Earnings Call: Q2 2014

Jul 31, 2014

Good day, ladies and gentlemen, and welcome to the Tesla Motors Second Quarter 2014 Financial Results. At this time, all participants are in a listen only mode. Later, we will conduct a Q and A session and instructions will follow at that time. I would now like to turn the call over to your host, Jeff Evanson. Please go ahead. Thank you, Patrick, and good afternoon, everybody. Welcome to Tesla's Q2 financial results Q and A Webcast. I'm joined today by Elon Musk, Tesla Chairman and CEO JB Straubel, Tesla Chief Technology Officer and Deepak Ahuja, Tesla's Chief Financial Officer. We announced first 2nd quarter results today in our quarterly shareholder letter. The letter is available at this time as a link to our website at ir.teslamotors.com. There'll also be a replay of this webcast available later today at the same link. Please note that certain financial measures used in this call such as revenue and income are expressed on a non GAAP basis and have been adjusted to exclude the effects of lease accounting used on Model S sales with a residual value guarantee and charges related to stock based compensation. Our GAAP results and reconciliations to non GAAP measures can be found in the shareholder letter. During this call, we may discuss our business outlook and make other forward looking statements. Such statements are predictions based on management's expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. And Patrick, why don't we turn it on over to the first question please? The first question comes from Adam Jonas with Morgan Stanley. Your line is open. Hey, everybody. First I had a question on your forward year guidance of 100,000 unit run rate by the end of 2015. Can you give us some sense of how much of that's coming from China? I mean, we understand that demand for your products in China is off the charts strong, but we're a little concerned about your ability to deliver and service the volume while focusing 100% on the quality and building the brand authenticity. So maybe how many China stores or service centers would you need by this time next year that might be commensurate with that volume target? Sure. Well, and just to sort of give you rough guesses on the $100,000 run rate at the end of next year, which I think is, you know, ugly one of the most interesting things in our newsletter, which you picked up on. We're expecting that to be sort of roughly split between X and S. So we're talking a little over it's roughly 1,000 units a week of each. And when you look at the market demand for SUVs and Sedans, that's about the split. It's almost exactly fifty-fifty. In fact, I think recently SUVs might have slightly edged ahead of sedans. So if we it's sort of reasonable to expect that if one has just to address the demand and then the servicing side of things, reasonable to expect that if we see sort of a comfortable 1,000 unit demand on the sedan side, well, probably we should expect that similar number on the SUV side. My guess is we'll actually see slightly higher on the SUV side. I think the Model X is going to be a phenomenal car. On the service front, we are spending a lot of money on service expansion. That's our primary in the sort of sales and service arena, it's primarily service, like an overwhelming majority of service really. Good. So it's not really like our concern is not demand generation, but how do we make sure that that demand is well served. So in terms of stores by the end of next year or number of service centers, I should say, by the end of next year, actually, I don't have that offhand, but it's probably on the order of 100 in China alone, I'm guessing, by the end of next year. And we are and probably worldwide it's on the order of 300. This is I'm sticking off the cuff here. Sure. But probably north of 300 worldwide. And I'd say I've been very impressed the Tesla China team and the quality of people that we're attracting in China. I mean, I think the Chinese team is smart and they work super hard. So and the pace of progress is just amazing. So I feel pretty comfortable about being able to do good service in China, great service actually. In fact, like the key metric we measure in service is the percentage of customers that are delighted, which is a 10 out of 10 score. That's the primary thing we look at. And our goal is to get that worldwide to a majority of customers. And domestically, I believe we're actually but in the U. S. We're about 70% of customers who experience service rated as perfect or yes, 10 out of 10 essentially. And another key metric we measure is the average time to service something. So it's our average is less than a day. So the car is so in most cases, we can actually pick up your car, fix anything that's wrong with it and give it back to you without you even knowing it was gone. So you just tell us my car is at my office and this is where it is. And we'll pick up the car, fix it and get it back to you before you finish work. Our goal of service is sort of invisible up, which is you don't even it's like Matt it's like Elle's service driven. You don't even see it. It's like it happens so fast. And when it's done, you love it. And so I think there's like there's an interesting opportunity to revolutionize service as well. It's not just like, oh, just do the same thing as before. I mean, there's a lot of lessons to learn from the Formula 1 per crew approach. So because we're not trying to sort of milk customers for the most amount of money possible in a service, which is typical of the conventional auto industry, We want to get the job done super fast and then also make sure that you don't like we want to anticipate issues so you don't have to come back again. And so we actually bring the car in and we kind of hit it with a pit crew, like a 0.01 pit crew. So instead of having 1 person per bay, the car gets slowly worked on over several days. It actually comes in and a team attacks it and we're constantly improving the tools and the metrics to say how can we get the car perfect as fast as possible. We're actually bringing in people from Formula 1 to help with the trading on this. And I think there's real opportunity to revolutionize the way service works. That's great color, Elon. Can I just ask a follow-up? Outside of BMW, can you say any other parties that have expressed interest in your patent sharing gesture? And I'm curious to think, why you think the why the industry is moving towards hydrogen in this or so much of the industry seems to be pushing hydrogen like crazy in the past few months. Is this just some bullshit move to kind of get carb to rewrite the rules on EVs? Or do you think they actually believe the stuff? And then just finally, can you confirm the rumor that Mr. Burns tries to kill you by running you over in an IA? Thanks. It doesn't have to kill me in The Simpsons, but not in an IA. Maybe a whole. Yeah. Well, I don't as you know, I'm not the biggest proponent of hydrogen. It's just our view, JV and my view and Mr. Raso team tells us like that really if you take a theoretically optimal fuel cells car and compare that to a current in production battery electric car on key metrics of mass, volume, complexity, cost, refueling infrastructure, it's just it's a loss. So if the best case in our opinion, the best case fuel cell car and obviously the current fuel cell cars are far from best case, cannot beat the current case electric car, well, why even try? That just makes no sense. Success is not one of the possible outcomes. JV is there anything you'd want to elaborate on that? I think that really is pretty clear. The only real benefits that get touted for fuel cell and hydrogen vehicles are potentially range and refuel time, but both of those are not sustained benefits when you look at where battery technology is today and certainly where it's going in a few years. So I think people make a mistake of comparing today's technology with future potential technology instead of 2 technologies at the same point in time. Yes. I mean, I just even if you take a theoretical optimal like theoretically perfect fuel cell carcinogens don't think you sold it. Then JB, like why are they doing this? That's why I asked if it's BS. Is this kind of a diversionary tactic? Or do you think they're just not on what's up? We're quite confused about this. Yes. It does not make a lot of sense. And I mean, we didn't even touch on the infrastructure challenges that Hydrogen brings, but building out that infrastructure is substantially more expensive than building out any electric vehicle infrastructure and there's almost none of it today. Yes. Also I don't think you understand like hydrogen is an energy carrier not an energy source. So you have to create the hydrogen, which is really inefficient because you either have to crack a hydrocarbon or electrolyze water. And if you want to do it renewably, the water electrolysis route is really the only Yes, which is super inefficient, yes. And then hydrogen has very low density. So if you're going to pick a chemical energy storage mechanism, the hydrogen is a terrible choice. Like at least do methane CH4, you'd lock up the hydrogen with 1 carbon atom or something. Anyway I think that answers the question. It doesn't make a lot of sense. Yeah. All right. Thanks a lot, Adam. We should get to the next caller please. Our next question comes from Andrea James with Dougherty and Company. Your line is open. Thanks for taking my questions. First one is I guess about quality control. Can you talk about the improvements you've made in quality control and where you think needs to go, maybe with a nod toward what's going on with the drivetrain systems? Sure. We definitely had some quality issues in the beginning for the early serial number of cars, because we were just basically figuring out how to make the Model S. And I think we've addressed almost all of those for current production cars. I mean, not all, but the vast majority have been addressed in cars that are being produced today. And we're also getting better at diagnosing what's wrong, because in some cases we particularly with respect to the drive unit, we would think that something's wrong with the drive unit, but it's actually something wrong with another part of the car. And then we'd replace the drive unit and that wouldn't solve the problem because the drive unit was not the problem. And we had one particular case where there was vibration and it was due to the cable detaching itself and touching the drive unit assembly and causing vibration to be transmitted to the body of the car. And it was somewhat pernicious because if the cable moved a little bit and so that it didn't provide a conductive path, then you would the vibration would go away. So you'd replace the drive unit, you'd temporarily tuck the cable back and think the problem was solved and it was but then the cable would vibrate itself down and transmit the energy. So, I mean that the cable thing takes us like it's nothing to fix it. It's like literally it's like a $3 cable tie to solve it. So there's a bunch of things like that which are just misdiagnosis problems that we've obviously addressed. There are a few items that will need a fair number of drivetrains will need to be serviced on it's actually related to one in particular is related to the differential and we need to shim the differential. It doesn't require a gripe unit replacement. It just requires a technician to and so to shim. We're going to have to do that on a fair number of cars. But that's like a $0.50 shim. So it's really I wouldn't assume that there's going to be some vast number of drivetrains that will need to be replaced. But there's several service buildings that we'll be instituting to everyone, many of which we already have instituted to address the issue. And every week I have a product excellence meeting, which is to which is a cross functional group, so we've got engineering service and production and we go over all the issues that customers reporting with the car and develop action items that had to be addressed to get the car ultimately to the platonic ideal of a perfect car. That's what we're aiming for. Because although I think we've got great service, the best service is no service. That's really what we want is a car that never needs to be serviced. And I think we're getting there quite rapidly. Would you say you're satisfied or more so with the quality control function and team you have in place? I think at this point, we've got an excellent quality control team. And we weren't there in the beginning, but I'm confident that we're there now. I mean our aspiration is sort of order of magnitude better quality than any other car. And we will keep at it unrelentingly until we get there. And then just to flip over to the Gigafactory, it says in the shareholder letter you've broken ground in Nevada. And I it's out there in the blogosphere that construction is paused. So I guess my question is, why slow it down? And do you have a drop dead date for when you really need to make sure you're really up and going? Yeah. We've essentially completed the creating of the pad, the construction pad for the Gigafactory in Nevada. So in terms of creating a flat pad and getting the Rocky foundation that is substantially complete, there's still a little bit of work ongoing. We're going to be doing something similar in 1 or 2 other states, which is something I previously said we'd do, because I think it makes sense to have multiple things going in parallel. Before we actually go to the next stage of pouring a lot of concrete though, we want to make sure we have things sorted out at the sort of state level, but the incentives are there that makes sense and prepared at the state and Tesla. But I do want to emphasize that we're not Tesla is not going to go for a deal that is unfair to the state or unfair to Tesla. We want to make sure it's compelling for all parties. And yes, I think on the Nevada side, at this point, the ball is in the court of the governor and the state legislature. Is Panasonic having any input into the site selection process? We're keeping them closely informed and so that they're aware of all the details. And they haven't volunteered advice necessarily. We'd certainly listen to their advice if they provided it, but they seem to be in accordance with our very own location. Yes. And Tesla is managing all of the utilities and infrastructure at the Gigafactory sites. So in that regard, Tesla is basically aggregating the inputs and requirements from not just Panasonic, but other potential partners as well. So it's primarily Tesla's role to be evaluating those sites. Appreciate. Thank you so much. Our next question comes from Ryan Brinkman with JPMorgan. Your line is open. Good afternoon. Thanks for taking my question. Earlier in the year you had discussed a potential I think $4,000,000,000 to $5,000,000,000 investment that could get back through 2020. Is that still the number that you're working with? And I think too you had planned for the CapEx to be shared by the Gigafactory partners. In your press release this morning, you mentioned that Panasonic will provide equipment, you the buildings, utilities, etcetera. Do you think you're on track to sign suppliers on to provide $2,000,000,000 to $3,000,000,000 of investment? And over what rough timeframe might we expect you to announce those partners in their respective investment commitments? Sure. Yes, that $4,000,000,000 to $5,000,000,000 number is I think we think probably accurate. I mean, particularly over through 2020, I think it'll be maybe closer to $4,000,000,000 maybe slightly less than that before we get to initial high volume production. But then as we do continued investments to improve output and improve the technology of the pack, It's probably closer to the $5,000,000,000 over the 2020 timeframe, but probably less than $4,000,000,000 to get up to serious production. And then of that number, we see Tesla probably providing 40% to 50% of the total. Panasonic probably about 30% to 40%, the states maybe 10% and other industrial partners about 10%, maybe 15% to 20%, depending on how vertical we go with the factory. And with having signed the contract with Panasonic, I mean, I think well, it was never really something that was in doubt from my standpoint. But I think some of those people take things that Panasonic says, which are I mean, they're going to be fairly conservative in their words, but I think the actions are really what matter. And Panasonic has always taken the actions of an excellent partner. We feel confident that there will be the amount of money needed to reach the 35 gigawatt hour level at the cell at the cell level and 50 gigawatt hour at the module and PAC level. So the module and PAC stuff is all Tesla internal. And then we're expecting precursor suppliers of the precursor materials from the anode cathode separator maybe the electrolyte to be also present in the factory. Great. That's extremely helpful and reassuring too. Switching gears, last question. Is there anything you can say at all on the trend to Model X orders? I know that you don't disclose backlog, but perhaps you could speak qualitatively to it, maybe how it compares to when you first started taking Model S orders or how many are maybe returning customers? Is there any difference geographically and who is preferring an SUV versus sedan, where the orders are coming from, etcetera? Sure. Well, first of all, it's important to appreciate for the X that there are just to put the orders in context, there are no cars available for a test drive. There is no information about the cars in our stores because we're only selling the S. In fact, if somebody comes in and wants to buy the X, we try to convince them to buy the S. So we anti sell it. And we don't really provide all that much information or details about the car or provide a really definitive date on when you can get it. Despite all that, there's huge demand from all around the world for the X. I think that actually people are right even though they don't have enough they don't really have enough information to know they're right, but they are. Great. Thank you. Yes. Our issue is not we will not have a demand issue. Yes. Thanks. Our next question comes from Colin Langan with UBS. Your line is open. Great. Thanks for taking my questions. Just on the 100,000 exit rate in 2025, is that I guess that implies that the battery constraints will be limited? And at what point should we think of sort of the battery constraint limiting you until the Gigafactory comes online? Sure. I think you can sort of see we see a path to potentially 150 1,000 cars a year, maybe if you really push it 200,000 cars a year without the Gigafactory. So the Gigafactory is needed for that sort of incremental 300,000 cars. But we can probably I would guess that probably it could be pushed to a couple of 100,000 units cars a year with the existing with or without the Gigafactory. That's probably a good guess. And so, yes, we'll sort of see where that leads. And on the Gigafactory, I mean, is the chemistry going to be the same battery chemistry that you're currently using? Or is that part of the discussions that are going on with Panasonic? There are improvements to the chemistry, as well as improvements to the geometry of the cell. So we would expect to see an energy density improvement and of course a significant cost improvement. Jay, do you want to hear that right? Yes. That's the cathode and anode materials themselves are next generation. So we're I mean we're seeing improvements in the maybe 10% to 15% range on the chemistry itself. Yes. In terms of energy density. Energy density. And then we're also customizing the cell shape and size to further improve the cost efficiency to sell and packaging efficiency. Right. We've done a lot of modeling trying to figure out what's the optimal cell size. And it's really not much it's not a lot different from where we are right now, but we're sort of in the roughly 10% more diameter, maybe 10% more height. But then since the cubic function sort of effectively ends up being just from a geometry standpoint probably a third more NG per cell, or maybe 30% -ish. And then the actual energy density per unit mass increases. Yes. Fundamentally, the chemistry of what's inside is what really defines the cost position though. It's often debated what shape and size. But at this point, we're developing basically what we feel is the optimum shape and size for the best cost efficiency for an automotive cell. Yes. But the chemical formula will be the same, it's just shaped differently or? No, no. It will differ from me. Yes, yes. Okay. And just one last question. It sounds like the Gigafactory might be very vertically integrated. How do you think about that for the assembly of the model at a Model 3? Do you need to be highly vertically integrated? Or do you think you'll probably outsource more of that to reduce the cost of that model? I don't think outsourcing decreases the cost and that tends to increase the cost in our experience. It's just like the reason we don't the reason we outsource stuff is just because we get too many fish to fry otherwise. But it's almost always the case that we've when we've in sourced something, it got cheaper. Yes. I mean it's just like if the thing that would make it really efficient is for any given technology level is to say how far did that molecule move? And if molecules taking several round trips around the world, that's expensive. If it's just moving one station to the next, then that's obviously lower cost. And so the vertical integration just means that the molecule doesn't move as much. And it's not being put in a box and then putting in a truck and then on a boat and then going through customs and stuff like that. So I think that's generally true that vertical integration and doing things at large scale results in cost reductions. I feel very confident about 30% cost reduction per unit of energy. We're obviously going to target something higher than that. Okay. All right. Thank you very much. The next question comes from Brian Johnson with Barclays. Your line is open. Yes. Thank you. Could you maybe help us understand how you think about the gap or how we ought to think about the gaps between production and deliveries. It looks like typically production has been running 900 to 1200 units in recent quarters ahead of deliveries. Your 4Q guide would actually imply deliveries roughly equal or actually a little bit higher than production. So can you help us kind of think through that? Production in Q4 was sort of significantly delivered, It depends on the mix of domestic versus international because when cars are sent to Europe or China, they've got to obviously get on a boat and they've got to go through customs and it's sort of a more lengthy process. So our average time for delivery of a car in North America is about 2 weeks ish. And then for international deliveries, you've got to add probably another 3 to 4 weeks on top of that. And we're trying to tighten that down a little bit. But then if you blend the 2, then maybe it's an average delivery time of 4 or 5 weeks. So for cars made in October, they will all be delivered in Q4. Okay. I mean, the math then works to go ahead. Yes. As we increase our overall production, there are 2 factors that drive that gap. 1 is the ramp of production increase. The other one is the mix of international markets. And even if the mix is the same, but we're increasing production, it creates a bigger gap each quarter. And then clearly, as we are shipping more to write and drive markets into China, our international mix is increasing too. So each quarter it's a slightly different story, but certainly there will be a gap as we continue. Okay. So the implication of that though is your production rate in 4 would be not slightly higher than 1,000 a week, but more than slightly higher than 1,000 a week? Yes, it will be sufficiently high that we still deliver to our expectations of slightly over 35,000 cars this year. Yes. And I mean, that's a question. At 1,000 cars a week, I mean, 1,000 cars a week steady state implies a 50,000 roughly delivery number in steady state. So it doesn't really need to be much all that much beyond $1,000 to achieve our goal on average for the Q4. Okay. And if you think about the difference between the roughly 500 to 600 deliveries per week this quarter and the 1,000 a week rate you're talking about, What how would you waterfall the step up in terms of the contribution of the 3 key geographies Europe, China and obviously Hong Kong is part of that and then North America? I mean long term I'd probably I'd say it's a well, it's not just China and Asia, of course. But I think long term, we're probably looking at this is just a guess, but I mean it's maybe 40% Asia, 40% North America, 20% Europe as a rough guess. And Asia is more than China for sure. We think we'll do reasonably well in Japan And we'll at some point go into Korea, Hong Kong, Hong Kong sort of being sort of China, it's a part of China especially not a special administrative zone I think. And then Australia and New Zealand and that kind of thing. So it's probably 40% Asia Pacific region. And then we tend to do very well in our home markets in North America, hence the 40% there. And then Europe, it's I mean, the demand is just not generally strong in Europe, but it's hard to say, Europe could have been 25% or 30% of the mix. This is just a rough guess. Okay. Thank you. Our next question comes from Rod Lackey with Deutsche Bank. Your line is open. Hi, everybody. You brought up a few times the future case electric car and you also mentioned that you're comfortable even in the near term with a 30% reduction in costs for batteries for PACS, most of which you said is logistics. I wanted to ask you 2 things on that. One is that additional 10% to 15% that you talked about related to anode and cathode chemistry and geometry, is that incremental to the 30%? And if you took a step back and thought about the trajectory for this in the next 10 years rather than the next 3 years, What would you sort of what do you see on the horizon? Is there kind of a case for $100 per kilowatt hour pack in 10 years? I would be disappointed if it you're saying that within the next within that timeframe, you would expect electric vehicles to reach cost parity and maybe even improve upon the cost of an internal combustion vehicle? Yes. That's interesting. Now, it's another that's a pretty big statement. But I just want to correct something. In your question, you had it actually, the sorry, just to be corrected, like the so the 30% savings is not just due to logistics. The logistics is a big factor. We are Not even the biggest though. Yes. Well, logistics, if you consider the fact that it's just going from one station to the next instead of going from multiple entities to multiple entities. But we're really when you get to the concept scale that we're talking about, you really get to design custom equipment that's much better at processing each step. And you really get to design the machine that makes the machine, not just do so with off the shelf equipment. So just everything about it is going to get a whole lot better. That's why we think the 30% number when the Gigafactory is at full production is a conservative number. Yes. And then yes. To get to those kind of targets beyond the 30%, is there some kind of breakthrough anode chemistries or things that you're looking at that you think are highly probable that are needed? Or is it just a bunch of incremental steps that you see kind of playing out over the next years? We're tracking things that have a whole range of different horizons for implementation. But to get to the to realize the Gigafactory and those cost targets, we don't need some fundamental breakthrough in chemistry or material science. Those things are pretty well understood in front of us. In the long term, there are a lot of interesting long term being the 10 years perhaps you mentioned or more. There's many very interesting things on the horizon with reducing probabilities as you go further out. Yes, absolutely. It's yes, it's heading to a place of no contest with respect to gasoline. But I mean, we're trying to make it go there as fast as possible because time is important here. The sooner this can be done, the sooner we can reduce carbon output and reduce the probability of a catastrophe. So, yes. In the absence of Gigafactory, this progress would be much slower. Yes. Just wanted to ask a quick kind of near term question. Now that it sounds like you're buttoning down a lot of things with regard to the Gigafactory and expansion of service centers and things like this. Can you share any kind of high level thoughts on how we should be expecting the trajectory of your CapEx, R and D and SG and A as we look beyond this year? Just maybe some kind of broad ranges into next year? Rod, we can share more details towards the end of the year as we look further out. But clearly, given the huge ramp up in our deliveries and consequently our revenue, we should see a significant improvement in our operating expenses as a percentage of revenue as we go forward. And then we can provide you a little bit more granular guidance as we go further up. Yes. I should also say like in the past, Ted was we've shown all of our cards. So you people have kind of gotten used to us showing all of our cards. We're not currently showing all our cards. Okay. All right. Well, thank you. Our next question comes from Patrick Archambault with Goldman Sachs. Your line is open. Hi. Thank you very much. Just a question on the cadence of sales with the guide for deliveries of 78 for next quarter, it does appear that you are going to be starving some demand there certainly, which is going to clearly get allocated into the following quarter once the changeover is done. But I guess how do you think about just the risks of kind of associated with hitting that target. I guess if the math is right, I think you go from 78,000 to 13,000. It just seems like an awful big ramp, maybe not in absolute units, but certainly kind of you think about it almost doubling. So how should we think about that in managing that? Sure. That's like we try to because I agree, it does seem like a sort of a crazy leap. But we try to address that by pointing out that there's 2 weeks missing in Q3 because of the factory retooling. And those are 2 weeks at fairly high production. So you can add almost 2,000 units to what Q3 really would be if we didn't have that 2 week interruption. So it would actually be more like 9,500 units or something like that in terms of Q3 deliveries. And then it's like, oh, okay, it's much more of a you can see how we get from sort of 7,500 to 9,500 to 12, 13,000 whatever the case may be. That seems the progression is much more sensible in that context, I think. Yes, it certainly helps us understand in terms of kind of the underlying cadence of purchases, if you will. I mean, I suppose even though we're talking about deliveries, but the I guess the one question I would have is how about in terms of the number of service centers and just the logistics of actually being able to physically deliver these cars? Is that a constraint or a risk in any way, I suppose? No, because we actually will be delivering at the 1,000 or 1,000 plus per week rate at the end of Q3. Okay. Understood. And then I guess another related question, if you have any color on this is, if you just kind of go through what you've laid out there and hold the regional delivery rates kind of constant with where they came in, in Q2. I mean most people sort of have those through various sources. It does imply again that it's clearly you're starving 1 or more regions in Q3 in terms of demand that they'd want but can't get. But for Asia, it implies something like maybe 5000 to 6000 units of deliveries, at least on our preliminary math. And I guess that's a similar number that you already? I'm imagining the answer is yes. You've got a backlog for already? I'm imagining the answer is yes, but I was just kind of curious. Demand will not be a problem. Yes. It's like an interesting little item like how many stores are we building? Wow, we're building hardly any, building lots of service centers. We can drive demand up at will. But if we keep if we drive it up too much then people get upset with us because they wait too long for their car. And when a guy in China got so upset that when he got his car he bashed it which seems self defeating, but his stated reason for fashioning the car was that we took too long to deliver it to him. I'm like, okay. But and when I was visiting China, the only unhappiness I saw was that customers were upset about waiting too long for their car. So, but boy, we better not stoke demand in that situation. And sales per square foot on our stores, I believe Apple's normally the leader on sales per square foot. Our sales per square foot are double that of Apple's. Thank you. That's helpful perspective. If I could just ask one more, just building on Rod's question, as you think about OpEx, I know you're not giving guidance for next year Deepak, but clearly what you've laid out for your expansion of service and distribution obviously that's an expense that we expect to increase in a fairly steady way. How do we think about just R and D in the shorter term? I mean, obviously, it's fairly elevated. I think the math implies more than $400,000,000 this year if I'm doing it right. Is that something that takes a little bit of a breather in terms of the growth rate or just given the significant product ramp you've got it, it's something we should look to continue to increase in the future? Yes. We are doing a lot of product related actions at this point and that is creating an artificial pump and especially Model X and other activities that are going on. That will sort of slow down, but then we want to work on so many exciting things. I don't want to just suggest that R and D will slow down. I think if there is one place you want to spend money, it's there and do more exciting stuff. So I think we'll just provide information as appropriate further on. Yes. I mean, I was saying our CapEx and R and D numbers are better than they appear because they're things you don't know about. Well, okay. A lot of interesting stuff to look ahead to. Thanks for the color guys. You're welcome, Patrick. Our next question comes from John Lovallo with Merrill Lynch. Your line is open. Hey, guys. Thanks a lot for taking my call here. First question is, I mean, there's clearly a lot of excitement and anticipation about China. It just seems that the Chinese government is doing just about everything in their power to kind of favor the domestic OEs. I mean, whether it's the 10% purchase tax avoidance that won't apply to imports, the charging station standards that at this point don't seem to be compatible with Tesla's technology. And even I mean they're allowing or thinking of allowing non OEs to have licenses to produce autos, including the owner of Fisker and A123 who might be in that race. So I guess the question is, I mean, how do you see this kind of environment developing? I mean, do you think there's going to be this increasing pressure from the Chinese government to kind of favor the domestic guys? Actually, I've been pretty impressed with the Chinese government at all levels, the city level and national level. They're actually I mean they have done some proactively actions certainly maybe quite a bit in the past, but I don't think that's going to be the path going forward for them. And actually for the sales tax exemption, it does actually apply to non Chinese cars. So I think you may be misinformed there. There are we have to adhere to Chinese charging standards, but we are going to do so. The challenge was that those standards weren't defined until about a month ago. So it's a little tricky to adhere to something that has not yet definitively been announced. Now that it has, we're committed to meet those standards and we expect to fit within the sales tax exemption. Yes. Yes. It's actually a very relatively simple matter to meet the Chinese standards. They're very familiar and quite close to European standard. Right. Yes, exactly. And we already meet the European standard. So we currently serve the U. S. Standard, the European standard and then we'll be serving the China standard which is as JV said very similar to Europe. Okay. That's very helpful. Yes. In Shanghai, we've got the exemption on the license plate fees, which is on an imported EV. So it's not just for local EVs that those policies are being applied. And we are having discussions in other cities where that's a possibility too. So I think so far it's been an overall a positive reception that we have received. So it's been good. Yes. They're genuinely committed to electric cars. And it's not just about favoring local manufacturers. Okay. That's helpful. And I guess the second question would be recently Edmunds put out a report on I guess, their 1st year with Model S. And obviously, everyone has their own opinion on this. But there's been a lot of talk about quality on the call. And what the Edmonton was saying and you may have read it is that there were something like 28 to 30 service campaigns that were not part of the regular schedule maintenance and because of that they couldn't recommend the car. So I just was curious how you guys might respond to that? Well, there were definitely there's definitely some genuine issues in the end of the car, but they had one of our early production units. And that's a lot of in fact, most of the problems that they've encountered there are not present in current cars. We also I think this maybe ended up being counterproductive, but the service team was ultra proactive with the Edmunds car. So they would they were doing their best to make Edmunds happy. And I think unfortunately that resulted in changing things out that just on the off chance something might go wrong. So and that drive unit issue that I mentioned earlier where the drive unit was sometimes replaced because even though it wasn't a drive unit problem that happened with them twice. So it's an unfortunate sort of case, but I don't think it's broadly correct. And it's definitely not correct for cause that made in like the past year. Yes. If I might add one thing on the drive unit replacements as well. I think it's important to note that the drive unit is a very complicated sort of assembly of different components and the pieces that have needed service and have failed internal to the drive unit are relatively not very expensive. And they're being replaced in order for expedience and to get the car back on the road for the customer in the minimum time. But going forward, we're looking at ways to repair them and give people back their same drive unit very, very quickly in about the same amount of time. If you had to replace your internal combustion engine every time something small went wrong Yes, turning it into gasket or something. That would scale. It's literally like the sort of small shim that I was mentioning, is equivalent to replacing a minor gasket on a terminal combustion engine. And normally you wouldn't give someone a new engine for that. But our optimization was customer happiness. So until we knew exactly what to do, we just wanted to give people back their car right away. Okay. Thanks a lot guys. Next question? Just to add from a cost perspective, since these are not significant, the overall impact on our warranty reserves has not been significant. Right. And we're going to be at and select car is 10x better than any other car on the road. Thank you. Our next question comes from Ben Kallo with Robert W. Baird. Your line is open. Hey, thanks for taking my question. As we look ahead to next year and the 100,000 unit by the end of next year, is the biggest production increase happening right now over these 2 weeks? Or is there some other step that has to take place next year to get you to that level? Well, there is a big step that's expected to occur in Q1 next year, which is the bring up of the body line, the Sx body line. So what we did the past 2 weeks is the assembly line where it's basically the bits get put together. But then there's the body line is where the body itself is welded together welded and bonded together. So in fact the core skeleton of the car is created. And so you can anticipate probably well, I'm not sure if it may or may not be okay, actually may have so I take it back. We're going to bring the body line up in parallel with the current line. Yes. So unlike this case with the assembly, we had to we couldn't have 2 complete assembly lines. We had to stop and retool. In the case of the new SX body line, which is a line that's designed to be capable of 2,500 units a week, maybe more than that, conservatively 2,500 units a week at a lower cost point. We should be able to do that in parallel. Got it. And like And I should say that sorry, another thing that's going to be see a big upgrade really big upgrade is the paint shop. So, there are a few cases where advanced CapEx spending makes sense even though it's going to pay off in sort of 2 to 3 years, but it's just such a big improvement that you kind of want to do it even at a high discount rate. So our paint shop is being upgraded. It's going to be the most advanced automotive paint shop in the world. But it's expensive to do that. And then we like watching Halle Berry every week, but can you give us any details on when we can see the Model X? And then there's slightly different language about the alpha and beta that I think is new. So could you just tell us the difference between the alpha model and the beta model? Yes. So the X that was produced the sort of the show car or advanced prototype is sort of pre alpha. The alpha itself is the production it's basically a production design. We're going to move very quickly from alpha to beta. So in this case like for the Model S, the alpha was a lot more primitive than the X will be because of course we didn't for the X we've got all the chassis and power train stuff that's been done for the S that we can build upon. In the S case, we didn't have that. So, it's really a very advanced alpha CAR that we're producing for the DX. And we'll move to beta within 3 months. So, it's a real fast alpha to beta. And you can expect to see production cost not in customer hands, but kind of on the road doing test and validation in Q1 next year. We'll have quite a few of those. Great. Thanks so much. Our next question, Alex. And something I do want to emphasize with the X is because we're moving very quickly into a high production mode as opposed to the S. The S had a Model S had a long production slope, so starting off very slowly and then we've taken kind of 6 months to reach the 400 unit per week level. In the case of the X, I mean, we're going to try to move to sort of a several 100 units a week within 3 months of production. So it's like half, maybe less than half the length. Yeah. Because of that, we really want to do serious validation on the car, test the heck out of it before going into volume production. Thank you. Our next question comes from Colin Rusch from Northland Capital Markets. Your line is open. Thanks so much guys. I just wanted to make sure I heard these numbers right. So we're going from 1,000 to 3 1,000 cars a week in 2015. So if I take the mid range of that, 1500 cars a week or production levels of 78 1,000 cars per year. And if I heard correct on the delivery timeframes, you're about 2 weeks in North America and something like 5 to 6 weeks overseas, which you're trying to shorten up. So we'd be thinking about works in progress of roughly 10%. So are those numbers right in terms of how I'm thinking about kind of targets for you guys for next year? It's difficult for us to predict the slope of next year like so what is the slope what is the exact curve of the production rise look like next year? We feel confident of exiting next year at 2,000 units a week of production and demand, absence like some macroeconomic shock. But it's hard to say exactly what the area under the curve looks like. But it's yes, so it's certainly more than 60,000 I would think. But yes. Okay. That's perfect. And then can you talk about the weight reduction efforts that you've got going on right now with the vehicles? And how should we think about the cadence of pulling weight out of the vehicle and potential translation of that into extended range? Well, the partial on weight versus range is not it's not super strong. There is an improvement, but it's not a huge improvement. But the Model S has gotten steadily lighter over time. It's really like it's a0.25 pound here, half pound there. But the modulation production today is at least a few £100 less than the finished product production. And we'll continue to see improvements over time. So to get to a step change on I mean, there's so many pieces in the car like you've got the battery pack, the motor, the transmission or rather the gearbox, the tires and wheels, the seats. If you got like a big improvement in any one of those items maybe with the exception of the battery pack, it's still it only changes the weight of the car by like 1%, 2% or something. These are all good things, but but there's not like one big block of lead sitting in the car that one can remove. It requires whittling away at a whole bunch of things. And the range impact is weight is one fraction of back on range, so even smaller than the direct percentage of weight reduction. Yes. But it is getting slightly better over time. It's hard for people to sort of perceive it from 1 month to the next, but if you look at it over the course of a year, you'd notice. Great. Thank you. The next question comes from Andrea James with Dougherty and Company. Your line is open. And Patrick, I should have mentioned that we probably need to cut the call off after this question. So have this be the last question please. Go ahead, Andrea, sorry. Please check your mute button. Andrea James, your line is open. I guess she's no longer in queue. So with that, I guess we'll call it a day. And thank you everyone for joining the call and we look forward to talking with you for our Q3 earnings release. Goodbye. Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.