the distribution constraints?
Yeah. First of all, it's worth emphasizing that the whole dealership thing only applies in the U.S. We don't encounter that issue anywhere else in the world. You know, what's happening is that dealers are using kind of a residual legislation, and that was originally put in for a just purpose, which is to protect them from predatory practices from the franchisor, and then using it for an unjust purpose, which is to prevent direct distribution. We believe that in the long term, justice will prevail.
Okay. Is there a view that you can actually achieve this even under the constraints that exist today, or is that something that you do need to address in order to achieve this plan?
We believe that that is not a constraint on our ability to achieve the plan.
Okay. The second question is, I'm assuming that concurrently with this plan, there's kind of a longer-term plan for growth and that there's gonna be a Fremont number two, and I think you alluded to further expansion of Gigafactory. Can you just give us the sense of what you're aspiring to in terms of the trajectory by the end of the decade as you've done before? Jason, I know you didn't wanna get into details on project spending, but it would be helpful just to pass along some thoughts on what needs to go into the company in terms of investment in order to get that sort of thing out.
Is it reasonable to assume that the new level of spending that we're seeing right now is something that we should assume is being a sustained level going forward?
Sure on that. Yeah, like I said, I don't wanna go into the details of what we think the total capital cost is gonna be for the Model 3 program. But certainly as we continue to ramp, there's gonna be more capital requirements of the company. That's just a fact. Ideally, I'd like to fund as much of that as possible with cash flow from operations. That is really the focus that we have in the short term.
Yeah.
Is there a target?
I mean, it's fair to say like probably like, you know, our 2020 target for volume is, you know, closer to, you know, maybe close to 1 million vehicles in 2020 or something like that.
Mm-hmm. Okay, great. Thank you.
Thank you. Our next question comes from Charlie Anderson with Dougherty.
Yeah, thanks for taking my question. I had just a two-parter on the Model 3 reservation holders. I imagine for many of them, this was their first interaction with Tesla and maybe the first time they went to a store. I wonder, as you've looked at that base, if there's any potential to upsell to a S or X in the interim while they wait for their car, if you have any programs planned to address that. Secondarily, I was curious if you have any color on sort of the geographic split of the reservation holders. Thanks.
Yes, this is Jon McNeill. In terms of your first question on there, whether or not the reservation holders, this was their first interaction with Tesla. Just about 93% of the reservation holders, this is their first interaction with Tesla. It is, it's a super majority of a new client base or customer base for Tesla. It's exciting. It was exciting when we walked the lines, there were people waiting in line at the stores and they were excited to become a part of the Tesla community and family.
The demographics of the owners, we're not gonna say much about that, but they are a bit different, as you can imagine, than the Model S and Model X owners to date. It presents an exciting new market for Tesla as well. It should be noted that these folks are not interested just only in Tesla Motors, but also Tesla Energy, because the price point of the Tesla Powerwall is an accessible price point for many of these folks. They're expressing interest in both.
In terms of their of S and X as a bridge to Model 3, we are talking through and thinking through that 'cause as Elon mentioned earlier, the quickest path to receiving a Model 3 is being a Tesla owner. We've agreed that Tesla owners are receiving priority in terms of production. You can run the math I just mentioned. If 93% are new to Tesla, 7% of the reservation holders are Tesla owners. The fastest way to get production, a production vehicle, even in 2017, is through Tesla ownership.
We're finding that there's a good conversion rate of folks that are coming in to Tesla to drive an S or an X who are Model 3 reservation holders, and are motivated to be Tesla owners now, so that they can receive their Model 3 earlier.
Yeah, actually, you know, an important point worth mentioning is like we were fairly worried about, you know, what would happen with the Model 3 announcement. Would it cause like some big drop in, say, Model S sales? It seems to have had the opposite effect. It seems as though S demand has increased. I mean, it has.
It has increased.
It has increased.
Yeah. Yeah. I think you saw the S demand number in the first quarter is 45% up year-over-year. That demand continues.
Thanks so much.
Yep.
Thank you. Our next question comes from Emmanuel Rosner of CLSA.
Hi, good afternoon. I wanted to ask you guys about any early thoughts on need for, you know, manufacturing expansion. Obviously, if you're already doing 500,000 units by 2018, I think that's the original capacity of the Fremont plant. Do you need to, you know, start thinking about, you know, an additional plant? In that context, any thoughts on, you know, global expansion? You were mentioning obviously very strong increase in Model S order in Asia, for example. Anything you could share with us at this point?
I mean, I'd say our plan, our plans, you know, for international expansion, establishment of new plants are sort of speculative. We haven't made any firm decision. I mean, the, I mean, some of the things are just sort of common sense, that manufacturing cars in California and then shipping them all around the world is not a very efficient thing to do, particularly as you go to more affordable vehicles. At some point, it's gonna make sense to have a plant in Europe and a plant in China, and probably plants in other parts of the world. That's kind of natural thing you'd expect, to It, like it wouldn't make sense to ship cars from California to Europe or California to Asia.
In those volumes.
In those volumes. It's, you know, it's just not, it's not an efficient way to go. Particularly as we, you know, as we saturate on Fremont volume in terms of satisfying demand in North America, I think we'll just to satisfy demand in North America for our future product lineup, we're gonna need more than one plant in North America, just to satisfy North American demand.
All right. When we think about these extra capital needs that you sort of alluding to in addition to just the obviously the cost of, you know, the Model 3, you know, development, are you also contemplating as part of that to raise the money for an extra factory to the extent that, you know, just beyond 2018 you would already need some extra capacity?
I don't think we'll be raising money for new factories before we're at volume production of the Model 3. As Jason was saying earlier, we'll really try to fund as much of this as possible from operating cash flow.
Got it. Thank you.
Thank you. Our next question comes from Ben Kallo with Robert Baird.
Hey, thanks a lot. I have 18 questions. The first one I have, Model X production. Where are we at right there? Because we've had all this Consumer Reports issues, you know, I think they're a little backdated, can you talk to us about the state production of that? Number two, on the Gigafactory and the battery size for the Model 3, I think everyone's dividing by 80 kWh or 75 kWh for the number of cars. How do we think about actually the Model 3 battery size and what the Gigafactory could support? The third question is.
Why is Bob Lutz and Jim Chanos, they keep on saying such negative things about you guys? What do you have to do to get the, you know, the dissenters to actually believe in Tesla a little bit? Thank you.
Yeah. I mean, I feel confident that we're gonna hit the like the 2,000 vehicle a week target by the end of this quarter, of which on the order of 40% are X. I'm just telling you that's our internal plan and what we expect to meet. There's no question the X is a very difficult car to manufacture. I think it, you know, I think it's unquestionably the actually the most difficult car to manufacture in the world, Bob Lutz would agree with that. I think he said something to the effect that he thought it wasn't manufacturable or something like that. I mean, it's certainly manufacturable, it's just a hard thing to solve for.
I mean, we have some internal milestones that we've achieved thus far that I'm pretty excited about. You know, Friday at 3 A.M., we achieved our first flawless production of a Model X, where went through the whole production process and had zero issues. That was a great milestone. Celebrating with the team at 3 A.M. Friday was great. Now we're starting to get several in a row that are flawless and it's really gaining momentum very quickly. I feel pretty good about the trajectory of that X. As for convincing all the naysayers, I think that will basically be never. There's always gonna be naysayers.
You know, I'll just say like what I find ironic about a lot of the naysayers is that they, the very same people will transition from saying it was impossible to saying it was obvious. I'm like, "Wait a second, was it obvious or impossible? It can't be both.
Right. Got it. Model 3 battery, we're all analysts here. We stare down a straw dividing by, you know, 75 kWh. Is that the right thing to do with the Model 3, or should we have a lower number like 40 kWh or 45 kWh? Then, you got the guy with the Bolt making that car, you know, saying that it's gonna be ahead of you guys and then sell for cheaper than you. How do I think about GM being able to make a car cheaper than you versus making a margin on a Tesla with a lower battery cost? Does that make sense?
Yeah, I mean, we don't wanna get into real specifics on battery pack size, but I think it's fair to say the average battery pack size for the three will be less than 75 kWh .
I'm sorry. What was that?
The average energy content of a three pack is certainly gonna be less than 75 kWh. It doesn't really need to be anywhere near 75 kWh to achieve the range of 215 miles. Getting into the nitty-gritty is probably unwise.
I mean, I don't think you probably don't need to fixate on the 35 GWh . You know, we're planning the Gigafactory to meet the production needs of the energy that we know, you know, the cars will need. You know, there's not a problem in scaling that as we need to. Obviously internally, we have, you know, we know the math and we know what we need to do, and we're on track to do it.
I guess my 18th question is, I'm not a car guy, but I have you guys having 40,000 units of the Model 3 in 2017. I, from your commentary, it seems like I need to raise my numbers. How do I think about that ramp up from, you know, from zero to 500,000 over, you know, let's push it from 2018 on? Does it go from zero to 500,000 over two years or one year? How do we think about that?
Well, I mean, obviously, if we're saying that Tesla will have total vehicle production of on the order of 500,000 cars in 2018, can't be more than sort of two years to get there. Now just sort of another maybe bit of information about or education about production ramps is production ramps look like an S curve. It's extremely difficult to predict with precision, the early part of the S curve. Because in the early part of the S curve, you have it sort of starts off very slow and then it increases exponentially, moves to a linear, and then moves to a logarithmic. It's really incredibly difficult to predict exactly what the shape of that S curve is.
That's where things get tricky because you end up putting quarterly results kind of bracketing somewhere on that S-curve, and depending upon where you are on that S-curve, it can actually look like a big difference. Actually, it could be a, you know, shift of a few because of the exponential nature of the, you know, the beginning of the S-curve.
My 19th question.
Thank you.
50% gross margin on it or 20% gross margin, or how do you think about margin on it? 'Cause people think you can't make it profitably. I'm taking it up there.
I mean, we're highly confident that it can be made profitably and design for manufacturing and economies of scale are really the keys to achieving that outcome. I think like, you know, GM is not aiming for anything near the volumes that we are. I mean, despite being am big company, their economies of scale are gonna be driven by whatever elements are unique in their EVs. We know for a fact that they will not be at the economies of scale that we will be at for Model 3.
Great. Thank you.
Thank you. Our next question comes from Dana Hull with Bloomberg News.
Yeah, hi. What is the mix of, in 2018 of the 500,000 cars? I mean, it's combined S, X, and 3. Should we think of it as like 300,000 3, or, I mean, what's the kind of mix of those three vehicles?
Well, I mean, I don't think we've got like an amazing crystal ball to, you know, to figure out exactly what it's gonna be. I feel confident about the top-line number, but the mix internally is difficult to figure that out. Maybe it's something like 100,000-150,000 S and X and then, 300,000-400,000 of three. This is I don't know. It's really hard to say.
Hard to say. Okay. As you try to attract top manufacturing talent as you begin to ramp, have you given any thought to trying to hire a COO? I mean, I'm just thinking about your personal life between Tesla and SpaceX and sleeping in a sleeping bag and working 90 hours a week between two companies. SpaceX has a great COO and has had one, you know, since the company for years, but Tesla never has.
I mean, it's sort of, I mean, it's true because, I mean, the sort of scope of Tesla's business activity is broader than SpaceX. SpaceX is more of a pure technology company, and does not have the sort of sales service and kind of fleet management, and customer financing and all that sort of stuff that Tesla has. Obviously, Jon McNeill is taking that, you know, has that role at Tesla. My focus is primarily on technology, design, and manufacturing. I mean, I think you certainly can expect that there will be announcements in the fairly near future about some great executives joining the ranks.
Okay, great. Thank you.
Thank you. Our next question comes from Phil LeBeau of CNBC.
Hi, Elon. I have a question. It was about 10 minutes ago, you made a reference to 1 million vehicles in 2020. Is that a production target, a production goal, or a hypothetical? Just looking for some clarification there.
I mean, that's my best guess. If we're half a million in 2018 and there's sort of roughly 50%-ish growth from there, then it's probably around a million in 2020.
Have an estimate as to how many production plants you will need in order to make that happen?
Well, I think it is actually feasible, maybe not advisable, but feasible to do it with just Fremont and the Gigafactory. We actually believe that Fremont and the Gigafactory could scale to a million vehicles. Whether that's actually wise is a separate question. As I said earlier, it's gonna make sense to do localized production, at least on a continent basis. Otherwise, your logistics costs end up being quite extreme. Your logistics costs start becoming a bigger and bigger percentage of the total vehicle cost. I mean, that's really why manufacturers build their cars for a local market.
They build cars for a market in that market, because logistics costs associated with shipping, you know, 1.5- 2 ton vehicle are massively greater than, say, shipping a little consumer electronics device.
Great. Thank you.
Thank you. Our next question comes from Alexandria Sage of Reuters.
Hi, can you hear me? Elon, you say that you're calling out to the best minds of manufacturing to join Tesla, but at the same time, Google and Apple are giving out the same call. I guess I would wonder what you would say to these people to have them join Tesla over these other companies. Second question is whether you had any takeaways from your in terms of your suppliers, in terms of this HOERBIGER experience and, how, you know, you can hold these suppliers' feet to the fire on some of these more complicated tasks that they're asked to fulfill?
I mean, in response to your first question, I mean, sure, you appreciate that Apple and Google do not manufacture things themselves.
Right. They are hiring manufacturing people.
To do what?
That's correct. That's a good question. They are hiring manufacturing people with manufacturing experience.
Okay.
Again-
Tesla believes strongly in making things. They do not. That's fine. It's a philosophical difference. We believe that manufacturing technology is itself subject to a tremendous amount of innovation. In fact, we believe that there's more potential for innovation in manufacturing than there is in the design of the car, by a long shot. Now this is just a philosophical difference. Perhaps we are wrong. We believe in manufacturing, and we believe that a company that values manufacturing as highly as we do is going to attract the best minds in manufacturing.
Okay.
Okay. I think that's all the time we have.
With the supplier question.
I don't understand who you're referring to.
Hoerbiger.
Hoerbiger?
The original.
Not familiar with that name.
It's the original.
We're certainly gonna do our best to ensure that we have high confidence in manufacturing and suppliers on the Model 3 program. You know, those that didn't perform very well on, say, prior programs are unlikely to be selected for the Model 3 program.
Okay.
At this time, I would like to turn it back to Mr. Jeff Evanson for any closing remarks.
All right. Thank you everyone for joining us today. We'll talk to you in a quarter. Bye-bye.
All right. Thank you.
Ladies and gentlemen, this concludes today's conference. You may now all disconnect and have a wonderful day.