Tesla Q2 2020 Earnings Call 22. Juli 2020 Musk kündigt die Gigafactory in Austin an und gibt einen Überblick über Teslas viertes profitables Quartal in Folge sowie die Fortschritte bei Full Self-Driving.
Musk kündigt die Gigafactory in Austin an und gibt einen Überblick über Teslas viertes profitables Quartal in Folge sowie die Fortschritte bei Full Self-Driving.
Transkript Operator
I would now like to hand the conference over to your speaker, Mr. Martin Vieja, Senior Director of Investor Relations. Please go ahead, sir.
Martin Viecha (IR)
Thank you, Sherry and good afternoon everyone. Welcome to Tesla's second quarter 2020 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 1:15pm Pacific Time in the update deck we published at the same link as this webcast. During this call we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations. As of today, actual events and results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the sec. During the question and answer portion of today's call, please limit yourselves to one question and one follow up. Please press Star one now if you'd like to join the question queue. But before we jump into qa, Elon has some opening remarks.
Elon Musk
Thank you. First of all, I'd like to thank the Tesla 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 challenges, too numerous to name, but 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. And as a result, we were able to achieve our fourth consecutive profitable quarter. And although the automotive industry was down about 30% year over year in the first half of the year, we managed to grow deliveries in the first half of the year. So despite that massive industry decline, we actually went up. We're also very excited to announce that we're going to be building our next gigafactory in Texas. It's going to be right near Austin. It'll be about. I'll just go into a bit of detail on this and then I'm sure there'll be a lot of questions, but the location is five minutes from Austin International Airport and 15 minutes from downtown Austin. It's about 2,000 acres and we're going to make it, I think, a factory that is going to be stunning. It's right on the Colorado river, so we're actually going to have a boardwalk where there'll be a hiking, biking trail. It's going to basically be an ecological paradise. Birds in the trees, butterflies, fish in the stream. And it will be open to the public as well. So not closed and only Tesla. So if anyone's interested in working at Giga Texas with 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, we'll be doing cybertruck there, the Tesla semi and we'll be doing Model 3 and Y for the eastern half of North America. Now at the same time I want to say we will continue to grow in California. So but we expect California to do Model S and X for worldwide consumption and 3 and y for the western half of North America. And we think probably also the Tesla Roadster, a future program would also make sense in California. So I think this is a nice split between Texas and California. And just to emphasize we'll continue to grow in California, but we'll be creating a massive factory and cybertruck and semi programs in Texas. So. And I also want to just do a shout out to Tulsa and just say thank you very much. The Tulsa team, the economic development team and the governor. Really I was super impressed. The whole Tesla team was super impressed. And we will for sure strongly consider Tulsa for future expansion of Tesla down the road. Let's see, is there anything more we want to say about. This is a lot of information. So. All right, well I'm sure there'll be lots of questions. We've already started work on the facility, so 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 cost solar in the United States and we added a lowest cost guarantee and a money back guarantee. So we're very confident that people will love our solar product whether it's the solar retrofit or solar roof. Our Solar is now 30% cheaper than the US average after the federal tax credit. Tesla Solar now costs $1.49 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 Tesla Solar roof or you want solar on your existing roof. Either way we're the company to go to. And then you could also get a powerwall and have energy independence and be your own utility. So I think 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 business potential. On the additional technology stuff, we introduced
Elon Musk
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 you basically can drive from LA to San Francisco nonstop and still have some miles left over when you arrive. And this is at highway speeds, so you don't have to do anything, drive slowly or anything. You can just drive normally and go very long distances. And then for full self driving we launched traffic lights and stop signs and we continue to improve that and make it more robust. And we're currently testing full self driving software for intersections and city streets and narrow streets. So I personally test the latest alpha build of full self driving software 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, because I'm literally driving it. In conclusion, I'd like to again say thanks for all the hard work of the Tesla team. Achieving our first full year of profitability in the company history was incredibly difficult and just as a result of the hard work of a lot of people from Tesla worldwide. And, and yeah, just think about the next 12 to 18 months. We'll have three new factories in place, things are looking great with Giga Berlin and we'll have cybertruck semi roadster full self driving. There's so much to be excited about. It's really hard to kind of fit into this.
Elon Musk
But the sheer amount of hardcore engineering, especially on the Autonomy and the manufacturing engineering front, is mind blowing. And then of course there's factory day, which is coming up pretty soon and I think that's really going to surprise people by just how much there is to see. So with that, thanks again for your support and our long term mission and we're looking forward to having a great journey with you to create amazing products and continue scaling it. And yeah, this is, I think I've never been more optimistic or excited about the future of Tesla and the history of the company.
Martin Viecha (IR)
Thank you. Thank you very much. And I think our CFO Zachary Kirkhorn
Elon Musk
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 net 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 U.S. 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 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 in both cogs and operating expenses on automotive gross margin excluding regulatory credits, this reduced sequentially from 20% to 18.7%. This sequential reduction is fully attributed to idle capacity charges and lower operational efficiency due to the various shutdowns. Despite these charges, we continue to make progress reducing our costs, particularly on Model Y in Fremont and Model 3 in 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 and 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 remain 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 Comp increased from Q1 to Q2. This is driven almost entirely by an expense related to the next tranche of the CEO grant as well as early vesting 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 AR 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 EV 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 Q2 due to our agile and dynamic culture. We will continue to appropriately manage our 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.
Martin Viecha (IR)
Thank you very much. Let's go to questions from institutional investors. First. The question number one is, as 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 volume growth over the next three to five years beyond model 3Y and the Cybertruck, cheaper smaller versions of 3 and Y or region specific vehicles or anything else?
Elon Musk
Well, I don't think we can comment on our detailed product roadmap beyond what's announced because I think 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 of, you know, and probably a higher capacity passenger 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 3 and Y and with Cybertruck and semi, you know, so it's a long way to go with those. I think we'll do the obvious things.
Martin Viecha (IR)
Okay. The second question from institutional is what is your vision for software at Tesla? What opportunities do you see for monetizing the installed base other than via fsd.
Elon Musk
Right now, by far FSD is just overwhelmingly the most important thing. You know, I think the upgrading of the fleet to full self driving essentially with an over the software update, I mean, may go down as the biggest asset value increase in history. As a step change, you know, maybe there's something bigger, but it certainly would be one of the biggest. I can't think of anything bigger. So overnight, you know, a million, depending exactly when it happens and when it's allowed in various regulatory jurisdictions, you have like, I don't know, at least a few million cars suddenly becoming five times more valuable or something like that. Suddenly five times higher utility. Go from like 12 hours a week of utility, something like that. That's how Many hours are used to 60, something like that.
Elon Musk
everything else is pretty small by comparison. Now, when things do become full self driving, so what are people going to do in the car? Well, I guess they're probably going to do productivity and entertainment of some kind. You know, watch movies, play games and do work. But that's in the future. We're already putting some games and stuff on the car just for fun. Yeah, we have been experimenting on that. And so FSD remains by far and away the biggest opportunity in the near term. 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 put in place and the ability to upgrade your vehicle through the app, for example on acceleration boost 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 on other things that we can launch and we'll trickle those in with time. Yeah, but they're all very tiny compared with like the step change to full self driving. Depending upon how you calculate it is probably worth at least $100,000 per car. So that's a lot of software you have to sell. In the app store or whatever.
Martin Viecha (IR)
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,
Elon Musk
The actual major milestone that's happening right now is really a transition of the Autonomy system or the cars, like AI if you will, from thinking about things in like 2 1/2 d space, taking like isolated pictures and doing image recognition on pictures that are partially correlated in time but not very well and transitioning to kind of a 4D where you know, it's like which is video essentially you get, you're thinking about the world in three dimensions and the fourth dimension being time. So that architectural change which has been underway for some time but has not really been rolled out to anyone in the production fleet is what really matters for full self driving. So what we've been doing thus far is really just been with
Elon Musk
mostly 2D and like I said, not well correlated in time. So it's just hard to convey just how much better a fully 4D system would work. Does work. It's capable of things that if you just looking at things as individual pictures as opposed to video, basically you go from individual pictures to surround video. So this is fundamental. So. The call will seem to have just like a giant improvement. I'll probably roll it out later this year. But, you know, we'll be able to do traffic lights, stop turns, troughs, everything, you know, pretty much. And then it will be a long march of nines, essentially, how many nines of reliability are?
Elon Musk
so it'll definitely be way better than human, but how much better than human does it need to be?
Tesla Executive (Energy)
So
Elon Musk
that's actually going to be the real work. There's just a massive amount of work with each kind of order of magnitude of reliability, But you'll see it happen. And if you plot the points on a curve, it'll be kind of obvious where it's headed. AI in general, I think, is something I've been saying this, banging this 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. That's the flow and the logic. They're just way dumber than they think they are.
Martin Viecha (IR)
Thank you. And the next question from this additional investor is, please, may you update us on ILI and Dreadnought. How has your thinking evolved and what is needed in order to get closer to fundamental physical limits?
Elon Musk
Well, we're putting a massive amount of effort into manufacturing, engineering the machine that makes the machine. There's probably 1,000%, maybe 10,000% more engineering required for the factory than for the product itself. So we're certainly making progress. I mean, factory and powertrain factory. Gigafactory in Nevada is on an alien driven with version 0.5, something like that, 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 Berlin. And we're really changing the design of the car in order to make it more manufacturable. 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 architecturally than what we've done to date. Drew, would you like to add to that?
Tesla Executive (Energy)
Yeah, I was going to expand on that thought. 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 from, like, one, when the raw materials enter the factory to the finished goods exit. And we're learning so much through doing that.
Elon Musk
Vertical integration is extremely important for this. But the supply chain, if you put, like, a GPS tracker on a Molecule from when it got mined to when it was in a usable product. It would look insane. It would be like, wow, it went around the world like six times. So with vertical integration, maybe you can only go around the world once. It's a big, huge improvement, or not even like half. I think you get vertical integration learning probably get you an order of magnitude improvement. So yeah, Jerome, you want to.
CFO (Tesla)
I think the focus for us is increasing the capex efficiency. This is something that we've been working very hard for the past three years. And you can see that we can build new factories for less amount of money and much faster those things go together.
Elon Musk
It's a better factory for less money and less time.
CFO (Tesla)
Yeah, less money means less time, so that's a great advantage. And also reducing this. And it still is a lot, the amount of inefficiencies. We want every operation to add value to the vehicle value meaning moving the atoms closer to their final state. So we do not want any robot
Elon Musk
that just moves things.
Elon Musk
Or a person. In fact, we want 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 tremendous. And I just want to be clear. Here at Tesla, we love manufacturing. It's awesome. And I really think more smart people should be working on manufacturing. And we want more people. We should have plenty of people if
CFO (Tesla)
people are interested in designing new lines and trying to do things different. Tesla's got a job for you. And now we've got jobs everywhere. It's not only in California. We've got jobs in China, in Berlin, in Austin, Texas and in California. So there's plenty of exciting places. And all these places will do original work and challenging, meaningful work.
Elon Musk
Absolutely. It's actually extremely exciting and fulfilling to design new production systems. And I think that for some reason I kind of got a bad rap, especially in the US for a long time. And I think people don't think that manufacturing sort of, they thought of manufacturing as like, oh, it's just some boring, just making copies or whatever. But actually there's far more opportunity for innovation in manufacturing than in the product itself, order of magnitude. So like, if there's one thing that comes out of this coalition, it's like, hey, if you want to help us invent amazing new manufacturing techniques and have input into the product itself, it's not like you just get to toss the product and say hey, make this product. And it's a kind of a lousy design. If you're a manufacturer, you get to change the product design and say hey, this product you're asking me to manufacture is dumb. And they're like great, let's fix it. So at Tesla, if you work on manufacturing engineering, you don't just get forced fed a toad sandwich, you get to change the product design. So it's super exciting. And we evolved the lines even after they're built. This rapid evolution of the production system
Tesla Executive (Energy)
and there's nothing more rewarding than going from zero cars an hour to 5,000 cars a week or 1,000 cars a day.
Elon Musk
So you know, the long term sustainable advantage of Tesla I think will be manufacturing.
Martin Viecha (IR)
Thank you very much. And the last question from institutional investor is how many vehicles can Tesla produce
Elon Musk
in Texas right now? Zero. But long term a lot. Our biggest property. Yes, biggest property. True.
Martin Viecha (IR)
And now we can shift to retail Investor questions on sei.com the first one is Tesla Energy seems widely ignored by Wall street despite elon comments about growth rate exceeding automotive. Could Tesla share more detail on current or planned projects during help investors better understand the business outlook? How disruptive is Tesla's automater technology?
Elon Musk
Yeah, I can't emphasize enough. I think long term Tesla Energy will be roughly the same size as Tesla 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, followed by wind. And those are intermittent. So you need to have a lot of batteries to store the, store the energy because the wind doesn't always blow and the sun doesn't always shine. So, so there's like three elements of the sustainable energy future. Wind and solar, sustainable energy generation, battery storage and electric transport. Those three things. And the mission of Tesla is to accelerate sustainable energy. So I can't emphasize enough like yeah, battery and solar will both be enormous and they kind of have to be in order for us to have a sustainable future. And we've got a great product roadmap on that front as well. So we've been shipping the Megapack. It's very well received. Do you want to talk about that?
Tesla Executive (Energy)
Yeah, I think the Megapack has represented itself and is an integrated rapidly deployable grid tied storage battery of megawatt hour scale. We're working with utilities large and small 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 a lot of demand for the product and we're growing the production rates as fast as
Elon Musk
we can for that product.
Tesla Executive (Energy)
And then on Autobidder. Autobidder is basically autopilot for grid tied batteries. It's an autonomous energy market participation system that does high frequency trading and that's a bad word.
Elon Musk
Sorry, sorry. Frequency trading should be called front running. We're not doing that.
Tesla Executive (Energy)
It's ensuring that the battery is doing everything it can to manage the grid interdependency of the renewables and just grid intermittency of all kinds. I mean people turn their lights on and off, power plants turn on and off, factories ramp up and down. And batteries are great to solve those problems.
Elon Musk
Yeah, it is grid stabilization at the millisecond level. So it just ensures that things are super smooth. It's like ups uninterruptible power supply of enormous size. But just ensure that the grid has smooth sailing. And then the batteries, the computers all interact with each other and make sure that they're working together to make the grid smooth. And this can be done with the powerwalls and the megapacks and the power packs all working together and interacting with third party systems as well.
Tesla Executive (Energy)
Centrally or distributed?
Elon Musk
It does both. Yeah, Yeah.
Martin Viecha (IR)
I mean we've.
Tesla Executive (Energy)
Yeah.
Elon Musk
Is this necessary in order to solve the sustainable energy problem?
Tesla Executive (Energy)
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.
Elon Musk
And that's what we're doing.
Elon Musk
The real limitation on Tesla growth is, is sell production at an affordable price. That's the real limit. So that's why we're going to talk a lot more about this on battery day. Because this is the fundamental scaling constraint and any part of that supply chain or processing at the cell level will, will be the limiting factor. So you know, whatever it may be, anywhere from mining to refining, there's many steps on refining to cathode and anode formation, cell formation, whatever the choke point is, that will set the growth rate. And so, you know, we expect to expand our business with Panasonic, with Catl, with LG Public, possibly with others. And you know, there's a lot more to say on that front on battery day.
Martin Viecha (IR)
Thank you. The second question is, now that it's time to bring the Tesla semi to volume production, can you share more detail on Production plans. What weekly production rate is considered volume production and when does Tesla expect to reach that rate?
CFO (Tesla)
Yeah, so we'll start production next year as we announced before. I'm personally very excited about the project. I can't wait. We do have a few trucks that keep driving around and that keep delivering cars, but we're going to accelerate that. I want to be clear that the first few units we will use ourselves, Tesla to carry our own freight, probably mostly between Fremont and Reno, which is a fantastic test route. We want to prove that we have received really good reliability so far.
Elon Musk
The early units do have it, but
CFO (Tesla)
we'll do that at the larger scale. And we have also promised some early units to some long term, very patient and supportive customers. And we'll do that now. We have more sales coming up in next year as Elon just pointed out, so we can increase the diversity of the portfolio. It didn't make sense up to now to do it, but we'll be ready. And that's maybe a little biased. Very excited about this and we have a lot of very unique technology that we've always dreaming about that we will be putting into that semi. It will be just awesome.
Elon Musk
Yeah, and just there's like two general classes of cell. There's like iron phosphate and then the nickel based, nickel based cells have higher energy density. So longer range. Obviously those are needed for something like a semi where 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 batteries. However, what we're seeing with our passenger vehicles is that our powertrain efficiency and so tire efficiency, drag coefficient, like basically all of the things that our H Vac going to a heat pump, basically our total vehicle efficiency has gotten good enough with Model 3 for example that we actually are comfortable having an iron phosphate battery pack in Model 3 in China and that'll be in volume production later this year. So we think that you know, getting a range that is in the high 200s, you know, basically we think you probably get a range of almost 300 miles with an iron phosphate pack taking into account a whole bunch of powertrain and other vehicle efficiencies and that frees up a lot of capacity for, for things like the Tesla semi and other projects that require higher energy density. So yeah, so have like two supply chains that you can tap into iron phosphate or nickel. We use very little cobalt in our system already and that's, that may trend to zero line. So it's really about nickel.
Martin Viecha (IR)
Thank you. The next question is Tesla recently decided not to produce standard range version of Model Y, no longer offers a standard range, Model S or X and has announced ramping of the semi. Does this shift from smaller pack vehicles suggest that Tesla is not battery constrained as in the past? What are the biggest constraints now?
Elon Musk
Well, I'd just like to re. Any mining companies out there, please mine more nickel. Okay? Wherever you are in the world, please mine more nickel and don't wait for nickel to go back to some long, some high point that you experienced some five years ago or whatever. Go for efficient as environmentally friendly nickel mining at high volume. 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 out to all mining companies. Please get nickel. With regard to passenger vehicles,
Martin Viecha (IR)
I think
Elon Musk
the new normal for range is going to be just in U.S. ePA 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 normal. You know, that's a standard expectation
Elon Musk
you do need to take into account like, you know, is it very hot outside or very cold or you know, are you driving up a tall mountain with a full load? And it's, you know, people don't want to have a, you know, get to the destination with like 10 miles of range. They want some reasonable margin. So I think 300 is going to be really. Or close to 300 is going to be a new normal. Close to 500 kilometers, basically, roughly.
Martin Viecha (IR)
Thank you. Next question on insurance. What is the holdup for Tesla insurance outside of California? Will you release numbers from that part of the business? Will Tesla insurance be required to participate in the Tesla ride hailing network as a driver?
Elon Musk
Yeah. We were joking before the call that we get. The quarterly insurance question that pops up on say.com here we are working super hard on insurance. I'll go into a little bit more detail here than I have on the past. 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. So you can think of it as a version one of Tesla insurance, version 0.9 in the beginning, at least 0.9. What we're working on now is we can call it version 2 or we can call it the first version of our telematics product. 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 customer's permission to use is not available in any other product or any other vehicle in the world. This gives us a unique advantage in terms of information. And you know, we have a decision point here where we could take the California product and replicate that into other states, or we could 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 then we'll continue to file for approval in additional states with regulatory approval there. We'll 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, et cetera, 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, are you forced to assess people statistically looking in the rearview mirror? Or can you assess people individually, looking ahead with smart projections and inform the driver of how they may reduce their, what actions they can take to reduce their insurance, as Zach was alluding to. It's like if you, okay, you're driving too fast, you're doing this or that or the other thing. It's like if you want to pay more for insurance, you can, but if you want to pay less, then please don't drive so crazy. Then people can make a choice like, ok, they want to drive aggressively in the case there'll be higher insurance or they want more capital insurance at the driving and it'll be pay less. This was actually very helpful for us to have a feedback loop to see what is driving insurance expense. A lot of it is just, it's like, you know, like little fender bender and the net fender bender because of the way that the body collision repair was being done, you know, cost like $15,000 or something crazy and like, wow. And 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 unearth a whole bunch of silly things that we were doing basically without realizing it. This is the problem in general with insurance. If insurance is all you can eat, then the feedback loop for improvement is wheat. So this gives us a great feedback loop for improvement, gives us basically a fundamentally better insurance product. I'd also like to say in 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 number one thing I'd like out of this call. And on the insurance front, I want to be clear, we're building a great, like major insurance company. If you're interested in in revolutionary insurance, please join Tesla. I would love to have some high energy actuaries especially. I have great respect for the actuarial 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 revolutionary actuaries.
Martin Viecha (IR)
Okay, thank you very much.
Elon Musk
Sorry, there was a second part of this question. Will Tesla insurance be required to participate 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 for folks 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 versus Tesla insurance will be required. There might be some things we need to think through there, but Tesla insurance at least will be working. Working for the ride hailing network.
Martin Viecha (IR)
Thank you very much. And in the interest of time, let's go to the Q and A of analysts online.
Operator
Thank you. Our first question will come from Dan Levy with Credit Suisse. Please go ahead. Hi, good afternoon.
Operator
I'll ask a question on the quarter and then just a question more broadly on strategy. Just on the quarter, if you could give us an update on gross margin. Was China accretive to gross margin in the second quarter and give us an idea of how far off Model Y gross margin was versus Fremont Model three and then just more broadly on strategy. It seems like your approach to insourcing is varying by region. You're insourcing 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 insourcing when you eventually open up Berlin and what your Texas factory is going to be?
Elon Musk
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 Y, 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 Y margin. And as we said before, the Model Y cost structure and Model 3 cost structure will converge. They're not quite there. Model Y is still slightly more expensive than Model 3 and it's not yet at full production. And with Model Y carrying a slightly higher price point, you can kind of back into the map there on the relative gross margin. Yeah, the Shanghai factory is a pretty big factory, but. And it's continuing to do more and more internally. But it's also the thing that's 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 both those components makes a massive difference to the cost of the vehicle. And the proportion of local sourcing has literally been rising at like 5 to 10% a month from 40. It was like 40% at the beginning of this year or something like that. You know, It'll be like 80%, you know, by the end of this year, maybe more.
CFO (Tesla)
There is also a lot of very strong, very competent and very eager suppliers
Elon Musk
around the factory in Shanghai. Yeah, I'd say like the suppliers in China have been extremely competitive, possibly the most competitive.
CFO (Tesla)
And so far, you know, we're in negotiations for Berlin and we've awarded a lot of business, also a lot of suppliers in Germany or the rest of Europe that are eager to support the factory in Berlin.
Elon Musk
Yeah, well, obviously Germany has a great automotive industry and supply chain, so actually a ton of suppliers in Germany are within a few hundred kilometers of the factory.
Martin Viecha (IR)
Thank you very much. Let's go to the next question, please.
Operator
Our next question will come from Tony Sakonaggi with Bernstein. Please go ahead.
Analyst
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 expect it to achieve industry leading operating margins over time. Maybe you could shed a little light on that. Industry leading for luxury vendors is 8 to 10% PTI. For poor shoes smaller it's 17. For mass market vendors it's 5 to 8. What do we think about and how much ultimately do you believe that EV credits will contribute to that margin? Because I know your margin has been 5% over the last 12 months, but it's actually less than 1% excluding EV credits. So it's a 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 EV credits? Regulatory credits. And I have a follow up, please.
Elon Musk
Sure. I've mentioned this before in terms of regulatory credits, you know, we manage the business. Said differently, we don't manage the business with the assumption that regulatory credits will contribute in a significant way to the future. I do expect regulatory credit revenue to double in 2020 relative to 2019 and it'll continue for some period of time. But eventually the stream of regulatory credits will reduce.
Tesla Executive (Energy)
Yes.
Elon Musk
I mean it's worth noting that
Elon Musk
of our car in the US receive zero federal tax credit, whereas many of our competitors, they get a $7,500 tax credit. And yet our sales have continued to do well. Yeah. And so what we see is continued decline in the cost to produce, manufacture and distribute our cars. That cost curve, even for mature products like the S and the X, continues to come down as we do work on that Model 3, which is our second most mature product that continues to come down. You then layer on top of that, as Elon was discussing earlier, the potential for software based revenue, particularly full self driving, there's the revenue recognition portion of that that we have today that will expand as we release more features. And then you can layer on top of that in the future revenue from a ride hailing network, operating expenses continue to come down and become more efficient as a percentage of revenue. There's still incredible opportunity there that we're working on, particularly on how customers interact with the company from sales and service and what their flow is and how we get cars to them. So we continue to see efficiencies there. So in the medium term here, what our modeling shows is in the low teens operating margin level. And I think there continues to drive the opportunity to drive that up. So I hear your point on the 5% and the 1%. We're on a bit of a journey here and we're continuing to make progress.
Martin Viecha (IR)
Thank you. And if I could just follow up.
Analyst
Elon, you've talked a lot about the mission of the company and in. Really trying to drive EV 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 we even saw it a little bit this quarter with price reductions. You could have probably kept price where it is, sold some units and had better profits. But that's been an ongoing choice that Tesla as a company has made. So how do you personally think about that trade off between, 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?
Elon Musk
Well, I think we actually achieve both. When you factor in autonomy, I think we can go way beyond industry margins and have the car be affordable to more and more people. And potentially almost everyone went factoring in autonomy. But that was really a mega game changer, Giga. Game changer. Yeah. But I mean it is important for people to distinguish between two things. There's value for money that a product has and then there's affordability. And even if you rail value for money and have value for money like infinite, if people do not have enough, if people do not have enough money in the bank account to buy the car, they simply cannot. So then you just have this like awesome thing that nobody can buy. So it is important to make the car affordable. 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're all making progress in that regard. Just sort of steadily making progress. So yeah, we need to not go bankrupt. Obviously that's important because that will fail in our mission. But we're not trying to be super profitable either. Obviously we're like, you know, Profitability is like 1% or something. 1 or 2%. 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 as affordable as possible. That's like what we're trying to achieve.
Martin Viecha (IR)
Thank you. Let's go to the next question, please.
Operator
Our next question will come from Emmanuel Rossmore with Deutsche Bank. Please go ahead.
Elon Musk
Hi, good afternoon. Could you please characterize the current near term demand environment for your vehicles? These are obviously unusual times. I think back in Q1 you had indicated record backlog, I guess at the beginning of this past quarter. But I haven't seen any specific comments about new order as a backlog in the release today. So can you give us some color? Demand is not our problem. Definitely not. We do have some production supply chain challenges we're trying to solve right now. For example, Model Y rear body casting. Obviously, because there's new technology, it's been tricky to maintain rate and keep growing the rate for Model Y casting, which is it's a two piece casting with a bunch and there's about 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're going to have a giant. The world's biggest casting press is getting assembled right now actually in Fremont for the Model Y rear body casting. It's enormous and looks awesome. So the things that are troubling us right now are not demand that they
Elon Musk
just a bunch of firefighting on supply chain and production issues. Okay, sorry. Yeah, don't worry about demand. That's not the issue. Okay, so when you're saying achieving 500,000 deliveries has become more difficult, was this really just a function of the recent shutdowns and some of these supply dynamics? Yeah, it's not to do with demand. It's really just a production issue. It's pretty hard when you've got
Elon Musk
global supply chain and it's kind of whatever the most effective part of that global supply chain is that sets you right, you know, So I mean, the number of rabbits we've had to pull out of a hat for supply chain is insane. Team's done an amazing job. So I think also 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 we'll hopefully use fewer airplanes that will improve our costs. But it's dramatic seed supply right now, where we are right now.
Martin Viecha (IR)
Thank you very much. And the last question, please.
Operator
Our last question today will come from Felipe Hu Thois with Jeffries. Please go ahead.
Elon Musk
Yes, good afternoon and thank you. You mentioned a few times the constraint to growth is battery capacity still. And I was hoping you could clarify the scope of the Berlin plants you're building right now. Will there be battery capacity consistent with the amount of assembly volume you expect to come out of Berlin? And if not, will you be able to source your battery requirements out of Europe? Would you have to import batteries from outside Europe to ensure production in Berlin? Okay, well, we can't say too much about this except that there will be local cell production and that will serve the needs of the Berlin factory.
Tesla Executive (Energy)
I mean. No, that's straightforward enough, I think. Just adding to what you said earlier about talent and people. Yes, the same goes in all areas of cell supply chain manufacturing, materials design. We are solving this problem and
Tesla Executive (Energy)
treating it like any other problem that we have solved. We will solve this problem and we want talented people to join us as we solve this problem.
Elon Musk
Yes, my biggest concern for getting up talented people is probably Berlin because the labor mobility in Europe is low. I would recommend changing this. If somebody wants to leave and join another company, sometimes they have to spend six months on garden leave. It's called garden hang out in the garden, basically. And like this is not a good use of people's time, you know, I mean, if they want to hang out in the garden, that's fine, but they shouldn't have to. Understood.
Martin Viecha (IR)
Thank you.
Elon Musk
I mean, those who know Europe will know what I'm talking about.
Martin Viecha (IR)
Filippa, do we have a follow up question?
Elon Musk
Thank you very much.
Martin Viecha (IR)
Thank you very much everyone for joining this call and, and thank you for all your good questions and we'll speak to you again in about three months.
Elon Musk
Yeah, maybe sooner. With Patri. Thanks.