Tesla Q2 2020 Earnings Call

I would now like to hand the conference over to your speaker mr. Martin vieta Senior Director of Investor Relations please go ahead sir you Thank You Shari and good afternoon everyone and welcome to Tesla second quarter 2020 Q&A webcast I'm joined today by Elon Musk Zachary Kirk horn and a number of other executives are cute the result were announced at about 1:15 p. m.

Pacific time in the update that we published at the same link as this webcast during this code 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 please limit yourself to one question and one follow-up please press star 1 now if you'd like to join the question queue but Before we jump into TNA Ilan has some opening remarks you want thank you first of all I'd like to thank the test team for exceptional execution in the second quarter despite tremendous

difficulties they've done an incredible job and it's an honor to work with such a great team I mean there were so many so many challenges to too numerous to name but that they got it done and just what a great group to work with like I said it's just an honor to work with such a great team so and as a result we were able to achieve a fourth consecutive profit profitable quarter and although the automotive industry was down about 30 percent year-over-year in the first half a year we managed to grow deliveries in the first half the year so despite a massive industry to industry decline we actually went up we're also very excited to announce that we're going to be building our next Giga factory in Texas it's going to be right near Austin or not but it'll

be about I'll just go into a bit of detail on this and then actually a lot of questions but the look at the location is five minutes from our Ocean International Airport and 15 minutes from downtown Austin is about 2,000 acres we're going to make make it a factory that it's going to be stunning it's right on the Colorado River so we're actually going to have we have a boardwalk where there will be a hiking biking trail it's going to basically be an ecological paradise birds and the trees butterflies fishing the stream and there we open to the public as well so not not closed and only Tesla so if anyone's interested in working at giggity-giggity Texas the engineering production whatever the case may be please let us know this is we're going to be doing

a major major factory there and it's also where we'll be doing is we'll be doing cyber truck there the Tesla semi and we'll be doing model 3 and why for the eastern half of North America now at the same time I want to say we will continue to grow in California so would we expect California to do model S&X for worldwide consumption and 3 and why for the western half of North America and we think probably also the Tesla Roadster future program would also make sense in California so I think this is a nice split between Texas and California and you know to emphasize will continue growing California but will be creating a massive factory and cyber truck and semi programs in Texas so and I also want to just say do a shout out to to Tulsa and and just say thank

you very much for to the the Tulsa team economic development team and the governor I really I was super impressed the hotels team was super impressed and we will for sure strongly consider a Tulsa for future expansion of Tesla down the road let's see is anything more we want to say about there's a lot of information so though these guys are I'm sure there were lots of questions we've already started work on the facility so set some initial construction work so it's already underway started this weekend let's see moving on to other subjects solar we recently adjusted the pricing of our retrofit solar so Tesla solar is the lowest class solar in the United States and we added the lowest lowest cost guarantee and a money back guarantee so we're very confident

that people will will love our solar product whether it's the solar retrofit or solar roof a solar is now thetan cheaper than the US average after the federal federal tax credit otezla silat now costs a dollar forty nine per watt and it's a very simple highly automated single click experience so definitely think about Tesla whether you want a new roof or for Tesla solar roof or you want solar on your existing roof either way where the grow the company to go to and then you also get a power wall and have energy independence and be your own utility so I think that that part is really coming together and it's only going to get better later this year so it's just very excited about that that's a business potential on the you know if additional technology

stuff we introduced the first production car with more than 400 miles range so the current Tesla Model S now has an EPA certified range of 402 miles I mean basically can drive from LA to San Francisco non-stop and still have some mild miles left over when you arrive and and this is at highway speeds so you're just talking after anything drive slowly or anything you drive it you just drive normally and you know grow very very long distances and then for full self driving we launched traffic lights and stop signs and we continue to prove that to make them more robust and we're currently testing also driving software for intersections and city streets and narrow streets so I personally test the the latest alpha build of full self-driving software when I

when I Drive my car and it is really I think profoundly better than people realize yeah really profoundly better it's like amazing so it's almost getting to the point where I can go from my house to work with no interventions despite going through construction and widely varying situations so this is why I'm very confident about full self-driving functionality being complete by the end of this year it isn't because I'm literally driving it in conclusion at like again say thanks for the hard work that tells the team achieving our first full year of profitability in the company history was incredibly difficult and just as a result the hard work of a lot of people from Tesla worldwide and and yet just think about the next the next 12 to 18 months we'll have

three new factories in place if things are looking great with a gig of all in and what we'll have cyber truck semi roadster full self-driving there's so much to be excited about it's really hard to kind of fit into this coal but the sheer amount of hard core engineering especially on the you know autonomy and the people manufacturing engineering front is mind-blowing and then of course is battery day which is you know coming up pretty soon and I think that's that's really going to surprise people by just how how much there is to see so with that thanks again for your support in our long term mission and we were looking forward to having a great journey with you to create amazing products and continue scaling it and yeah this is a I think I've never been

more optimistic or excited about the future of Tesla and the history of company thank you thank you very much and I think our CEO feels like a record corn has some remarks as well yeah thanks Martin I want to start by thanking our employees customers and suppliers for your support over the last quarter in particular to the tesla team i couldn't be more impressed with the hard work and the resiliency that you all have shown on that income overall as Elon mentioned we achieved our fourth sequential quarter of profitability this is despite a significant impact to our financials as a result of suspended operations of our US factories and field operations around the world to ensure the business remains healthy we took temporary action to reduce costs including

expenses related to personnel and non-critical path projects the direct cost savings that the direct cost impact of the temporary shutdown was largely offset by these cost savings actions although the costs were concentrated in cogs and the cost reductions were on both cogs and operating expenses on automotive gross margin excluding regulatory credits if this reduced sequentially from 20% to 18.

7% this sequential reduction is fully attributed to idle capacity charges in lower operational efficiency due to the various shutdowns despite these charges we continue to make progress reducing our costs particularly on model why and Fremont and model 3 and Shanghai given the global macroeconomic context we made the decision in q2 to pass through savings to customers around the world on some of our products with the release of stoplight and stop sign recognition and response we recognized 48 million of deferred revenue in the period the full profit impact on our P&L is less than half of this due to cost associated with FSD computer retrofits in the field regulatory credit revenue increased sequentially to 428 million while difficult to forecast precisely

our best estimate of 2020 credit revenue is roughly double that of 2019 services and other margin improved yet again marking the fifth sequential quarter of improvement in the energy business our megapack product achieved its first quarterly profit we remained for production constrained in this business and are continuing to work towards building additional capacity and our solar installation business was impacted by permit office closures limiting installation volume stock based compensation almost entirely by an expense related to the next tranche of the CEO grant as well as early lifting of the first tranche which is reflected in SGA within operating expenses on cash flows our cash balance increased to our highest level yet of 8.

6 billion which included free cash flows of over 400 million this is a strong result on its own despite an increase in capital expenses associated with Shanghai and Berlin as well as movements in working capital a few things to note on working capital particularly accounts receivables while our a our balance is usually about 20% of revenue it can fluctuate depending upon a number of factors first overall less than 30% of our receivables is associated with new car sales second due to payment terms associated with financing and enterprise customers settlement timelines for certain methods of cash payments and geographic mix of our deliveries our cash balance and associated receivables are impacted significantly by how many cars are delivered in the final

weeks and days of the quarter third roughly 40% of the balance is attributed to payment terms on regulatory credit sales and statutory evey incentive programs both of which have been increasing customer deposits reduced slightly as well note that as we transition to lower order fees across the world the average deposit per order will continue to reduce driving down this balance as we look forward Tesla was able to navigate through queue to do - our agile and dynamic culture we will continue to appropriately mail enjoy cash flows through cost optimization and close working capital management this is key as we remain focused on expanding production scaling our operations and preparing for the launch of three new factories over the next year and a half thank

you very much let's go to questions from institutional investors first the question number one is s Tesla continues its journey towards the long-term goal of selling 20 million units per year what are the most important vehicle programs that will drive building growth over the next three to five years beyond model three why and the cyber truck cheaper smaller versions of three and why or region specific vehicles or anything else I don't think we can cut the comment on you know our detailed part roadmap beyond what's announced because I agreed we want to reserve that for product launches but it would be reasonable to assume that we would make a compact vehicle of some kind you know and probably a higher capacity Astra vehicle of some kind you know these

are likely things at some point but I do think there's a long way to go with the three and why and with cyber truck and semi and you know so it's a long way to go with those I will do the obvious things okay the second question from this additional is what is your vision for software at Tesla what opportunities do you see for monetizing the installed base other than bio FSP and right now by fraud by far FST is just overwhelmingly the most important thing you know I think the the upgrading of the fleet to full self-driving essentially with an over there software update I mean may go down as the biggest asset value increase in history as a step change you know about the maybe the something bigger of it it certainly would be one of the biggest I can't think

of anything bigger so sort of those overnight you know at a million defined exactly when it happens and when it's allowed in various regulatory jurisdictions you'd have like kind of a few million cars suddenly becoming five times more viable or something like that it's only five times higher utility it to go from like twelve hours a week of utility something like that or of that it doesn't hours are used to sixty like that you know so it may else is pretty small by comparison now when things do become full self-driving so what if we were going to do in the car well I guess they probably want to do productivity and entertainment of some kind you know for traveese play games and do work well that that's best in the future yeah we're already putting some

games and stuff on the car just for fun yeah yeah we have been experimenting on that and so the fsd remains by far and away the biggest opportunity in the new environment but we're putting the plumbing in place to be ready to scale other areas when the time is right so premium connectivity subscription is something that we've put in place and the ability to upgrade your vehicle through the app for example on acceleration boosts or upgrading a standard range model 3 to a standard plus adding rear heated seats so these are things that we have and we're continuing to get feedback from the field and other things that we can launch and will trickle those in with time yeah but they're all very tiny compared with like the trailers like the step change to full

self-driving depending upon high calculated is probably worth north you know at least $100,000 per car so as blood software you have so yeah in the app store or whatever yeah and thank you the third question is also about autopilot what are the most important upcoming self-driving milestones and how do you think about timing well um the actual major milestone that's happening right now is really transition of the autonomy system of the cars like AI if you will from thinking about things in AI code like two and a half D it's like big finger blue but it's big steak like isolated pictures and and during image recognition on the on pictures that are harshly correlated in time but not not very well and transitioning to kind of a 4d where you know it's like

your which is video essentially you get you're thinking about the world in three dimensions and look at the fourth dimension being time so that that architecture change which is been underway for some time but has not really been rolled out to anyone in the production fleet is what really matters for fulfill driving so what you know what we've been doing thus far is really just been with like 2d mostly 2d and Alexa pop no well correlated in time so it just you're just it's just hard to convey just how much better a fully 4d system would work it does work it's capable of things that it that if you just look looking at things as individual pictures as opposed to video it looks to basically like you could go from like individual pictures to surround video

this is a fundamental so the call will seem to have just like a giant improvement have I never probably roll it out later this year but you know be able to do your traffic lights stop turns crops everything you know pretty much and then it will be a long march of nines essentially how many nines of reliability are okay so it definitely way better than human but how much better than human does need to be so that that's actually going to be the real work is just a massive amount of work with each kind of order of magnitude of reliability but you'll see a perfect happen and if you plot the points on the curve it'll be kind of obvious where it's headed ái in general I think is something you know I've been saying this famous AI drum for a decade we should

be concerned about where AI is going the people I see being the most wrong about AI are the ones who are very smart because they can't imagine that a computer could be way smarter than them but that's the flaw in their logic they're just way down more than they think they are thank you and the next question from his additional investor is please may you update us on alien dreadnought how has your thinking evolved and what is needed in order to get closer to fundamental physical limits or bring a massive amount of effort into manufacturing engineering the Machine O'Lakes machine there's probably 1,000 percent maybe 10,000 percent more engineering required for the factory than for the product itself so we're starting making amazing progress I mean you know

battery and powertrain factory Giga factory Nevada is you know on an alien driven work version 0.

5 something that God just you know starting to approach version 1 we're getting way better at making cars you can see that in Giga Shanghai you'll see that even more with the Berlin and we're really changing the design of the car in order to make it more manufacturable the the fundamental architecture of model Y will be different in Berlin it may look the same but the internals will be quite different and fundamentally more efficient architectural II then than what we've done to date fake juju like to add to that yeah I was going to extend on that side I think part of the alien dreadnought concept is not just automation but minimizing the number of process steps and complexity involved in the manufacturing system which involves really integrating design

and manufacturing across some like when the raw materials enter the factory to finish goods exited and we're learning so much through doing that vertical integration is extremely important for this but the supply chain if you put like a GPS tracker on a molecule from winter cuff mind to miner was in a usable product it would look insane we were to be like wow weird around the world like six times so with vertical integration maybe you're going to like around the world once you know the huge improvement or not even like half oh I like a happy get vertical integration like Rapala gauge an order of magnitude improvement so yeah it's Romulan I think the focus for us is increasing the capex and efficiency this is something that we've been working very hard

for the past three years you can see that we can build new factories for less amount of money and much faster yeah those things go together gets better it's a better factory for less money in less time and as money means less time there so that's a great advantage and also reducing this and this still is a lot the amount of inefficiencies we want every operation to add value to the vehicle mmm value meaning moving the atoms closer to the final state you know so we do not want any robot that just moves things yes proportionate in fact it's like we're going to be super respectful of people's labor if we're asking somebody to do something are we sure it's useful are we asking them to spend their time in a way that is respectful of their time but but it's

like wow the potential for improvement is this tremendous and like that's why we clear here at Tesla we love manufacturing it's awesome and I really think more smart people's to be working on manufacturing they lay one more people yeah we we we do if people are interested in designing new lines and trying to do things different you know Tesla's got a job for you and now we've got jobs everywhere it's not only in California there we got just in China and Berlin in Austin Texas yeah and in California if you so the plenty of exciting places and all these places will do original work and challenging yet meaningful work absolutely it's actually extremely exciting for and fulfilling to design new production systems and I think that you know for some reason

I kind of got a bad rap especially in the u.

s.

for a long time and and I think people didn't think that manufactures is sort of a thought of manufacturing is like oh it's is porous I'm boring just making copies whatever but actually this far more opportunity for innovation in manufacturing than in the product itself order magnitude so but like if there's one thing that comes out of this cool it's like hey if you want to help us invent amazing new manufacturing techniques and and have input into the product itself it's not like you just get tossed the product and say hey make this this product and it's a kind of a lousy design you'd get if you're manufacturing you get to change the product design and say hey if it was the product you asking me manufacturers dumb it was like great let's fix it you know

so I it you know I if you work on manufacturing engineering so you're just get force-fed a turd sandwich you get to change the product design so you know it's a super exciting and and we evolved the lines even after their vote this rapid evolution of the production system so and there's nothing more rewarding than going from zero cars an hour to yeah five thousand cars a week or thousand cars a day yeah so you know like the long-term sustainable advantage of Tesla I think will be up manufacturing thank you very much and the last question from this additional investor is how many vehicles can Tesla produce in Texas right now zero but long-term a lot top biggest property yeah it's based architecture okay and now we can shift to retail investor questions

on save calm the first one is Tesla energy seems widely ignored by Wall Street despise despite a long comments about growth rate exceeding automotive could this not share more detail on current or planned projects to help investors better understand the business outlook how disruptive is Tesla's auto bidder technology yeah kara says I think long term Tesla energy will be of roughly the same size as tells automotive so I mean the energy business collectively is bigger than the automotive business so you say like you know how big is the energy sector bigger than automotive so and in order to achieve a sustainable energy future we have to have sustainable energy generation which i think is going to be primarily solar and you know set foot followed by wind

and those intimate anied to have a lot of batteries to store the solar energy because when does noise blow and the Sun doesn't shine so so there's like three elements of the sustainable energy future wind and solar sustainable energy generation battery storage and electric transport both three things and the mission of Tesla is to accelerate the sustainable energy so I can emphasize enough the defect like yeah the bad battery and solar will both be enormous and they kind of have to be in order to have a sustainable future and we've got a great product roadmap on that front as well so we're going trip in the mega pack it's very well received talk about that um yeah but I think the mega pack is has represented itself and is an integrated rapidly deployable

you know grid-tied storage battery of mega megawatt-hour scale we're working with utilities large and small you know not just utilities but also just like micro grid and project developers of all type and building our own projects where it makes sense and there's there's a lot of demand for the product and we're growing the production rates as fast as we can for that product and then on auto bidder Auto bidders is basically autopilot for grid tied batteries it's an autonomous energy market participation system that you know does high frequency trading and ensure that that's a bad word sorry sorry it frees to Treasury called front-running yeah we're not doing badly anything like that it's ensuring that the battery is doing everything you can to manage

the credit identity of renewals renewables and just grid intermittency of all kinds I mean you know people turn their lights on off power plants to turn on and off yeah factories ramped up and down and batteries are great just to solve those problems yeah it just it does grid stabilization you know the millisecond level exactly so it just ensures that things are super smooth it's like it you know a UPS an uninterruptible power supply of enormous size but just get just ensure that this grid has smooth sailing and then the batteries you know the computers like all interact with each other and make sure that they're working together to make the grid desperate and this can be done quick with the power rules and and the mega packs and the power packs all working

together and interacting with the party systems as well yeah essentially or distributed it does vote yeah yeah I mean we've yeah oh is it necessary in order to solve the sustainable energy problem yeah you can't plan power plants on the hourly scale in a renewable world you need to plan you need to optimize them on a minute-by-minute scale and that's what we're doing yeah the real limitation on Tesla growth is is cell production at an affordable price but that's the best rule limit so you know that's why we're where we're going to talk about a lot more about this on battery day because that this is the fundamental scaling constraint and at any part of that at that supply chain or pressing of at the cell level will will be the limiting factor so you know

whatever it may be anywhere from mining to refining as many steps or refining to the cathode and anode formation cell formation whatever the choke point is that will set the root of the growth rate and so you know we we expect to expand our business with Panasonic with C ATL with LG possibly with others and you know and there's a lot more to say on that fraud on better day thank you and the second question is not it is time to bring the Tesla semi to volume production can you share more detail on production plans what weakly production rate is considered volume production and when does this like spec to reach that rate okay so what's our production next year as we announced it before I'm personally very care about the project I can't wait we do have a

few trucks that keep driving around and like keep delivering cars but we're going to accelerate that I want to be clear that the first few units we will use ourselves and Tesla to carry our own Freight probably must be between Fremont and Reno which is a fantastic test route we want to prove that we have very good reliability and so far the early units do have it but we'll we'll do that at them larger scale and we have also promised some early you to some long-term very patient and supportive customers and we'll do that now we have more self coming up in next year as you know just pointed out so we can increase the diversity of the portfolio it didn't make sense up to now to do it yeah but we'll be ready and that's maybe have a bias very excited about

this and we have a lot of very unique technology that we're always dreaming about that we will be putting into that semi it will be just awesome yeah and just there's like two general classes of cell there's like iron phosphate and then the nickel based nickk nickk nickk obey cells have higher energy density so a longer range obviously those are needed for something like a semi where you're every every unit of mass that you add in battery pack you have to subtract in cargo so it's very important to have a mass efficient and long-range pack for full batteries however what we're seeing with our that passenger vehicles is that our powertrain efficiency and higher efficiency drag coefficient like basically all of the things that our HVAC going to a heat pump

basically our total vehicle efficiency has gotten good enough with a Model 3 for example that we actually are comfortable having an iron phosphate battery pack in model 3 in China and you know that that'll be in volume production later this year so we think that you know getting a range that is in the high to hundreds you know basically but we think you probably get a range of almost 300 miles with an iron phosphate pack taking into account a whole bunch of of power train and other vehicle efficiencies and that frees up a lot of capacity for things like the Tesla semi and and in other projects that require higher energy density so yeah so you have like to to supply chains that you can tap into your iron phosphate or or nickel we use very little cobalt

in our system already and that's that may trend you know to zero long so it's really about nickel thank you and the next question is Tesla recently decided not to produce standard range version of model why no longer office offers the standard range Model S or X and has announced ramping of the semi does this shift from smaller pack vehicle suggests that Tesla is not battery constrained as in the past what are the biggest constraints now well I just like to reify them size any mining companies out there please mine more nickel okay wherever you are in the world please mine more nickel and and don't wait for nickel to go back to some long some high point that you experienced some five years ago whatever go for efficient you know as environmentally friendly

nickel mining at high volume if Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way so hopefully this message goes all mining companies please get nickel with regard to passenger vehicles I think the new normal for range is going to be just in US EPA rip terms you know approximately 300 miles so I think people will really come to expect that as you know some number close to 300 miles as as normal you know that that's a standard expectation because you do need to take into account like you know is a very hot outside or very cold or you know are you driving tall mountain with a full load I and and it's a you know people that when I have a you know gets the destination with

like 10 miles range though they want some regional reasonable margin so I think 300 is going to be really close to 300 going to be a new normal quote 500 kilometres basically roughly thank you the next question on the insurance what is the holdup for Tesla insurance outside of California will you release numbers from that part of the business will title insurance be required to participate in the Tesla ride-hailing Network as a driver sure um yeah we were joking before the call then we get the quarterly insurance question that touch response a calm here we are working super hard on insurance I'll go into a little bit more detail here than I have on the past but currently we have a product in California as I've described before it's been quite well received

and I would largely describe it as a fairly standard insurance product with elements of it that are unique to our cars that you can think of it as version 1 of Tesla insurance yep versions are for night is it getting at least zero at night yes but what we're working on now is we can call it version two or we can call it the first version of our telematics product yeah and so really ultimately where we want to get to with Tesla insurance is to be able to use the data that's captured in the car in the driving profile of the person in the car to be able to assess correlations and probabilities of crash and be able then to assess a premium on a monthly basis for that customer and what makes this very exciting for us is the amount of data that is available

with the customers permission to use is is not available in any other product or any other vehicle in the world you this gives us a unique advantage in terms of information and we have a decision point here where we could take the California product and replicate that into other states or we could delay delay going into additional states and instead put more effort into the telematics side of this and we chose the latter and where we are now is nearly complete with the risk and cost analysis associated with the first version of the telematics product we hope to be filing that in a handful of states with regulators very shortly and assuming that regulatory approvals go smoothly we hope to have this in a handful of states by the end of the year and and

then it will continue to file for approval in additional states with regulatory approval there will continue to roll this out nationwide as quickly as we can and then that product as we continue to collect more data and we iterate on it will be version 2 version 3 etc as we continue to refine that yeah I mean at the heart of being competitive with insurance is what is the accuracy of your information like are you dealing with like are you forced to assess people statistically looking in the rearview mirror or can you assess people individually looking ahead with with smart projections and inform the driver that that of how they may reduce their what what actions they can take to reduce their insurance as I could learning to it's like if okay you're driving

too fast you're you know doing this that or the other thing it's like if you if you want to pay more for insurance you can but if you want to pay less you know then please don't drive from so crazy then I then people can make choice like okay they want to drive aggressively in the case no view higher higher insurance or there won't be you're more careful in that the driving and it'd be Pepi less it's also actually very helpful for us to have a feedback loop to see what is driving insurance expense lot of it is just it's like yeah like little fender-bender and the net Center vendor because of the way that the body collision repair is being done you know cost like fifteen thousand dollars or something crazy and like we'll have and and then we can actually

adjust the design of the car and adjust how the repair is done to actually have the fundamental cost of solving that problem be less so this has helped us on a whole bunch of facility things that we were doing basically without realizing it which is this is a problem which in general with insurance it's like so if the insurance is like all-you-can-eat then it the feedback loop for improvement is we so this gives us a great feedback loop for improvement gives us basically a fundamentally better insurance product I'd also like to say the spirit of recruiting because if there's one thing I'd like to come out of this call it's that a lot of great people want to join Tesla that's the no 1 thing I'd like another school and on the insurance front I want to clear

we're building a great like a major insurance company if you're interested in revolutionary insurance please join Tesla I would love to have some high energy actuaries especially I have great respect with after real profession your guys are great at math please join Tesla especially if you want to change things and you're annoyed by how slow the industry is this is the place to be we want we want revolutionary actuaries ok thank you very much for the exercise that so there was a second part of this question will Tesla insurance be required to participate in in the Tesla ride-hailing Network and so I think I've answered this before in Prior calls but by the time the ride hailing network is available we will Tesla insurance coverage will be provided great

oaks who are in this network it's a different type of insurance because of the use of the car it's not decided whether third party insurance for successful insurance will be required there might be some things we need to think through there but it Tesla insurance at least we'll be working working for the right-half Palin Network it thank you very much and in dangerous of time let's go to the Q&A of analysts online thank you our first question will come from Dan levy with Credit Suisse please go ahead hi good afternoon thank you Alaska a question on the quarter and then just question more broadly on strategy just on the quarter if you could give us an update on gross margin was China the creative to gross margin in the second quarter and he has an idea

of how far off model why gross margin was versus Fremont model three and then just more broadly on strategy seems like your approach to in sourcing is varying by region you're in sourcing a lot more in Fremont but you're relying a lot more on the supply chain in Shanghai what do you expect your approach to be on his first thing when you eventually open up Berlin and what your Texas Factory is going to be thank you yep just to start with the gross margin questions we did see progress on gross margins in China and that was despite pricing action that was taken the factory is still not running at full capacity yet as it continues to ramp so we think there's a continued opportunity to optimize the cost structure there model why as we mentioned last quarter

was profitable in its first quarter of production and despite the inefficiencies that we had due to the shutdown we did see a pretty substantial improvement in the model line margin and it is as we said before the model wide cost structure and model 3 cost structure will converge that they're not quite there model wise still slightly more expensive than model 3 and it's not yet at full production and with model like carrying a slightly higher price point you can kind of back into the map there on the relative gross margin yeah in the shanghai factories pretty big factory but yet and there it's continuing to do more and more internally but it's also that the thing is really helping is like there were previously a ton of parts that were made in other parts

of the world that were being shipped to shanghai from every part of the world and just locally sourcing those components makes a massive difference to the cost vehicle and I mean the proportion of local sourcing has literally been rising it like five to ten percent a month you get from 40 it was like 40 percent of getting us here something like that it'll be like 80 percent yeah idea this year maybe more there is also a lot very strong there component and very eager suppliers around the factory in Champak yeah I feel like the suppliers in China have been extremely competitive possibly the most converter and so far you know we're in negotiations with for bargain and was awarded a lot of business also a lot of suppliers and in Germany or the rest of Europe

there are eager to support the factory burning yea well jhonny has a great automotive industry and supply chain so actually a ton of of our suppliers are in Germany within like a few hundred kilometres of the factory thank you very much let's go to the next question please our next question will come from Tony Succar Nagi naka Tony Succar Nagi with Bernstein please go ahead yes thank you you mentioned in the slide deck a couple of times that you were pleased with gross margin with PTI margin progress and you expected to achieve industry-leading operating margins over time maybe you could shed a little light on that you know industry leading for luxury vendors is 8 to 10 percent PTI for poor shoes smaller 17 for mass market vendors it's 5 to 8 what do

we think about and how much ultimately do you believe that EB credits will contribute to that margin because I know your margins been 5% over the last 12 months but it's actually less than 1% excluding evey credit so it's a four four point contribution right now how do we think about ultimately what industry-leading margins are and how much of that you think is coming from EB credits regulatory credits and I have a follow up place sure I've mentioned this before in terms of regulatory credit you know we manage the business but so different we don't manage the business with the assumption that regulatory credits will contribute in a significant way to the future yeah I do expect for the tour credit revenue to double in 2020 relative to 2019 and it will

continue for some period of time but eventually the talk that's will reduce yes'm its witness worth learning that we receive you know buyers about card in the u.

s.

received zero federal tax credit whereas made about competi rhetoric that they get a $7,500 pipe tax credit and yet our sales haven't continued to do well it yeah and so what we see is a continued decline in the cost to produce any funds and distributors are bars that cost of even for mature products like the s and the Act continues to come down as we work on that model 3 which is our second most mature product that can use to come you then layer on top of that as Elon was discussing earlier the potential for software based revenue particularly full self-driving that there's the revenue recognition portion of that that we have today you know that will expand as we as we release more features and then you can layer on top of that in the future revenue

from arrival in network operating expenses continue to come down and become more efficient as a percentage of revenue there's still incredible opportunity there that we work we're working on particularly on how customers interact with the company from sales and service and in what their flow is and how we get cards to them so we continue to see efficiencies there so you know in the medium term here what our modeling shows is you know in their load load teams operating margin level and I think there continues to drive the opportunity to drive that up so here your point on the 5% in the 1% you know we're on a bit of a journey here and we're doing to the government thank you and if I could just follow up Ilan you've talked a lot about the mission of the

company and in you know and and and really trying to drive evie adoption globally so how do you think about that trade-off between driving towards industry-leading profitability yet trying to make your cars more affordable and broader it feels like historically you've always picked the path of I'd rather Drive more growth and more adoption because ultimately that's the mission of the company and Weavin thought a little bit this quarter with with price reductions you could have you probably kept priced where it is sold some units and had better profits but but that's been an ongoing choice that Tesla's a company has made so how do we how do you personally think about that trade-off between you know even if you were to get to industry-leading margins wouldn't

you be inclined to give more of that back to drive a greater adoption more quickly well I think we actually achieved both when you factor in autonomy I think we can go way beyond is free margins and and have a car V affordable to more and more people and essentially you know almost everyone Plus everyone when factoring in autonomy but that was really a mega game-changer giggity-giggity I'm changer yeah but I mean it is important for people to get to distinguish between two things there's value for money that a product has and then as affordability and and even if you rail value for money and have value for money like infinitive people do not have enough if people do not have enough money in the bank counts to buy the car today so we cannot so then you

just have this like awesome thing and nobody can buy so it is important to make the car affordable that we will not succeed in our mission if we do not make cars affordable like the thing that bugs me the most about where we are right now is that our cars are not affordable enough we need to fix that so we are making progress in that regard and just sort of steadily making progress yeah so yeah like we need to you know not go bankrupt obviously that's important because I will fail in our mission but we're not trying to be super profitable either obviously you know profitability is like 1% or something yeah this will cut 1 or 2% it's not it's not crazy last quarter was only 0.

1% so we want to be profitable like I think just we want to be like slightly profitable and maximize growth and make the cars that as affordable as possible that's what we're trying to achieve thank you let's go to the next question please our next question will come from emmanuel Rossmore with deutsche bank please go ahead hi good afternoon could you please characterize the current near-term demand environment for your vehicles these obviously unusual times I think back in q1 you had indicated record backlog I guess at the beginning of this past quarter I haven't seen any specific comments about new orders a backlog in the release today so can you give us some color demand is not our problem definitely not yeah we do have some production supply chain

challenge that challenges we're trying to solve right now for example model white we were body Casting obvious new technology it's been tricky to maintain rate and keep growing the rate for moto white casting which is it's a two piece casting with a bunch and about a half a dozen other parts that are added on that will transition to a one-piece casting in fact I'm pretty super excited about this we can have a job the world's biggest casting press is getting assembled right now actually in Fremont for the model wire rear body casting it's enormous and looks awesome so it's like our the things that are troubling us right now I'm not demand that they are just a bunch of firefighting on supply chain and production issues okay well to put it sorry yeah dori

about demand hey that's what busy okay so when you're saying achieving 500,000 deliveries has has become more difficult which is really just a function of the recent shutdowns and some of these in a supply dynamics yeah it's it's not it's not true with the man it's really just a production issue it's pretty hard when you've got like you know I global supply chain and it's kind of whatever the most effective part of that global supply chain is that's your rate you know so I mean the number of rabbits we've had to pull out of a hat for supply chain is insane teams done an amazing job so I think it also say yeah some of our costs were related to having to you know use a lot of airplanes to get parts around because of parts shortages so hopefully use fewer

airplanes but stuff that will improve our costs but it's a demand exceeds supply right now so it flips where we are right now thank you very much and the last question please our last question today will come from Felipe who boys with Jeffries please go ahead yes good afternoon and thank you you mentioned a few ties into the stadium the constraint to growth is very capacity still and I was hoping you could clarify the scope of the billion plants you're building right now will there be little battery capacity consistence with the amount of assembly volume you expect to come out of there in and and if not we should be able to source your battery requirements out of Europe would you have to import batteries from outside Europe to Iran to ensure production

and burning okay we can't say too much about this except that where there will be local cell production and that will that will serve the needs of the Bowen factory but sure is a that I mean I know that's that's straightforward enough I think just adding to what you said earlier about talent and people yes yet like the same goes in all areas of cell yes supply chain manufacturing materials design we are solving this problem and it we work we're treating it like any other problems that we have solved we will solve this problem and give talented people to join us as we solve this problem yes and like - my biggest concern for gang of talented people is just probably Berlin because the labor labor mobility in Europe is not as low I would recommend changing

is he like computer somebody wants to leave and join another company sometimes I have to spend six months on cotton leaf it's called gardener hang out in the garden basically and like this doesn't this is not a good use of people's time yeah if they want to hang on the garden that's fine but they shouldn't have to thank you I mean those are know Europe will know what are talking about Phillipa do we have a full operation it's fine thank you very much ok thank you very much for everyone for joining this call and thank you for all their good questions and we'll speak to you again in about three months yeah maybe sooner with battery take oh thanks