Jul 26, 2021

Tesla, Inc. TSLA Q2 2021 Earnings Call Transcript

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Full transcript of the Tesla, Inc. (symbol TSLA) Q2 2021 earnings conference call from July 26, 2021.

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Speaker 1: (00:00)
Thank you for standing by. Welcome to the Tesla, Second Quarter, 2021, Financial Results and Q&A Webcast. At this time, all participants are in listen only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Martin Viecha, Senior Director of Investor Relations. Please go ahead.

Martin Viecha: (00:34)
Thank you and good afternoon, everyone. And welcome to Tesla, Second Quarter, 2021 Q&A Webcast. I’m joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q2 results were announced at about 1:00 PM Pacific time in the update deck we published at the same link as these webcasts. 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 and 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, please limit yourself to one question and one follow up. Please press star one now if you would like to join the question queue, but before we jump into Q&A, Elon has some opening remarks. Elon.

Elon Musk: (01:27)
Sure. So to recap, Q2, 2021 was the record quarter on many levels. We achieved record production [inaudible 00:01:35] , and surpassed over a billion dollars and gap income for 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 Ev’s is at an inflection point. And this point, I think almost everyone agrees that electric vehicles are the only way forward. Regarding supply chain, while we’re making cars at full speed, the global chip shortage situation remains quite serious. For the rest of this year, our growth rates will be determined by the slowest parts in our supply chain, which is there’s a wide range of chips that are at various times the slowest parts of the supply chain. I mean, it’s worth noting that if we had everything else, if we had vast numbers of vehicles in sales, we were not able to make them, if everything except the chips, we would be able to make them. The chips supply is fundamentally the governing factor on our output. It’s difficult for us to say how long this will last because we don’t have, this is because 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 chips, writing new firmware, integrating with the vehicle and testing in order to maintain production. And I also like to thank our suppliers who worked with us and there’ve been many calls, midnight, 1:00 AM just with suppliers, in resolving a lot of the shortages. So thanks very much to our suppliers.

Elon Musk: (03:56)
Let’s see in terms of epic FST subscription, we were able to launch a full self driving subscription last month and we expect it to build slowly and then, but then gather a lot of [inaudible 00:04:09] over time. Obviously we need to have the full self-driving [inaudible 00:04:14] widely available for it really to take off at a high rate. And we’re making a lot of progress there. So yeah, I think FSC subscription will be a significant factor probably next year.

Elon Musk: (04:33)
We’ve got two 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 earnings call. And the team has made incredible progress here. You can see the pictures online and see that there’s basically nothing a year ago and this mostly complete large factory a year later. So really, 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 in limited production later this year. It’s always like, it’s hard to sort of explain to people who have not been through the agony of a manufacturing ramp. Like, why can’t you just turn it on and make 5,000 a week. This is, it is so hard to do manufacturing. It is so hard to do production. First approximation, there are thousand 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.

Elon Musk: (06:10)
And a bunch of them are not even in our control. So it’s insanely difficult. I’m fond of saying that prototypes are easy and production is hard. And I do believe that the really remarkable thing that Tesla’s done, it’s not to make an electric car or to be a car startup because there’ve 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 two 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 cannot do that. They often, if you look at the look at history, so often at the Caesar’s feet are set on the day of victory. We will endeavor not to make that the case at Tesla.

Elon Musk: (07:38)
So let’s see. The Model Y is in Texas and made Texas, and Berlin will look very much like the Model Y’s we currently make, but that 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 4680 cells, which is a mass reduction and a cost reduction. But we’re not counting on that as the only way to make things work. We have some backup plans with a non-structural pack and 2170, essentially. So, but at scale production, we obviously want to be using 4680’s 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 lightest, lowest cost, but there’s a lot of new technology there. So it’s difficult predict with precision. When does it work and when do you reach the scale production. Andrew’s going to talk a bit more about the 4680 productions.

Elon Musk: (09:08)
Yeah. So we are making great progress in 4680 cells, but there is a tremendous amount of innovation that we’re packing into that 4680 cell. And so it’s not simply a sort of minor improvements on state of the art. There are… And we went through this on the factory sell date, really dozens of, half a dozen major improvements and dozens of small improvements. So I think it will be great, but it’s [inaudible 00:09:43] to say when the last of the technical challenges will be solved.

Elon Musk: (09:50)
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 a power shortages, and we hope those will be relieved in the coming weeks and months. And we’re making great progress on self driving. So far this is not easy to see because of, at the foundational software level. And so it ends up being sort of a two steps forward, one step back situation, and, but over time, if you do two steps forward, one 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 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. But again, thanks to all of our employees who are making this a breakthrough year for Tesla and an incredible quarter. Thanks, guys.

Martin Viecha: (11:02)
Thank you very much. And we have some follow-up remarks from Zachary Kirkhorn.

Zachary Kirkhorn: (11:07)
Yeah. 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, excluding 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 volumes. 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. In supply chain challenges, including expedites continued to provide costs 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.

Zachary Kirkhorn: (12:09)
Over the last two years, our vehicle delivery volumes have more than doubled. This volume increase was made possible by a steady decrease in ASP’s of more than 10%, driven by a roadmap 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 as mentioned, and a testament to the hard work by the Tesla team.

Zachary Kirkhorn: (12:51)
Additionally, OPEX as a percentage of revenue has declined. And in particular SGNA representing the work we’ve done to become more efficient as we scale the company while still making the required R&D investments to support our future. As a result, our gap 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&L is benefiting from the marginal profitability of each incremental unit. Or said differently, we are recognizing the benefits of scale and improved fixed costs absorption. With strong operating cash flows and cash balance, we were 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 a higher volume.

Zachary Kirkhorn: (14:05)
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.

Martin Viecha: (14:32)
Great. Thank you very much, Zach. And now let’s go through the retail investor questions on say.com. The first question from Robert M. is, Tesla’s website still says cyber truck production is expected to begin in late 2021. Can Tesla share more details on the current status of the cyber truck and confirm if production is still-

Zachary Kirkhorn: (14:54)
Okay. Martin, do you want to-

Martin Viecha: (15:02)
Sorry. We cut out there for a second.

Drew: (15:02)
Sorry, we cut out there for a second. Yeah. The Cybertruck is currently in its alpha 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 [inaudible 00:15:34] Texas after model Y is up and going.

Elon Musk: (15:38)
Yeah. I just want to reemphasize the extraordinary difficulty of ramping production of large manufactured items. At risk of being repetitive, it’s 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, it’s going to move as fast as the slowest of the, say rough order of magnitude, 10,000 unique parts and processes. And so you can have 9,999, where just one is missing. We were missing, for example, a big struggle this quarter was the module that controls the airbags and the seatbelts. And obviously you cannot strip 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 17 different car models, because they all need the airbag module. It’s just irrelevant.

Elon Musk: (16:49)
So in order for Cybertruck and Semi to scale to volume that’s meaningful for customer deliveries, we’ve got to solve the chip shortage, or working with our suppliers. People sometimes say, why don’t you just build a chip vat? Okay. Well, okay. That would take us, even moving like lightening, 12 to 18 months. So it’s not like you can just whip up a chip vat. It’s just like, yeah, just make a quick chip vat.

Elon Musk: (17:25)
So some of these things are … yeah. 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 is scaling. I think we might be the fastest in history ever for scaling a large manufactured object. Maybe the Model T would have been comparable back in the day of the Ford Model T. Probably internet knows the answer, but I think we may be scaling large manufactured objects at the fastest rate in history, or I’d like to know who did it faster so we can learn from them.

Elon Musk: (18:11)
So it’s worth just noting that, in the grand scheme of things, it’s not bad. So, yeah. So the Cybertruck and Semi actually both are heavy users of sub capacity, so we’ve got to make sure we have the sub capacity for those two vehicles or 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 insane. They would literally cost a million dollars piece or more. There’s a reason why you do things at volume production, which is to get the economies of scale that get the cost down.

Elon Musk: (18:57)
So we are looking at a pretty massive increase in cell availability next year, but it’s not like in January one, it comes through … it ramps up through the course of next year. But even without Tesla … (silence).

Elon Musk: (19:20)
Hello? Even without Tesla’s cell production, our suppliers will be able to deliver about twice as much cell output in next year as this year. [inaudible 00:19:51], do you want to talk more about that?

Drew: (19:52)
Yeah. Given concerns over cell’s bottlenecking growth, our target is to grow cell supply ahead of the 50% year on year growth targets of the vehicle business and also enable increased energy storage deployments. So yeah, our cells suppliers are tracking to double their production in 2022.

Elon Musk: (20:09)
Yeah. It’s worth noting. If you have a target of a certain number, that doesn’t mean it happens as sure as night follows day. It’s a target. So if there is some calamity in the world that interrupts the supply chain, then it will be less. But the contracts that we have with cell suppliers, roughly a doubling of cell supply to Tesla in 2022. And we have to joggle these exponential … it’s whole bunch of exponential graphs, sort of overlayed 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 code. So what we’re thinking of doing is, depending on if … It’s basically overshooting on cell supply for vehicles, and then, as we have, say excess cell supply in one month or another, then routing that cell’s outputs to the Megapack and Powerwall. [inaudible 00:21:30] if we’re prioritizing vehicle production, if there’s a shortage of cell output for some reason, then we will throttle down Megapack and Powerwall production. But something’s got to give basically.

Drew: (21:43)
Or if there’s a disruption in the vehicle production, then you have an outlet for the cell capacity.

Elon Musk: (21:49)
Yes, exactly. There’s a tremendous amount of inertia in the supply chain. So if we say to a supplier, we want you to double cell output. 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 supertankers. It’s insane.

Drew: (22:11)
Speaking of which, from a raw materials perspective, we also have long-term contracts to secure our supply chain to also enable this growth. So we’re not just looking at the suppliers, but upstream from there. Which is more flotillas.

Elon Musk: (22:26)
Yeah. As mentioned, things will move as fast as the slowest parts of the entire supply chain, which goes all the way back to raw materials, 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.

Elon Musk: (23:06)
So on a weighted average basis, we might use 2% cobalt compared to Apple’s 100% cobalt. Anyway. So it’s really just not a factor. We expect to basically have zero cobalt in the future. 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 iron phosphate, but might as well just call it iron, the phosphate is taken for granted. But iron-based cells, lithium-ion cells, and nickel-based lithium-ion cells, I think probably we’ll see a shift, my guess is probably to two-thirds iron, one-third nickel or something on that order.

Elon Musk: (24:05)
And this is actually good because there’s plenty of iron in the world, there’s an insane amount of iron, but nickel is … there’s much less nickel. And there’s way less cobalt. So it is good for relieving the long-term scaling to move to iron-based cells 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. It seems most likely the case since you do not need to transport it. And there’s less of volume capacity constraint for stationary storage. So then nickel would be for, really for long range road transport, ships and aircraft and that kind of thing.

Martin Viecha: (25:03)
Thank you. 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 select brands, or will they contribute to the growth of this network?

Elon Musk: (25:25)
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 stall you’re in. So you plug in your power, even if it’s not Tesla, and then you just access the app and say, turn on the stall 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 is super slow, then somebody will be charged more. Because the biggest constraint at the superchargers is time. How occupied is the stall?

Elon Musk: (26:17)
And we’ll also be smarter with how we charge for electricity at the superchargers. So rush hour charging will be more expensive than off-hours 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 on them.

Drew: (26:41)
Yeah. We’ve been doing that, and it’s been working and people respond. It helps with utilization.

Elon Musk: (26:46)
Yeah, exactly. So, yeah, 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, developed our own connector, which in my opinion is actually the best connector. It’s small and light and looks good as a standard. So we developed our own connector, which in my opinion, is actually the best connector because it’s small and light and looks good.

Elon Musk: (27:21)
So an adapter is needed to work for EVs in North America, but people can buy this adapter and we anticipate having it available at the superchargers as well. If people don’t sort of steal them or something.

Drew: (27:37)
We have a good solution for that one.

Elon Musk: (27:39)
Okay. So that’s a constraint on the North American thing. That’s basically a vestige of history. But I think we do want to emphasize that our goal is to support the advent of sustainable energy. It is not to create a walled garden and use that to bludgeon our competitors, which is sometimes used by some companies.

Drew: (28:09)
I think it’s also important to comment that increasing 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 network 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. And just continue to focus on minimum wait time for all customers.

Elon Musk: (28:41)
Yeah. Obviously in order for superchargers to be useful to other car 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 hell of a rate. So superchargers needs to grow faster than vehicle output. So this is a lot of work for the supercharger team, but it is only useful, in the grand scheme of things, it’s only useful to the public if we’re able to grow faster than Tesla’s vehicle output. That is our goal.

Martin Viecha: (29:15)
Thank you very much. And the third question is, Elon said 4680 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.

Elon Musk: (29:36)
Yeah, really this is not … We’ll definitely make the 4680 reliable enough for vehicles. And we, I think, are at the point where, in limited volume, it is reliable enough for vehicles. Again, going back to limited production is easy or prototype production is easy, but high volume production is hard. There are a number of challenges in transitioning from …

Elon Musk: (30:02)
There are a number of challenges in transitioning from a small scale production to a large volume production. Not to get too much into the weeds of things, but right now we have a challenge with basically what’s called calendaring, or basically squashing the cathode with material to a particular height. It just goes through these rollers and gets squashed like pizza dough basically. But very hard pizza dough and it’s damaging the calendar rolls.

Elon Musk: (30:42)
This is not something that happened when the calendar rolls were smaller, but it is happening when the calendar rolls are bigger. We weren’t expecting that.

Drew: (30:54)
It’s not a science problem. It’s an engineering problem. It’s a question of if, it’s a question of when, and the team is a hundred percent focused on resolving these limiting processes as quickly as possible.

Elon Musk: (31:04)

Drew: (31:07)
On the reliability side, as Elon mentioned, we have successfully validated performance and the lifetime durability of the 4680 cells produced with Cato, and we’re continuing ongoing verification of that reliability. We’re actually accruing over one million equivalent miles on our cells that we produce every month in our testing activities. The focus on that is very clear. We want high quality cells for all of our customers. We’re just focused on the unlucky limiting steps in the facility, and with the engineer’s focused on those few steps remaining, we’re going to breakthrough as fast as possible.

Elon Musk: (31:50)
Meantime, we have a massive amount of equipment on order and arriving for the high volume self production in Austin and Berlin. Obviously, given what we’ve learned with the pilot plant, which is in Fremont, which is really quite a big plant by most standards, we will have to modify a bunch of that equipment. So it won’t be able to start immediately, but it seems like, Drew 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.

Drew: (32:39)
We’ll have all the equipment installed to accomplish a hundred gigawatt hours. It’s possible that by the end of the year, we will be at an annualized rate of a hundred gigawatt hours. By the end of the year.

Elon Musk: (32:58)
I mean, my guess is, more likely than not, above 50% of reaching a hundred gigawatt hours a year by the end of next year on annualized rate. Something like that.

Elon Musk: (33:12)
It could shift by a little bit. But, as Drew said, it’s nothing fundamental. Just a lot of work.

Drew: (33:19)
Even to the large roller question Elon, on the anode side, the large rollers work great, no concerns. We’re just learning as we go. The nice thing about having that facility on the fast track like we had it, and we talked about it at battery day, was really de-risking the big factories here. That’s what we’ve done and we’ve learned a lot. With each successive iteration, the ramp up and the equipment installation will be faster and more [crosstalk 00:33:49].

Martin Viecha: (33:51)
All right. Thank you very much. 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 nominate David Leon Investing or [inaudible 00:34:03] Tesla Daily channels as first possible candidates.

Elon Musk: (34:16)
Yeah. I guess, I’ll do an interview. I mean, [inaudible 00:34:21], if I’m doing interviews, I can’t do actual other work. So it’s not, there’s only so much time in the day. But yeah, I’ll do it once. I wouldn’t do it annually, but I’ll do it once. I think, also, this is, I would say, the last time I’ll do earnings calls. I will no longer be default doing earnings calls. 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 I need to say.

Martin Viecha: (35:17)
Okay, thank you. Now let’s go through these additional questions. The first one, and we covered a lot of these already, can you please update us on timelines for the start of production of Berlin and Austin Model Y Cyber Track into semi? Do you expect the ramp of Cyber Track to be as difficult as it is a new process?

Elon Musk: (35:37)
I think Cyber Track ramp will be difficult because it’s such a new architecture. It’s going to be a great product. It might be our best product ever, but there’s a lot of fundamentally new design ideas inside of a truck. Nobody’s ever really made a car like this before, a vehicle like this before. So, there’ll probably be challenges because there’s so much unexplored territory.

Martin Viecha: (36:09)
Thank you. I think question two and question three we can skip given we have already addressed it. I’ll get the question four. In five 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?

Elon Musk: (36:27)
Right. Well, like I said, I think we might be the fastest growing company in history for any launched, manufactured item. Those who have not actually been involved with manufacturing ramp up have just no idea how painful and difficult it is. It’s like, you got to eat a lot of glass and for our manufacturing ramp, it’s hard.

Drew: (37:02)
Yeah. 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 five to six months to full volume.

Elon Musk: (37:14)
That took longer than that, about a year.

Drew: (37:18)
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. There’s always challenges, as you said Elon, with new designs and ramping that. But I think having teams in three locations, or three continents, will definitely expand our ability and our capacity to grow more lines rather than just having the one factory in Fremont that we had and year and a half ago.

Elon Musk: (37:48)
Yeah. For Shanghai, it was incredible that we obtained both those factories in 11 months, but it took longer building the factory. It took longer than that to actually reach volume production, high volume production. It took about a year. When you put a factory in a new geography, in order for that factory to be efficient, you have to localize the supply chain. There’s no such thing as cut and paste. It does not exist. It would obviously be insane to do vehicle production in Europe, but send vast numbers of parts from North America. That would make producing in Europe, for example, just crazy.

Elon Musk: (38:42)
You’ve got to localize the supply chain to have efficiency, and then you’re moving as fast as your least lucky, least good supplier. It’s supply chains where you go three or four layers deep. Frankly, I feel at times that we are inheriting old force majure of Earth. So, if anything goes wrong anywhere on Earth, something happens to mess up a supply chain.

Drew: (39:16)
I think the human capital, the human capital growth though, of having factories here, Berlin, Shanghai, Fremont does a lot to maybe not exponentially grow, but hopefully exponentially grow.

Elon Musk: (39:39)
We are exponentially growing.

Drew: (39:39)
Hopefully maintain that exponential growth.

Elon Musk: (39:48)
Also, it takes a while to hire old people and train old people to operate the factory. The factory is like giant cybernetic collective, and you can’t just hire 10,000 people and have it work instantly. It is simply not possible.

Elon Musk: (40:08)
I really encourage more people to get involved in manufacturing. I think, especially in the US. This has just not been an area where all that many smart people have gone into. I think US has an over allocation of talent in finance and law. It’s both a criticism and a compliment. I’m not saying we shouldn’t have people in finance and law. I’m just saying maybe we have too many smart people in those areas. Maybe.

Drew: (40:48)
Manufacturing is fun.

Elon Musk: (40:49)
Yeah. Manufacturing is great. It’s a very interesting problem. Obviously you can’t have stuff unless someone makes it. That’s how you gets stuff.

Martin Viecha: (41:04)
Okay. Thank you very much. Let’s go through 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?

Elon Musk: (41:25)
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. I think Tesla is well positioned, and frankly is the leader objectively, in both of those arenas, electrification and autonomy. It’s always tempting to try to find analogies, with other companies, whatever, but really the value of a fully electric autonomous fleet is it’s going to be gigantic, boggles the mind really. That will be one of the most valuable things that is ever done in the history of civilization.

Martin Viecha: (42:28)
Thank you very much. Now let’s go back to Analyst Q&A please.

Speaker 2: (42:35)
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Colin Rush with Oppenheimer. Your line is open.

Colin: (42:52)
Thanks so much, guys. Can you speak to the attach rates for FSD so far, and where you’re targeting in terms of the subscription levels?

Elon Musk: (43:03)
It’s not worth commenting on right now. It’s not meaningful. We really need full self-driving, at least the beta, to be widely available so that anyone who wants it can get it. Otherwise, it would be pointless to read anything into where things are right now.

Colin: (43:25)
Okay. Then just to 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?

Elon Musk: (43:43)
At least in the US, we don’t see regulation as the fundamental limiter. We’ve also got to make it work, and then demonstrate that the reliability is significantly in excess of the average human driver for to be allowed, for people to be able to use it without paying attention to the road.

Elon Musk: (44:12)
I think we’re going to have a massive fleet. It will be, I think, straight forward 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 millions of miles of travel to be able to show that the safety of the car with auto pilot on is a hundred percent or 200% or more safer than the average human driver.

Elon Musk: (44:50)
At that point, I think it would be unconscionable not to allow auto pilot, because the car just becomes way less safe. It would be like-

Elon Musk: (45:03)
Because the car becomes way less safe. Shake the elevator analogy. Back in the day, you used to have elevator operators with a big sort of switch to operate the elevator and move between floors. But, they get tired or maybe drunk or something or distracted. And every now and again, somebody would be kind of sheared in half between floors. That’s kind of the situation we have with cars.

Elon Musk: (45:33)
At what time we will become so safe that it will be unsafe to manually operate the car, relatively speaking? And today, we were just getting in an elevator, we pressed the button for which Lori wanted, and it just takes us there safely. It would be quite alarming if elevators operated by a person with a giant switch. That’s how it will be with cars.

Speaker 3: (46:06)
Thank you. Let’s go to the next question, please.

Speaker 4: (46:09)
Next question comes from the [inaudible 00:46:11] with Wolf Research. Your line is open.

Speaker 5: (46:14)
Hi everybody. Your costs of goods sold per vehicles are 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 46 80 sell, 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 for us to think about.

Elon Musk: (47:06)
Yeah. It’s really difficult for us to make specific predictions. It’s very difficult. I think you feel confident of say at least 50% growth year over year, next year, and maybe it’s a hundred percent. We need a lot of crystal balls to figure out exactly what it’s going to be. And it is literally impossible to make a specific prediction. But you know, at least 50, maybe 100, something like that.

Speaker 5: (47:39)
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 drag cathode mixing that you talked about on battery day? What’s the timeline? How are those evolving?

Drew: (48:04)
Yeah. We’ve we commented on it today already actually. In the facility at Cato, over 90% of the processes have demonstrated rate there, but we are limited by the unlucky few that have not. And that’s what we’re working on. One of them that I mentioned was running the full-scale cathode colander. 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.

Drew: (48:38)
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 complexities.

Elon Musk: (49:03)

Drew: (49:03)
And I mean, and the cost associated with everything.

Elon Musk: (49:07)
Yeah. Don’t over-emphasize dry cathode. Maybe it’s like 10 or 15% of the cost improvement or something like that. I don’t know. 20% maybe?

Drew: (49:20)
Oh, yeah. 10.

Elon Musk: (49:20)
Yeah. So people don’t think like, this is like the Messiah or something. You know, wet versus dry, reduces to dry as like 10% less cost than wet. So it’s not 10%, so nothing to sneeze at, especially if you’re making hundreds of gigawatt hours a year. But it’s about the Messiah, basically. Yeah.

Speaker 3: (49:58)
Thank you very much. We can go to the next question please.

Speaker 4: (50:02)
Next question comes from Pierre [inaudible 00:50:04] with New Street Research. Your line is open.

Speaker 6: (50:08)
Hey, thanks so 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 [inaudible 00:50:21] all the work you’re doing to develop your in-house production. But what about asking other battery manufacturers to do for [inaudible 00:50:34] says with their own technology, maybe less innovation than what you guys are lining up internally. And I was wondering if the first 46 80 says 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? Now, how did we put up?

Elon Musk: (51:02)
Yeah, we, we are in fact working with our existing suppliers to reduce 46 80 format cells. And this is just a guess right now, but I see us consolidating around the 46 80 nickel-based structural pack and for long range vehicles. And then not necessarily a 46 80 format, but some other format for iron based cells.

Elon Musk: (51:35)
So we kind of have the Baskin Robbins of batteries situation where there’s so many formats and so many chemistries that it’s like, we’ve got 36 flavors of a battery at this point, you know? 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.

Elon Musk: (52:13)
So it is going to be important to consolidate to maybe ideally two form factors, maybe three. But ideally one nickel chemistry and one iron chemistry, so we don’t have to troubleshoot so many different variants.

Drew: (52:37)
Yeah. And towards that end, we are engaging with the suppliers that we’ve had good partnerships with on 46 80 designs to enable that simplification. So far so good, they’re bringing their core competencies to bear on that. We’re not mandating what’s going on inside, but it’s been a good collaboration.

Elon Musk: (52:58)
Yeah. And we do expect to see significant increases in supply from our existing suppliers in addition to the sales that Tesla’s making. So it’s both. Sometimes I get questions from our sales suppliers of like, “Oh, are we just going to make all the cells in ourselves?” So then we’re like nope, please make as many as you possibly can and supply them to us. We have a significant unmet demand in stationary storage. Mega pack is basically sold out through the end of next year I believe.

Drew: (53:33)

Elon Musk: (53:34)
We have a massive backlog in Powerwall demand in Powerwall versus production is an insane mismatch. Now, part of that problem is also the semiconductor issue. So we use a lot of the same chips in the Powerwall as we do in the car. So it’s like, which one do you want to make, the cars or Powerwalls? So we need to make cars so that Powerwall production has been reduced. But as that semiconductor shortage is alleviated, then we can massively ramp up. Powerwall production. I think we have a chance of hitting an annualized rate of a million units of Powerwall next year. Maybe towards on the order of 20,000 a week, but again, dependent on self-supply and semiconductors.

Elon Musk: (54:33)
But in terms of demand, I think there’s probably demand for in excess of a million Powerwalls per year. And actually just a vast amounts of omega vacs for utilities. As the world transition to a 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 of the utilities in the world, this is a vast amount of batteries that are needed. That’s why long-term, we really think combined Tesla and suppliers needs to produce at least a thousand gigawatt hours a year and maybe 2000 gigawatt hours a year.

Speaker 6: (55:25)
Okay, great. Thank you. And I have a quick question. I know Elon, you don’t think it’s meaningful today, but I’d be curious to know if you have any stats about when you announced a new pricing on the SAP Marine from 10 grand around to 199. I’d be curious to understand how it affected behavior issues. So like a massive effect begging the service. And I’m not thinking about people looking at this as a message, but more to try the most advanced version of autopilot and to try it. So even on Thursday on the pricing, have you seen like the ACDC can spy in the take rate? And can you give us a sense of how big it was?

Elon Musk: (56:32)
Okay. You’re asking like, is the FSD take rate too expensive? And that’s why we’re doing subscription? Or I’m not sure if I understand your question correctly.

Speaker 4: (56:43)
No, my question is from the time you announced like the subscription at 199, don’t ask the amounts. How much did the take rate increase? Like the best in business people who basically took the subscription as they booked a new car, they had to pay 10 grand in price.

Zack: (57:07)
Yeah, this is Zack here. I think we’re still early in understanding how our FSD subscription will unfold, but a couple of data points here.

Zack: (57:16)
So we took a look at customers in our backlog who have ordered FSD, did they cancel presumably to go to subscription apps or did they take delivery? And the level of cancellations there was not same cannibalization there. It’s possible that that changes, but that was also part of our pricing strategy at $99 and $199.

Elon Musk: (57:39)

Zack: (57:40)
Also part of our pricing strategy at $99 and $199.

Elon Musk: (57:45)
Yeah. It’s like any given the price is going to be wrong. So we’ll just adjust it over time, as we see if the value proposition makes sense to people. I’m not thinking about this a lot right now. We need to make full self-driving work in order for it to be a compelling value proposition.

Elon Musk: (58:07)
Otherwise people are kind of… Depending on the future. Like right now, if it doesn’t make sense for somebody to do FSD subscription, I think it’s debatable. But once we have full self-driving widely deployed, then the value proposition will be clear. And at that point, I think basically everyone will go use it. Or a rare individual who doesn’t.

Speaker 3: (58:44)
Okay. 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 three months time. Have a good day, everyone.

Elon Musk: (58:58)
Thank you.

Speaker 4: (58:58)
This concludes today’s conference call. Thank you for participating. You may now disconnect.

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