Earnings Call: Q1 2014

May 7, 2014

Good day, ladies and gentlemen, and welcome to the Tesla Motors First Quarter 2014 Financial Results Q and A 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 that time. I would now like to turn the call over to your Jeff Evenson with Investor Relations. Please go ahead. Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's Q1 financial results question and answer webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO and Deepak Ahuja, Tesla's Chief Financial Officer as well as JB Straubel, our Chief Technology Officer. We announced Q1 results today in our quarterly shareholder letter. This letter is available at the same link as this webcast. Also a replay of this webcast will be available later today at the same link. Please note that certain financial measures used on this call such as revenue and income are expressed on a non GAAP basis and have been adjusted to exclude the effect of lease accounting used on Model S sales with a residual value guarantee and charges related to stock based compensation. Our reconciliations to non GAAP measures can be found in the shareholder letter. During the course of this call, we may discuss our business 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 Form 10 filed with the SEC. So we are ready to take questions. To take questions. We are going to try to limit the call to about 45 minutes. So please be respectful of other callers by limiting your questions. So Patrick, let's have the first question please. Our first question comes from Brian Johnson with Barclays. Your line is open. Yes. Good afternoon. I know, Yaron, you're back from China. Just want to get a sense of what the order book in China is looking for? How much of a contribution that's going to make to your especially second half implied delivery targets? And then do you have to get beyond Beijing or Shanghai this year in order to grow further in China? Well, I really don't think we've got any kind of demand challenge in China. In fact, I was blown away by my business in China at the level of interest and enthusiasm for Tesla the amount of goodwill that I encountered from people at all levels from the government, from people in industry and consumers in general. And I'm really optimistic for how things will go there. We are trying to expand our service centers and supercharger coverage as fast as possible in China. It's not to generate sales. It's just in order to be able to deal with the cost that we deliver in market. So we're really doing very few stores in China. Our focus is 90% plus on service centers and superchargers. And then I think we'll actually have to limit the amount of cost we send to China otherwise it would starve the rest of world production. So I mean that's really how we view things there. I did mention that we are likely to do local vehicle production in China in 3 to 4 years. Although I should mention that goodwill existed before I said that, it wasn't that didn't make goodwill wasn't as a function of that. But that will be for vehicles delivered to the local market in China and maps to some surrounding countries. And actually just to be clear that wouldn't mean shifting any production from California. That would be assuming that California is starting to reach its max production. It makes sense for us to start looking at local country factories. And I think we'd be looking at 1 in Europe as well. Just to I mean these really end up minimizing the logistics costs because shipping 2 tons of metal over long distances is not very efficient. So it's just a sensible thing to do is to try to satisfy local demand with local production over time. And any sense of quantification either the orders or the deposits or the wait times in China? We're actually really trying to get the wait times down in China. That's it's really quite a long wait time. In fact, the only source of unhappiness that I encountered in China was that some customers who are in some of the midsized cities are unhappy that we're delaying their deliveries because it'll take us a bit longer to get the service and a supercharger access. But the service isn't necessary what we're planning. We can have a service center be like 500 miles away from where somebody lives. So that's the our biggest decision in China is like customer unhappiness that they're not getting their cars soon enough. And I think the wait time is quite long in some cases like 4 months or 5 months or something like that. Thanks. Thanks, Matt. Our next question comes from Andrea James with Dougherty and Company. Your line is open. Thanks for taking my questions. Your R and D expense is ramping pretty significantly sequentially in Q2. And I was wondering if you could just talk about what components make up the R and D increase? And then also in line with that, how are the costs to bring the Model X to market kind of tracking against your earlier expectations? Yes. Hi, A. J. So our R and D expenses went up exactly as planned in Q1. And it's primarily driven by all the engineering design and testing work that's going on, on our new product development. It's the Model X as well as what we're doing to get the Model S ready for China and other markets. Yes. For example, it's like Right Hand Drive is Exactly. Japan localization, U. K, Hong Kong, I can't thing. Right. So it's more driven by those expenses rather than just headcount increases. And so these are the cyclical expenses that you typically see before the launch of new products. Yes. I should say that some of that is also that we want to do ongoing improvement to the Model S. As times go by, we've made hundreds of small improvements to the car. And like a lot of these people wouldn't necessarily notice, but I think collectively they add up to an improved experience with the car. So we've made some improvements in seat comfort for example. And share and there in fit and finish, we're modifying the rear doors so it can open wider. So rear ingress, egress is improved. There's so much software improvements that we talked to. So I think there's some it's very exciting software updates that are going to come out in the next few months that will improve the experience for the whole fleet of customers out there. And if anyone is thinking about asking me about that, I'm not going to say what they are. So just a lot of information as it is. But I think customers can certainly look forward to some really awesome functionality improvements in their existing car. We're doing a lot more in country testing before launching in new markets to make sure it's an outstanding customer experience, doing that in China and doing it in other countries too. Yes, exactly. It's I was mentioning a bit earlier like the there was a bit of unhappiness in China about some of the midsized cities delaying customers' deliveries. But what we found is that it's more important that we can service the cars really well that charging is sorted out and to make sure that when customers do get their car, they have an excellent experience. But I think we didn't do as good a job as we should have done in some of our prior market launches and want to make sure we recognize that mistake and correct it going forward. I want to make sure I mentioned Model X costs are also obviously driving the increased R and D expenses as we're working on Model X. Model X is like the biggest driver of R and D expense honestly. With the X, we're really trying to make an amazing car and very importantly, sell a car that with a production version is better than the prototype, better than the show car. I don't want to be surprising or crazy about the car industry. It's like you'll see often these great show cars. And then when you actually get the production car, some bizarre, dumbed down, facsimile of the exciting prototype that was displayed. That's terrible. So a baseline expectation, Tesla, that whenever we have a prototype, the production car is better in every way. So that's quite difficult to do and requires some creative problem solving with Model X. So one of the biggest challenges is the thought going through making sure that that is truly a step change in utility for the car and not a gimmick. So it's got to work perfectly and the details have to be just right. And it's amazing how like seemingly little things become quite significant engineering challenges such as for example getting the seals on the propylene door to work properly and not be too prominent. So that you've got a seal against rain, wind, snow and against road noise. And but you've got something that's articulating across multiple hinges. You've got T junction joints and that kind of thing. So it's quite a difficult ceiling problem to get it right and be consistent and remain good over many years. So we spent a lot of time on field engineering. Thank you for the thorough response. And one more and then I'm done. Why hasn't your Gigafactory partner or partners, why haven't they signed on the dotted line yet? I was actually I was very pleased to ask that question. So we actually do have a letter of intent signed with Panasonic. So we're happy to announce that, yes, we have a letter of intent signed. I mean, for us, that's actually not that big of a deal, because our expectation has always been that Panasonic would be the partner with the Gigafactory. I believe that's been Panasonic's intent. And in fact, just to make sure we're both on the same page, JB spoke with Panasonic yesterday just to make sure we're on exactly the same page. So, JV, do you want to just elaborate on that? Sure. Well, as Elon said, we do have a signed letter of intent. And under that letter of intent, we've also created a joint working team between Panasonic and Tesla that's working almost daily, certainly weekly, exploring all the mutual topics and answering questions and making progress. We're actually quite comfortable that we're heading toward final agreements in the later part of this year. And it's something where, as we said, it doesn't seem like a big step change. It's something that's been progressing smoothly for the last months and we feel confident in it. Yes. I think we're quite confident, highly confident at this point of achieving the 30% reduction in cost per kilowatt hour. Maybe moving towards, I say, cautiously optimistic about exceeding that number. I don't want to make any commitments, but I think we've got a decent chance of exceeding that number. As we explore the cost structure and the supply chain with Panasonic and with a number of other companies that make the precast materials, we found that there's really a lot of opportunity for innovation and for cost reduction. And in fact, we've had a number of conversations that are really interesting with mining companies, talking about some of the key constituents that go into the cell, such as the nickel and the cobalt, the lithium, although lithium is sometimes sort of as bigger thing than it really is for lithium ion cell, like using maybe a couple percent of the cell mass. But the biggest cost constituent is nickel. And we're still in conversations with some of the big nickel mines in Canada in particular. And we've been really, I say, positively surprised by the potential for cost reduction on producing the precursor materials. And it's kind of funny, it's like the it's working to like some of the mining companies, it's like nobody ever calls them. We call them up and like, hey, yes, we never get calls from companies like Tesla. It's like selling for the fundamental exchange or it's a big for stainless steel companies because nickel is a common alloying steel. And like cutlery, for example, usually involves quite a bit of nickel. So if your price of pork is usually, yes, electroplated nickel silver is usually what they do. So it's the mining guys are just like super happy to hear from us and have quite good ideas for how to optimize the cost of the materials for minimizing logistics and processing and just doing a fairly sensible thing. A lot of it's actually quite obvious to create a supply chain that can deliver a large volume of battery packs with dramatically reduced costs. And I should say, we're also trying to do our best to ensure that in the supply of the components for the cell that at our suppliers going all the way to the mine level are companies that operate in a good and fair way. And so like do they take reasonable care of environmental standpoint, do they take care of people working in the mine, that kind of thing. So as much as we can, we want to make sure that our suppliers are good suppliers. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open. First question just following up on the Gigafactory. Is the formal announcement or kind of more than a letter of intent a prerequisite for breaking ground on the ground on the 1st Gigafactory location. I want to be precise about this because I don't want any of the states with which we're talking to sort of have the wrong impression. We're going to move forward with breaking ground on multiple sites in order to minimize the risk of completion of the Gigapakary. And we expect to break ground on the first of those probably next month, So it's really quite soon. And then shortly thereafter, maybe a month or 2 after that, we'll break ground on the second one. And should also say that California is potentially back in the running. So that's I mean, it's still in the sort of improbable kind of kind of improving, improbable, but it is back in the running. And the governor and his staff have really, I think, tried to do everything they can to make California a significant candidate for the Gigafactory. The main thing with California is it's got nothing to do with incentives or anything like that. It's the time to completion of the Gigafactory. I don't think we did a good job explaining why California wasn't on the list of 4 states to begin with. And it's just because this is a large greenfield construction project. California has quite a complex and lengthy process for approval of greenfield sites. And so what we couldn't afford was waiting like a year or more for permits to proceed, which would, I think, ultimately show no environmental impact of any significance. But it would just take a lot a long time for the California regulatory agencies to process the information that they would need to fulfill their obligations under California law, whereas in other states it's much more streamlined approach. And since the vehicles will be built in Fremont in California, if we don't have the Gigafactory on vehicle capacity online, we will actually be in deep trouble because we'll have all the equipment and people for making cars, but not be able to produce battery packs. So that was the reason why California wasn't originally on the list. The government legislature are going to try to do something about that. But I think the question significantly worse than other states. Significantly worse than other states. So I think like I said, I think California is still in the sort of improbable, but not impossible category at this point. Okay. Thanks. Thanks, Yael. And I can just add a follow-up. When you're thinking about the Gigafactory, is the idea to have just one dedicated full cell supplier like a Panasonic? Or is it possible that it could be Panasonic and kind of some coopetition with another battery component or cell supplier kind of making another part of the sub cell, the cathode or hand odors? It just kind of is there kind of mutual or pure exclusivity for Panasonic, for example? And then finally on China, do you have or the expansion of other manufacturing in China or Europe, is that within the scope of your current capitalization and financial resources? Or is that something or that of your expectation of your cash flow generation? Or is that another item on the list that might require new capital at some point? Thank you. Yes. So the way the Gigafactory is set up right now is we Panasonic would be the only company producing sales in the Gigafactory. And one way to think of Gigafactory is like sort of like an industrial park under one roof. Tesla is producing the modules. Tesla is sort of the overall, I guess, landlord. When we're producing the modules and the battery pack, then the cells are would be produced by Panasonic. And then we'd actually have a number of other companies producing the precoses to the anode cathode separator electrolytes and so forth that have been feeding into Panasonic. However, if going back to our original sort of short presentation on the Gigafactory, you'll see that the cell capacity target is around 35 gigawatt hours, but the pack capacity is 50. So we expect to bring in cells from other cell factories in the world to make up the others for roughly 15 gigawatt hours. And those would be I would expect a lot of those will be Panasonic sales, but to the degree that Panasonic isn't able to meet that demand, there would be other suppliers as well. Thank you. Thank you. Our next question comes from Patrick Arkanbach with Goldman Sachs. Your line is open. Good evening. Just a couple ones here. Just in terms of the cadence of some of the OpEx items, I mean maybe just like R and D specifically, Deepak, you described how there's a sequential increase of 30%. Can you I guess the part of my question is, how do we think about it trending in the back half? And then sort of longer term, how do we see that as an expense as we sort of model out over the next couple of years? I think best in class vehicle producers probably have that in the mid single digits as a percentage of sales. But just given your growth profile, it would probably be higher. Can you help us just dimensioning to dimension that just as we think about our forward modeling? Yes. As time in future quarters as we go towards the end of the year and potentially next year early as Model X development is behind us. I would expect some reduction in R and D spending. And then of course Gen 3 will pick up in other products that we start working. But to your broader point of percentage of revenue, we clearly see that as revenue is going to pick up significantly, the percentage of revenue of R and D expenses is going to be I expect in the single digits high single digits clearly. So I think we won't be too far away in that sense from some of the other, I would say, more growth oriented companies. Don't want to just benefit against automotive, because we will be doing more R and D in general. Hasn't happened absolutely. Okay, great. I think R and D is maybe more limited by the pace at which we can recruit and integrate it to the company rather than some of the budget. Yes. Got you. Okay. That's helpful. And then just as we think about the cadence of deliveries, which is obviously very back half loaded, but you're obviously confident in the 35%. Can we just get like a little bit more clarity as to sort of what's driving sort of the back half inflection? Is it cell capacity? Is it that second production line coming on? Is it just it seems like it's more supply driven than demand driven, but just wanted to get a little bit more clarity on what's driving that sequential progression? Yes. So the main thing in the first half year and that's something actually I mentioned I think last week last year is that for the first half of this year, we're constrained by cell supply. We expect that to I mean, it is in the process of alleviating and we expect that to really start alleviating in the Q3 basically. And there's obviously a bit of a delay because the sales are coming from Japan, so they got it produced and put on the water and brought over here and that kind of thing. Thus far from what we see, everything's on track to have sales pipeline be able to at least meet, but probably exceed by a little bit the 35,000 targeted deliveries. Our production number also will be higher than that because the company is growing quite a bit and we've got a lot of vehicles that will be en route to various countries. So and then I think there is another constraint I mentioned, which is the vehicle production line. So we'll actually be taking the factory the 3 on factory down for roughly 10 days or so in July to convert to the new line, which enables the substantial increase in production capacity on the vehicle side as well as a labor hours reduction. So it's just a fundamentally more efficient process. Yes. So if it is worth highlighting the point, because very often in the media, it seems like there's a confusion between Tesla production and Tesla demand. For example, like Volvo, we're sold out of Q2 production. The way the term sales usually means demand, but in our case sales means deliveries. It's not a measure demand, it's a measure of how many costs we were actually able to get to customers. If we'd been better at production and delivery, we would have delivered more cost. Thank you. Okay. Thanks. Okay. Thank you, guys. Our next question comes from Colin Rusch with Northland Capital Markets. Your line is open. With the Model X, previously you talked about going into production before the end of 2014. Can I just understand exactly what you're saying with the prototypes being done by the end of the year versus production and how we should think about that relative to the previous comments? Yes. I mean, there's no question which laid on the Model X, although that's I wouldn't say particularly new information. So relative to our earlier forecast, we have to spend a lot more time making sure we got the Model S right and longer to get to some of the international markets and whatnot. So it just didn't make sense for us to be focusing on Model X if we didn't have Model S house and order. I think we're in pretty good shape on the S front. So our focus is very heavily on the X and just making sure it's a phenomenal product. And we expect to be delivering production costs roughly Q2 next year. We'll have the production design articles, like I guess beta articles or production release candidates around the end of this year. But we want to make sure we've got a decent period of validation with those release candidate vehicles, because the production ramp for Model X will be much greater than for S. So much steeper. So, yes, we had quite a shallow production ramp, start off real slow. And so as we encountered issues, we're able to correct them without having a large number of cars on the roads. With X, it's going to be sharp ramp, which means we really need to make sure that we probably validated issues and in all temperatures and climates and road types that the car is really solid before ramping up production otherwise having a recall or a bad customer experience. Okay. And then just one quick technical question. As you look at the components and the materials inside of your cells, the quality of lithium, how much leverage do you think you can get as you start to see higher quality of lithium from the supply chain? The quality of lithium, how much would you mean by pure? Just in terms of higher purity, I should say. It's really not been an issue. Yes, that's not a big trade off or driver of performance. It's something that we're constantly looking at with the different suppliers and trading off different processing mechanisms and different feedstocks and that can affect the pricing. But the ultimate purity doesn't really drive performance of funnel cell. Yes. I mean there are some things that are sort of a tricky or that matter like, for example, like the anode, the structure of the carbon in the anode is important. I mean, we use a very high percentage of synthetic graphite, because I think it's a sort of a more precise microstructure. And so there's some potential trade offs there as to how much work you put into creating synthetic graphite. And I think generally we want to probably aim for highly precise microstructures. So, which is a little trickier to do, you want to just have the kind of random microstructures stuff that came out of the ground. Great. Thanks a lot guys. And next question comes from John Gallallo with Merrill Lynch. Your line is open. Hey, guys. Thank you very much for taking my call. First question is, we've recently had conversations with several of your customers in China and Hong Kong who have placed firm orders pretty high trim levels and now are actually seeking refunds because what they discovered is that the electric wiring at the residential level is so poor that charging equipment is not being permitted in their high rise buildings. So I guess the question is, I mean, are these kind of one off exceptions? Or are you guys seeing kind of a trend in this? No. We're not really seeing a lot of cancellations as I've heard. I mean, one of the things we have required of customers to place the deposit is that we want to before they take delivery of their car, we want to make sure that they have a wall connector installed. But usually like the wiring situation of all this is what max amperage the output can be. So some places maybe able to handle 80 amp outlet, some maybe only 20 amps. But it's pretty unusual to see those. Something we are doing in China and other parts of the world is we're putting superchargers in cities, not just between cities. This is obviously important places like Beijing, Shanghai, London, San Francisco, New York, where at times people may have a challenge with having a fixed parking space. Space. So it's less about maybe the wiring thing. It's more like sometimes people don't have a competitive parking space. They might have street parking or something. London is a particularly tricky one with this. There's a lot of high end neighborhoods just have street parking. Yes. If I might add, there's been a lot of questions about the supposed poor quality of the grid in China. But from what we've seen installing hardwired charging equipment and superchargers, it's actually been somewhat the opposite and been quite a robust, very new actually, new equipment, new grid. So we have not seen very many problems. Yes. No, exactly. In fact, it's exactly as JV said, it's we've actually found it's been a positive surprise for us in China, not a negative one. Negative point. Okay. And then for my second question, I think in the release you mentioned that North American deliveries were up I think 10%. So this is still sequentially, so this would still imply that they were lower in the Q1 and the Q2 of 2013 and about in line with the Q3. Is that a fair characterization? Jeff, do you want to just go ahead? Yes. John, just to clarify, we said the orders in North America were up 10% not deliveries. Okay. So how were the deliveries in the quarter in North America? The deliveries were down. We were trying to reduce the lead time in Europe. We had a long lead time there and we were shipping a lot of cars into Europe, so that we come to a more even lead time between North America and Europe. Yes. I mean, I think this is getting back to that what I was talking about earlier. It's easy to confuse deliveries with demand. Deliveries and demand are not the same thing for Tesla. They are for other car companies, not for Tesla. Okay. Thanks very much. And we've so let me just be clear, we're seeing a steadily increasing demand in North America. So yes. Okay. Thanks guys. The next question comes from Rod Lache with Deutsche Bank. Your line is open. Hi everybody. It seems like you're making a lot of progress in terms of purchase material and efficiency just looking at the numbers. And what I'm looking at is it looks like your product gross profit you reported like $190,000,000 last quarter, but there was a gain in there. So maybe it was $180,000,000 in Q4. And then this quarter, you did $180,000,000 including a charge. So it seems like your gross profit didn't move even though your revenue was down. I'm just hoping that you can maybe give us a little bit of an update on where your incremental margin stand today, just given some of the progress that you've made in a steady state basis, these incremental units what kind of conversion for incremental volume do you achieve today on the gross profit line? Ron, I'm not improvement that's happening because of cost improvements that we continue to achieve. And this is the internal road map that we have on a variety of actions to achieve material cost reduction, some internally, some at our suppliers, some through design. And those actions will continue throughout the year and that's why we feel comfortable that we will achieve 28% gross margin by Q4. Yes. I think a couple of important points I'd like to make here, which is, first of all, overall, we don't do any cost down if it makes the product worse. So that doesn't really gain us anything, which is quite tempting to do that sometimes and that drives me crazy when companies in other ultimately in the car industry or in other industries reduce cost by reducing value. That's not a good thing. So our cost reductions are really aimed at figuring out how to get the molecules in the right shape in a smarter way, as opposed to trying to sort of strip value out. In fact, in a number of cases, we've actually added cost to the car because this was something that needed to be improved. The underbody shield is an example of that. And our gross margin in Q1 will be we have a number of sort of charges against that negatively affected gross margin, would have been a little bit higher if it hadn't been put in things like for example the underbody shield activity. But I think it's we feel fairly comfortable achieving the 28% gross margin by the end of the year on the wireless front. Okay. Thanks. And you indicated again in your release $650,000,000 to $850,000,000 CapEx this year. Can you give us some high level thoughts on preliminarily what next year might look like as you're starting to ramp up the Gigafactory? And also I know that you made some reference to SG and A and R and D as a percentage of sales, but I guess for your stage of development, I'm not sure that that's really applicable. Can you give us an idea of how that might look on an absolute basis? Rod, it's a bit too early for us to give their guidance or thoughts on 2015. CapEx, clearly 2015 at a high level will be dominated by spending on the Gigafactory as well as we start to prepare for Gen 3. I think much of Model S and Model X spending will be behind us. There'll be some lagging Model X spending from a CapEx perspective just before launch from a tooling and an equipment perspective. So there'll be a small change or there'll be a change in the categorization of spending. And then beyond that, clearly, we will continue to expand rapidly globally with our stores, service centers and superchargers. So that growth will continue. But I think we can provide you a bit more clarity on that perhaps a couple of quarters from now. Okay. And just last one on China. When you do actually expand to domestic production, do those requirements for fifty-fifty JV partners, do do they apply to you? Or are there any exceptions for new energy vehicles? Or do you actually have any thoughts on that at this point? I think it's too late to make a prediction on that front. Yes, so I think we can't say for sure how things will look at that time. I can't say that we're postponing any serious discussions with the big companies in China because we're still really at Tulea stage. So we're not trying to sort of run this to ground because we've got sort of really basic priorities of getting service and supercharging all that in China. And so yes, we just don't have anything to say on that front yet. Okay, great. Thank you. The next question comes from Ben Kallo with Robert W. Baird. Your line is open. Thanks for taking my question. Back to the battery factory, can you talk about the cost associated with running 2 sites in parallel maybe 3 and any optionality you have there? And then adding maybe 2 more on top of it. One is how much work have you done as far as business development with stationary storage to get comfortable with that angle there? And then as far as additional investors, should we wait to see them after Panasonic comes to the table? And I'll stop there. Thanks guys. Well, the reason I mean, your first question was fundamentally are we spending too much money by working on 2 sites together? And I think as Elon has said a few times for us, it's really critical that we have the 1st giga factory ready on time to supply the cells for Gen 3. And that delay every 1 month delay at that point is far more expensive for us than the incremental cost that we may incur upfront to kick off 2 sites at one time. Absolutely. Yes. Maybe I can speak to the stationary business development part of the question. We have done a huge amount of effort there and work there and we've talked to most major utilities and energy service companies at this point. It's still early days in that effort. And I think maybe the thing to focus on is our long term optimism looking at the price versus cost of what we expect we could do. And the demand for the long term demand for stationary energy storage is quite extraordinary when you look at the size of the grid and what needs to be done with renewable energy and buffering the variability of that. So I think that's really where we keep our focus is on the long term economics that could be enabled once the Gigafactory is online. Yes. Exactly. Right now, we're not trying to build demand for stationary storage because we have cell constraints, so come at the expense of vehicles. So what we're doing right now is more on the engineering side, figuring out what would be a really cool stationary storage pack that can be produced at volume and that could be combined. So you could stack a whole bunch of them if you wanted. But I think particularly for like the home solution, I mean, the sort of thing we have in mind is something that looks a bit like the battery pack in the Model S. There was something really flat It just maybe takes it's coming 5 inches off the wall, like wall mounted, nice beautiful cover, integrated bidirectional inverter and it's just plug and play. That's the sort of thing we have in mind for the station storage pack on the residential front, which could conceivably you could stack a bunch of them and have something that works commercially as well. But we'll probably only want to talk about that in detail end of the year or early next year or something like that. Yes. And I think the third part of your question was about other participants in the Gigafactory. Important to understand that there's a lot important to understand that there's a lot of aspects of this that Panasonic simply doesn't do. So it's not necessarily a competition, but it's complementary different pieces of the production operations. So those discussions are underway, but it's premature to talk about any specifics. Great. Thank you guys very much. Next question comes from Craig Irwin with Wedbush Securities. Your line is open. Good evening. Thank you for taking my question. So Elon, when you look at the Chinese market, everybody knows that this is the largest luxury automotive market in the world. But it's not a market that we have as much visibility as we might like. How do you quantify the total opportunity for sales for Tesla? And what have you seen since you launched in China that surprised you or maybe that you didn't expect? And how is this shaping the plans for your store map over there and the obvious service centers and other investments? I don't think I think you probably know, obviously, about as much as I do about the demand for cars in China. So as far as I've got some incredible crystal ball, as you mentioned, China is the biggest market for cars in the world and actually the biggest market for premium sedans in the world. So to the degree that our sales track that of other manufacturers presumably China would over time become the biggest market for Tesla. I mean, that's really the best guess that anyone could make at this point. I mean, all I know in the short term is that we really don't have a demand issue in China like we've got a lot of demand. And so our focus then obviously is just to make sure that that is serviced and we'll try to roll out service centers and supercharge as fast as we possibly can. And my instructions to the China team are to spend money as fast as they can spend it without wasting it. So that's I think that's what's happening. Yes. Makes sense. Thanks, Craig. And let's make this the last question, please. Our last question comes from Colin Langan with UBS. Your line is open. Hi. This is Rahul Chadda on behalf of Colin. Can you help us understand the difference in the variable cost structure for a Model S compared to comparable luxury sedan like maybe a BMW 7 Series? And other than the battery, which are the key areas where you'll be able to cut costs as you go ahead and achieve scale? We don't really know what the gross margin is of individual product lines in other companies. So it's difficult for us to make an exact comparison there. The sorry, I just don't know how to answer that question exactly. As far as cost reductions, it's across the whole vehicle. It's not just in the battery pack. Battery pack is one portion of the car. It may be a quarter of the value of the car. It's not like the overwhelming portion of the car. So cost reductions really come across the board. Are there any specific components which you see a bigger opportunity to cut costs than or the process? I mean the biggest single cost production, I would say in Q4 this year would be related to labor and overhead, which as I mentioned earlier in the call, we have a much more efficient production line that's going to come online in July, which has more automation and it's just set up in a better way. And so it's making the car with the greater labor efficiency is the biggest single improvement. But there are really hundreds of improvements across the board. And what really comes down to this, you make anywhere from like a $5 to $100 improvement here, there and everywhere and pretty soon it adds up to a significant number. I wish there was like one place where this is where this is one incredibly stupid super expensive thing that if we fixed would suddenly make the car cheap. That is unfortunately not the case. Thank you. And then do you have any update on the dispute with the dealer body? I think there was something that happened just today. I mean, this stuff tends to be reported in real time. So it sounded like there's something we know that is not public information. I think the appeal in Massachusetts from the dealers was denied today. So dealers sorry, what's that? Yes. No, that's all? Okay. All right. So no update on the deal. Okay. Thank you. Thanks. All right. Hey, Patrick, I apologize, I cut off Craig Irwin there. If he's back in the queue, we could take another question from him. Anything else? We have Craig Irwin in queue, Wedbush Securities. Your line is Thanks, Greg. Sorry about that. Thanks, Jeff. No, not a problem. Not a problem. So I really appreciated the comment in the shareholder letter about 10% sequential growth in orders in North great demand. But one of the points of controversy is the potential for declining shipments into North America. Can you maybe give us a commentary about your year over year order rates in North America, whether or not you expect to continue selling Model S vehicles with similar volumes once you've started to satisfy some of the European and Asian demand? I mean, rather not make any additional predictions about deliveries. I mean, I see demand in North America, but I can tell you, what we see is we see a certainly increasing demand in North America. That's the information that we have. We don't have something that's more predictive than that. That's helpful. Thank you. All right. Thank you, Patrick for getting Craig back on the line. I appreciate that. So this concludes our call. Thank you everyone for joining us this afternoon. We look forward to seeing many of you this month in New York. Next Monday, we'll be at the Deutsche Bank CleanTech Conference And on Tuesday, we'll be at the Wedbush Transformational Technologies Conference. And finally, at the end of May, we are presenting at the Freedman Billings Ramsey Energy Technology Summit. So we hope to see some of you at some of those conferences. Thank you, everyone. Have a great day. Bye bye. Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.