Good day, ladies and gentlemen, and welcome to your Tesla Motors third quarter 2013 financial results Q&A conference call. At this time, all participants will be in a listen-only mode, but later there will be a chance to ask questions and instructions will be given at that time. If anyone should require audio assistance, you can press star, then zero, and an audio operator will assist you. As a reminder, today's conference is being recorded. Now I would like to turn the call over to your host, Jeff Evanson.
Thank you, John, and good afternoon, everyone, and our welcome as well to our Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO, and Deepak Ahuja, Tesla's Chief Financial Officer. We announced the financial results for our third quarter shortly after the close of trading today. The shareholder letter, financial results, and webcast of this Q&A session are all available at our investor relations website at ir.teslamotors.com. A replay of this webcast will be available at the same site later today. Please note that certain financial measures that we use on the call, such as revenue and income, are expressed on a non-GAAP basis and have been adjusted to exclude the effects of lease accounting on Model S sales and changes related to stock-based compensation and non-cash interest expense. Our GAAP results and reconciliations of non-GAAP to GAAP measures can be found in our earnings press release.
During the course of this call, we may discuss our business outlook and make 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 recently filed 10-Q with the SEC. Now, John, why don't you give the instructions for asking a question, we'll turn it right on over to our first question.
Okay. At this time, ladies and gentlemen, if you do have a question or comment, press the star followed with the one key and you'll be placed into a question queue. Again, for any questions or comments, press the star followed with the one key, and you'll be placed into the question queue. Okay, we'll take our first question from James Albertine from Stifel. Jamie, please go ahead.
Great. Thank you for taking my question, and good afternoon. The first question I had was going back to some comments you had made on the last quarterly conference call around gross margin visibility. I think if I heard it correctly, you basically said you had a pretty good feel where the fourth quarter was going to be about a month before the fourth quarter happened. Given the sequential gross margin expansion that we saw in the third quarter, what update are you able to give us for the fourth quarter at this point? Thanks.
Sure. We expect to track to 25% gross margin in the fourth quarter excluding ZEV credits, so excluding the zero-emission vehicle credits. Yeah, I feel pretty confident about that outcome unless there's some force majeure event. Of course, we're almost roughly halfway through the fourth quarter. Almost halfway through. I think that's pretty secure. Then we'll probably deliver more cars. One thing that I hope was clear in the shareholder letter, but maybe it wasn't, is that we really are production-constrained, not demand-constrained. We're working hard to address the production constraints, and then improve the effect of the deliveries. Because the thing that people still don't quite get is that we're different in that fundamental way from other car companies. It doesn't make sense for us to do things to amplify demand if we can't meet that demand with production.
What we spend our time doing here in the management team is trying to figure out how do we ramp up production faster and obviously maintain good quality and keep improving the product. That's where we expect to alleviate a lot of those production constraints next year.
That's great. As a quick follow-up, maybe, given some of the announcements that you've made intra-quarter and that you alluded to in your shareholders letter, what does your sort of feel on the current assembly line capacity as it stands today look like today versus maybe how you felt three months ago? Thanks.
The main constraint on our production is really the cells, and I think I've mentioned that before in talks, and I think I alluded to that on the prior earnings call. We're addressing the cell supply constraint, and any sort of non-cell constraints that exist. Really the critical thing is the cell production constraint. Obviously, we announced a deal recently with Panasonic, which is for a much-increased volume. When we think about the constraint on growth, that's the biggest item, and that gets most of our attention. Like I said, I think we'll see some relief on that constraint next year.
Very good. Thank you for taking the question.
Sure.
Okay, thank you. We'll take our next question coming from Craig Irwin from Wedbush Securities.
Good evening. Thank you for taking my question. Elon, I wanted to ask a more philosophical question of you. We're hearing from different sources that the cost of your Model S drivetrain is more or less at parity with some of the conventional ICE vehicles out there, some of the premium vehicles in the market. Now, with some visibility on battery costs coming down fairly significantly over the next few years, when you look at the Model 3 vehicle, would you still want to price that at a premium versus comparable vehicles where you would basically be benefiting from the ROI that you offer to the customer, basically less expensive gas in the tank, considering they're not using petroleum, they'll be using clean electricity? Would you consider pricing that more or less at parity or possibly at a discount versus the conventional competition?
I think what I said before is that we want to try to price the Model 3 vehicle at around the $35,000 price point. When you consider the savings from gasoline, depending on what you consider gasoline to be at that point, it's effectively like buying a gasoline car in the U.S. for maybe $28,000, or a gasoline car in Europe for maybe $22,000. That makes it pretty competitive. As we, over time, we're going to get better and better at our lease offerings, with lower interest rates and just better access to capital with a track record and more visibility into residual values. I think our residual values can be very good, therefore, to get the lowest-cost capital, you have to kind of prove that.
I think long-term, just like with SolarCity, I see leasing as being overwhelmingly the path to go for electric cars, because it just brings the cost of transportation, it makes it immediate. Because you have the lease and you look at the amount you're paying per month, plus the amount you pay for electricity, versus your gasoline car lease plus gasoline costs. I think gasoline cars also inherently require more maintenance. There's that as well. With a lease, you don't have to worry about capturing that savings over a certain period of time or worry about the battery life or anything like that. You just experience those savings immediately. Long-term, I see leasing as being the main way that people buy our car. I think it's going to seem like a very compelling value proposition.
Great. The second question I wanted to ask was about the priorities for R&D investment in 2014, and I guess, over the intermediate term. Can you discuss the breadth of projects that you would be looking to fund and whether or not this is an acceleration from your prior plans, or if this is consistent with what you'd been thinking previously?
I think it's far less consistent. The thing that we're really going to be doing in 2014 is expanding Model S deliveries worldwide, particularly into Asia, more broadly into Europe, as well as other parts of the world. It's kind of international expansion, production expansion with Model S, development of the Model X. Just refining all of that, getting the tooling in place, building out a really high-volume production line, kind of next-generation production line for the S and the X. Next year, we'll also be doing the design work, the styling, essentially, of the third-generation vehicle. Because we'll be done with the Model X styling, essentially, even the fine brushstrokes in the next few months. Next year is going to be about really getting that design of the third-generation car done.
It's going to take us a while to build out the capacity for that third-generation vehicle. We're going to have to sort out the cell and battery pack capacity, because ultimately, if we're to produce 500,000 vehicles a year from the former NUMMI plant, we need cell capacity that's commensurate with that. Which is maybe bigger than all the lithium-ion production in the world today, or at least on par with it.
Excellent. My last question, if I can squeeze it in. The Panasonic agreement, 1.8 billion cells over four years. My back-of-the-envelope math is, if we assume 85 kilowatt-hour Model S's It's probably one of the larger batteries of what you're going to produce over the next few years. Something like 250,000 cars. There's obviously been a lot of press coverage of your discussions and qualification of Samsung. I'm going to guess there's incremental demand on top of that you anticipate to have.
Yeah.
Can you sort of shape that for us, how you potentially see the ramp, and how you would look for the stagger in these supply agreements to work?
Certainly, I would say people shouldn't look at the X number of cells over four years and assume that that's the number of cars that we'll make. I think we'll make, towards the back end of that, a lot more cars. There'll need to be other agreements with some combination of Panasonic, maybe with others. Panasonic is obviously our primary partner. When it comes to the high volume, third-generation vehicle, it's clear that there's going to need to be incremental production capacity created that doesn't exist in the world today. We're in the process of figuring that out, and there's going to need to be some kind of Gigafactory built.
Fantastic. Thanks again for taking my question.
Okay.
Okay, thank you. Our next question comes from Dan Galves from Deutsche Bank. Dan, please go ahead.
Hey, good afternoon. Thanks for taking my question. Wanted to ask about kind of the current level of demand. We've seen it, apparently, the order to delivery time has expanded over the last couple of months. Customer deposit account went up quite a bit in Q3, you kind of confirmed that you're seeing demand increases. Can you quantify that at all in terms of how many orders you took in Q3 versus Q2 or just in kind of a more order of magnitude? Is the U.S. demand continuing to increase? Where does Europe stand, compared to where you were, let's say, at the same point in kind of the U.S. launch process?
Well, U.S. demand or North American demand has continued to increase. We've actually had to stop North American demand in order to feed Europe. We've had European customers that have been waiting for a long time, so we've had to constrain deliveries to North America in order to get people their cars who have been waiting, in some cases, two or three years. I think we could sustain 20,000 cars a year in North America, and maybe more than that. It doesn't make sense for us to try to amplify demand if we aren't able to deliver to that demand. That just makes people unhappy. Where we are in Europe is we're still at the early stages. We're kind of in Europe where we were in the U.S. maybe in January or February of this year. European demand is, well, I wouldn't say demand.
It's on the order of maybe 10,000 units a year. Again, it doesn't make sense for us to try to drive that demand higher if we aren't able to meet it. We want to make sure that we're laying the groundwork for future demand increase. I think we could get demand in kind of the greater Europe to be similar to that of North America. That seems pretty achievable to me.
Okay, great. I just wanted to ask about kind of the production ramp. You said that cell capacity or cell flow is kind of the biggest constraint right now. You seem to be addressing that. Where do you see production per week going over the next few quarters? Also, I would expect you'd continue to deliver significantly less than you produce, as you continue to have more and more vehicles on ships at the end of the quarter versus the previous quarter. Is that correct?
Yeah. As our deliveries to Europe increase, then we necessarily have more inventory in transit. As we start adding Asia in there, we've got even more inventory in transit. We'll probably have 60%+ of our sales going outside the U.S., to Europe and Asia and then going to other parts of the world as well. I think there's, in Gulf states, South Africa, South America and so forth, over time. We can expect certainly a majority of our inventory to be on the water or on trains, that kind of thing, over time. Now in terms of that being a capital issue, I think that's probably not going to be a capital issue because we can get pretty low-cost funding for inventory and transit to customers. Because there's no question mark.
Unlike a lot of other products, these cars are going to customers, to people who have actually bought the car. It's not speculative as to whether they actually want the car. We're shipping them their car.
Got it. Just one more quick one. We heard this morning that the city of Beijing announced that they would further constrain license plate issuances, but at the same time, they would issue about 15% of the license plates they issue next year, 20,000 units, is going to be reserved for EVs and PHEVs. That percentage goes up to about 60,000 vehicles by 2017 reserved for EVs. Do you know if Tesla imported vehicles would qualify for that? What are your next steps in terms of getting delivery started into China?
Yes, I believe we would qualify. We certainly are an EV, a pure EV. I suspect we would qualify. We have our Beijing store, which we've done sort of a soft opening on, then we'll start delivering cars in the first quarter, probably. We're aiming for February, but it could be March. We're aiming for February. We've passed all of the China homologation requirements.
That's right, yeah.
Yeah.
Homologation is behind us, which is great.
We have all the potential approvals from the Chinese regulatory authorities to ship the car. We expect to probably put our first cars on a boat in January, they'll be arriving in February if things go according to plan. We'll still be somewhat production constrained. It doesn't make sense for us to expand the scope of our sales territories too fast if we're production constrained, because that just amplifies the set of problems we have to deal with. We do want to get some cars to China in the first quarter and lay the groundwork in terms of service centers, Superchargers, and so forth for hopefully significant growth in the rest of the year in China.
Despite the soft initial opening, we are seeing pretty good initial demand in China for the Model-
Yeah, we're not really even trying.
Right.
When I say soft, we really mean soft. It's word of mouth, maybe. It's just not really anything beyond that. Yeah. It seems like things are going to probably go pretty well there, I think.
Yeah. Thanks very much. Appreciate it.
Thank you. We'll take our next question from Andrea James from Dougherty & Company. Andrea, please go ahead.
Hi. Thanks for taking my questions. Thinking back to the cell supply issue again, and you've got this great track record of insourcing and building your own ERP system and the like, I guess, can we assume that you've at least looked at building your own battery cell plant? I'm just wondering what your thoughts were there.
We're not quite ready to make a big announcement on the cell and battery kind of Gigafactory, but we are exploring a lot of different options right now. If I were to guess, I think that we would do that kind of super nuts Gigafactory, with raw materials coming in all the way to finished packs, with partners. That's probably my best guess. That factory would most likely be in North America, but we are investigating other options as well.
Wow, thanks for that. Where does that rank? I imagine if you look at building a more mass-market vehicle car, the cell issue would be probably one of multiple. Where does that sort of rank? Is it sort of in the middle of all the challenges you would look at, or close to the top, or?
The cell production is the biggest single constraint, but there are certainly many others that we'd want to look at that aren't too far behind it. I think if you look at, say, what's the critical path item, it's the cell production. I think we can ensure that everything else is no slower than the ramp in cell production.
Thank you. Just one final. The raw materials, though, correct me if that's not an issue, raw materials supply.
Raw materials are not an issue. That's correct.
Okay.
I wouldn't worry about, say, lithium supply or there's a lot of lithium out there. The main constituents really in the cell are, if we test by weight, are actually sort of nickel and then cobalt, aluminum, then lithium. Lithium's maybe 1% of the cell mass-ish.
Well, very exciting. Thank you very much.
Sorry, 2% of the pack mass maybe, or 1% of the pack mass, I should say, 2% of the cell mass.
Okay, thank you. Our next question is from Elaine Kwei from Jefferies. Elaine, please go ahead.
Hi, everyone. Thanks for taking the question. Just going back to the new Panasonic supply agreement real quick, does this require a new factory or lines on their part, or is a significant portion already covered by their existing capacity? In other words, how should we think about what needs to happen on their side to meet the supply obligations?
I think as far as next year is concerned, they got it covered. We've been working closely with them, we spent a fair bit of time in the Panasonic factories. Pardon me? I think we have high confidence that Panasonic can deliver on their commitment.
Okay, great. The shareholder letter mentions that you've accelerated development work on the X. Does that mean the launch might not be quite as late in 2014? If you're starting Gen 3 design next year, are we still looking at that 2017 timeframe for production as well?
I think for the X, we're aiming for maybe a few units at the end of next year. For volume production, into the high-volume production is probably Q2 2015. High volume meaning volume's comparable to the Model S at the time.
That's the normal ramp of production as.
Yeah, exactly.
while maintaining a very high level of Model S production in the factory. These are very large numbers at that point.
Yeah, exactly.
Okay, that's really.
Yeah.
That's very helpful. Just lastly, in the letter, you also mentioned that you'll be starting production to support a launch by Daimler in early 2014. Could you just remind us what vehicles you'll be supporting, and are there any new ones that would be under consideration as well?
The main one is really the Mercedes-Benz B-Class, which is going to be the biggest electric vehicle program in Daimler history. It's really going to be a great car. I think it'd be the most compelling sort of affordable electric car on the market.
Great. Thanks so much.
There's beyond that.
Okay. Thank you.
It's just particularly when you look at the fact that we have these cell supply constraints, it doesn't make sense for us to be finding new ways to use cells.
Right. It makes a lot of sense. Thank you.
Okay.
Okay, thank you. Our next question comes from Ben Kallo from Robert W. Baird. Ben, please go ahead.
Hi. Thanks for taking my question. A good quarter. As you guys think about what you've learned from logistics, shipping to Europe, and then we think ahead to next year, is there risk around that or have you guys got that ironed out as far as shipping to a different continent and then delivering there?
I think we've mostly got it ironed out with Europe in that there were initially a number of challenges shipping, because we ship partially built cars to our assembly facility in the Netherlands, and then they get put together there. We're actually ramping up our investment in that Tilburg plant in the Netherlands, adding more and more capabilities to that, and just making that whole process a lot more efficient. In addition to the myriad of challenges delivering to a dozen different countries, there are also the challenges with the electrical system. It's just the nature of the electrical grid is that almost every country has their nuances, which you experience as a consumer when you've got this plethora of plugs. We experienced that same sort of thing with electric cars. Norway is our highest sales per capita.
One of the challenges there is it has a floating grid, so it's got a somewhat unique electrical system. It took a fair bit of effort to make sure that we were able to charge properly in Norway. Yeah.
Overall, we had delivered zero cars in Europe in Q2, and in Q3, we delivered over 1,000 cars, and the first of the cars got delivered early August. In just a matter of two months, we could deliver over 1,000 cars, which was a significant achievement for the company despite the logistics that Elon mentioned of several countries, as well as different electrical infrastructure.
Yeah.
I agree. I've heard from some customers in different parts of Europe, that have waited longer for deliveries. The rumor out there is that you're shipping to Holland ahead of a tax reset. How do you balance situations like that and meeting customer satisfaction?
It is tricky. In some countries, there are some tax credits that were due to expire or that we thought might expire because they had not yet been renewed, as was the case in the Netherlands. Obviously, if there's a danger of a tax credit not being renewed, then I think the right thing to do is to accelerate deliveries to that country, which is what we did with the Netherlands. They then went ahead and extended the tax credit, so it turned out to be a false alarm. In balancing, what's the right thing to do, it seemed like the right thing to do was to try to accelerate deliveries to the Netherlands, to make sure that people could take advantage of the tax credit. Now we're sort of more in kind of a normal delivery mode.
Great. My final question is: as you think about the battery capacity for Gen3. What kind of timeframe, if we're building in North America, a factory for cells would you need? How difficult of a permitting process is that? I'll jump back in queue, and thank you guys very much.
Well, like I said, this isn't the right time to talk in detail about our plans for the Gigafactory. Except to say that obviously we're acknowledging the fact that one needs to be built, and we're looking at a variety of different locations. I don't think permitting is going to be the driver here. This is going to be a very green factory. It's going to have a lot of solar power. It's going to have essentially zero emissions. No toxic elements are going to come out of this factory. We would build in recycling capability right into the factory. Old packs would come in one side and get reprocessed into new packs. The way to think of this is, a factory is the machine that builds the machine. That itself has a version.
Just as you have a version of a product, it's like a version of a factory. We're trying to figure out what's the right way to do version one of this Gigafactory. We want to be thoughtful about it, and this is going to be a really giant facility. Like I said, we're talking about something that's comparable to all lithium-ion production in the world in one factory. It's big.
Great. Thanks, guys.
Okay, thank you. Our next question comes from Adam Jonas from Morgan Stanley. Adam, please go ahead.
Thanks, everyone. I was curious if the third quarter or even your outlook for the fourth quarter benefits from any true-ups from suppliers who might have been gouging you on production that they didn't expect you to do and you were able to do. We were hearing there could be some potential for true-ups. Curious if you can comment on that.
No, Adam, no such luck. There are no such one-time benefits from suppliers that we hoped. This is a clean quarter.
Okay, that's good. Could you comment on the wait time for a car ordered today in Europe on average? I know it can vary dramatically by country, but maybe you can give some examples of an order placed tomorrow morning, for example, how long someone could expect to wait for a car and also for China, mainland.
Right. Well, bearing in mind that from the point which a car is manufactured in California, it's about six weeks-ish, maybe seven weeks before it actually gets in the hands of the customer. Because we make the sort of sub-assembled car kit that then gets transported to Netherlands, gets assembled into a car, goes through final checkout, and then will be scheduled for delivery to a customer. All of that, like I said, takes six or seven weeks. Then there is a bit of a backlog. I think it's something on the order of three to four months.
Mm-hmm.
If you order a car now, you get one in three to four months because there's a couple of months of lead time on top of that.
For China, presumably you'd add then just your live launch for the Beijing dealer, for example, like you had a couple of months on top of that, or is it for China?
If you order a car for delivery in China right now, you'll probably get it in much like Q2.
Okay.
I'd certainly recommend anyone in China who does want to order the car to place their order fairly soon, because it looks like that wait time may be accelerating.
In other words, the longer you wait, the longer you will have to wait. At least that's what it looks like.
Got it. Elon, just finally, any update on when you're going to take that cross-country road trip with your family? Everyone's kind of curious to see how that goes, or have you already done it and we just didn't see the production of it yet? Thanks.
No, you would've seen it. In looking at sort of kids' schedules and everything, it looks like we might do that trip during spring break instead of over the Christmas holidays because, well, it's going to be pretty snowy and, yeah.
You don't want to put your kids in the car with that, yeah.
Yeah. Just going through the country when it's the shortest day of the year and it's mostly nighttime is probably not the best way to go. I want to make sure they enjoy the trip, I think I'll probably end up doing it in late March.
Well, the car's built like a tank. It seemed to go through those Mexican concrete walls pretty well, pretty strong build quality. Thanks a lot, everyone.
You're welcome. Yeah, actually, the full story on that is actually it's even crazier than that. The car actually sheared off something like 17 feet of curb wall, went through a concrete wall, six-foot-thick concrete wall, smashed into a tree. It's like, holy crow.
Okay, thank you. Our next question comes from John Lovallo from Bank of America. Please go ahead with your question.
Hey, guys. Thanks for taking the call. I guess the first question would be, it looks like in the second quarter, North American volumes rose by about 250 units sequentially. The third quarter, it looks like they declined by 650 units sequentially. I know you've talked about the supply constraints, but I guess the question is, do you think that we could be hitting a point where maybe the early adopters, their orders have been filled, and maybe demand is leveling?
No, I think there's a huge amount of untapped demand in North America.
We saw a pretty solid increase in reservations in Q3 in North America compared to Q2. The fact that we delivered less cars is not an indication of demand. It's just a matter of how we mixed our production between Europe and North America. We don't want to create any misimpression of how production happened versus demand.
Yeah. We set a finite number of cars that we produced, at some point, we have to start delivering cars to Europe.
That's helpful, guys. Thank you. Looking at free cash flow, it looks like you guys generated about $26 million in the quarter, which is encouraging. Now you're forecasting about flat free cash flow in the fourth quarter. It looks like you'll burn through about $50 million this year. I guess the expectation would be that CapEx is going to continue to ramp, given the capital intensity of this business. How should we think about free cash flow maybe heading into next year and maybe even further out, just high level?
You want to say anything?
We'd prefer to give 2014 guidance in a bit more detail at the next call, certainly our goal is to generate significant amount of cash from our operations and offset as much as, if not all of our capital expenditures as we go forward. It also depends, to some extent, how much we accelerate development of new products and how much we continue to grow globally in 2014, we have big ambitions of that. I think it's probably best that we hold on and give you a bit more granular sense of this in the next quarter.
That's fair. Sorry, go ahead, Elon.
The general approach we're trying to take is to make steady, modest improvements in our available cash while growing the business at a really rapid percentage rate relative to the rest of the industry. These are super big percentage growth rates.
Exactly
Compared to what's normal in the car business. If we can actually generate a little bit of positive cash flow while having an ongoing, very high percentage growth rate, that seems like a pretty good outcome.
That's how we look at Q3 results, considering how much we have invested globally in our infrastructure, in our growth, and we still generated positive cash flow. It's a great outcome for the quarter.
Yeah, exactly. Just like Superchargers alone, we're aiming to have essentially all of North America covered in detail by the end of next year. In some cases some frequently traveled routes will be potentially double or triple covered with Superchargers, and we expect to be able to travel anywhere in Europe, or at least Western Europe and many parts of Eastern Europe by the end of next year. Despite all that, and growing production volume and developing the Model X, despite all that, I think we can still be positive cash flow.
That's very helpful, guys. If I could just sneak one more in. Can you just tell us what the effect of the GHG and CAFE credits were in the quarter, the effect on gross margin?
It was really small. That effect continues to decline every quarter, John. It was slightly over 1%.
1%. Okay, thanks, guys.
Thank you. Our next question comes from Colin Rusch from Northland Capital. Please go ahead with your question.
Thanks so much. Can you talk about the improvement in takt time and the elimination of overtime in the quarter for your production run rate?
Yeah, I think overall, our production efficiency is continuing to reduce. As a result, we are using less overtime and our cost per car, per unit continues to decrease.
Yeah. I think there's room to improve on our labor cost per car. We have a number of initiatives underway to reduce labor cost per car, which we kind of need to do. Otherwise, we can't fit enough people at the factory. We'll continue to grow headcount, but our headcount per car should get much better in the ensuing quarters.
Okay.
Yeah.
Go ahead. I can follow up offline with a couple of other things. On the evolution of the relationships with your battery suppliers, can you talk about how much they're contributing to the IP and the evolution of the cell designs and new materials integration? Are you having to contribute more there than you would've thought when you started working with these folks a few years ago?
Well, we're contributing a fair bit to the optimization of the cell for automotive purposes. In a lot of ways, the cell still looks the same from the outside because it's roughly the same 18-millimeter diameter by 65-millimeter long cell. Although technically they're tiny changes, like 18.3 or 18.4 millimeters, that type of thing. The internals of the cell are evolving quite a lot. We're trying to be as helpful as we can working with our partners, well, really our primary partner is Panasonic, on that. I think Panasonic's doing really a great job and has really exciting things in the pipeline for future cell chemistry improvements. We want to try to bring those to fruition with them as soon as possible.
Just one final one. Can you just comment on the cycle time for some of those improvements? Are we talking about things that have been in the works for a couple of years, just making it into cars now, or can you turn things around in six or 12 months?
Our general goal is to make a meaningful step change improvement in the cell and pack technology every roughly 4 years. We started production a year and a half ago. One would expect it in roughly 2 years, there'd be a significant change. There'll be small changes before then, but probably a more significant step change in the 2- to 3-year timeframe.
Okay, thanks so much.
Yeah. The key thing is to have that step change in place for the third-generation vehicle. Of course, that would have benefits to the Model S, the premium line of cars as well.
All right, John, we probably have time for just one more question. We're going to go a little bit over here, but let's just try to fit one more in, please.
Okay. Well, we'll take our next question from Patrick Archambault from Goldman Sachs. Patrick, please go ahead.
Okay. Yeah, thanks for squeezing me in here. Wanted to actually follow up on that last question. If I remember well, part of the rationale for using 18650s was to take advantage of the scale that was already there. When you're talking about building a new factory on your own, you're sort of bringing your own scale to the table, right?
Sure.
Probably opens up a lot of options. As we think about battery technology for the Gen3, might you actually rotate away from that 18650 architecture into something that's maybe a little bit more compact and simple? Would be my first question.
It would be odd if an 18-millimeter diameter and 65-millimeter length just happened to be the perfect size for a cell. That said, if it's a flat optimization, there's no reason to go away from that form factor. We're still investigating that. We're not 100% one way or the other. I would imagine, though, that we don't go particularly far away from that size. We'll either stick to that size or we'll have something that's not hugely bigger. It's somewhat of a misconception that a bigger cell is cheaper. It's not cheaper. In our experience, we've yet to see a situation where large format automotive cells are actually cheaper on a cost per kilowatt-hour basis.
Got you. Okay. If I get just one more just on how you're going to configure your manufacturing, sort of going into the end of this year. Does your current line have flexibility, or will it have flexibility to build Model S's and X's going through the same line, or are you going to have to sort of build a parallel one? Ultimately, I think the original expectations you put out was 40-50 global units of demand for S. Clearly, that would probably tax, at some point, the setup you have now, but just kind of wondering when that additional capacity would go in and how it might be configured.
We have a game plan on that front. Obviously if we're doing 40 or 50 in Model S volume, if Model X turns out to have a comparable demand, and we're on the order of 100,000 units, clearly our current production line is not going to do the trick, we're going to need something else. We're looking at reconfiguring part of the factory, maybe using one of the moving production lines that's still there from the NUMMI days. I feel pretty confident. The production of vehicles is not going to be a constraint. That's not a limiting factor. Nor do I think we've got some sort of huge capital draining thing that's going to need to happen. I think we've got a handle on how to get there.
Okay, terrific. Well, thanks for taking my questions.
All right, you're welcome.
All right. Thank you very much, everyone, for joining us this afternoon. We look forward to seeing many of you tomorrow at RW Baird's Industrial Conference in Chicago or next week at Barclays Auto Conference in New York City. Have a great day.
Okay, ladies and gentlemen, this does conclude your conference. You may now disconnect, and have a great day.