Good day, ladies and gentlemen, and welcome to the Tesla Motors' First Quarter 2014 Financial Results Q&A call. At this time, all participants are on a listen only mode. Later we will conduct a question and answer session, and instructions will follow at that time. I would now like to turn the call over to your host, Jeff Evanson with Investor Relations. Please go ahead.
Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's First Quarter 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 First Quarter 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 GAAP results and reconciliations to non-GAAP measures can be found in the shareholder letter.
During the course of 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 Form 10-K filed with the SEC. We are ready to take questions. Please press star one to ask a question. We are going to try to limit the call to about 45 minutes, please be respectful of other callers by limiting your questions. 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, Elon, 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. 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 visit to China at the level of interest and enthusiasm for Tesla and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry, and consumers in general. 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 cars that we deliver in-market. We're really doing very few stores in China. Our focus is 90% plus on service centers and Superchargers.
I think we'll actually have to limit the amount of cars we send to China, otherwise it would starve the rest of the world production. That's really how we view things there. I did mention that we are likely to do local vehicle production in China in three to four years, although I should mention that goodwill existed before I said that. Goodwill wasn't as a function of that. That will be for vehicles delivered to the local market in China and perhaps to some surrounding countries. Just to be clear, that wouldn't mean shifting any production from California. That would be assuming that California's going to reach its max production. It makes sense for us to start looking at local country factories. I think we'd be looking at one in Europe as well.
These are really aimed at minimizing the logistics costs, because shipping two tons of metal over long distances is not very efficient. It's just the sensible thing to do is to try to satisfy local demand with local production over time.
Any sense of quantification of 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. 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 mid-sized cities are unhappy that we're delaying their deliveries because it'll take us a bit longer to get the service and Supercharger access. The service is a necessary requirement. We can't have a service center be 500 miles away from where somebody lives. Our biggest issue in China is customer unhappiness that they're not getting their cars soon enough. I think the wait time is quite long in some cases, like four months or five months or something like that. Yeah.
Thanks.
Yeah.
Thanks, Brian.
Our next question comes from Andrea James with Dougherty & Company. Your line is open.
Thanks for taking my questions. Your R&D expense is ramping pretty significantly sequentially in Q2. I was wondering if you could just talk about what components make up the R&D increase. Also in line with that, how are the costs to bring the Model X to market kind of tracking against your earlier expectations?
This is Brian.
Yeah. Hi, AJ. Our R&D expenses went up exactly as planned in Q1. It's primarily driven by all the engineering design and testing work that's going 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.
Yeah. For example, it's like right-hand drive.
Exactly
Japan localization or China localization, U.K.
Right
Hong Kong, that kind of thing.
Right. It's more driven by those expenses rather than just headcount increases. These are the cyclical expenses that you typically see before the launch of new products.
Yeah, I should say that some of that is also that we want to do ongoing improvements to the Model S. As times go by, we've made hundreds of small improvements to the car. A lot of these people wouldn't necessarily notice, but I think collectively they add up to an improved experience with the car. We've made some improvements in seat comfort, for example, and here and there in fit and finish. We're modifying the rear door so it can open wider so rear ingress, egress is improved. There's a whole bunch of things.
Software improvements that we continue to make.
Continue to make software improvements. I think there's some very exciting software updates going to come out in the next few months that will improve the experience for the whole fleet of customers out there. If anyone's thinking about asking me about that, I'm not going to say what they are, so just because there's a lot of information as it is. 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.
Exactly.
We did that in China and doing it in other countries, too.
Yeah, exactly. I was mentioning it a bit earlier, there was a bit of unhappiness in China about some of the midsize cities delaying customers' deliveries. 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. I think we didn't do as good a job as we should have done in some of our prior market launches, and we want to make sure we recognize that mistake and correct it going forward.
I want to make sure I mention Model X costs are also obviously driving the increased R&D-
Yeah
expenses as we're working on Model X.
Model X is the biggest thing-
Yeah
driver of R&D expense, honestly. With the X, we're really trying to make an amazing car and very importantly have a car that with a production version is better than the prototype, better than the show car. One of the surprising crazy about the car industry is 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. The baseline expectation is that whenever we have a prototype, the production car is better in every way. That's quite difficult to do and requires some creative problem-solving. With Model X, one of the biggest challenges is the Falcon Wing door, making sure that that is truly a step change in utility for the car and not a gimmick.
It's got to work perfectly, and the details have to be just right. It's amazing how seemingly little things become quite significant engineering challenges, such as, for example, getting the seals on the Falcon Wing door to work properly and not be too prominent. You've got to seal against rain, wind, snow, and against road noise. You've got something that's articulating across multiple hinges. You've got TP junction joints and that kind of thing. It's quite a difficult sealing problem to really get it right and be consistent and remain good over many years. We spent a lot of time on seal engineering.
Thank you for the thorough response. One more and then I'm done. Why hasn't your Gigafactory partners, why haven't they signed on the dotted line yet?
That's actually, that's very somebody to ask that question. We actually do have a letter of intent signed with Panasonic. We're happy to announce that, yeah, 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. 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. JB, do you want to just elaborate on that?
Sure. Well, as Elon said, we do have a signed letter of intent. 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 a final agreement in the later part of this year. 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.
Yeah. I think quite confident, highly confident at this point of achieving the 30% reduction in cost per kilowatt-hour.
Maybe moving towards, I'd 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 precursor materials, we've found that there's really a lot of opportunity for innovation and for cost reduction. 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 thought of as a bigger thing than it really is for lithium-ion cells. It's usually a couple % of the cell mass.
The biggest cost constituent is nickel. We're still in conversations with some of the big nickel mines in Canada, in particular. We've been really, I'd say, positively surprised by the potential for cost reduction on producing the precursor materials. It's kind of funny, it's like in talking to some of the mining companies, it's like nobody ever calls them. We call them up, and like, "Hey, yeah, we never get calls from companies like Tesla." In other words, like going to The London Metal Exchange or to the big stainless steel companies, because nickel is a common alloying constituent in steel. Cutlery, for example, usually involves quite a bit of nickel. If your knife and fork is usually electroplated nickel silver, is usually what they do.
The mining guys were super happy to hear from us and have quite good ideas for how to optimize the cost of the materials. We're minimizing logistics and processing and just doing the 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. I should say also, we're trying to do our best to ensure that in the supply of the components for the cell, that our suppliers, going all the way to the mine level, are companies that operate in a good and fair way. Do they take reasonable care from an environmental standpoint? Do they take care of the people working in the mine? That kind of thing. As much as we can, we want to make sure that our suppliers are good suppliers. Yeah.
Fantastic. Thank you so much.
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 factory?
No. We actually expect to break ground on the first Gigafactory location, or 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 Gigafactory. We expect to break ground on the first of those probably next month. It's really quite soon. Shortly thereafter, maybe a month or two after that, we'll break ground on the second one. I should also say that California's potentially back in the running. It's still in this sort of improbable, in the category of improbable-
It is back in the running. 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 four states to begin with. It's just because this is a large greenfield construction project. California has quite a complex and lengthy process for approval of greenfield sites. 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.
It would just take 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 a much more streamlined approach. Since the vehicles will be built in Fremont, in California, if we don't have the Gigafactory online when we have the vehicle capacity online, we will actually be in deep trouble because we'll have all the equipment and tooling and people for making cars but not be able to produce the battery packs. That was the reason why California wasn't originally on the list. The government legislature are going to try to do something about that, I think the question of timing is still a big one.
We also need to make sure that the ongoing operational costs of the Gigafactory are not significantly worse than other states. Like I said, I think California is still in this sort of improbable but not impossible category at this point.
Okay. Thanks, Elon. I'd like just to 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 co-opetition with another battery component or cell supplier kind of making another part of the sub-cell, the cathode or anode? Is there kind of mutual or pure exclusivity for Panasonic, for example? Finally on China 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.
Yeah. The way the Gigafactory is set up right now is Panasonic would be the only company producing cells in the Gigafactory. One way to think of the Gigafactory is like sort of like an industrial park under one roof. Tesla's producing the modules. Tesla's sort of the overall, I guess landlord. We're producing the modules and the battery pack. The cells would be produced by Panasonic, we'd actually have a number of other companies producing the precursors to the anode, cathode, separator, electrolyte and so forth that are then feeding into Panasonic. However, referring 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.
We expect to bring in cells from other cell factories in the world to make up the other sort of roughly 15 gigawatt hours. I would expect a lot of those would be Panasonic cells, but to the degree that Panasonic isn't able to meet that demand, there would be other suppliers as well.
Okay. Thank you.
So.
Thank you. Our next question comes from Patrick Archambault 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, maybe just like R&D specifically, Deepak, you described how there's a sequential increase of 30%. I guess the first part of my question is, how do we think about it trending in the back half? 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. Just given your growth profile, it would probably be higher. Can you help us just to mention that just as we think about our forward modeling?
Yeah. 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&D spending. Of course, Gen 3 will pick up and other products that we start working. 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&D expenses is going to be, I expect, in the single digits, high single digits, clearly. 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 pit it against automotive, because we will be doing more R&D in general as a company.
Yeah, absolutely.
Okay, great.
In fact, I think our R&D is maybe more limited by the pace at which we can recruit great engineering talent and integrate it to the company rather than a budget.
Yeah.
Got you. Okay. That's helpful. 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 a little bit more clarity as to sort of what's driving the back-half inflection? Is it cell capacity? Is it that second production line coming on? 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.
Yeah. The main thing in the first half of the year, this is something actually I mentioned, I think late last year, is that for the first half of this year, we're constrained by cell supply. We're in the process of alleviating, and we expect that to really start alleviating in the third quarter, basically. There's obviously a bit of a delay because the cells are coming from Japan, so they've got to be 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 cell supply 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's growing quite a bit, and we've got a lot of vehicles that'll be on route to various countries. Then there is that other constraint I mentioned, which is the vehicle production line. We'll actually be taking the Fremont factory down for roughly 10 days or so in July to convert to the new line, which enables a substantial increase in our production capacity on the vehicle side as well as a labor hours reduction. It's just a fundamentally more efficient process. It is worth highlighting the point because very often in the media, it seems like there's confusion between Tesla production and Tesla demand. For example, like for Tesla, we're sold out of Q2 production already. The term sales usually means demand, but in our case, sales means deliveries.
It's not a measure of demand. It's a measure of how many cars we were actually able to get to customers. If we'd been better at production and delivery, we would've delivered more cars.
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 previous comments?
Yeah. There's no question we're delayed on the Model X, although that's, I wouldn't say particularly new information. Relative to our earlier forecasts, we had to spend a lot more time making sure we got the Model S right and took longer to get to some of the international markets and whatnot. It just didn't make sense for us to be focusing on Model X if we didn't have our Model S house in order. I think we're in pretty good shape on the S front, our focus is very heavily on the X and just making sure it's a phenomenal product. We expect to be delivering production cars from roughly Q2 next year. We'll have the production design articles, like biggest beta articles or production release candidates around the end of this year.
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. Much steeper. With S, we had quite a shallow production ramp. Started off real slow, and as we encountered issues, we were able to correct them without having a large number of cars in production or on the roads. With X, it's going to be a sharp ramp, which means we really need to make sure that we properly validated issues and mature in all temperatures and climates and road types that the car is really solid before ramping up production. Otherwise, we risk having a recall or a bad customer experience.
Okay. 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 lithium from the supply chain?
The quality of lithium? How much do you mean by that?
Just in terms of a higher purity, I should say.
It's really not been an issue.
Yeah, 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. The ultimate purity doesn't really drive performance of the final cell.
Yeah, there are some things that are sort of a tricky one or that matter, for example, like the anode, the structure of the carbon in the anode is important. We use a very high percentage of synthetic graphite, because that gives a more precise microstructure. There's some potential trade-offs there as to how much work can be put into creating synthetic graphites. I think generally we want to probably aim for highly precise microstructure. Which is a little trickier to do. You don't want to just have random microstructure stuff that came out of the ground.
Great. Thanks a lot, guys.
Our next question comes from John Lovallo 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've 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. I guess the question is, are these kind of one-off exceptions or are you guys seeing a trend in this?
No, we're not really seeing a lot of cancellations, as best I've heard. One of the things we have required of customers who place their deposit is that before they take delivery of their car, we want to make sure that they have a wall connector installed. Usually, the wiring situation will just determine what max amperage the output can be. Some places may be able to handle an 80-amp outlet, some may be only 20 amps. It's pretty unusual to see those. Something we are doing, though, in China and other parts of the world, is we're putting Superchargers in cities, not just between cities. This is obviously important in places like Beijing, Shanghai, London, San Francisco, New York, where at times people may have a challenge with having a fixed parking space. It's less about maybe the wiring thing.
It's more like sometimes people don't have a dedicated parking space. They might have street parking or something. London's a particularly tricky one with this. A lot of high-end neighborhoods just have street parking.
If I might add, there's been a lot of questions about the supposed poor quality of the grid in China. 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. We have not seen very many problems.
Exactly. In fact, exactly as JB said, we've actually found it's been a positive surprise for us in China, not a negative one.
For my second question, I think in the release, you mentioned that North American deliveries were up, I think, 10%, sequentially. This would still imply that they were lower than the first quarter and the second quarter of 2013 and about in line with the third quarter. Is that a fair characterization?
Jeff, do you want to answer?
John, just to clarify, we said the orders in North America were up 10%, not deliveries.
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.
I think this is getting back to what I was talking about earlier, it's easier to confuse deliveries with demand. Deliveries and demand are not the same thing for Tesla. They are for other car companies, but not for Tesla.
Okay. Thanks very much, guys.
Let me be clear, we're seeing a steadily increasing demand in North America.
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 purchased material and efficiency, just looking at the numbers. What I'm looking at is it looks like your product gross profit, you reported like $190 million last quarter, but there was a gain in there, so maybe it was $180 million in Q4. This quarter you did $180 million, including a charge. 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 margins 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?
Rod, I'm not exactly clear what your question is, but I think to your broader point, there is a gross margin improvement that's happening because of cost improvements that we continue to achieve. This is the internal roadmap that we have on a variety of actions, to achieve material cost reduction, some internally, some at our suppliers, some through design. Those actions will continue throughout the year, and that's why we feel comfortable that we will achieve a 28% gross margin by Q4.
Yeah, there's, I think, a couple of important points I'd like to make here, which is, first of all, a rule that we don't do any cost-down if it makes the product worse. That doesn't really gain us anything, which it's quite tempting to do that sometimes. It drives me crazy when companies in other, elsewhere in the car industry or other industries reduce cost by reducing value. That's not a good thing. 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 we felt there's something that needed to be improved. The underbody shield is an example of that.
Our gross margin in Q1 will be, we have a number of sort of charges against that effectively that negatively affected gross margin. Would've been a little bit higher if it hadn't been for things like, for example, the underbody shield-
Right
activity. I think it's fairly comfortable achieving the 28% gross margin by the end of the year on the Model S front.
Okay, thanks. You indicated, again, in your release, $650-$850 of 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? Also, I know that you made some reference to SG&A and R&D as a % of sales, 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 clear 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 Gen3. 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. There'll be a change in the categorization of spending. Then beyond that, clearly we will continue to expand rapidly globally with our store service centers and Superchargers. That growth will continue, I think we can provide you a bit more clarity on that perhaps a couple of quarters from now.
Okay. Just last one on China. When you do actually expand to domestic production, do those requirements for 50/50 JV partners, 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 early to make a prediction on that front. Yeah, I think we can't say for sure how things will look at that time. I can say that we're postponing any serious partnership discussions with the big companies in China because we're still really at an early stage. We're not trying to run this to ground because we've got really basic priorities of getting service and supercharging all that in China. Yeah, 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.
All right, thanks for taking my question. Back to the battery factory, can you talk about the cost associated with running two sites in parallel, maybe three, any optionality you have there, and then adding maybe two 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? As far as additional investors, should we wait to see them after Panasonic comes to the table? I'll stop there. Thanks, guys.
Yeah.
Well, your first question was, fundamentally, are we spending too much money by working on three sites together? I think as Elon has said a few times, for us, it's really critical that we have the first Gigafactory ready on time to supply the cells for Gen 3. Every one-month delay at that point is far more expensive for us than the incremental cost that we may incur upfront to kick off two sites at one time. Absolutely.
Yeah. 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, we've talked to most major utilities and energy service companies at this point. It's still early days in that effort, 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. 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. I think that's really where we keep our focus is on the long-term economics that could be enabled once the Gigafactory's online.
Yeah, exactly. Right now, we're not trying to build demand for stationary storage because we have cell constraints, it would come at the expense of vehicles. What we're doing right now is more on the engineering side, figuring out what would be a really cool stationary storage pack that could be produced at volume that could be combined, you could stack a whole bunch of them if you wanted. I think particularly for the home solution, the sort of thing we have in mind is something that looks a bit like the battery pack from the Model S, something really flat, just maybe coming five inches off the wall-mounted, a beautiful cover, integrated bi-directional inverter, it's just plug and play.
That's the sort of thing we have in mind for the stationary storage pack on the residential front, which could conceivably, you could stack a bunch of them and have something that works commercially as well. We'll probably only want to talk about that in detail end of the year or early next year or something like that.
Yeah, I think the third part of your question was about other participants in the Gigafactory, We are talking to various different people in parallel. I think it's important to understand that there's a lot of aspects of this that Panasonic simply doesn't do. It's not necessarily a competition, but it's complementary different pieces of the production operation. 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. Elon, when you look at the Chinese market, everybody knows that this is the largest luxury automotive market in the world, 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? What have you seen since you launched in China that surprised you or maybe that you didn't expect? How is this shaping the plans for your store map over there and the obvious service centers and other investments?
I think you probably know almost about as much as I do about the demand for our cars in China. 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. To the degree that our sales track that of other manufacturers, presumably China would, over time, become the biggest market for Tesla. That's probably the best guess that anyone could make at this point. All I know in the short term is that we really don't have a demand issue in China. We've got a lot of demand. Our focus then obviously is just to make sure that that demand is serviced, and we're trying to roll out service centers and Superchargers as fast as we possibly can.
My instructions to the China team are to spend money as fast as they can spend it without wasting it. I think that's what's happening. Yeah. Makes sense?
Thanks, Craig.
My-
Patrick, 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 Chadha on behalf of Colin. Can you help us understand the difference in the variable cost structure for the Model S compared to a comparable luxury sedan, like maybe a BMW 7 Series? Other than the battery, which are the key areas where you'll be able to cut costs as you go ahead and achieve scale?
Well, we don't really know what the gross margin is of individual product lines in other companies. It's difficult for us to make an exact comparison there. 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. The battery pack is one portion of the car. It's maybe a quarter of the value of the car. It's not the overwhelming portion of the car. 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?
The biggest single cost reduction, let's say in Q4 this year, would be related to labor and overhead, which as 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. It's making the car with greater labor efficiency is the biggest single improvement. There are really hundreds of improvements across the board.
What it really comes down to is you make anywhere from a $5-$100 improvement here, there, and everywhere, and pretty soon it adds up to a significant number. I wish there was one place where this is this one incredibly stupid, super expensive thing that if we fixed, would suddenly make the car cheap. That is unfortunately not the case.
Thank you. Do you have any update on the dispute with the dealer body?
I think that was something that happened just today. This stuff tends to be reported in real-time, there's sort of this thing we know that is not public information. I think the appeal in Massachusetts, from the dealers, was denied today, dealers-- What?
Hearing this morning.
Oh, the hearing. Okay, the hearing.
We didn't get a decision.
Oh, we didn't? I thought we got something. What's the email you sent?
Don't have anything.
Oh, that's all? Okay, fine. All right. Well, no update on the dealer front.
Okay. Thank you.
Okay.
Thank you.
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 on the queue?
We have Craig Irwin in queue, Wedbush Securities, your line is open.
Go ahead, Craig.
Thanks, Craig.
Sorry about that.
Thanks, Jeff. No, not a problem. I really appreciated the comment in the shareholder letter about 10% sequential growth in orders in North America. We understand you're obviously capacity-constrained, and you've got great demand. 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 at similar volumes once you've started to satisfy some of the European and Asian demand.
Sorry. We'd rather not make any additional predictions about deliveries. I see demand in North America, I can tell you certainly what we see is we see a steadily 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.
Okay.
Thank you.
All right. Thank you, Patrick, for getting Craig back on the line. I appreciate that. 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 Clean Tech Conference. On Tuesday, we'll be at the Wedbush Transformational Technologies Conference. Finally, at the end of May, we are presenting at the FBR Energy Technology Summit. 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.