Earnings Call: Q2 2021

Jul 26, 2021

Good day and thank you for standing by. Welcome to the Tesla Second Quarter 2021 Financial Results and Q and A Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Martin Viecha, Senior Director of Investor Relations. Please go ahead. Thank you and good afternoon everyone. Welcome to Tesla's Q2 2021 Q and A webcast. I'm joined today by Elon Musk, Zachary Kirchhorn and a number of other executives. Our Q3 results were announced at about 1 p. M. At the same time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today. Actual events and results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answer portion of today's call, But before we jump into Q and A, Elon has some opening remarks. Elon? Sure. So to recap, Q2 2021 was a record quarter on many levels. We achieved record production deliveries and surpassed over $1,000,000,000 And GAAP net income is the first time in Tesla history. I'd really like to congratulate everyone at Tesla for an amazing job. This is really an incredible milestone. It also seems that public sentiment towards EVs is at an inflection point. And at this point, I think almost everyone agrees that electric vehicles are the only way forward. Regarding supply chain, while we're making The global chip shortage situation remains quite serious. For the rest of this year, our growth rates will be determined by The slowest part in our supply chain, which is a there's a wide range of chips that are at various times the slowest parts in the supply chain. I mean, it's worth noting that if we had everything else, if we had vast numbers of vehicles and sales, We're not able to make them. Everything except the chips, we wouldn't be able to make them. The chip supply is fundamentally The governing factor on our output. It is difficult for us to see how long this will last because We don't have. It's out of our control essentially. It does seem like it's getting better, But it's hard to predict. So in fact, even achieving the output that we did achieve was only due to an immense effort from people within Tesla. We were able to substitute alternative chips And then write the firmware in a matter of weeks. It's not just a matter of swapping out a chip. You also have to rewrite the software. So It was an incredibly intense effort of finding new jobs, writing new firmware, integrating with the vehicle and testing in order to maintain production. And I'd also like to thank our suppliers who work with us. And there have been Many calls midnight, 1 am, just with suppliers in resolving a lot of the shortages. So thanks very much, suppliers. Let's see. In terms of FSD subscription, we were able to launch full self driving subscription last month. And we expect it to build slowly and then But then gather a lot of momentum over time. Obviously, we need to have the full self driving build, widely available for it really to take off at At high rates and making a lot of progress there. So Yes. I think FSD subscription will be a significant factor probably next year. With regard to Giga Texas and Giga Berlin, we're actually doing this earnings call from Giga Texas, so we're in the factory right now doing this The team has made incredible progress here. You can see the pictures online and I see that there's basically Nothing a year ago and there's a large mostly complete Large factory a year later. So it's really great work by the Giga Texas team And then also great work in Berlin, Brandenburg, with the team there. So We expect to be producing the sort of new design of the Model Y in both factories and limited production later this year. It's always like It's not it's hard to sort of explain to people who have not been through the agony of a manufacturing ramp. Why can't you just turn it on and make 5,000 a week? This is it is so hard to do manufacture. It is so hard to do production. To first approximation, there are 10,000 unique parts and processes that have to work and the greater Growth of production goes as fast as the least lucky, and dumbest of those 10,000 things. And a bunch of them are not even in our control. So it's like It's insanely difficult. I'm fond of saying that prototypes are easy and production is hard. And arguably, the really remarkable thing that Tesla has done is not to make an electric car or to be a car startup Because there have been hundreds of car startups in the United States and outside United States. So the thing that's remarkable is that Tesla didn't go bankrupt in reaching volume production. That's the amazing part because everyone else did. Because they all thought the prototype or the idea was the hard part and it is not. It is trivial by comparison with actual production. So it's always worth noting that of all the American car companies, There are only 2 that have not gone bankrupt and that is Ford and Tesla. So The seeds of defeat are sown on the day of victory, and we must be careful that we do not do that. They're often, if you Look at history so often as the seasons beat us on the day of victory. We will endeavor not to make that the case So let's see, the Model Ys in Texas and Maine Texas and Berlin will be will look very much like the Model Y's we currently make, but there are substantial improvements in the difficulty of manufacturing. So for example, the Model Y made here and in Berlin will have a cast front body and a cast rear body, Whereas the one in California has cast rear body, but not a cast front body. We're also aiming to do a structural pack with 4680s sales, which is a mass reduction and a cost reduction. And, but we're not counting on that as the only way to make things work. We have a sort of backup plan with nonstructural pack and 2170 essentially. So but at scale production, we obviously want to be using 4680s and structural pack. From a physics standpoint, this is the best architecture and from an economic standpoint, it is the lowest cost way to go. So the light is lowest cost. But there's a lot of new technology there. So it is difficult to predict with precision when does it work and when do you reach Scale production. And Drew is going to talk a bit more about the 4,680 production. Yes. So we are making great progress on 4,680 cells. But there are there is a tremendous Innovation that we're packing into that 4,680 cell. And so, it's not simply a sort of minor improvement on state of the art. There are and we went through this on the factory sale day, really dozens of Half a dozen major improvements and dozens of small improvements. So I think it will be great, But it's difficult to say when the last of the technical challenges will be solved. So in conclusion, our team continues to make huge efforts to make our factories run at full speed, which is very difficult. We have had some factory shutdowns due to of part shortages. And we hope those will be relieved in the coming weeks months. And We were making great progress on full self driving. Some of the progress is not easy to see because it's that as to the foundational software level. And so that ends up being sort of a 2 steps forward, 1 step back situation. And But over time, you should do 2 steps forward and 1 step back and keep going, you do move forward. So I'm highly confident that The cars will be capable of full self driving. If they have full self driving computer And the cameras, I'm confident that they will be able to drive themselves with the safety levels substantially greater than that of the average post. Once again, thanks to all of our employees who are making this a breakthrough year for Tesla and an incredible quarter. Thanks, guys. Thank you very much. And we have some follow-up remarks from Zachary Kirkhorn. Yes. Thanks, Martin, and thanks, Elon. Just to reiterate, Q2 was a great quarter for the Tesla team with strong improvements across the business. In particular, auto gross profit and margin, including credits, increased substantially. This was primarily driven by better cost optimization across our factories, good execution against our cost reduction plans as well as increases in production and delivery volume. There was some benefit from pricing action mostly in North America. However, it was small in the context of the other contributors. Note that the Model S and X program was at a slight loss for the quarter due to the relatively low volume. And supply chain challenges, including expedites, continued to provide cost headwinds. Additionally, it's encouraging to see the progress made on profitability within our Energy and Services and Other businesses. While there's some benefit to looking at our progress quarter over quarter, I find it more helpful to look at progress over a slightly long term horizon. Over the last 2 years, our vehicle delivery volumes have more than doubled. This volume increase was made possible by a steady decrease in ASPs of more than 10%, driven by a road map to increase affordability and shifting mix towards our more affordable vehicles. Yet over that same period of time, our auto gross margin, excluding credit, has increased nearly 10 percentage points to our highest yet since the introduction of Model 3. This is only possible because our average cost per vehicle has reduced by more than the reduction in average price. This is a remarkable achievement in the context of the volume growth and ASP reduction I've mentioned and a testament to the hard work by the Tesla team. Additionally, OpEx as a percentage of revenue has declined and in particular, SG and A, representing the work we've done to become more efficient as we scale the company while still making the required R and D investments to support our future. As a result, our GAAP operating margins have risen from negative to double digit, in line with what we have guided. By managing our overhead costs and driving higher volumes, our P and L is benefiting from the marginal profitability of each incremental unit. Or said differently, we are recognizing the benefits of scale and improved fixed cost absorption. With strong operating cash flows and cash balance, we are putting that cash to use. CapEx continues to tick up, primarily driven by capacity investments in Austin, Berlin and Shanghai. Additionally, each quarter, we are using our cash to retire legacy debt, which was taken on at a time when interest rates and company risk were much higher than in today's environment. As I've mentioned before, our 2021 volumes will skew towards the second half of the year as we push for continued sequential increases in volume. Despite the great work so far managing the instability of the supply chain, these challenges remain and are unfortunately increasing in pain with the higher volume. As we work through the uncertainty, we want to ensure we do our best to manage customer wait times as well as the impact these interruptions have on our employees and costs. And as Elon mentioned, volume growth will be determined by part availability as we have the factory capacity ready and are in a strong demand position. I'm excited to see the progress made by the Tesla team as we continue building the business and strengthening our financials. Thank you very much. Great. Thank you very much, Zach. And now let's go to the retail investor questions on say.com. The first Question from Robert M. Is Tesla's website still says Cybertruck production is expected to begin in late 2021. Can Tesla share more details on the current status of the Cybertruck and confirm if production is still Okay. Lars, do you want to? Sorry, we cut out there for a second. Yes. The Cybertruck is currently in its out of stages. We finished basic engineering architecture of the vehicle. With the Cybertruck, we're redefining how the vehicle is being made. As Elon said, it carries much of the structural pack and large casting designs of The Model Y being built in Berlin and Austin. Obviously, those take priority over the Cybertruck, but we are moving into the beta phases of CyberTruck later this year and we'll be looking to ramp that in production in Giga Texas after Model Y is up and going. Yes, it's worth reemphasizing that the extraordinary difficulty of ramping production of large manufacturing items. The risk of being repetitive, it is actually easy to make prototypes or Sort of handle small volume production, but anything produced at high volume, which is really what's relevant here is, It's going to move as fast as the slowest of the say a rough order of magnitude, 10,000 unique parts and processes. And so you could have 9,999, but just one is missing. I mean, we were missing, for Like a big struggle this quarter was the module that controls the airbags and the seat belts. And obviously, you cannot ship a car without those. And that limited our production, severely worldwide in Shanghai and in Fremont. So it wouldn't have mattered if we had like 17 different car models because they won't need the So it's irrelevant. So the in order for Cybertruck and Semiac to scale to Volume that's meaningful for customer deliveries. We would got to solve the chip Shortage working with our suppliers, if you also want to say why don't you just build a chip bag. Okay, well, okay, that would take us Even moving like lightning 12 to 18 months. So it's not like You can just whip up a chip bag. This is like yes, I'll just make a whip chip bag. Some of these things are yes, anyway, It is quite a trial dealing with all of the constraints of scaling a large manufactured object. I think it may be the case that Tesla Yes. Scaling, I think we might be the fastest in history Ever for scaling a large manufactured object. I think maybe the Model T would have been Comparable back in the day, the Ford Model T. Probably the Internet knows the answer, but I think we may be scaling large manufactured objects The fastest rate in history or I'd like to know who did it faster, so we can learn from them. So it's worth just noting that Yes. In the grand scheme of things, it's not bad. So yes, so CyroTrox and Semi, Actually both are heavy use of self capacity. So we got to make sure we have the self capacity for those 2 vehicles Of course, it's kind of pointless. We can make a small number of vehicles, but the effective cost if you make a small number of vehicles is Same. Like they would literally cost $1,000,000 apiece or more. And There's a reason why you do things in volume production, which is to get the economies of scale and get the cost down. So we are looking at a pretty massive increase in cell availability next year. But it's not like in January 1, it comes through it ramps up through the course of next year. But even without Tesla, Tesla's Even without Tesla Cell production, we believe our suppliers will be able to deliver about twice as much cell output in next year as this year. Drew, do you want to talk more about that? Yes. Given concerns over sales bottlenecking growth, our target is to grow sales supply Ahead of the 50% year on year growth targets of the vehicle business and also enable increased energy storage deployments. Yes. So yes, our sales suppliers are tracking to double their in 2022. Yes. It's worth noting that if you have a target of certain number, That doesn't mean it happens like as sure as night follows day. It is a target. So if there is Some calamity in the world that it drops the supply chain, then it will be less. But the Contracts that we have with sales suppliers call for roughly a doubling of sales supply to Tesla in 2022. And we have to juggle these exponential there's a whole bunch of exponential graphs sort of We're overlaying on top of each other. And small changes in where you are on the x axis of time can quite substantially change the area under the curve. So What we're thinking of doing is like depending on it's basically overshooting on Sell supply for vehicles and then as we have excess sales plan in 1 month or another, Then routing that cell output to the MegaPath and Powerwall. Or by the same token, if Yes, we're prioritizing vehicle production. If there's a shortage of sell output for some reason, then we will throttle down MegaPack and Powerwall Production. So it could be something's got to give basically. Or if there's a disruption to vehicle production, we have an outlet for Yes, exactly. There's a tremendous amount of inertia in the supply chain. So if we say to a supplier, we want you to Well, even doing that in a year is very difficult. And then that system has a tremendous amount of momentum. It is like a flotilla of We're tankers. It's insane. Speaking of which, from a raw materials perspective, we also have long term contracts to secure Our supply chain also enable this growth. So we're not just looking at the suppliers, but upstream from there. Yes. Which is more flotilla. Yes, exactly. As mentioned, Things will move as fast as the slowest part of the entire supply chain, which goes all the way back to raw materials, The lithium and nickel and that kind of thing. And There's sometimes misperception that Tesla uses a lot of cobalt, but we actually don't. Apple uses, I think almost 100 cobalt in their batteries and cell phones and laptops. But Tesla uses no cobalt in the iron phosphate packs and Almost none in the nickel based chemistries. So on a weighted average basis, we might use 2% cobalt Fair to say Apple is 100 percent cobalt. Anyway, so it's just it's really just not a factor. We expect to basically have 0 cobalt in the future. I do to stay with that, I think probably There is a long term shift more in the direction of iron based lithium ion cells Over nickel. As the energy density of sort of iron or it's called typically iron phosphate, My little support iron, the phosphate is taking for granted. But iron based cells, Lithium ion sales and nickel based lithium ion sales. I think probably we'll see a shift. My guess is probably to 2 thirds iron, 1 third nickel or something on that order. And this is actually good because there's I see of iron in the world. There's an insane amount of iron. But nickel is much less nickel and there's way less cobalt. So, it is good for relieving the long term scaling, to move to iron based sells mostly. And I think long term possibly all There's a good chance that all stationary storage, that is Powerwall and MegaPack, moves to iron. This is most likely the case, since you do not need to transport it and there's less of volume and mass constraint for stationary storage. So then, nickel would be for really for long range road transports, Let's go to the second question from retail, which is Elon has said that Tesla will be opening up the supercharger network to other EVs later this year. Can you share some more details on how this will be structured? Will this be a select brands or will they contribute to the growth of this network? Yes. We're currently thinking it's a real simple thing where you just download the Tesla app and you go to a supercharger And you just indicate which store you're in. So if you plug in your car, even if not a Tesla, And then you just access the app and say turn on this door that I'm in for how much electricity. And this should basically work with Almost any manufacturer's cars, there will be a time constraint. So if the charge rate If super slow, then somebody will be charged more because the biggest constraint at the superchargers is How occupied is the store? And we'll also be smarter with how we charge for Electricity at the superchargers. So rush hour charging will be more expensive than Or virus charging because there are times when the superchargers are empty and times when they're jam packed. And so it makes sense to have some time based Discrimination. Yes. We've been doing that and it's been working and people respond and it helps with utilization. Yes, Exactly. So, yes, I think we're in Europe and China and most parts of the world, it's the same connector for everyone. So this is a fairly easy thing to do, Our own connector, which in my opinion is actually the best connector. It's small and light, looks good, So we developed our own connector, which in my opinion is actually the best connector. It's small and light, looks good. So an adapter is needed to work for EVs in North America. But people could buy this adapter And we anticipate having it available at the superchargers as well if people don't sort of steal them or something. We have a good solution for that. Okay. So but that is that's a constraint on North America. That's basically the best of your history. But I think we do want to emphasize that it is our goal is to support the advent of sustainable energy. It is not to create a Wolf Garden, and use that to bludgeon our competitors, which is sometimes used by some company. I think it's also important to comment that increasing the The utilization of the network actually reduces our costs, which allows us to lower charging prices for all customers, makes the network more profitable, allows us to grow the Faster, that's a good thing there. And no matter what, we're going to continue to aggressively expand the network capacity, increasing charging speeds, Improving the trip planning tools to protect against site congestion using dynamic pricing, as Elon mentioned. Yes. And just continue to focus on minimum wait time for all customers. Yes. Obviously, in order for this to be for Supercharger to be useful to other power companies as far as, we need to grow the network Faster than we're growing vehicle output, which is not easy. We're growing vehicle output at a at a hell of a rate. So superchargers Need to grow faster than big last question. So this is a lot of work for the Supercharger team, but it is only useful in the grand scheme of There's only a few things to the public if we're able to grow faster than Tesla if we have an upgrade. So that is our goal. Thank you very much. And the third question is, Elon said 4,680 cells aren't reliable enough for vehicles. Is this referring to cycle life degradation or something else? Please update us on progress of 4680s and what still needs to be done To make them reliable enough for vehicles? Yes. I mean, really, this is not We'll definitely make the 46 to 80 reliable enough for vehicles. And we, I think, are at the point where in limited volume, it is reliable enough for vehicles. Yes. Again, going back to like limited production is easier, There are a number of challenges in transitioning from sort of Small scale production to large volume production. And not to get too much into the weeds of things, but right now, We are challenged with basically the what's called calendaring or basically squashing the cathode material to A particular height. So it just goes through these rollers and gets squashed like pizza dough basically And it's causing it's denting the calendar rolls. This is not something that happened when the calendar rolls were smaller, but it is happening when the calendar rolls were bigger. So just like We're like, okay, we weren't expecting that. Yes. It's not a like science problem, it's an engineering problem. It's not a question of if, it's a question of when. And the team is 100% focused on resolving these limiting processes as quickly as possible. Exactly. Yes. And On the reliability side, as Elon mentioned, we have successfully validated performance and the lifetime durability of the 4,680 cells produced in Cato. And we're continuing ongoing verification of that reliability. We're actually accruing over 1,000,000 equivalent miles on ourselves that we produce every month In our testing activities, the focus on that is very clear. We want high quality sales for all of our customers. And yes, we're just focused on the unlucky limiting steps in the facility. And with The engineers focused on those few steps remaining. We're going to break through as fast as possible. Meantime, we have a massive amount of equipment on order and arriving for the high volume Cell production in Boston and Berlin. And but obviously given what we've learned With the pilot plant, which is in Fremont, which is really quite a big plant We will have to modify a bunch of that equipment. So it won't be able to start like immediately. But it seems like, let me correct me if I'm wrong, but we think most likely, We will hit an annualized rate of 100 gigawatt hours a year sometime next year. We'll have all the equipment installed to Accomplish 100 gigawatt hours and it's possible that by the end of the year, we will be at an annualized rate of 100 gigawatt hours by the end of the year. Yes. I mean, my guess is More likely than not, about 50% of reaching 100 gigawatt hours a year by the end of next year on the annualized rate, something like that. But it could shift by a little bit. So, but nothing as Drew mentioned, nothing fundamental. No. Just let it work. Yes. And even to the large roller question, Elon, right? Like on the Inode side, the large rollers were great, no concerns. And so we're just learning as we go. And the nice thing about having that facility on the fast track like we had it and we talked about it Battery Day was really derisking the big factories here. That's what we've done, and we've learned a lot. And With each successive iteration, the ramp up and the equipment installation will be faster and more stable. All right. Thank you very much. And the last question from retail is from Emmett. Can Elon do an interview with one of our YouTube channels once or twice a year. I would not even name David Leon investing or Rod Mauer's Tesla daily channels as first possible candidates. Yes. I guess, I'll do an interview. I mean, just bear in mind, like, if I'm doing interviews, I can't do actual other work. So It's not, you know, it's only so much time in the day. So But yes, I'll do it once. I won't do it annually, but I'll do it once. I think also like This is the I would say the last time I'll do earnings calls, but this is the I will no longer be default doing both earnings calls. So obviously, I'll do the Annual Shareholder Meeting. But I think going forward, I will most likely not be on earnings calls unless there's something really important That's I need to say. Okay. Thank you. Let's go to institutional questions. The first one and we covered a lot of this already. Can you please update us on time lines for the start of production of Berlin and in Model Y, Cybertruck and the semi. Do you expect the ramp of Cybertruck to be as difficult as it is a new process? I think Savantruck ramp will be difficult because it is such a new architecture. It's going to be a great product. It might, I think, be our best product ever. But it does a lot of fundamentally new Design Ideas and Cybertruck, nobody's ever really made a car like this before, a vehicle like this before. So There will probably be challenges because there's so much unexplored territory. Thank you. I think question 2 and question 3 we can skip given we have already addressed it. I'll go to question 4. In 5 years' time, how much faster, better could you be at manufacturing capacity expansion using cut and paste? And what are the biggest issues you need to solve to get to that rate? Well, like I said, I think we might be the fastest growing So those who have not actually been involved in the manufacturing ramp up just no idea How painful and difficult it is. It's like you got to get a lot of glass And for our manufacturing ramp, it's hard. Yes. I mean, I think, If you look at the expansion we've done in Shanghai, that factory was built in less than a year and ramped in 5 to 6 months to full volume. We'll count from that. We'll count from that, about a year. And when you consider cut and paste, we've repeated that in Fremont and whatever, but now with Berlin and Austin, we have new factories and new designs. And so there's always challenges, as you said, Elon, With new designs and ramping that, but I think having teams in 3 locations or 3 continents will definitely expand our ability and our capacity to Grow more lines rather than just having the 1 factory in Fremont that we had a year and a half ago? Yes. So I mean for Shanghai, it was incredible seeing both the factory in 11 months, but it took longer than It's longer than building the factory, which was hot. It took longer than that to actually reach volume production, high volume production. So it took about a year. So when you put a factory in a new geography, in order for that factory to be efficient, You have to look like the supply chain. So there's no such thing as cut and paste. It does not Yes. And it would be possibly insane to do vehicle production in Europe, but send vast numbers of parts from North America. That would be That would make the producing in Europe, for example, just crazy. You've got to look like supply chain to have efficiency and then you're moving as fast as your lease lucky, lease goods supplier. Yes, it's only the supply chain 3 year like 3 or 4 layers, Lee. It's frankly, I feel at times that we are inheriting All, of course, monsieur of earth. So if anything goes wrong anywhere on earth, something happens to mess up the supply chain. I think the human capital growth though of having factories here, Berlin, Shanghai, Tremont, it does allow us to maybe not exponentially grow, but Yes. Hopefully, maintain that exponential growth. Yes. So, yes, It takes a while to hire older people and train older people to operate the factory. The factory is like giant cybernetic collective. And you can't just hire 10,000 people and have them have it work instantly. It's not possible. I really encourage more people to get involved in manufacturing. I think especially in the U. S, like This has just not been an area where all that many smart people have gone into. I think U. S. Has And the overallocation of talent in finance and more. It's both a criticism and a compliment. I'm not saying we shouldn't have people in finance anymore. I'm just saying that this might be maybe we have too many smart people in those arenas. So, manufacturing is fun? Yes, manufacturing is great. It's a very interesting problem to solve. And obviously, you can't have stuff unless someone makes it. That's how it gets up. Yes. Okay. Thank you very much. And let's go to the last investor Question, does Tesla plan to offer more services beyond FSD or high speed connectivity as part of its subscription bundle going forward? What areas in particular present an opportunity? Yes. We don't have a lot of ideas on this, to be frank. Really, full self driving is the main thing. Things are obviously headed towards Fully Autonomous Electric Vehicle Future. And I think TESUS is Well positioned and in fact, it is the leader objectively in both of those areas, electrification and autonomy. So, it's always tempting to try to find, analogies, but with other companies, whatever. But really, the value of a fully electric autonomous We is insanely gigantic, buckles the mind really. So that will be One of the most valuable things that is ever done in the history of civilization. Thank you very much. And now let's go back to analyst Q and A please. Thank you. Our first question comes from Colin Rusch with Oppenheimer. Your line is open. Thanks so much, guys. Can you speak to the attach rates for FSD so for and where you're targeting in terms of the subscription levels? Yes. It's not worth commenting on right now. It's not meaningful. We really need full stop driving at least the beta to be and widely available. So anyone who wants it can get it. Otherwise, it requires us to read anything into where things are right now. Okay. And then just the follow-up there is about the cadence of the regulatory environment keeping up with the technology. Are you seeing meaningful evolution in terms of the regulators really understanding the technology and beginning to set some standards here sometime in the near term? At least in the U. S, we don't see regulation as The fundamental limiter, we've obviously got to make it work and then demonstrate that The reliability is significantly in excess of the average human driver, for it to be allowed Yes, for people to be able to use it without paying attention to the road. I think we have a massive fleet. So it will be, I think, straightforward to make the arguments On statistical grounds, just based on the number of interventions Especially in events that would result in a crash. At scale, we think we'll have 1,000,000,000 of miles of travel to be able So that it is the safety of the car with autopilot on is 100% or 200% or more safer than the average human driver. At that point, I think it would be Unconscionable to not to allow the Autopilot because the car just becomes way less safe. If we sort of like Take the elevator analogy, back in the day, you used to have elevator operators with like a big sort of switch That operate the elevator and move between floors. But that gets hired or Maybe strong for something, or distracted and every now and again, somebody would be kind of shared in half between floors. That's kind of the situation we have with cars. Autonomy will become so safe that it will be unsafe To manually operate the car, relatively speaking. And today, Obviously, we just get an elevator, we press the button for which floor we want and it just takes us there safely. And It would be quite alarming if elevators were operated by a person with a giant switch. That's how we would be with cars. Thank you. Let's go to the next question, please. Next question comes from Lyle Boitchey with Wolfe Research. Your line is open. Hi, everybody. Your cost of goods sold per vehicle is already down to the mid $37,000 range in the quarter. It's down $5,000 year over year Despite some of the inefficiencies that you talked about. And I know that a lot is going to change from here just given how mix Is going to evolve, but if you're successful on the structural pack and front and rear castings and the launch of the 4,680 cell, can you just maybe give us a sense Of what a successful outcome would look like maybe a year from now? Obviously, a lot has to go right, but just any kind of broad framework Yes, it's really difficult for us to make specific predictions, it's very difficult. I think we feel confident of, say, at least 50% growth year over year next year. And maybe it's 100%, but that's we need a lot of At least $50,000,000 maybe $100,000,000 something like that. Okay. And maybe just separately from this, can you just clarify what the status is of Some of the advances in battery manufacturing, things like dry cathode mixing that you talked about on Battery Day. What's the time line? How are those evolving? Yes. We commented on it Today, already actually. But in the facility at Cato, over 90% of the Processes have demonstrated right there, but we are limited by the unlucky few that have not, and that's what we're working on. One of them that Elon mentioned was Running the full scale cathode calendar, we're working through some improvements that we need to make to that equipment and to The actual raw material itself to not have those limitations. But again, it's an engineering problem. It's not a question of if, it's a question of when. On the mixing side, we haven't actually really had any challenges specific to your question. Fundamentally, we're still happy with The dry process direction in terms of the factory footprint, complexity, utility consumption, space and overall complexity simplification. Yes. And I mean, and the cost associated with everything that I just mentioned. Yes. And regarding O'Brien says dry I mean, it is a I don't know, maybe it's like 10% or 15% of the cost improvement Something like that, I don't know, 20% maybe over the way. Yes, 10%, closer to 10%. Yes. So it's like just like people don't think This is like the Visayo or something. Wet versus dry reduces to dry is like 10% Less cost than wet. So it's not 10% sold nothing to sneeze at, especially if you're making hundreds of gigawatt hours a year, but it's not The site, that's good. Yes. Thank you very much. We can go to the next question, please. Next question comes from Pierre Ferragu with New Street Research. Your line is open. Hey, thanks. Thanks very much for taking my question. I have another question actually on batteries, but on a slightly different angle. I was wondering how you're looking at your sourcing strategy for the 4,000,000 680. You've talked a lot about all The work you're doing to develop your in house production. But what about asking other battery manufacturers to do sophisticated sales with their own technology, maybe less innovation than what you guys are lining And I was wondering if the first 4,680 sales that we'll see on the road will definitely come from Tesla's own manufacturing lines or whether they could be coming actually from outside suppliers as well. And I have a quick follow-up. Yes, we are in fact working with our existing suppliers to produce 4,680 format sales. And this is just a guess right now. But I see us sort of like Consolidating around 4680 nickel based structural pack and for long range vehicles and then Not necessarily a 4680 format, but some other format for iron based sales. So right now, we kind of have the Baskin Robbins of batteries situation, where there's We have so many formats and so many chemistries that it's like we got like 36 flavors of battery at this point. This is just this results in an engineering drag coefficient, where each variance of Cell chemistry and format requires a certain amount of engineering to maintain it and troubleshoot and this inhibits our forward progress. So it is going to be important to consolidate to Maybe ideally 2 form factors, maybe 3, but ideally 2. And then just 1 nickel chemistry and 1 iron chemistry. And so we don't have to Troubleshoot so many different variants. Yes. In terms of that end, we are engaging with the suppliers that we've Good partnerships with 4,680 Designs to enable that simplification and so far so good. They're working on They're bringing their core competencies to bear on that. We're not mandating like what's going on inside, but it's been a good collaboration. Yes. We do expect to see significant increases in supply from our existing suppliers in addition to the So it's both. Sometimes I get questions from our sales suppliers of like, are we just going to Make all the sales ourselves and we'd like to know, please make as many as you possibly can and supply them to us. We have a significant unmet demand in stationary storage. MegaPack is basically sold out through the end of next year, I believe. We have a massive backlog in Powerwall demand. The demand of Powerwall versus production is an insane mismatch. Now part of that problem is also the yes, the semiconductor issue. So we use a lot of the same chips in the Powerwall as we do in the car. So So like which one do you want to make cars or Powerwalls? So we need to make cars so that Powerwall production has been reduced. But as the semiconductor shortage is alleviated, then we can massively ramp up Powerwall production. I think we have a chance of hitting an annualized rate of 1,000,000 units of Powerwall next year, maybe, towards on the order of 20,000 a week. But again, dependent on self supply and semiconductors. But in terms of demand, I think there's probably demand for in excess of 1,000,000 Power Wheels per year. And actually just a vast amount of the megapacks for utilities. As the world transitions to of sustainable energy production, solar and wind are intermittent and by their nature really need battery packs in order to provide a steady flow of electricity. And when you look at all the utilities in the world, this is a vast Not a back of batteries that are needed. That's why long term, we really think sort of Combined Tesla and suppliers need to produce at least 1,000 gigawatt hours a year and maybe 2,000 gigawatt hours a year. Okay, great. Thank you. And I have a quick question. I know, Ilan, You don't think it's meaningful today, but I'd be curious to know if you have any starts about When you announced the new pricing on the SSD moving from 10 ground at frond to 199 with either looking, I'd be curious to understand how it affected behavior as an issue, so like a massive uptake in the service. And I'm not thinking about people looking at it as an SSD, but more to try the most advanced version of autopilot And to try it, so in the 1st days you've announced the pricing, have you seen like a very significant spike in the take rate? And can you Give us a sense of how big these were? Okay. So you're asking like is the FSD take rate too expensive and that's why we're doing subscription? Or, let me turn it back to you if I understand your question correctly. No. My question is from the time you announced like The subscription at $199 per month, how much did like the take rate increase like the percentage of People who basically took the situation as they bought a new car. That is how it was when they had to take time ground upfront. Yes, this is Zack here. I mean, I think we're still early in understanding how FSC subscription will unfold, But a couple of data points here. So we took a look at our backlog to see of customers in our backlog who have ordered FSC, Did they cancel presumably to go to subscription after they take delivery? And the level of cancellations there was not Seeing cannibalization there. It's possible that, that changes, but that was also part of our pricing strategy at $99.1.99 Yes. I mean It's also part of our pricing strategy at $99.1.99. Yes. I mean, It's like any given price is going to be wrong. So we'll just adjust it over time, as we see the value proposition makes sense to people. So, we're just really I'm not thinking about this a lot right now. We need to make full self driving work, in In order for it to be a compelling value proposition. Otherwise, people are kind of betting on the future. I mean, like right now, Does it make sense for somebody to do a FSD subscription? I think it's debatable. Once we have full stop driving widely deployed, then the Value proposition will be clear. And at that point, I think basically everyone will use it. Or if we rare Thank you very much for your help. And I think that's all the time we have for today. Thanks for all your questions and we'll speak to you again in 3 months' time. Have a good day everyone. Thank you. This concludes today's conference call.