Earnings Call: Q2 2013

Aug 7, 2013

Good day, ladies and gentlemen, and welcome to the Tesla Motors Second Quarter 2013 Financial Earnings Results 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 like to turn the call over to your host, Jeff Evanson. Please go ahead. Thank you, Patrick, and good afternoon, everyone. Welcome to our Q2 financial results Q and A webcast and conference call. I'm joined today by Elon Musk, Tesla's Chairman and CEO and Deepak Ahuja, Tesla's Chief Financial Officer. We announced our financial results for the Q2 shortly after the close of trading today. The shareholder letter, financial results and webcast of this Q and A session are all available at our Investor Relations website at ir.teslamotors.com. Today's webcast is for your questions. And I thank you for primarily using the webcast that helped save us some money. So thank you. We're going to conduct this Q and A session live. Star 1 now if you'd like to ask a question and we do plan to end this call in 45 minutes as always. Now during the course of this discussion, we may talk about our business outlook and make forward looking statements. Such statements are predictions based on management's current expectations. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10 Q filed with the SEC. Such forward looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward looking statements. And so now, Patrick, could we please have the first question? Our first question comes from Patrick Bachchanbal with Goldman Sachs. Your line is open. Yes. Thank you very much, guys. Congratulations on a good quarter. I think obviously the execution looked great. And but my one question would be just can you help us walk a little bit from I think your margin is adjusted 10% ex sev credits. It sounds like you still have some levers to pull to get to the 25%. Can you just go through those with us? Well, I think Patrick, Deepak here. Our automotive gross margin excluding ZEV credits is closer to 13% and maybe we can walk you through that later on to clarify. I know this is a confusing quarter with significant accounting numbers here, so we'll just help you with that. But we see clearly a path that gets us to 25% excluding ZEV credits given the actions that are underway and have been underway for a while and these relate to on the cost reduction aspects with our part cost reduction roadmap, the efficiencies we have in our manufacturing and supply chain that are happening over the second half, as well as a combination of the new options that we have put in the marketplace and the margin enhancement we get from there. I'm sure Elon has more to add. Right. Well, I mean, just in summary, I mean, we're about 12 points away from getting to the 25% gross margin target without their credits. And if you look at, say, Q1 to Q2, we increased 8 points. So obviously, on average, between Q3 and Q4, we need to do 6 points per quarter. So we need we don't need to make as quite as big as an improvement as we did Q1 to Q2, but obviously still significant hill to climb and huge amount of work. But we feel pretty confident about the 25% number. And it's important to note that there's this we have visibility into these numbers within reason ahead of time. So the things that affect the gross margin in order for them to affect the growth of the 4th quarter really needs to be in place or substantially in place about a month before the Q4. Otherwise, the parts that go into the car will not contain the cost savings that are necessary. So essentially, things need to be in place next month. And so that's why we're very far away. So that's why we feel felt confident enough to reaffirm the 25% gross margin guidance absent their credits for the 4th quarter. Okay. A force majeure event or something, some really big unexpected thing, but as long as there's nothing really unusual that happens, then that should meet that target. Okay, great. And then I guess, I haven't we haven't had an update on the X and when that's likely to we understand that obviously the variance of the S are what's taking a lot of engineering resources kind of in the near term? Deepak, maybe in terms of the X timing, is it still towards the end of next year when you're thinking about it? And when do those engineering resources sort of come to bear on your capital budget? Thanks. Sure. I'll maybe do part of the answer and then add a few thoughts. But yes, we're hard at work on the Model X, refining the design. We expect to be in limited volume, so deliver a small number of units at the end of next year, and then volume production would only occur in 2015. So in terms of if you're trying to sort of model it financially, I'd model it more in 2015 than 2014, although we're on track to deliver units to customers at the end of next year. And from a product standpoint, the Model X is our primary focus, obviously, at this point. We're most our resource is not spending a lot of time personally on the Model X and trying to get the details right. And I think there are some things we can do to improve the Model X of the early demonstration prototype that people have seen. I think there's room to make it better. So we're going to push pretty hard to make it better than what people have seen. I think there's some exciting features that I love, but hopefully other people like them too. Yes. I think Elon has covered the key points. A lot of the resources required for Model X is in our plan in terms of expenditures and that's one of the contributors for the increase in the expense as we go forward. Okay. Thanks a lot guys. I'll get back in the queue. Our next question comes from Andrea James with Dougherty and Company. Your line is open. Hi. Thank you for taking my questions. I guess I imagine you have several options available to you now. I mean, from investing in the Model S capacity, which you mentioned in your letter, to finishing up the Model X, and then to engineering the next generation of vehicle. And I was wondering if you could just weight your priorities and tell us how you're thinking about it, both from factory investment and also from your R and D? Okay. Well, okay. So it depends on how you how one says wait for those things. So in terms of our expenditures, we're still more on Model S than anything else on every front, including R and D, because bear in mind, we've got a right hand drive that's coming out in the spring. And then there's the China version and obviously we've got the European version that's going in. And there are a number of nuances in the various European countries that require work to ensure the car operates smoothly. There's the Japan right hand drive version. So there's just a lot of versions and individually and maybe not so huge, but you add them up and they amount to a fair bit of spending. In terms of executive time, I think we're the Model X is swiftly rising to become the main priority. It's not quite there yet, but it will be soon. I'm allocating an increasing portion of my time to that every week. Probably in the Q4, it becomes the top one the top item, so I guess. I mean, these are somewhat qualitative statements, but yes. Yes. And the capital expenditure for Model X will primarily kick in next year as we start to get some of the tooling in place. Right now it's not more of the human resource literature in some of the It's like the it's design and engineering, but not a lot of tooling. So it's a lot of lab work and design work, but not a lot of hard tooling or anything. Yes, there'll be a fairly big chunk of that in the second and third quarter and fourth quarter next year. When does the next generation of vehicle sort of move up? Is it a timing thing? Is it a cost of the battery pack thing that we source it? I mean, our high volume sort of affordable car? That's right. Right. So there's So there's a couple of this it's interesting like as we sort of think ahead to that vehicle, we're allocating a little bit of time to some of that advanced planning. It's only maybe less than 5% a week, but of sort of exact of our sort of planning activity. But when you do the math on saying, okay, how many batteries do you need for like what's the cell fabrication capability, the raw materials, all the elements, it's really quite a large number in order to ultimately, say, beat a factory that's producing 500,000 vehicles a year. And we start exceeding the entire laptop industry by a decent margin. So clearly, new factories, new cell factories need to be built. And we need to be smarter about the raw materials going into the pack. But I mean, I certainly see a clear path. I don't see any I see not really actually, I'd say, I not only do not see obstacles, I see a fairly clear path to that vehicle. I have high confidence that we can create a compelling car for around $35,000 compelling meaning a 200 mile range. And of course, a lot of the other features that people have come to expect from Model S, although a few things would be default features. So yes, I feel pretty good about it. There's a huge amount of work, but miracles required. Are Tesla shareholders going to see any benefit from the Hyperloop? I don't know. I think it's not out of the question, but I think I kind of shot myself in the foot by mentioning the Hyperloop because I'm too strong. I mean, obviously, I have to focus on core Tesla business and SpaceX business, and that's more than enough. But I did commit to publishing a design and provide quite a detailed design, I think, on Monday. And then I invite critical feedback and see if people can find ways to improve it. And then it could just be out there as kind of like an open source design that maybe people can keep improving. And I don't have any plans to execute it because I must remain focused on SpaceX and Tesla. If nothing happens for a few years, with that, I maybe it could make sense to make the hot loop happen with Tesla involvement, but that mostly is extremely speculative. And finally, just for Deepak, what were the other regulatory credits in the quarter? And does your GM assumption include those in the long term? Yes. Our gross margin for automotive does include the other regulatory credits because we have good visibility of those and they are locked in for us over a longer term. ZEV credits are the ones which are not predictable from in terms of recognizing sales and revenue by quarter. And given their unpredictability, we have deliberately kept that aside in our own projections. And in this quarter, in Q2, those were roughly $18,000,000 And just can you just the visibility is better than the ZEV credits because why exactly? And then I'll hop off. Thank you. Because we have longer term contracts with certain carmakers to sell those credits. Thank you so much. Our next question comes from Adam Jonas with Morgan Stanley. Your line is open. Hey, everybody. Okay, Elon, I'm not going to ask you any questions about a cap raise this time. I don't think we need to go there. First question on the 40,000 unit annualized sales comment you made by late 2014 as a potential. What metric were you using when you were extrapolating that for Asia? Is that something like on a sales per store or percentage of addressable market? Actually, it's just based on what we kind of see that Amanda is like I mean, right now, obviously, we're selling in North America at about 20,000 units a year. So Europe is a similar sized market to North America. China is actually bigger. And then that doesn't include the rest of Asia Pacific, South America, South Africa, Australia. So it seems like that's a pretty safe number to assume. I mean, I think we've probably got some potential upside from that number. Okay. That's clear. Just next one, can you elaborate a bit on the nature of the supplier bottlenecks that you mentioned? Is it related to homologation for some of the exotic European or right hand drive type deliveries? Is it a new issue? Or is it what is it, a lingering legacy issue? Any update on when this could be resolved? Yes. This is an important point that our production is we are production constrained, not demand constrained. Very often, I mean, people will suggest all sorts of marketing ideas and this, that and the other thing. But obviously, our time is spent trying to figure out how to make more costs. And the things that prevent us from doing that are supplier parts essentially. And we've got like 90% of our suppliers are able to ramp up. And 5% have some difficulty and 4% have a lot of difficulty and 1% just can't. And so we've got to replace those or in source those items. You can't supply give people a car that's 99% complete, unfortunately. And there's several 1,000 unique parts in the car. So that's what we're really spending our time on is clearing out the those production bottlenecks or supply chain bottlenecks. And I think we should have probably cleared most of them out in the next 6 months. I think by maybe end of Q1, Q2, we should certainly by Q2, I think unlock a bit more production potential. And we'll see what the demand looks like at that point. But we're striving to become demand limited as opposed to production limited. And I feel like we're actually able to attract kind of more the A team on suppliers, whereas previously, we had some trouble attracting A team from suppliers. They thought we wouldn't be around long term. And we had that issue where IHS had predicted that Tesla would only ever sell 3,000 cars lifetime of the Model S. And then we sold that in the first basically the Q1 of production. And so the tricky thing was that a lot of us support many of our suppliers had taken the IHS number or taken like historical electric vehicle numbers and maybe given us a little bit of credit for our projections, but not much. And so they didn't tool up for the production that we actually experienced. And so they were scrambling to make up for it. And yes, so that's really Bitch didn't believe it. So it takes some time to tool up and do it. And then some suppliers, a small number, they're just not set up for volume production. So we've got to switch them out or in source it. That's clear, Iain. Thanks. I think and this is my last question. I think many people on call might be interested in your views on the BMW I3. That's it. Thanks. What do you think? Well, I'm glad to see that BMW is bringing electric car to market. That's cool. I think there's room to improve on the I3 and I hope that they do. My comments about other manufacturers. Sorry. Yes. Yes. Anyway, I feel the coupon I'm going to make is I really do encourage other manufacturers to bring electric cars to market because it's a good thing and they need to bring it to market and then keep iterating and improving and making better and better electric cars and that's what's going to result in us in humanity achieving a sustainable transport future. Kind of wish it was going faster than it is. Yes. Thank you for that, Elon. Good answer. Our next question comes from Brian Johnson with Barclays. Your line is open. Yes, good afternoon. Two questions, one for Deepak probably and one for Elon on Jan 3. For Deepak, the first question asked you to bridge on gross margin through the end of the year. Could you just maybe give us on the bridge of improvement from 1Q to 2Q, the big chunks of things that contributed to that margin increase ex reg credits? Sure. I would say the biggest pieces there were part cost reduction as we continue to get more efficient in at our suppliers as well as some of the design changes we made to make the design efficient while not taking anything away from a consumer point of view. We also had improvements in our labor and overhead and our freight costs. And all of those, in fact, were partially offset by the mix. We had a poor mix in Q2 since we sold the 40 kilowatt hour cars that had the 60 kilowatt hour battery pack. Yes, but it essentially sold it a lot. Right, right. Yes, which had a from an average gross margin perspective a negative impact. So I think what I'm sharing with you is no different than what we have shared before. It's those same levers and part cost is our biggest lever that helps to drive these improvements. Yeah, yes, bonds labor and yes, bonds labor. That's what cars may do. The Yes, and I think maybe another way to characterize it is like in the Q4 of last year, we were extremely down at making cars. In the Q1, we were maybe still pretty dumb. And we're slightly dumb in the Q2 and hopefully by the Q4 we will at least not be dumb. I'll figure out how to quantify that. This is not some super how do we get so super good? It's like how do we stop being so stupid? 2nd question, Gen 3. The 30 2 questions underneath. The 35 ks price point, is that before or after regulatory excuse me, consumer credits and tax credits? And then second, as you kind of think of Gen 3 and making money at it, some talk I've heard that maybe small format batteries aren't the right way to go, but large format. Just maybe reiterate, I kind of think the former, small format, kind of where you are on those and how that gives you some comfort in getting to the price point on the Gen 3? Sure. So, yes, the 35 ks does not assume assumes that the $7,500 federal tax credit is no longer available. And there may be other sort of state level tax credits or maybe other things, but we're assuming that the $35,000 is the is without any subsidy. Right. I think it's always helpful to have some subsidy, but we're not counting on it. And yes, so in terms of the sale format, for us, when we talk to our key sale suppliers and we ask them to give us, say, at the cell level, what is the best energy density, so watt hours per kilogram and what is the best price and sort of dollars per watt hour. Invariably, the 18,650 format is the best, but usually by a pretty decent margin. And that's an 18 millimeter by 65 millimeter cylinder with yes, that's the format that seems to be the best. It has advantages. I think if you say, well, why is it cost less? I mean, I think you're able to kind of pack and then why does it have that energy? So you're able to compress, unpack in quite a bit of electrode and electrolyte in that cylinder. That's why batteries really like consider grade batteries are there's like cylinder AA, AAA and that kind of thing. You can pack more in there. And it just happens to be a fairly efficient manufacturing process in almost every way relative to the sort of prismatic approach. Also, as you make the cell bigger, you have to say that the reject rate for the cell is going to increase. So if you think of maybe an analogy to the silicon wafer fab and say, what would be cheaper? Having a whole bunch of, say, 6 inches wafers or 1 12 inches wafer. And actually, it's the lower diameter wafer that is cheaper because with the silicon as with electrode area, you have to reject anything that's got a flow. So the reject rate and it's also helped us think things in the limit. So I say in the limit where the battery where the whole battery is 1 cell, the reject rate would be virtually 100%. And then as you make the cell smaller and smaller, the reject rate will reduce. And at the 18,642 format, the reject rate is very low. And you have very good statistical reliability. So I'm sort of going giving long winded answers here. Shorthand, could we call it a server rack versus a mainframe strategy? Yes, sure. Okay. And in terms of how you're managing the load, are there advantages to having several thousand, I've heard numbers of size 8,000 cells versus a smaller number? Again, kind of thinking about the statistics behind it. Well, I think we're at around the 7,000 cell number for the 85 kilowatt hour pack. If we were to say, well, what's the ideal cell number? And if we were to do a whole new cell, like a whole new sort of cell plant, I mean, I think we might drop the cell number in half, but probably not less than that. And another thing that sales give you is that for long term life of the pack, if you have a large number of cells, then losing a cell actually has a very small impact on the total capacity of the pack. Whereas if you have a small number of cells, then losing a cell has a big impact on the capacity of the pack. There are some advantages for life as well and for reliability. Okay. Thanks. Our next question comes from Dan Galves with Deutsche Bank. Your line is open. Okay. Thanks. Just wanted to follow-up on the 40,000 units per year by late 2014 comment and the shareholder letter. Can you tell us what North American order flow is on an annualized basis right now? And what type of order rate are you seeing in Europe currently? And kind of what's the trajectory what's been the trajectory of that? Yes. So I don't want to get too specific, but it's we're at a in terms of net orders, weekly net orders, so new orders net of cancellations, it's something that fluctuates a little bit from week to week, but it's around 20,000 right now for North America. We're not trying to push it higher than that because it's kind of pointless to push volume when you don't have the production to meet it. So I think there's potential there for once we are sort of we have service centers in more parts of the country and more stores out there and more word-of-mouth that and more supercharger stations. And there's an argument that the long term demand in North America is greater than 20,000 units a year since we lack those things today and have that approximate demand. And then in Europe also in Europe, we're actually not trying to push sales very hard because the if you order a car in Europe, you're going to get it in like maybe November. So we really, again, need to improve our production. We need to make sure that the entry of the car into Europe is smooth, that people have a good experience with the car, that all the service centers are there, that the people are well trained. These are the really important things. And then, I mean, like I said, I think if you look at sort of sedan demand, the sort of EU or greater EU area is actually higher than North America in general sedan demand. So if you say how many premium sedans are sold, more are sold in the very EU area than in North America. So that to the degree that there's some that we achieve a similar percentage in Europe and maybe it's a bit less because our car costs a bit more because it's got to come from the U. S. And there's increased logistics costs and some import duties and that kind of thing. So maybe that's why I'm we're not going to say assume it's just going to be as good as North America, but it's probably at least half as good as North America. And maybe it is ultimately as good as North America, But our conservative estimate would say it's half as good. And then China and rest of Asia and other countries, well, if they can be half as good as North America, then we're at the 40,000 unit number. And that so that seems that all seems pretty reasonable to me. That makes sense. In terms of capacity to build, I think your current line is set up for maybe 40,000 to 50,000 units on 2 shifts. I guess two questions. When do you think you can get to that number in terms of production rate? And what is the decision making process in terms of potentially adding more capacity, if you're going to fill that up with just the Model S? Right. And yes, and as I said earlier, while we have the ability to produce at the 40,000 unit level, all of our suppliers must also have that ability. So that's the thing that's holding us back. I think we there's certainly room to grow beyond that. We have a big factory. But yes, so we'll have to see how demand settles out. As I mentioned, we want to get to being demand constrained as soon as possible. Hopefully, we'll get there next year. That's our goal, by the end at least by the end of next year. And then, of course, we'll bring the Model X online in limited numbers into next year and then in bigger numbers in 2015. And the potential is obviously very significant. But I don't want to overpromise or I think there's a lot of potential, but we'll have to see how it turns out. Okay, great. One last question. You mentioned that the changes to Do you Do you have any sense of kind of how much it would have benefited margins in this quarter? Or do you have a projection for how much of an increase you'll see from that action? We're really not sure because we only introduced them less than a week ago, like 4 days ago, 5 days ago, and we don't know what the take rate is going to be. And it's like we've got some guesses, but I think there's no need to guess because we'll in, let's say, a few weeks' time, we'll have a pretty good sense for what the option mix is in reality as opposed to just like a guess. So what we did with the options is we obviously unbundled a bunch of things. We added some additional options that weren't there before like parking sensors and improved interior trim options and a number of other things that people have been asking for. There's a subzero weather package. There's improved tires, which come as default on the 85 and are an option on the 60. There's a whole bunch of cool things actually. New wheels. Yes, new wheels, the aero wheels, which improve range and give us actually by far the lowest drag coefficient of any car in production. And yes, there's a whole much cool stuff. And then we like I said, we unbundle the things some things like the performance package, which required you to buy a whole bunch of things in addition to just the 0 to 60 time. Now you essentially can buy just the power and then decide if you want the other options. And we slightly lowered the price of the technology package. So to be clear, the base price stayed the same and the technology package dropped, the cold weather package. We also dropped in deference to our customers in Norway because I think the cold weather or the subzero package you kind of need if you're in Norway. And so we actually dropped the cost of that a fair bit. We made xenon headlights and the high definition backup camera. We made that standard equipment on all cars. So essentially, I think the value for money is actually better. But we did increase the price on some of the optional the extra is that so we'll actually make more margin on some of the things out there, like, for example, the 3rd row seats. And those were a fairly low margin item, and so we increased the price to make it more of a better margin item for us. Okay, great. Thanks. Okay. Our next question comes from Colin Rusch with Northland Capital Markets. Your line is open. Great. Can you guys talk a little bit about the introduction of new generations of batteries into the battery pack? How much testing they need to go through? And how much impact do you think that can be on the cost structure over the next several quarters? We're not making we're not planning on making a significant fundamental technology change in this at the cell level. We're making a number of improvements at the pack level and in the electronics and packaging and all that stuff that surrounds the pack. So there's the sell and the non sell portion of the cost. To get the cell cost lower, we're working with our main cell supplier, which is Panasonic, and improving working with them to improve the cost of the sale. And obviously, more volume there helps. And we're quite optimistic about that relationship. It's going really well. They're a great partner to have actually. So yes, I'm not quite fully answering your question, but it's we feel good about where things are and where they're headed on both the cell and non cell portion of the battery pack cost. Okay. Perfect. And then with the purchase of the additional land around your current facility behind the sky, how much capacity would that potentially give you if you build out all of that area? Well, it's worth noting that, that piece of land adjacent to the factory was originally part of the Niomi facility. So when we bought the factory, it was actually divided into the center parcel and then a north parcel that was mostly just mostly just land and a south parcel that was mostly land. So when we bought NIMO, we bought essentially the factory and the main parcel of land, but there were these 2 little sort of satellite parcels. And what we did was we bought about half, I guess, of the Southland parcel. And Numi as a whole, as a factory, had about 500,000 unit capacity. So we would actually need to be slightly more space efficient than them to achieve the 500 ks number or buy some maybe some more land. So I don't think buying that land puts us above the 500 ks number. It just makes it easier for us to achieve the 500 ks number. Our next question comes from John Lovallo with Bank of America Merrill Lynch. Your line is open. Hey, guys. Thanks for taking the call. First question would be on what you're expecting in terms of the ramp in R and D and SG and A in the back half of the year? Can you hear me okay? I think yes. R and D and SG and A, right? Yes. Right. I mean, I think certainly it's going to be fairly significant. I want to be careful about how much I quote in terms of percentages, but I think it's more important to understand the physicals as we have indicated in the shareholder letter that overall given the continued emphasis on multiple product programs that we have, we will see an increase in R and D. And on the sales and SG and A side overall, we are strengthening our infrastructure globally on a variety of fronts. So I would say from a trend perspective, the percentage increase would be higher than what you've seen in the last couple of quarters. Okay. That's helpful. And then if we think about cash flow for a minute, I think if you look at just free cash flow was a use of about $79,000,000 in the quarter. And I think if you the adjustments that you guys had talked about, I think $11,000,000 for the DOE payments and $67,000,000 increase in receivables that may not occur. That looks like about a use of $1,000,000 Now you have CapEx ramping up in the back half of the year. So how are you thinking about just kind of free cash flow generation through the remainder of the year and into 2014? As we said in the shareholder letter that we clearly intend to generate cash flow from operations. You're right in pointing out that some of that will be offset by our capital expenditures. And we want to be very careful about burning cash. We want to be sure we are as close as possible to a free cash flow position, but that's something that we don't want to necessarily guide to how we're going to manage it, but we are going to be still judicious and spend the CapEx where we need to in order to make sure that we are growing at the right place. Yes. I mean, we are aspiring to make slight improvements to our cash position quarter over quarter. I mean, that's our aspiration. Okay. That's very helpful again. And the final question would be, I mean, just looking at kind of the typical ramp curve of a vehicle after launch, I mean, generally speaking, and I mean, I don't want to put you guys in a category with any other vehicle, but generally speaking, volumes tend to peak, call it, 7, 8 quarters out. Now you guys sorry? I don't think that's going to be the case in for the Model S. Okay. That was the question. So in North America, you would say that you have not seen any signs of a slowdown in new orders? No. Yes. The traditional model doesn't apply for Tesla because that assumes that you have a network which is already present not only in the U. S. But globally. Right. So we just don't have that presence. We are starting here essentially from scratch and slowly increasing our presence and making consumers feel comfortable about what EVs are. Exactly. Yes, I think there's a pretty long way to go. Yes, go ahead. Sorry. Yes, I mean, you got it's sort of like an S curve of technology adoption. You've got there's the sort of the really early adopters. But for the mainstream audience, they need to really see a lot of cars on the road for a long time to really feel like to feel comfortable buying it, particularly when it's a new technology like an electric car, as people say. Our next question comes from Craig Irwin with Wedbush. Your line is open. Good evening, gentlemen. Congratulations on the solid progress. Thanks. Thanks. First question I wanted to ask was about the Tillberg plant capacity. What sort of capacity have you put into that plant? And what sort of capital investment will be needed there as far as expanding finishing capacity. I mean, can you sort of sketch this out for us a little bit? Yes. I really don't think that that's going to be in any way a limitation on our progress. It's a fine typically, it's a final assembly plant. So we're not dependent on parts from suppliers or anything. It's generally, when we haven't been dependent on parts on when we haven't had an external dependency, we've been able to get the job done. But when beta is in the hands of others, that makes it a lot more difficult. And our end update is not in the hands of others in the case of the Chobot plant. Great, great. Then progress in China, obviously the Chinese market is a huge market. There's a lot of enthusiasm over there for electric cars. Can you share with us where you stand on your order rate out of China? What you think we're likely to see over the course of the next couple of quarters and if maybe you could update us on your store plan for China? Sure. I wouldn't say that this is quite the quarter to talk about China. I think we might want to talk about it probably at the next earnings call in more depth. But as you say, China is it's a huge market. It's the world's biggest market for premium sedans. If you take something like the, say, the Mercedes S Class, they sell approximately half of all of their worldwide production in China. And obviously, if we were to ratio have a similar ratio, that would be a pretty amazing outcome for Tesla. But we're not counting on anything remotely like that, quite the opposite. But there could be a positive upside surprise there. You just never know. But we have one store in Beijing that we're probably open later this year. And And then I'm going to visit China obviously and really try to understand the market and make sure we're doing the right things for Chinese consumers and the buyers over there. Because not every market wants exactly the same thing, so we've got to make sure that our product is properly tailored to the desires of consumers in every market in Europe, North America or China or Japan or anywhere else. So we were doing a few things, especially for the China market to for example, improving the comfort level of the rear seat because it's common for people in China to be driven rather than drive themselves. And when we first signed the Model S, we designed it to be the perfect driver's car, really. It's like how do we make the driver fall in love with the car. And obviously, if people are being driven around, then we need to make sure that the back seat is optimized. So we're working on an executive kind of executive back seat that's more comfortable than what we have right now, which is kind of like the family back seat. Anyway, so that's sort of the things. It's a little difficult to predict, and like I said, this is not the quarter to talk about China maybe at the next earnings call. And certainly, the earnings call about Q4 is but we're talking quite a bit about it at that point, I think. Great. And then last one, if I may. Got a pretty interesting trajectory on battery cost over the next few years. Can you share with us philosophically whether or not you might use the reduction in battery pack costs as a way to sort of neutralize the impact of the federal tax credit rolling off for your customers? Or do you see this possibly extending out beyond the timeframe where that would have the necessary benefit? Well, you see the limit of the $2,500 federal tax credit is limited to the first $200,000 cars for any manufacturer. So that between Model S and X, we think probably that's going to get exhausted in the next several years. And that's why we think it probably won't apply to 3rd generation kind of the affordable car. At that point, if it's possible for us to maintain high margin and neutralize loss of the tax credit, I think we'll probably I'd probably like to do that rather than have a higher margin car. Yes. Thanks again for taking my questions. Okay. We're running about 5 minutes over, everyone. We want to make sure that we get to all the questions in the queue. So we have a couple more left. So if we can keep the questions brief, we'll wrap this up as quickly as we can. Our next question comes from Aditya Sadgari with Lazard Capital Markets. Your line is open. Thank you. I had two questions. Firstly, just a follow-up on the 40,000 unit price on the 40,000 unit target, how many different versions of the Model S and how many different countries do you plan to sell into to get to that 40,000 unit target? Well, in terms of number of countries, there'd be quite a large number of countries because of the EU, which is I'm not sure the exact number of countries in the EU, like 14 or 15 or something like that. And then of course there's Norway and Switzerland, which are not in the EU. So I mean, right there, you're approaching and taking Canada and U. S. To account, talking about 20 countries right there. And then the China, Japan, Japan is a very important market for us. By the way, I really want to we're going to take the Japan market very seriously. I know that a lot of American pulp companies don't take the Japan market really seriously, but I think it's we're going to do that. I think it would The Japanese market is very discerning. And actually, I would consider it a great honor if the Japanese were to actually buy a car. Got it. Okay. Okay. And the second question was on the U. S. Market. So could you give us a little bit more color about your buyer base here? And what kind of potential brands do you think your customers are swapping out? And who do you think you're grabbing share from? We have some pretty good numbers for that. It's a really broad mix of cars. It's not and not just the premium sedan. In fact, I think we I believe we used some of that in our last earnings call where we shared Or the capital raise that we put. Probably, that's right. If you go back and look at our capital raise presentation, the iPhone we have in the slide, Joe. But go ahead and just talk about some of the cars we're replacing. Yes. It's a wide range of cars. Not like you can say, oh, it's a BMW 530 or something like that or it's a we're just pulling up the pie chart right now. Next slide. So this is from the it's an ALG overview, taking data from Polk. And they're showing sort of the essentially it's like the it's different in premium sedans and hybrids. So are the big ones. And but it's interesting like we've got there's no the largest one here is sort of on the order of 10%, 11 A lot of people are buying our car instead of the Prius, but that's 10%. There's obviously things like the E Class. People are buying our car instead of the LEAF or coming from the sorry, these are the cars they're coming from. So it's like E Class, Prius, LEAF, the Highlander, BMW 5 Series, Odyssey, Honda Odyssey, it's like just 4% is Honda Odyssey, starting from Model S. Volvo XC90 is 4%. Volkswagen Jetta is 4%. Interesting. But the broad mix overall, Honda Civic is 3%. I mean so it's really a pretty broad range. It's just from the premium sedan segment. Got it. That's helpful and congratulations on good execution this quarter. Okay. We have time for one last question, please. Our last question comes from Elaine Kuei from Jefferies. Your line is open. Hi, everyone. Thanks for squeezing me in. Just now that you're beginning to ship internationally, could you talk a little bit about the thinking behind the pricing strategy for Europe and Asia? Just are there any adjustments based on local incentives? Is it based on what the local market can bear? And would you expect margins to vary compared to the U. S? And then I'll just throw the second part in there with the supercharger network has really overcome the infrastructure obstacles for long distance driving and does Tesla have any strategy for addressing the challenges for urban dwellers especially in international markets where that might be more common? Thanks so much. Sure. The Tesla policy is to try to make the same amount of money on a car in any given market. So this is not a policy that in fact, I mean, we may be unique in this. I'm not sure if there's another automaker that does this, but we don't want to make more money off to someone just because they're in another country. So I don't think that's the right thing to do. So for example, in China, it's quite common for manufacturers to mock up the cars in a pretty huge way. We will not be doing that. And we're also trying to be extremely transparent about pricing. So you can take the U. S. Price and you could factor in logistics and any import taxes. And then there's this is like maybe a 3% allowable for exchange rate movements and then some incremental for any extra costs of doing business in that country that increase our overhead. But we try to be really transparent about that and keep trying to improve those costs over time. I mean, I guess the overarching principle here is like we don't rip anyone off. So you should assume the same watch in every country. That's great. And then is there any thoughts behind addressing the challenges for folks living in apartments or condos where you might have a personal garage? I could see this especially being an issue for the Gen 3 buyers especially. Yes, absolutely. It's not a huge percentage of the market that has this issue, but it is something we need to address. So for and the biggest the toughest one is street parking. Now a lot of cities and municipalities are putting and charging infrastructure on the street. So we're working with them to get more of that established. And then on the for apartments and condos for the garages there, we're forming or we actually have sort of loosely formed a group within our sales and service operations team that is able to work with the whoever is running the condo or farm building and tell them what they need to do to install sockets. And then there's and I think that's going to be important long term is the ability to sort of load level or limit total power electricity power load in an apartment building. So if there's a lot of cars, you don't want to exceed the total power going through that building at any one time. So it's just kind of a peak power limiter that's able to communicate between the cars that are getting charged. So and there's there are a few companies we're working with in that regard to deal with that for peak power load in apartment buildings. It really hasn't been thus far a constraint on our growth. So it took to occupy a little bit of our attention as that becomes next year, perhaps, it will become a constraint on our growth and then it's going to be more centrally in our attention. That's great to hear on the international and the infrastructure front. Thank you so much, Elon. Okay. Thank you, everyone, for joining us today. We look forward to seeing you over the next quarter. And in fact, we'll be at Jefferies Industrial Growth Conference in Manhattan next Monday. And on Tuesday, also in Manhattan, we'll be at JPMorgan's Auto Conference. So hope to see you all out on the road and happy driving. Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.