Earnings Call: Q1 2016

May 4, 2016

Good day, ladies and gentlemen, and welcome to the Tesla Motors First Quarter 2016 Financial Results Q and A Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at this time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Evenson. Mr. Evenson, you may begin. Thank you, Sherry, and good afternoon, everyone. Welcome to the Q1 2016 Q and A webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO JB Straubel, our CTO CFO, Jason Wheeler and John McNeil, 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 2. 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 We're going to start today's call with some comments by Elon, followed by the question and answer period. And during the Q and A time, please try and limit yourselves to one question and one follow-up, so we can give everyone a chance to ask a question. So while Ilan is making his remarks, if you haven't done so, go ahead and please press star 1 now to get into the queue to ask a question. Elon, I'll turn it over to you. Thank you. I think the most important point here that we want to make is that we're advancing the Q3 as well as the Model 3 build plan substantially. So and just the overall volume plan with Tesla aiming to get to the 500,000 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. So this is probably the biggest change strategically. Also Tesla, it is going to be hell bent on becoming the best manufacturer on earth. So the 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. And so the 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. So we take manufacturing very seriously at Tesla. It's the thing that we need to obviously solve we're going to scale and scale rapidly and make the cost more affordable. So that's really want to sort of send the message out there to those to the best manufacturing people in the world. We want you to come join our company. And that is going to be the primary focus of Tesla is how do we get super good at making large complex objects. So that's the most salient point. It's easy to get wrapped up in like a bunch of sort of short term issues, but I think in terms of what matters to 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 5 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. So that's I feel very confident in us achieving that goal. And with the increase in ramp, we do feel comfortable affirming the 80000 to 9000 deliveries this year. So that's yes, I think it's just the rate of improvement with each passing day is very significant. And finally, I'd like to sort of thank Greg Greichow, who was our Head of Production for Chimera's contribution over the last 5 years. Greg is contrary to some meter reports, Greg is still at Tesla. He's still with the company, and he's helping with the transition to sort of to some new leadership. And we have some, I think, exciting announcements coming in the next possibly in the next few weeks, out to addition to the Tesla management team on the production side. So that I feel really, really excited about where things are heading in that direction. With that, let's go to questions. Thank you. Our first question comes from James Alberty of Stifel. Great. Thank you so much Christian. And Elon, thank you for that introduction. 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 and L adjustments that we need to make along the way. But can you just help us sort of choreograph how that's going to take place? Sure. So 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 1 of the vehicle. 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 1 of the car. We also have a much tighter feedback loop between design engineering, manufacturing engineering and production. And so 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 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 flyswatter. So 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. So having that 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 are necessary to achieve the production volume is also extremely important. I'm going to 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 1,000 unique components actually works and what dates are relevant and it's what in order to achieve volume production of a car, a new car with several 1,000 unique items, you actually have to set a target date internally and with suppliers that is quite aggressive. And that is a date that has to be taken seriously. So like the date, because I'm sure this will leak, 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 1 next year. Now will we actually be able to achieve volume production on July 1 next year? Of course not. The reason is that even if 99% of the internally produced items and supplier items are available on July 1, 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 needs to be some penalties for anyone internally or externally who does not meet that time frame. This has to be the case because there's no way that you have several 1,000 components, all of whom make it on a particular date. So 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. But it is a bit of a confusing thing and it is it does create some churn because people like, well, what's the real date? It's like you have to take the July 1 date seriously in order for some date a few months later or some months later to actually be the real date. So, yes, that's actually how it has to work. So in order for us to be kind of achieving volume production Model 3, by late 2017, we actually have to a date of mid-twenty 17 and really hold people's feet to the fire internally and externally to achieve an actual volume production date of late 2017. So 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. Yes, so that's the thing. And now what I would say to anyone that is thinking about ordering 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 5 years from now. If you place your order now, there's a high probability you will actually receive your car in 2018. So I'd really recommend that anyone who wants to receive their car in 2018, place their order very soon. Yaron, thank you. And if I may, as a follow-up, can you give us some reference as to, again, most generously you would think if you said end of Q4 or sorry, you said Q4 of 2017, so that's 6 months at its most generous calculation. How did that compare with the volume production agreed date for the Model X, just as an example? And then 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 2 fit together, that'd be helpful. Thanks. It's always tempting for people to reason by analogy instead of first principles. And that's what that would be the mistake of assuming that anything to do with BX production has bearing on, call it, 3. They are very different programs with fully different approaches. So I would not try to extrapolate from that any more than it would have made sense to extrapolate from the Roaster when we were making 600 cars a year to 20,000 cars a year with the Model S. So 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're going to do 20,000 get to around 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 Rogers' Moisture experience, you would be completely wrong about the Model S outcome and many people were. That's why it's I would say, X is not relevant. As far as the increased capital raise, well, obviously, if you double 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, operator. Let's go to the next question. Our next question comes from Colin Langan of UBS. Great. Thanks for taking my questions. Just a kind of follow-up, you've had issues with the Act, there's management changes. What gives you the confidence of the $500,000 That's a pretty amazing jump into next year. What kind of gives that conviction that that's going to be possible by 2020? You mean by 20 18? Yes, 2018. Yes. Well, first of all, I think we've got an excellent team at Tesla in production, and and we're adding world class ACEs in production with each passing week. It is a huge advantage to have the most I mean, I think it's better 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, so from a manufacturing standpoint. So our ability to recruit top manufacturing talent to most compelling product on earth is very strong. We find the response to be extremely good when we call people up. So based on the rate which we're adding Wilcast manufacturing expertise and some of the things that I know we're going to announce in the future, I feel highly confident that Model 3 is going to be well executed as a program. And yes, but that's do you want to add something, JV? Yes. If I might just add, I mean, you mentioned this briefly before, but the design of the vehicle lends itself to high volume production very efficiently. And I think that's really Yes, designed for manufacturing. Absolutely. And that's something that we're doing even today. Those designs are firming up. So this is something happening far, far ahead of time. And the second point would be the quality and the motivation of the suppliers involved in the program is Yes. I think massively increased. Yes. 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 going to be an important factor when the 3 launches. I think you've indicated that your battery costs with PAC are now under $190 per kilowatt hour. How do you think that compares to the industry? Where do you think it will be by the time the Model 3 is launching since that launch is being pulled forward? Yes, we're trying to comment on individual component costs and that's fairly proprietary, that's kind of giving away our playbook. So but 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. So 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 quarter basis. And any 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 on line? Yes, next question. Thank you very much. We'll go to the next question then. Thanks. Thank you. Our next question comes from Colin Rusch of Oppenheimer. Thanks so much. 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 had previously expected? Yes, this is Jason. I think 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% to 25 percent for 2016. So there's obviously going to 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 $12,000,000 from Q4, down 3%. So there's a renewed focus in the halls here at Tesla. I'm making sure that we are managing costs extremely effectively and all of our employees get that and are contributing to that. Yes. I mean, I think it's our sort of operating leverage means sort of fixed costs relative to our variable costs is going to improve dramatically as you get volume up? Yes, absolutely. We talked a little bit about this on the call last quarter. The potential for operating leverage is massive with production scaling. Great. And then 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. So obviously, there were some things you're concerned about, but what are you going to want to see to go back to a different location? Yes. I mean, my desk has frequently been in the factory, so this is not some new thing. On the Model S ramp, my desk is also in the middle of the factory at the start of the body line for a year. So I move my desk around to wherever the most important place is for the company. And then I'll sort of maintain a desk there over time to sort of come and check-in on things. But 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 Pat Archibald of Goldman Sachs. Thank you. Good afternoon. Just so getting back to the capital requirement for the expanded Model 3 production, appreciate the guidance that you've provided for this year from a CapEx perspective, that's helpful. But I don't know, maybe this is a question for Jason. I mean, have you guys 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 is going to be or what you want to produce too? Yes, a couple of things there. So one, we provided some bread crumbs like we updated our CapEx guidance to we had guided at 1 $500,000,000 last quarter and we think it'll probably be 50% higher than that for 2016. Into 2017. 1.5. 1.5. 1.5. And into 2017, we're not going to talk about that right now. But the other thing to pay attention to is our CapEx for this quarter was $216,000,000 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. But 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. And I think those principles are what's going to guide the Model 3 program. Yes. I mean, look, that's a good starting point to work with for us. I mean, we appreciate the update for this year. Maybe the way to take the question is just to kind of understand when the peak spending periods are going to be. If you're launching through middle of next year, is it kind of a good idea to maybe extend the amount of capital you see spending kind of in the balance of the 3 quarters through the second half of next year? And then clearly with the launch that tapers off, is that a right way to think about it? And then second to that, I would probably ask the same question just on the R and D front, when did those costs spike 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 and D piece of it, that is a big driver behind our updating of our range to 20% to 25% OpEx in 2016. So 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 twenty seventeen. Got it. If I can squeeze in one last one, just on the sourcing, Is this changing your strategy of 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 kind of volume number you're talking about. So are you thinking about changing the level of vertical integration? And how does that work into sort of the ongoing capital requirements for this program? No, I think we're actually going to 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, 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 those 2 that 2% of parts internally, is really massively reduces risk associated with the production ramp. That's that I think is very important thing. Now once like 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 in source to outsource. Our goal is not to in source for the sake of in sourcing, but rather to in source if we think that it has meaningful improvement on schedule or cost or quality. And I mean, one of the challenges we face is that for a lot of the supply chain, there are impedance match to the timeframe of the big OEMs, and Tesla just moves a lot faster than the big OEMs. And so if they're impedance matched to a typical sort of 10 or sort of call like a 6 year development cycle and we're on a 2 or 3 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 Johnson with Barclays. I just want to 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. First, it looked like in the proxy that the Alpha prototype was completed as of when it was filed a few weeks ago. So a few questions. 1, 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? And then in terms of the capital, do you see 2 other questions kind of when would you see raising capital if at all to meet this? And then 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 this one. You can send us the project plan. Well, from an engineering standpoint, we're already almost complete with the design of Model 3. And in fact, the prototype that was driving at the Model 3 event at the end of March was actually using the production drivetrain. So I think we feel pretty good about engineering completion of the last items probably within 6 to 8 weeks per month. So completing final release for tooling no later than the end of June, that sort of leaves roughly 9 months for the tools to be manufactured, which I think is an achievable timeframe. Basically, some suppliers but it's achievable timeframe. I mean, you can have a human baby in 9 months, you can pretty much make a tool in 9 months. So that's our expectation. So then we want to have parts of production tooling starting in April next year. So we've got 3 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. And so that's and if you could tell me what those parts would be, we'd be able to take action now. It's easier to work what these things are in hindsight, not in advance. And sometimes there are things you don't expect to be a problem. So there's Tesla is a large complex business. I don't want to comment on too specifically on senior exec hires. Okay. And I guess does this imply similar accelerated schedule for the Gigafactory, which always seem tied to the $20,000,000 $20,500,000 unit goal? It does. Yes. JB, do you have anything on that? Yes. We've I mean, as we've discussed previously, this is a small part of why the Gigafactory was we accelerated some of our plans there. And we're still on track to have 1st cell production starting at the end of this year, so that we'll be able to ramp up to match the Model 3 schedule as well. Yes. Again, I sort of want to emphasize some comments that I made earlier in the earnings call, which is Tesla is really hell bent on being the world's best in 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 in the road as possible. And what's the limiting factor? Well, it's production. How can we scale and scale efficiently? And so we need to go to we need to figure out how to be the lowest best in manufacturing. That's what we're going to be helping us on doing. Okay, thanks. Thank you. Our next question comes from Adam Jonas of Morgan Stanley. Hey, Elon. So on our math, your combined fleet of Model S and X are driving more than 3,000,000 miles a day. So in just one day, your car is due about 2x the distance that Google has done in entire history of their self driving car project. Now while your cars aren't exactly sensor encrusted Christmas trees with tens of 1,000 of equipment like a retrofitted Google car, it's still a lot of miles. And 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 and some commercial or financial terms if you could? Thanks Or even engineering terms. Well, I mean, I think you pretty much asked the question and then answered it. I mean, data is everything really when you're trying to solve the autonomous transport problem and having millions of miles per day of data accumulating. And then as the fleet grows, grows proportionate to the fleet is incredibly helpful. I mean, I think really and particularly as you go to say kind of long term kind of fully autonomous driving, which I think is going to that's going to require quite a lot of regulatory oversight. And I think in order for regulators to be comfortable proving that, they're going to want to see a very large amount of data, maybe billions of files 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. And yes, it will have to be something statistically significant like billions of miles. Okay. Well, that actually leads to my follow-up, which is 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 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 armed with the data empirically? And 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 a scientifically proven case? Thanks. Well, I want to be clear like, I mean, Tesla will argue for autonomous driving, but we're not going to argue against manual driving. And I believe people should have the freedom to choose to do what they want to do. And yes, sometimes those things are dangerous, but freedom is important. And if people want to drive, even if it's dangerous, they should be allowed to drive, in my view. But then the autonomous safety systems should be in there, so that's 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 the adjusting the Gigafactory plans. I believe originally you indicated about 15 gigawatt hours per year were earmarked for energy. And with Model 3 demand 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, just accelerate 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 we have a lot more capacity at that site than the initial 35 to 15 gigawatt hours that we discussed. That's part of why we've so aggressively made sure that we have extra land and extra space around the site so that we can continue to expand. And we won't need to rob from Tesla Energy plans in order to meet the Model 3 schedule. We definitely have a way to solve both. And are you willing to provide an update to those initial targets? Not yet. Maybe in 1 or 2 earnings calls from now, I think we'll be able to provide more shed more light on that. But yes, as JV is saying, we're going to make sure that Tesla Energy is not constrained by vehicle needs. And I think we're yes, the growth rate of Tesla Energy is on a percentage basis, it's only going to be far greater than the growth rate in cars. Okay. Thank you. Thank you. Our next question comes from Ryan Brinkman of JPMorgan. Great. Thanks for taking my question. We can all now see with the Model 3 preorders that you are entirely correct that there is tons of demand for the car, just like you've been saying all along. So I think about a month ago, we started tweeting those preorders, right, the investor and parts supplier confidence and your ability to ramp to 500,000 units, right place skyrocketed. With that said, 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. So 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 X or some other factor that should give confidence in your ability to be at a 200000 to 400000 unit annual run rate of Model 3 production approximately 14 months from now? Yes. Again, I want to emphasize that the July 1 date is not a date that will actually be met. It is an impossible date. However, it is a date we need to hold ourselves to internally and we need to hold suppliers to. But it is an impossible date, because there's 6,000,000, 7000 unique components in the Model 3 and that would assume that all of them arrive on time. And just like, if some like in 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. But it absolutely will not even 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 at some risk of this being misinterpreted, but hopefully people will appreciate that I'm trying to explain how it needs to work and it kind of has to work that way, there's no other way to do it. And the things that help us get there are designing Model 3, 4 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 when it'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. The S was the first car we really designed ourselves. And it was all about just trying to make the car work in the 1st place. X was basically built off of the 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. But this is really a fundamental difference. And then 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. Thank you. 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 $400,000,000 left on the ABL. And given the preorders or the reservations for the Model 3, it seems like you'll have at least another $400,000,000 flowing in the Q2. So 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 want to rely too much on customer reservation money as a source of capital. Maybe there is a buffer or something, but it's not known as a primary source of capital. So yes, I mean, I think it's going to 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 cash on hand. It's just I think it's important for derisking the company. Okay. And then This is Jason. The only thing I'd add to that is, we did draw $430,000,000 on 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. And as those cars are delivered in early April, we were able to pay a significant portion of that back. Yes. And 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. Unlike other automotive companies, Tesla doesn't ship to dealers, we ship to customers. So we build the cars to order, the car is complete and it's going to a known customer. So really the only risk associated with that is if like the ship sinks or something or the truck that's carrying the cars crashes. But the ABL is the asset backed line is basically finished goods in transit to known customers. It's not like general corporate debt. It's I think more appropriately thought of as a slight increase in cost of goods sold. Okay, that's helpful. And then if I could just ask one follow-up from another question is, I mean, as you look at the ramp with suppliers, is there any recourse to suppliers that don't meet sort of that start of production next year or any point of the production schedule? Or is there is it really just you cancel the business and move on to another supplier? Yes. So we'll be asking for firm commitments from suppliers to meet that timeframe. And I'm meeting personally with the team from that supplier who is going to 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. And we want to confirm that we feel confident in the actual team. And basically, 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. And if they are willing to do that, then we work together, otherwise not. And recourse if they miss targets? Yes. So 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 there will not be a flyer to Tesla. Okay, great. Thank you. Thank you. Our next question comes from Rod Lache with Deutsche Bank. Hi, everybody. Couple of questions. 1, distribution and franchise laws in the U. S. Have always seemed like they're an issue that they're going to 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? Yes. 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. And what's happening is that dealers are using kind of vestigial legislation 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. But 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. And 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 going to be a Fremont number 2 and I think you alluded to further expansion of Gigafactory. Can you just give us a sense of what you're aspiring to in terms of the trajectory by the end of the decade as you've done before. And Jason, I know you didn't want to get into details on project spending, but it would be helpful just to pass along some thoughts on what needs to go in to 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. So yes, I don't want to go into details of what we think the total capital cost is going to be for the Model 3 program. But certainly as we continue to ramp, there's going to be more capital requirements of the company. That's just a fact. And ideally, I'd like to fund as much of that as possible with cash flow from operations. So that is really the focus that we have in the short term. Is there a I mean, it's fair to say like probably like our 2020 target for volume is closer to maybe close to 1,000,000 vehicles in 2020 or something like that. Okay, great. Thank you. Thank you. Our next question comes from Charlie Anderson with Dougherty. Yes, thanks I had just a 2 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. And I wonder as you've looked at that base if there's any potential to upsell to S or X in the interim while they wait for their car, if you have any programs planned to address that? And then secondarily, I was curious if you have any color on sort of the geographic split of the reservation holders? Thanks. Yes. So this is John. In terms of the your first question on 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. So it is a super, super majority of a new client base or customer base for Tesla. And it's exciting. It was exciting when we walked the lines that were people waiting in line at the stores and they were excited to become a part of the Tesla community and family. And the demographics of the owners, we're not going to say much about that, but they are a bit different as you can imagine than the Model S and Model X owners to date. And it presents an exciting new market for Tesla as well. And 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. And so 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 because 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. And so you can run the math I just mentioned, 93% are new to Tesla, 7% of the reservation holders are Tesla owners. And the fastest way to get production a production vehicle even in 2017 is through Tesla ownership. And so we're finding that there's a good conversion rate of folks that are coming in to Tesla drive an S or an X or Model 3 reservation holders and are motivated to be Tesla owners now, so that they can receive their Model 3 earlier. Yes, actually, an point worth mentioning is like we're fairly worried about 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. Yes, Yes. I think you saw the estimate number in the Q1 is 45% up year over year and that demand continues. Thanks so much. 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 manufacturing expansion? Obviously, if you're already doing 500,000 units by 2018, I think that's the original capacity of the Fremont plant. So do you need to start thinking about an additional plant? And in that context, any thoughts on global expansion? Yes. I Yes. I mean, I'd say our plans for international expansion, establishment of new plants are sort of speculative. We haven't made any firm decision. But 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. So, at some point, it's going to make sense to have a plant in Europe and a plant in China and probably plants in other parts of the world. So that's kind of natural thing you'd expect to do. It wouldn't make sense to ship cars from California to Europe or California to Asia In those volumes. In those volumes. It's just not it's not an efficient way to go. And then particularly 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 going to need more than one plant in North America, just to satisfy North America demand. Right. So when we think about these extra capital needs that you're sort of alluding to, in addition to just the obviously the cost of the Model 3 development should are you also complaining as part of that to raise the money for an extra factory to the extent that 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. And then as Jason was saying earlier, we'll really try to find 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. Well, 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, and I think that a little backdate, but can you talk to us about the state production of that? Number 2, on the Gigafactory and the battery size with Model 3, I think everyone's dividing by 80 kilowatt hours or 75 kilowatt hours for the number of cars. And how do we think about actually the Model 3 battery size and what the Gigafactory could support? And then 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 centers to actually believe in Tesla a little bit? Thank you. Yes. So I mean, I feel confident that we're going to hit 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 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's it's unquestionably actually the most difficult car to manufacture in the world and Bob Lutz would agree with that. I think he said something to the fact that he thought it wasn't manufacturable or something like that. I mean, certainly manufacturable, it's just a hard thing to solve for. So, I mean, we have some internal milestones that I think are that we've achieved thus far that are I'm pretty excited about. Friday at 3 am, we achieved our first flawless production of the Model X where it went through the whole production process and had 0 issues. That was a great milestone. We are celebrating with the team at 3 am on Friday. It was great. And then now we're starting to get several in a row that are that are close. And so it's really gaining momentum very quickly. I feel pretty good about the trajectory of S and P. As for convincing all the naysayers, I think that will basically be never There's always going to be naysayers. And I'd 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 was obvious. And I'm like, wait a second, was it obvious or impossible? It can't be both. Got it. And Model 3 battery, we're all analysts here. We stare down a straw dividing by 75 kilowatt hours. Is that the right thing to do with the Model 3 or should we have a lower number like 40 kilowatts or 45? And then you got the guy with the bolt making that car saying that it's going to be ahead of you guys and sell for cheaper than you. So 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? Yes. I mean, we don't get into like real specifics on battery pack size, but I think it's fair to say like the average battery pack size for the 3 will be less than 75 kilowatt hours. That's I'm sorry, what was that? The average energy content of a 3 pack is certainly going to be less than 75. It doesn't really need to be anywhere near 75 to achieve the range of 215 miles. So but we don't want to get into like getting to the nitty gritty is probably on why. Yes. And I mean, I don't think it's probably you probably don't need to fixate on the 35 gigawatt hours. We're planning the Gigafactory to meet the production needs of the energy that we know the cars will need. So there's not a problem in scaling that as we need to. So obviously internally we have we know the math and we know what we need to do and on track to do it. Yes. I guess my 18th question is, so I'm not a car guy, but so I have you guys having 40,000 units of the Model 3 at 2017. And from your commentary, it seems like I need to raise my numbers, but how do I think about that ramp up from 0 to 500,000 over let's push it from 2018 on, does it go from 0 to 500,000 over 2 years or 1 year? Or 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, it's happy more than sort of 2 years to get there. So now just sort of another maybe about 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. So 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. So it's really difficult to predict exactly what the shape of that S curve is. And 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 in that S curve, it can actually look like a big difference. But actually, it could be a shift of a few because of the exponential nature of the beginning of the S code. And my 2019 question, can you make 50% gross margin on it or 20% gross margin or how do you think about margin? Because people think you can't make it profitably. Yes. 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. Yes, I think GM is not aiming for anything near the volumes that we are. And so that there despite being a big company, their economies of scale are going to be driven by whatever elements are unique in their EV. And 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 Hall with Bloomberg News. Yes. Hi. What is the mix in 2018 of the 500,000 cars? I mean, it's combined S, X and 3, should we think of it as like 300,003 or I mean, what's the kind of mix of those 3 vehicles? Well, I mean, I don't think we've got like an amazing crystal ball to figure out exactly what it's going to be. But I mean, I feel confident about the top line number, but the mix internally is difficult to figure that out. I mean, yes, but I mean, maybe it's something like $100,000 to $150,000 S and X and then $300,000 to $400,000 or $300,000 but this is I don't know, it's really hard to say. Hard to say. Okay. And then 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 2 companies. SpaceX has a great COO and has had one since the company for years, the Tesla never has. I mean, it's true because I mean, the sort of scope of Tesla's business activity is broader than SpaceX. And 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, John McNeill is taking that has that role at Tesla. And then my focus is primarily on technology, design and manufacturing. So but I mean, I think certainly we 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 Leveau of CNBC. Hi, Elon. I have a question. It was about 10 minutes ago, you made a reference to 1,000,000 vehicles in 2020. Is that a production target, a production goal or hypothetical? I'm just looking for some clarification there. I mean, that's my best guess. If we're $500,000 in 2018 and that's sort of roughly 50% -ish growth from there, then it's probably around $1,000,000 in 2020. And do you 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 1,000,000 vehicles. Whether that's actually wise is a separate question. As I said earlier, it's going to make sense to do localized production at least on a continent basis. Otherwise, your logistics costs end up being quite extreme. They start your logistics costs start becoming a bigger and bigger percentage of 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 1.5 to 2 ton vehicle are massively greater than say shipping a little consumer electronics device. Great. Thank you. Thank you. Our next question comes from Alex Sage of Reuters. Hi. Can you hear me? I'm, 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. At the same second question is whether you had any takeaways from the your in terms of your suppliers, in terms of this Herbigger experience and how you can hold these suppliers' feet to the fire on some of these more complicated tasks that they're asked to fulfill? Yes. I mean, in response to your first question, I mean, sure, you appreciate it. I mean, Apple and Google do not manufacture things themselves. Right, but they are hiring manufacturing people. To what? You're right. It's a good question, but they're hiring manufacturing people, people with manufacturing experience. Okay. Well, Tesla actually 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. And 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. And so now this is just a philosophical difference, Perhaps we are wrong. But 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. So I think that's all the time we have. With the supplier question. I don't understand who you're referring to. Herbiger. Not familiar with that name. Yes, the original. We're certainly going to try to we're still going do our best to ensure that we have high confidence in the suppliers on the Model 3 program. Those that didn't perform very well on, say, prior programs will 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.