Tesla Q3 2020 Earnings Call

[Music] [Applause] [Music] so [Music] [Applause] [Music] so [Music] so [Music] [Applause] [Music] oh [Music] so [Music] bye [Music] legally [Music] so [Music] ladies and gentlemen thank you for standing by and welcome to the tesla q3 2020 financial results and q a webcast at this time all participants are in a listen only mode after the speaker presentation there will be a question and answer session to ask a question during the session you will need to press star 1 on your telephone if you require any further assistance please press star zero i would now like to hand the conference over to your speaker mr martin veeka senior director of of investor relations please go ahead sir thank you sherry and good afternoon everyone and welcome to tesla's third

quarter 2020 q a webcast i'm joined today by elon musk zachary kirkhorn and a number of other executives our q3 results were announced at about 1 pm 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 or 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 one now if you would like to join the question queue but before we jump into the q a

elon has some opening remarks elon thanks martin all right so q3 was our best quarter in history we achieved the record production deliveries record revenue record net income uh both gap and on gap and record-free class cash flow of 1.

4 billion dollars this is really due to the amazing execution by the tesla team i could not be more proud to work with such a great group of people just really kick out performance across throughout the world of course we had battery day uh so we hosted showed our plans for how we can expand the future and improve core battery technology core cell technology at the form factor level of chemistry level and i think more significantly at the manufacturing technology level there's only a comment i've made in the past is that i think tesla's long-term competitive strength will be primarily manufacturing this is counterintuitive but i i'm quite confident this will be uh what what happens uh anyway so we presented what the team has been working on for a long

time well batteries um we wanted to step back and really rethink batteries from scratch uh first first principle thinking just look at the fundamental physics and say what uh rather than compare to uh other products and market just say from a physics standpoint if you you know what what's the limit of physics what's the platonic idea of a perfect cell and how close can we get there um and uh that was our aspiration and i think we've we've got a pretty good uh approach to it um which will only get better over time so we went through all of the engineering solutions for every important part of battery design and production um and we'll continue to iterate on that and just recursively improve the core cell and battery technology the the result we think in

you know in a few years will be batteries that cost half as much and where the capital expenditures required are a third or less of what they are today and we expect giga berlin will see our first battery cell production line at scale regarding the full self-driving beta release the autopilot team again just a really all-star team um i spent a lot of time with the with the autopilot team and there's a lot of really talented people in that team who've worked incredibly hard to make the to get the beta release out so i just really like to thank them for their their hard work um and uh it's just a it's just a very smart group of people so um i i think we're starting very slow and very very cautiously um because the world is a complex messy place and so we

we're um you know we put it out there last night and then we'll see how it goes and then uh probably release it to more people this weekend or early next week and then just gradually step it up until we have hopefully a wide release by the end of this year and of course as the system collects more data and it becomes more robust um so um it's sort of like you know how does google as a search engine get better it's because everyone is programming it by asking your questions all the time and clicking on particular links so it's got this great feedback loop and that that makes it an extremely effective search engine it's the same thing for autonomy having on the order of a million cars that are providing feedback and specifically feedback on strange corner

case situations that you just can't even come up with in simulation uh this is the thing that is really valuable it's not like the the the the the obvious stuff obvious stuff you can do in simulation um but weird corner cases uh only reality can can give you that so that's but we're able to say okay we need to train the system on this corner case situation uh and and look for examples so we can we can then uh train against those examples and improve uh some very esoteric corner case um and um also important to emphasize that this is a generalized uh neural net based approach uh there is no need for high definition maps or a cell phone connection so the the car this system is designed such that even if you have no connectivity whatsoever and you're in

a place that you have never been to before and no tesla has ever been there the car should still be able to drive just like a person that is the system that we are developing and aiming to release this year then in terms of capacity build out we're making progress on um three major factories uh we're continuing to expand shanghai significantly uh which is going incredibly well the tesla china team is just i mean incredibly good i we're super smart work hard it's like i'm always amazed by how much progress the china team makes uh it's beyond all reasonable expectations um and then we're under construction in berlin and tech and and austin um so also making good progress there um yeah it's overall going well i should make a point that for berlin and austin

um we we do expect to start delivering cars from those factories next year but because of the exponential nature of of a of the spool of a manufacturing plant especially one with new technology um it it will start off very slow at first and then then and then um become very the upper will become very large just in general manufacturing follows the s-curve and you know and i think sometimes people if they haven't spent a lot of time manufacturing kind of think that once you have a factory you can just sort of turn it on and it's at capacity but it will typically take about 12 to 18 months to reach capacity and that is a very fast a period of time especially for new technology so yeah i'd say 12 to 24 months even um so generally what i see is um the manufacturing

capacity is underestimated in the beginning um for quite some time then it's sometimes overestimated because this is an s group um it goes exponential to linear to logarithmic and it's it's actually incredibly hard thing just bringing a production plant uh to volume technology it's because you can actually think of it like you've got two first order approximation ten thousand unique uh parts of processes all of which operate on an s curve s-curve and and and if we're build with a bunch of uncertainty and you can just slide 10 000 s-curves on an x-axis and that's what bringing up a large automotive plant is like and which one is which one's the the the laggard which one's the leader it's very difficult to tell and it's constantly changing so it's really

one of the most difficult challenges i've ever seen um so let's see um in conclusion uh thank you uh all we've achieved would not be possible without the incredible hard work of tens of thousands of tesla empire employees and all people at our suppliers as well like thank our suppliers we continue to grow as fast as we can while focusing on cost control and improving quality and ultimately the the best company will be that which makes great products at an affordable price and that is uh that's our goal i think i've never felt more optimistic about the future of tesla than i ate than i do today i'd also like to thank investors who have stuck with us with us through thick and thin um this is uh i think there's there's a lot more good stuff to come all right

with that we can move to questions uh thank you liam i think uh our cfo zachary kirkland there's some opening remarks as well okay sure yeah thanks martin overall our financial health continues to rapidly improve with q3 being another great quarter on nearly all dimensions as elon has mentioned on that on on net income we achieved our fifth sequential quarter of profitability our best net income and nearly double digit operating margins the two things that are important to note to set context for q3 profitability first the regulatory credits business was stronger than our expectations and we are tracking to more than double this year compared to last second as a result in the rise of the market cap of the company the second and third tranche of the ceo

grant vested during the quarter additionally we have begun expensing one more tranche resulting in roughly 300 million of combined period expense i think it's reasonable to view the quarter excluding both these items to get a true sense of the health of the core business on automotive gross margin excluding regulatory credits it increased materially from 18.

7 to 23.

7 percent with some of our programs achieving great greater than 25 gross margin keep in mind that inefficiencies related to factory shutdowns affected our margins in q2 we continue to reduce our manufacturing and operational costs we are also seeing benefits from the ongoing upward trend of locally built and delivered cars which has increased from under 50 percent at the beginning of last year to over 70 most recently which is a core component of our cost reduction strategy we are also seeing financial benefits from improved vehicle reliability across the feet across the fleet services in other margin approved yet again driven by our used vehicle business and and efficiencies in our service operations in the energy business we achieved record storage

deployments aided by the positive reception of the mega pack and powerwall products as production and deployments grow additionally our solar deployments doubled and we're continuing to make progress on that front on cash flows our cash balance increased to 14 and a half billion which includes free cash flows of 1.

4 billion are highest yet our operating cash flows were 2.

4 billion including a 600 million benefit from working capital as we've made progress on days of receivables and inventory despite a reduction in days of payables note that the majority of our operating cash flows are driven by the strengthening of our core operations capital expenses grew to 1 billion driven by model y incidents in shanghai berlin and austin as for previous investments in model 3 shanghai and model y in fremont we're expecting these programs to have already fully paid for their respective investments by the end of this year looking forward to 2021 and 2022 we have revised up our expectations for capital spending by two to two and a half billion which we have ample liquidity and expected cash flows to fund this is driven by an increase

in in-source scope for certain factories including battery cell manufacturing as well as investments to enable greater capacity expansion in the future while we expect the return on our investments to remain very strong keep in mind that with additional scope and location specific costs the payback of these investments may be slightly longer than what we saw in model 3 in shanghai and model y in fremont financing cash flows were four and a half billion as we reduced use of our working capital lines offset by 5 billion equity rates in september note that we're currently expecting over a billion in early convert pay downs in q4 primarily associated with the 2021 conversions but also our 2022 and 2024s looking forward we remain focused on strengthening the

core fundamentals of the business we are increasing production to meet demand reducing costs including localization driving higher efficiency across the business and tightening our cash conversion cycle we've made tremendous progress on this front over the last year and a half we're also aiming to achieve our original 2020 guidance of 500 000 deliveries despite the operational interruptions earlier in the year while this goal remains a genuine challenge we believe it's possible with tight execution across the company so congratulations again to the tesla team for a great quarter and a great year i'll hand it over to rj johnson who joined tesla earlier in the year and is leading our energy business for a few comments thank you zach first i'd like to also

thank and congratulate the team on a job well done q3 was a strong quarter for the energy business and were poised for continued strong growth in energy storage and solar mega pack is going to be a large growth segment for the business and deployments will continue to expand rapidly as the product reaches full capacity we have more demand than supply through 2021 and we continue to ramp the product to match unprecedented demand across the globe through 2023 and beyond our order book is rapidly filling up through 2023 in the multiple gigawatt-hour scale large-scale solar plus storage is now more cost effective than traditional fossil fuel generation in many locations across the globe this trend will continue as we remove cost which will further displace

existing and new fossil fuel generation this is true for standalone storage as well many customers are utilizing auto bidder to maximize returns as we optimize our hardware and software with advanced real-time bidding strategies that continue to outperform the market where deployed for powerwall we see continued strong demand for residential storage as customers seek increased reliability and backup home generation we have a very large backlog of powerwall orders and we continue to invest to increase capacity to fulfill customer orders we're just now capturing the full power of customer sighted solar plus storage as customers in some jurisdictions are providing services back to the grid when they don't need to consume energy or have backup power this

has massive potential to reduce system costs and make the grid more efficient globally in the united states we lowered our residential solar retrofit price to 1.

49 cents a watt after tax incentives which is the lowest in the industry we're able to do this by leveraging our online vehicle ordering infrastructure which substantially reduces soft cost associated with sales and marketing as a result our fixed costs remain relatively flat as our volume and efficiency increase leading to increased profitability in the retrofit business we're using the same methodology across the enter the entire energy business including service to capitalize on the technology backbone of the company solar roof is especially exciting as we've gained significant experience over the last year in the installation process which is a key enabler to scale the business we've recently demonstrated our ability to complete solar roof in installation

in just one day please note this still requires one to two days to remove the existing roof and prepare it for the solar roof installation clearly there will be a range of installation times based on size complexity weather and other factors overall our reduced installation time provides a better customer experience and will enable the business to grow exponentially as scale effects allow for increased efficiency in closing we believe the energy segment is poised for a strong growth as we continue to focus on increasing scale while reducing cost to maximize profitability i want to thank the team again for their hard work and i look forward to another strong quarter ahead of us thank you very much everyone and let's begin with questions from set.

com uh the first question from retail shareholders is is tesla planning to start 4680 cell production at giga berlin at the same time as vehicle production can tesla share more information on what products will use the battery cells from the pilot line in fremont uh yeah um drew do you want to take us sure uh yeah we will incorporate 4680 design solutions into many applications in time across both energy and vehicle and we can use our our pilot production facility in fremont to support the new factory in berlin as it ramps thank you very much let's go to the next question which is um question number two from retail shareholders does tesla's tablet cell design allow for significantly higher peak charging rates does it improve the required taper curve yeah

the fundamental limitation on charge rate and lithium ion batteries is avoiding lithium plating on the anode and while the tablets architecture helps avoid overheating because it's a more power dense architecture at high continuous charge rates it doesn't change the anode plating story electro design and another material choice more directly determines the maximum charge rate and how to avoid that lithium plating problem okay thank you very much the third question from retail is would fsb be able to tr to be transferred to uh to our next vehicle or pay a transfer fee uh it would add a broad uh it would add to a brand of loyalty the same way gaming companies and cell phone companies keep you in their ecosystem by letting you transfer purchases to upgraded

hardware um yeah i think we'll we'll give it some thought okay the fourth question is what are the remaining constraints to be solved for solar roof installations to ramp significantly carl yeah i'm on the solar roof engineering and installation the biggest constraint right now in solar roof ramp is getting enough installers on board and trained and experienced we've made a lot of progress on this in in q3 and we're continuing to hire the next opportunity is improving the material flow on the job site we've talked about this a lot in the factory as well that setting up the right packaging kitting so that every every installer on the roof has the parts they need at their fingertips also we've had great response from third-party roofing contractors as they're

ramping up installations for solar roof on their customer homes which is a big source of future growth yeah i mean here's a way to think about a product in my opinion you have to say i think what do you want the world to look like when you look around the neighborhood in the future decade from now you know what do you want what products are going to make your life better what what future do you want i think a future where we've got beautiful roofs with generating energy that are tough and tougher and resilient and better in every way than a regular roof and a lab with energy that's the future we want the solar roof is a killer product this will become obvious next year thank you and the last question from retail shareholders is you recently referred to

tesla as a conglomerate of startups other than manufacturing electric cars what do you suppose will be the most valuable business units within tesla over the next five to seven years could you envision any of them ever spinning out from tesla well yeah think about this today tesla is probably there's probably in excess of a dozen startups effectively in tesla every major product line is a startup um every every new big new plant is a startup um and sometimes frankly we have to learn a lesson a few times before it sinks in um but and you know even things like service and sales are our startups other car companies oems they don't own their sales and service so we have to create our service network we have to create our sales and delivery network we have

to do this in i don't know 40 countries multiple languages something that people don't even don't really even know much about is our internal applications team that that writes the core uh technology that runs the company um we are not dependent on um enterprise software like for those who understand what this means this is a very big deal in my heart as well to the great work of the internal applications team um that they're right there at the nervous system the operating system of the company the tesla operating system uh extremely fundamental um obviously insurance is is substantial so insurance could very well be under 30 40 percent of of the the value of the cart business frankly um and as we've talked about before with a much better feedback loop

um instead of it being statistical it can be specific now obviously somebody does not have to choose our insurance um but i think a lot of people will it's just it's going to cost less and be better so why wouldn't you uh then the whole autonomy thing is a startup the computer chip was designing our computer chips for the startup uh obviously cells are as a startup designing and making our own power electronics for the drive units designing manufacturing our own motors chargers the supercharger network is a startup the thing i think that people just don't really understand about tesla is that it's it's a whole chain of startups and they're like well you didn't do that before yeah we're doing it now and i mean i think so far we have not we've maybe been

a bit slow with some of the startups but i don't think we've had any any of them fail so so far so good no plans to spend anything out that just sounds com like added complexity thank you very much let's go to interditional investor questions the question number one is as they bridge to the riled hailing network could you leverage the insurance product to give customers the ability to rent out their vehicles via via the app thereby enabling the car to make money for them so basically proprietary version of two-row we're i think we're going to focus on enabling the robo taxi system so you can just basically like that's a that's a sub that's just really quite a small subset of the overall robo taxi or robocar thing where you can have the car be autonomous

for you uh you can have the car be you know share with friends and family uh you can add or remove it from the network you can have it be entirely in the network i mean if you're an uber or left driver you could be managing you know a fleet of 10 cars um it sort of seems like a you know shepherd attending the block type of thing it's like you just get way more leverage so you know i think that that's that's sort of a week we could do that and it wouldn't be very difficult um but we we're going to just be focused on just having an autonomous network you know that has sort of elements of uberlift and airbnb thank you and the second question from institutionals is residential energy use accounts for roughly the same magnitude of carbon emissions as road

transport today's boilers and aircon units are profoundly unsexy could you elaborate on hints that hvac advances with the why it could also find use in a domestic system yeah go ahead drew i was just going to say i mean i think one of the things we focused on with the model y and now model 3 pump system was learning how to build a tightly integrated system capable of moving heat to and from anywhere really powertrain battery cabin the environment in outside ambient temperatures all the way down to like negative 20 uh c so 30c and that's definitely applicable to uh to the home's needs of heating and cooling the the home and the water in your house so certainly applicable um elon yeah absolutely um i think like the heat if what he pop in the car being able

to use the battery as both a thermal and an electric energy reservoir is very significant same thing could be applied to a home with the water heater so and the battery pack itself of course so i think there's potential for an integrated home system that canada's power generation storage heating cooling air filtration uh you know water purification in a really tight package um we don't actually have like a prototype or anything but i think conceptually that is something that would be probably good to have thank you the third question from institutionals is if meeting your long-term volume targets requires price reductions that preclude you from achieving your low double digits stated margin targets for the autos business will you still reduce prices accordingly

um well we want to make our cars more affordable and it's always important to separate out affordability from value for money um you know if if the car's car is too expensive or given products too expensive then people don't have enough money in the bank account they simply can't buy it no matter what the value proposition is so it is important to lower the prices in order to such that people can literally just have enough money to buy it i i do not think we lack for desire for our products but we do lack for affordability and so we have to improve the affordability of our products so they are not out of reach of people we want to bring them more in reach over time um but but also improve our cost of production um also you know we get hopefully a little

bit better every year sort of sometimes a lot better and in terms of margins like all of these margins are going to look pretty comically small when you factor in autonomy yeah um two things i'll add to that um without a doubt i mean we're moving forward to push as much volume as we reasonably can uh you know so elon talked through earlier kind of how the s-curve and the timeline of incremental factors looks like and so we're moving full speed ahead with as much volume as we can re reasonably move forward with but the the second comment i'd make is if you just look at the journey of the company uh over the last year and a half we have grown volumes and grown gross margins uh despite a number of price reductions over that period of time and we've kept

opex fairly stable during that period of time as well and so the key is what elon mentions here i mean we have to improve the affordability of the vehicle we have to also continue to make progress improving the cost structure of not only cogs but of opex which we've demonstrated over the last year and a half i think quite successfully and improved the value of the vehicles at the same time so in addition to reducing the cost of the car we're making the cars better and that's the formula to sell the volume that's what we're focused on thank you very much the fourth question from institutionals is at one at what point do you expect to have enough internal or external battery capacity to start ramping up stationary storage deployments again yeah we're we're

ramping up stationary storage a lot so i mean it's approximately doubling that we expect is approximately double um next year so that's pretty good um and uh hopefully we can accelerate that in years to come and approximately doubling it this year too so the growth yeah yeah i mean if you just keep doubling things pretty soon you hit the mass of the universe and we'll need to start you know turning jupiter into cells and the last question from institutionals is manufacturing is hard delays happen what contingencies do you have in place to ensure that bottlenecks that you might encounter while renting internal cell production will not preclude you from the from your ability to hit your model y production volume targets in berlin and texas yeah so i think

it's we've tried to de-risk uh 2021 so that there's um you know almost no dependency on our internal cell production uh it's very very small uh the internal cell production will help us ramp in 22 but we're not dependent on it for 21.

and to de-risk the manufacturing system itself that was one of the reasons why we located our pilot production facility here in fremont so we can rapidly iterate on manufacturing scale-up challenges provides rapid feedback to the design of both the product and the equipment yeah and i know our pilot line is pretty big as plot lines go it's uh it would be in the top 10 cell factories on earth i believe yeah that's true a sub-scale one yeah thank you very much and now we can go to questions uh from analyst offline cherie thank you again we remind you to please ask one question and one follow-up question our first question will come from rod lashay with wolf research please go ahead hi everybody um just wanted to ask about uh the targets from your your battery

day um looked like you you could be approaching something like 20 million vehicles by 2030 if you you hit those goals um could you maybe share with us a little bit more of a midterm target like where would you be by 2025 and and maybe uh give us a little bit more insight into the investment required to get there just to put that extra two to two and a half billion dollars per year in into context yeah i i mean i think the the tricky thing with trying to predict things midway through an exponential is that you you know if if things are doubling every year or even just growing 50 then if you shift one you know plus minus one year it has a huge effect on the the number um is so then it sounds like wow you either massively exceeded or massively uh undershot

but it's actually what's going on isn't a a giant s-curve so a whole bunch of pretty big escrows that integrate into a gigantic escrow um so that's why it's difficult to predict the middle and i'm not saying for sure we would hit 20 million vehicles but it just seemed like a good goal to have because that would mean that we're replacing one percent of the global fleet per year um and it's so it's difficult to say that we're you know are we really changing the world if we're not um switching out one percent of the global uh fossil fuel vehicles i mean it's i'm not sure that we can make that argument unless we unless we change at least one percent of the vehicles per year so that that's where the two the 20 million vehicles for a year comes from it's like

one percent of two billion vehicles which is the the global fleet currently the global feed is growing uh so it'll probably be a bit bigger in the future um so okay you know it's hard to say it's like i'm gonna map an s cove to a 20 million dollar a 20 million vehicle target in 2030 and move the slider around and see what that number looks like that will give you about as much insight as we have okay um and just secondly um you know if solid state lithium metal were to become viable you just maybe just pass along your perspective on that and would you be able to repurpose most of what you're putting into place uh for changes in technology yeah i mean answering the first part um the the self-production system is fairly agnostic on anode cathode electrolyte

separate that kind of thing it's we could change and we will change and upgrade the all aspects of the cell so [Music] we could for example make iron prostate or nickel manganese or something like that um it's quite adaptable um so i wouldn't i wouldn't say it's just too much more about the the lithium like a pure lithium anode is um i mean not it's not as as it's it's not as great as it may sound um you know uh yeah um but volumetrically you're you're not gaining all that much uh yeah because if you've got nothing on the so it's on the outside you've got and just played out lithium it's got it's got to go somewhere so you could have room for it yeah yeah lithium is less volumetrically dense in the pure metal form than it is intercalated into silicon

so it's kind of hard to understand but that that's that's the truth and and then as we showed in our presentation the total anode cost that we're talking about is only a dollar or two per kilowatt hour so the value of like removing the end of material isn't super high either so yeah i totally agree elon yeah exactly um but if it should turn out that if your lithium anode is the right move that would simply that would be no problem right agreed all right thank you thank you next next question please our next question will come from colin rush with oppenheimer please go ahead um thanks so much guys yeah you're talking about insourcing um a number of processes can you talk a little bit about which processes you're you're moving in house and the equipment

that you're planning to make yourself uh versus uh some of the equipment that you'd be buying from other folks sorry are you talking about the for cell manufacturing or something or well manufacturing for sure as well as on the molds uh they talked about but you know in terms of the catbacks budget that you mentioned earlier talking about uh you know the number of processes coming in house um and which equipment pieces you're planning to make yourself versus buying okay well i mean tesla is absolutely vertically integrated compared to other order companies or basically almost any company the we have a massive amount of internal manufacturing technology that we that we build ourselves we literally make the machine we in fact we we design so like okay what

is the thing we want to make design the machine that will make that thing then we make the machine this is what this this makes it quite difficult to copy tesla which we're not actually all that opposed to people copying us but it's quite difficult because you can't do catalog engineering you can't just i'll pick up the supplier catalog i'll get one of this machine one of that machine bingo i'm now on tesla um you have to there is no catalog what cat you know so we made the machine that made the machine that made the machine it could no no we don't we don't want to get carried away here but um and quite frankly we would like to outsource less um that would be great um because then if we could outsource if we could take something that we're doing and outsource

it then we could take those people and and we're going to have them do something else um but um yeah it's like we just make a crazy amount of machinery internally um this is puzzles are not well well understood um if you walk around the factory you can get a sense for it and um yeah i don't mean i don't know if this is like a smart move but i i just know like hey if we're trying to make progress and nobody's got the machine that we we need we got to make it so that's what we do um okay and then the second question is really around you know the balance sheet has really changed you guys have run awfully lean and you've got a lot more a lot more cushion at this point and obviously there's opportunities around insurance to drive out some of the cost of ownership

as well as financials you know how are you guys thinking about that as you move into trying to accelerate demand a little bit and your ability to to leverage your access to capital and enable some of those uh those other products um yeah is that changing from from where you've been in the past yeah i mean something like insurance is a good example of a product that's basically made by our internal applications team um so we just we made the insurance product and connected to the car look at the data calculate the risk this is all internally basically internal software application um it's pretty low capital but has very high return i i don't know if we're trying to spend money at the fastest rate that we can possibly spend it and not waste it that's our

current plan and so it's quite hard to spend money without wasting it um or just you know we're like really just trying to not waste too much of it frankly we will certainly waste some of it uh but trying to waste not waste too much of it this is very difficult um but otherwise we just try to spend money as quickly as possible in a way that is sensible and yields more value than it costs thank you our next question will come from adam jonas with morgan stanley please go ahead hey elon um question on lidar if lidar were totally free would you want to use it in your cars near term would that tech significantly helped tesla in the training of your neural network for fsd i mean totally free probably not i think probably i i think even if it was free we wouldn't

put them on okay um let's follow up then um amazon appears to be investing and building an autonomous or electric transport network of some ilk through some organic investments but also you know zuke's aurora ribbon etc what advice would you give jeff bezos in his endeavor well i don't know how much he cares about this but i guess he sure is investing a lot of money in it um i mean i think he also needs to vote for if you care about autonomy you need to focus on vision because the entire road system is based on passive optical so you have to solve passive optical for to have a self-driving system that is a generalized solution and once you solve past optical you've solved self-driving so why bother with anything else thanks elon thank you welcome to the

next question please our next question will come from pierre farragu with new street research please go ahead um hey thanks a lot for taking my question a very simple one you haven't talked that much about like the cyber truck today uh and i was wondering uh how like the ramp of that product is uh looking like when we when we should see [Music] the product hitting the road and how fast you expect to rent volumes can i have a quick follow-up sure um i was in the studio actually on last friday with franz and team just going over the just sort of sort of some improved improvements to the cyber truck you know generally with you know i tell you we we really aim to make the car that is delivered better than the car that is uh unveiled um because always drove

me crazy you know car companies would unveil these awesome looking cars and you're like great i can't wait till i make that and then they have the car they actually make this like much worse and that is just it's like really disappointing so man we always want to make the car that we deliver better than the car we unveil and that's the goal with the cyber truck so um there's like a lot of a lot of small improvements compared to what was unveiled um it's you know i think it's going to be better than what we showed and um yeah it's it's cool like it it's going to be made in um in austin so this can you know depending on completing that factory and there are obviously new technologies with the you know high hardness uh kind of armored exoskeleton this is

never been done before so there'll be there'll probably be some challenges along the way um and obviously something something that's extremely high hardness and difficult to scratch or dance is also difficult to form so it's there's some manufacturing challenges there that's why it's so plainer although it also looks good i think from a cleaner standpoint um yeah if we focus well we will be able to do some cyber truck deliveries uh towards the end of next and towards the end of next year yeah so it's difficult to predict um i'd say there's probably a lot of deliveries in 22 and some deliveries towards the next year if things go well okay and now i'm trying to get a sense of how next year is going to look like so if i look at your production capacity at

the end of this year it's going to be almost 850 000 units on an annualized basis and you're going to increase capacity in shanghai open berlin you say today you would open austin as well so you're probably going to end the year above the million units and and so am i right thinking next year we should expect you to deliver uh like somewhere like between 840 000 and 1 million cars during the year yeah we'll provide uh guidance on 2021 after next earnings call i mean it's it's in that vicinity um yeah you're not far off thank you thank you thank you our next question will come from dan levy with credit suisse please go ahead hi uh good evening thank you just i wanted to start with a question on the quarter um zack maybe you could give us a sense of uh

where directionally model y and china model 3 gross margin was in the quarter relative to fremont model 3 and then just a little more color on the gross margin in the quarter was this just purely a function of higher volume or was there also uh fsd revenues just puts and takes on the gross margin in the quarter sure on your question about fsd uh there was a small amount of deferred revenue released is not particularly material in the 10 million dollar range for the quarter with respect to product margins um you know what we're seeing across the board is just continued reduction in cost really across every product shanghai continues to make good progress there model y cost is also coming down quite quickly as we branch that but we've got it in the past

that model y cost should be roughly equivalent to the model 3 built-in fremont cost it's not quite there and it's also a bit of a moving target as model 3 fremont cost comes down model y also has to come down with that but we're generally seeing strength in in shanghai margin strength in model y margins and not too far off of it we're seeing strength in model 3 fremont and snx margins so overall for the quarter i think it was quite a good story for the products great great thanks um and then this is the follow up wanted to ask about your your strategy uh in europe and i think your strategy generally has been you know you cut cost so that allows you to cut price and you can generate the extra volume and i think that's you know what we're seeing in china

you know the use of lfp that's that's a good example so once you ramp in berlin what's a reasonable expectation of what pricing might look like in europe and how flexible are you going to be on pricing you know to generate uh incremental red credit so you know uh margins out of the gate that are a little low but you know that are then used for the red credits that you know help to offset that yeah but what i think i would say generally to the question is i mean we've been in a position for for some time now where we are prioritizing where in the world we send our production and you know there's different factors to that depending upon when different product changes are made what the logistics routing looks like different things going on in different markets

but we are in a position where we need to prioritize uh ideally i mean what we're trying to do as fast as we possibly can is get production up higher so that we're not in a position of needing to prioritize again um there are yeah i think that gets at the sentiment of your question okay let's go to the next question please our next question will come from gene munster with loop ventures please go ahead good evening uh question on the semi you know if you could just walk us through the development of mega chargers platooning and maybe just how you think about autonomy for tesla semi and what it's how you envision it impacting the broader trucking industry beyond just ev well actually jerome do you want to ask that yeah we continue the development of the

semi and in particular mega chargers we realized that the 350 kilowatt or or or so that we might be looking for cars is not going to be enough for semi so we're looking for something much more uh powerful than that that can achieve essentially charging as fast uh the semi as as you during a break during your driving time so that you can drive until the next break yeah so there is no usable or efficient time wasted for charging uh the semi that's that's the goal um we're working with uh other parties to make sure that there is a standard infrastructure that will be able to uh be deployed uh for all customers um yeah that's probably all i can say at this point yeah yeah we're not working just we're not working in isolation yeah we're trying to we have to

invent it because it doesn't exist you know but we're we're trying to invent something uh that could be uh helpful for everybody yeah just as a note on the sort of semi the the semi does consume a lot of cells so it's uh you know caught you know four to six times more than a passenger vehicle very cool five you know there's five ish times so um if we are self-constrained it is it kind of it's difficult to ramp up the semi because there's no cells um so we need to solve the cell constraint before ramping semi to significant volume that's the only real constraint on semi-progress um and uh you know just we found over and over again we were just we just kept running into self self production limitations um and then we're just taking things out of one pocket

and putting them in another this is it we just need more cells so that we can do more stationary storage more vehicles um more vehicle lines yeah we need more cells so make makes sense uh a question just if you think about you know you've talked about robo taxi and how you i think that's going to impact kind of humans moving around how do you think about semi impacting freight longer term i mean is this uh something that is nice to have and a compliment to all of your tech getting in new markets or do you think that this could be a material business i think it's very material for sure um i mean really long term all transport will go autonomous yeah horses are already autonomous but all transport will go autonomous yeah so including semi so it'll be pretty

significant and the technology that we're putting in semi is identical to what we're putting in the other vehicles yeah it's just big bigger bigger and more motors yep thank you let's go our next question will come from ben callow with baird please go ahead hey thanks for taking my question hey elon what do you think the biggest structural issue is with the let's call it old school oems um or one or two of the structural issues for them not getting their act together and catching up with you and then um you you mentioned what you we want the world to look like ahead of us what do you envision that is like just tesla or tesla and rivian or or or what thanks well i do think there will be other car companies i don't think we're going to be the only one so

i mean the thing is that like like what what uh other car companies do even in the auto segment is quite a small subset of what tesla is so you know tesla we we design and build we're very vertically integrated so we're designing a building so much of the car so much more of the car than other oems who will largely go to the traditional supply base and like i call it catalog engineering you know so um it's not very adventurous uh and and basically it ends up like all the products end up looking the same because they're going to the same suppliers so i mean to the degree that you inherit legacy components you inherit the legacy limitations and cost structure and so you kind of need to make new ingredients new parts and then you need then there's no machine

to make those parts so you have to make the machine that makes the parts so tesla's like we probably i mean we might be in order of magnitude more vertically integrated than other car companies if we're not now we certainly will be um and then we also uh we also have to create our sales and service and distribution system in i don't know something on the report 40 countries you know somewhere it'll be over 100 countries whereas the other uh car companies do not own their sales and service and distribution so you know they they kind of you know assemble parts from a supply base and then and then hand them to a dealer base so it's just like it's not just like it it's like comparing tesla to a car company like just comparing just really one facet or dimension

of tesla we're like maybe 10 in common with other car companies thank you let's go to the last question please and our final question today will come from philly pushua with jeffreys please go ahead um yes thank you for taking my questions i've got two um the first one for me is try to understand your business model for stationary storage have your thoughts on it i mean there are two broad directions for me one is selling hardware which is a bit of a cost plus business and i'm just wondering if there's an opportunity where tesla could actually share into the savings that utilities in particular could be able to achieve and like grid stabilization the information i was able to get on your business in australia a few years ago suggests that given the savings

that are achieved your your hardware could have been sold at a higher price i'm just wondering if you have some shared views on where the difference is going yeah i think you're probably right about that uh um i mean rj and zach what do you guys think yeah i mean we're already seeing this in australia where we're seeing behind the meter aggregation that is providing grid services back to the grid which effectively reduces the price to the customer and reduces the prices for the grid operator so you're seeing this trend happening across the globe and it's going to be at the residential level as well at the wholesale level so mega pack on one end and then power wall on the other side those two working together in tandem and the software layer on top of

it auto bidder being that that really is going to help make the grid more efficient using the hardware platform and software together and just a point of clarification like that the large power plant in large battery power plant in australia like we continue to operate that power plant and generate revenue in the market so whether we could have sold it for more or less like we're continuing to make money off of that power plant okay thank you and the following question i had was during the battery day you talked about this cell vehicle integration um approach it's very interesting and when i look at that when i think about it it looks like this means that the skateboard design the tesla pioneered and many of your followers are using is going to become

obsolete or am i not thinking about the right way it will be obsolete long term yes but i mean yes i mean several years from now it's it it for now it's not like existing cars stop hiring value it's just that this that if you have an if you have the if you have a structural pack where the pack is contributing uh structural value to the car um because of like the sort of like the composite honeycomb effect of you know shear transfer between an upper and lower plate then anything that doesn't do that is going to have to have duplicate hardware um it's going to weigh more it's going to cost more um and then the same goes for the front and rear castings um i mean we're clearly frank we're trying to make the car like you'd make a toy um you know if you had

a toy model car how would and then it's got to be real cheap and look look great um how would you make that you cast it that's how it's done it would be absurd to make it up of tiny little pieces of of stamped metal uh joined in complex ways so it's sort of a natural thing to do and then the same goes for using the energy storage the battery as a structure which is done for aircraft wings and for rockets with the early rockets and aircraft they they had a separate aeroshell from the propellant tanks or fuel tanks and and then they realize that doesn't make sense and you've got to integrate you've got to have your fuel tank in wing shape you've got to have your propellant tanks in the shape of the body of the the rocket for example um you don't want to

put a box on a box basically uh so you know it's so which over many years made it like basically uncompetitive to have an aircraft that has separate fuel tanks uh for from the wing the wing the wings need to be feeling um but like i wouldn't think of this as like it's like an overnight transition it's several years uh if but but then like i said over time it just it would be competitive to have a different architecture in my opinion thank you very much unfortunately this is all the time we have for the q a today i appreciate all your great questions and we'll speak to you again in about three months thank you goodbye thank you ladies and gentlemen this concludes today's conference call thank you for your participation [Music] you