Tesla Q3 2020 Earnings Call 21 octobre 2020 Musk et le directeur financier Zach Kirkhorn évoquent le trimestre record de Tesla, le Full Self-Driving et l'expansion des usines lors de l'appel sur les résultats du troisième trimestre 2020.
Musk et le directeur financier Zach Kirkhorn évoquent le trimestre record de Tesla, le Full Self-Driving et l'expansion des usines lors de l'appel sur les résultats du troisième trimestre 2020.
Transcription Operator
Sa. Sam. Sa. It. It's sa. It's. Sa. Sa. Sam. It's. It's sa. Sa. Ladies and gentlemen, thank you for standing by and welcome to the Tesla Q3 2020 financial results and Q and 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 one 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 Vieja, Senior Director of Investor Relations. Please go ahead sir.
Investor Relations
Thank you Sherry and good afternoon everyone. Welcome to test 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 1pm 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 and A, Elon has some opening remarks.
Elon Musk
Thanks Martin. All right, so Q3 was our best quarter in history. We achieved the record production, delivery, record revenue, record net income, both GAAP and non GAAP and record free cash flow of $1.4 billion. 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 so we hosted our plans for how we can expand the future and improve core battery technology, core cell technology at the form factor level, chemistry level, and I think most significantly at the manufacturing technology level. 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'm quite confident this will be what happens. So we presented what the team's been working on for a long time. Batteries. We wanted to step back and really rethink batteries from scratch first principle thinking, just look at the fundamental physics and say what? Rather than compare to other parts in the market, just say from a physics Standpoint, if you what's the limit of physics? What's the platonic ideal of a perfect cell and how close can we get there? And that was our aspiration and I think we've got a pretty good approach to it which will only get better over time. And we went through all of the engineering solutions for every important part of battery design and production and we'll continue to iterate on that and just recursively improve the core cell and battery technology. The result we think 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. I spent a lot of time with the autopilot team and there's a lot of really talented people on that team who worked incredibly hard to make the, to get the beta release out. So I just really like to thank them for their hard work and it's just a very smart group of people. So I think we're starting very slow and very cautiously because the world is a complex and messy place. And so we put it out there last night and then we'll see how it goes and then 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. So 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 it questions all the time and clicking on particular links. So it's got this great feedback loop and 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. This is the thing that is really valuable. It's not like the obvious stuff, obvious stuff you can do in simulation, weird corner cases. Only reality 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 and look for examples so we can then train against those examples and improve some very esoteric corner case. And also important to emphasize that this is a generalized neural net based approach. There is no need for high definition maps or a cell phone connection. So the Car. The 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 three major factories. We're continuing to expand Shanghai significantly, which is going incredibly well. The Tesla China team is just, I mean, incredibly good, super smart, work hard. It's like I'm always amazed by how much progress the Tesla China team makes. It's beyond all reasonable expectations. And then we're under construction in Berlin and Austin, so. Also making good progress there. Yeah, it's overall going well. I should make the point that for Berlin and Austin we do expect to start delivering cars from those factories next year. But because of the exponential nature of the spool up of a manufacturing plant, especially one with new technology, it will start off very slow at first and then become very, the upper will become very large. Just in general, manufacturing follows the S curve. And, 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 period of time, especially for new technology. So yeah, I'd say 12 to 24 months even. So generally what I see is the manufacturing capacity is underestimated in the beginning for quite some time. Then it is sometimes overestimated because this is an S curve. It goes exponential to linear to logarithmic. And it's actually an incredibly hard thing just bringing a production plant to volume technology because you can actually think of it like you've got two first order approximation, 10,000 unique parts of processes, all of which operate on an S curve and with a bunch of uncertainty and you can just slide 10,000s curves on an X axis. And that's what bringing up a large automotive plant is like. And which one's 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. So let's see. In conclusion. Thank you. All we've achieved would not be possible without the incredible hard work of tens of thousands of Tesla employees. And all the people at our suppliers as well like to thank our suppliers we continue to grow as fast as we can while focusing on cost control and improving quality. And ultimately the best company will be that which makes great products at an affordable price. And that is our goal. I think I've never felt more optimistic about the future of Tesla than I than I do today. Also like to thank investors who stuck with us through thick and thin. This is. I think there's a lot more good stuff to come. All right, with that, we can move to questions.
Investor Relations
Thank you, Lim. I think our CFO Zachary Kirkhorn has some opening remarks as well.
Zachary Kirkhorn (CFO)
Thanks, Martin. Overall, our financial health continues to rapidly improve, with Q3 being another great quarter on nearly all dimensions. As Elon has mentioned mentioned, on net income, we achieved our fifth sequential quarter of profitability, our best net income and nearly double digit operating margins. 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%, with some of our programs achieving 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% 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 across the fleet services and other margin improved yet again driven by our used vehicle business and efficiencies in our service operations. In the energy business, we achieved record storage deployments, aided by the positive reception of the Megapack 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 14.5 billion, which includes free cash flows of 1.4 billion, our 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
Tesla Executive
of our core operations.
Zachary Kirkhorn (CFO)
Capital expenses grew to 1 billion driven by model Y investments in Shanghai, Berlin and Austria. In as for previous investments in Model 3 Shanghai and Model Y in Fremont, we are 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 2 to 2.5 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 and 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
Tesla Executive
Model Y in Fremont.
Zachary Kirkhorn (CFO)
Financing cash flows were 4.5 billion as we reduced use of our working capital lines, offset by a 5 billion equity raise in September. Note that we're currently expecting over a billion in early convert paydowns 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 companies.
Tesla Executive (Energy)
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 we're poised for continued strong growth in energy storage and solar. Megapack 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 a 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 costs which will further displace existing and new fossil fuel generation. This is true for stand alone storage as as well well many customers are utilizing Autobidder 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 sided 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 a watt after tax incentives 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 entire energy business including service to capitalize on the technology backbone of the company. 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 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.
Investor Relations
Thank you very much everyone. And let's begin with questions from set.com the first question from retail shareholders is if 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?
Elon Musk
Yes. Drew, do you want to take that?
Tesla Executive
Sure, sure. Yeah. We will incorporate 4680 design solutions into many applications in time across both energy and vehicle. And we can use our pilot production facility in Fremont to support the new factory in Berlin as it ramps.
Investor Relations
Thank you very much. Let's go to the next question, which is 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?
Tesla Executive
Yeah. The fundamental limitation on charge rate and lithium ion batteries is avoiding lithium plating on the anode. And while the tablet's 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. Electrode design and anode material choice more directly determines the maximum charge rate and how to avoid that lithium plating problem.
Investor Relations
Okay, thank you very much. The third question from retail is would FSD be able to be transferred to our next vehicle or pay a transfer fee? It would add a broad, it would add to a brand loyalty. The same way gaming companies and cell phone companies keep you in their ecosystem system by letting you transfer purchases to upgraded hardware.
Elon Musk
Yeah, I think we'll give it some thought.
Investor Relations
Okay. The fourth question is what are the remaining constraints to be solved for solar roof installations to ramp significantly? Carl?
Carl Peterson
Yeah, this is Carl Peterson. 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 this 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 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.
Elon Musk
Thank you, Carl. 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 future decade from now, you know, what do you want? What products are going to make your life better? What future do you want? And I think a Future where we've got beautiful roofs with generating energy that are top and resilient and better in every way than a regular roof and alive with energy. That's the future we want. Solar roof is a killer product. This will become obvious next year.
Investor Relations
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?
Investor Relations
Could you envision any of them ever spinning out from Tesla?
Elon Musk
Well, as thinking 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, every new big new plant is a startup. And sometimes, frankly, we have to learn the lesson a few times before it sinks in. Even things like service and sales are setups. 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 really even know much about is our internal applications team that writes the core technology that runs the company. We are not dependent on enterprise software. Like, for those who understand what this means, this is a very big deal. And my hat is off to the great work of the internal applications team. They write the Nova system, the operating system of the company, the Tesla operating system. Extremely fundamental. Obviously insurance is substantial. So insurance could very well be 30, 40% of the value of the car business, frankly. And as we've talked about before, with a much better feedback loop, instead of it being statistical, it can be specific. Now obviously somebody does not have to choose our insurance, but I think a lot of people will. It's going to cost less and be better, so why wouldn't you? And the whole autonomy thing as a startup, the computer chip was designing our own computer chips was a startup, obviously cells startup, designing and making our own power electronics for the drive unit, 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, that it's a whole chain of startups and they're like, well, you didn't do that before. Yeah, we're doing it now. 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 of them fail. So so far so good. No plans to spin anything out. That just sounds like added complexity.
Investor Relations
Thank you very much. Let's go to institutional investor questions. The question number one is, as a bridge to the route hailing network, could you leverage the insurance product to give customers the ability to rent out their vehicles via the app, thereby enabling the car to make money for them? So, basically, proprietary version of two roads.
Elon Musk
I think we're going to focus on enabling the robo taxi system. So you can just basically, like, that's really quite a small subset of the overall robotaxi or robocar thing, where you can have the car be autonomous for you, you can have the car be shared with friends and family, 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 Lyft driver, you could be managing, you know, a fleet of 10 cars. This sort of seems like a, you know, shepherd tending the flop type of thing. It's like you just get way more leverage. So, you know, I think that's sort of. We could do that and it wouldn't be very difficult, but we're going to just be focused on just having an autonomous network that has sort of elements of Uber, Lyft and Airbnb. Yeah.
Investor Relations
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 unsexile. Could you elaborate on hints that H Vac advances with a Y could also find use in a domestic system?
Elon Musk
Yeah, yeah, go ahead, Drew.
Tesla Executive
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 heat pump system was learning how to build a tightly integrated system capable of moving heat heat to and from anywhere, really. Powertrain, battery, cabin, the environment, outside, ambient temperatures all the way down to like negative 20C, so 30C. And that's definitely applicable to the home's needs of heating and cooling the home and the water in your house. So certainly applicable, Elon.
Elon Musk
Yeah, absolutely. I think for heat pump 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 and the battery pack itself. Of course, I think there's potential for an integrated home system that kind of does power generation, storage, heating, cooling, air filtration, you know, water purification in a really tight package. We don't actually have like a prototype or anything, but I think Conceptually, that is something that would be probably good to have.
Investor Relations
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?
Elon Musk
Well, we want to make our cars more affordable and it's always important to separate out affordability from value for money. If the car is too expensive or given product is too expensive and people don't have enough money in their bank account, they simply can't buy it no matter what the value proposition. So it is important to lower the prices in order to such that people can literally just have enough money to buy it. 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, but also improve our cost of production. Obviously we get hopefully a little bit better every year, sometimes a lot better. And in terms of margins, all of these margins are going to look pretty comically small when you factor in autonomy.
Zachary Kirkhorn (CFO)
Yeah, two things I'll add to that,
Tesla Executive
without a doubt. We're moving forward to push as much volume as we reasonably can. So Elon talked through earlier kind of how the S curve in the timeline of incremental factories looks like. And so we're moving full speed ahead with as much volume as we can reasonably move forward with.
Zachary Kirkhorn (CFO)
The second comment I'd make is if you just look at the journey of
Tesla Executive
the company over the last year and a half, we have grown volumes and
Zachary Kirkhorn (CFO)
grown gross margins despite a number of
Tesla Executive
price reductions over that period of time. And we have 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 improve the value of the vehicles at the same time. So in addition to reducing the cost of the car, we're making the cards better. And that's the formula to sell the volume. That's what we're focused on.
Investor Relations
Thank you very much. The fourth question from Institutionals is at what point do you expect to have enough internal or external battery capacity to start ramping up stationary storage deployments again?
Elon Musk
Yeah, we're ramping up stationary storage a lot. So I mean it's approximately doubling that. We expect it to approximately double next year. So that's pretty good. And hopefully we can accelerate that in years to come
Tesla Executive
and approximately doubling it this year too. So the growth.
Elon Musk
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 turning Jupiter into cells.
Investor Relations
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 your ability to hit your model Y production volume targets in Berlin and Texas?
Elon Musk
Yes, I think we've tried to de risk 2021 so that there's almost no dependency on our internal cell production. It's very, very small. The internal cell production will help US ramp in 22, but we're not dependent on it for 21.
Tesla Executive
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 provide rapid feedback to the design of both the product and the equipment.
Elon Musk
Yeah, our pilot line is pretty big as pilot lines go. It will be in the top 10 cell factories on Earth, I believe.
Tesla Executive
Yeah, that is true.
Elon Musk
I'll subscale one,
Investor Relations
thank you very much. And now we can go to questions from analysts online.
Operator
Cherie, thank you again. We remind you to please ask one question and one follow up question. Our first question will come from Rod Lachey with Wolff Research. Please go ahead.
Analyst
Hi everybody. Just wanted to ask about the targets from your battery day. Look like you could be approaching something like 20 million vehicles by 2030. If you hit those goals. Could you maybe share with us a little bit more of a midterm target, like where would you be by 2025 and maybe give us a little bit more insight into the investment required to get there just to put that extra 2 to $2.5 billion per year into contract.
Elon Musk
Yeah, I mean I think the tricky thing with trying to predict things midway through an exponential is that if things are doubling every year or Even just growing 50%, then if you shift one plus minus one year, it has a huge effect on the number. So then it sounds like, wow, you either massively exceeded or massively undershot. But actually what's going on is a giant S curve. So a whole bunch of pretty big S curves that integrate into a gigantic S curve. So that's why it's difficult to predict the Middle. And I'm not saying for sure we'd hit 20 million vehicles, but it does seem like a good goal to have because that would mean that we're replacing 1% of the global fleet per year. And it's difficult to say that we're. Are we really changing the world if we're not switching out 1% of the global fossil fuel vehicles? I mean, I'm not sure that we can make that argument unless we change at least 1% of the vehicles per year. So that's where the 20 million vehicles per year comes from. It's like 1% of 2 billion vehicles, which is the global fleet. Currently, the global fleet is growing, so probably be a bit bigger in the future. So, you know, it's hard to say. It's like, I don't know, map an S curve to a $20 million, 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.
Analyst
And just secondly, if solid state lithium metal were to become viable, could 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 for changes in technology?
Elon Musk
Yeah, I mean, answering the first,
Elon Musk
cell production system is fairly agnostic on anode, cathode, electrolyte, Subaru, that kind of thing. It's. We could change and we will change and upgrade the all aspects of the cell. So we could, for example, make iron phosphate or nickel, manganese or something like that. It's quite adaptable. So I wouldn't say it's too much to worry about the lithium like a pure lithium anode is maybe not, it's not as. It's not as great as it may sound, you know. Yeah. Volumetrically you're not gaining all that much because if you've got nothing on the, let's say, on the anode side and just played out lithium, it's got to go somewhere. So you've got to have room for.
Tesla Executive
Lithium is less volumetrically dense in the pure metal form than it is in turculated into silicon. So it's kind of hard to understand, but that's the truth. 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 removing the anode material isn't super high either. So. So, yeah, I totally agree, Ilan.
Elon Musk
Yeah, exactly. But if it should turn out that a pure Lithium anode is the right move. That would simply. That would be no problem, Right, Agreed.
Analyst
All right, thank you.
Investor Relations
Thank you. Next question, please.
Operator
Our next question will come from Colin Rush with Oppenheimer. Please go ahead.
Analyst
Thanks so much, guys. You're talking about insourcing a number of processes. Can you talk a little bit about which processes you're moving in house, in equipment that you're planning to make yourself versus buying from other folks.
Elon Musk
So are you talking about the. For cell manufacturing or something or.
Analyst
For sure, as well as on the molds that you talked about. But you know, in terms of the capex budget that you mentioned earlier, talking about, you know, the number of processes coming in house and which equipment pieces you're planning to make yourself versus buying.
Elon Musk
Okay, well, I mean, Tesla is absurdly vertically integrated compared to other auto companies or basically almost any company. We have a massive amount of internal manufacturing technology that we build ourselves. We literally make the machine. In fact, we design. It's 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 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. You have to. There is no catalog. So we made the machine that made the machine that made the machine. No, no, we don't want to get carried away here, but. And quite frankly, we would like to outsource less. That would be great 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 we can have them do something else. But yeah, it's like we just make a crazy amount of machinery internally. Not well understood. If you walk around the factory, get a sense for it and yeah, I don't know if this is like a smart move, but I just know, like, hey, if we're trying to make progress and nobody's got the machine that we need, we got to make it. So that's what we do.
Analyst
Okay, and 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 cushion at this point, you know, and obviously there's opportunities around insurance to drive up some of the cost of ownership as well as financials how are you guys thinking about that as you move into trying to accelerate demand a little bit and your ability to leverage your access to capital, enable some of those other products? Is that changing from where you've been in the past?
Elon Musk
Yeah, something like insurance is a good example of a product that's basically made by our internal applications team. So 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. It's pretty low capital but has very high return. I don't know. 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 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, but trying to waste, not waste too much of it, this is very difficult. 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.
Operator
Thank you. Our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.
Analyst
Hey Elon, question on lidar. If LIDAR were totally free, would you want to use it in your cars near term? Would that tech significantly help Tesla and the training of your neural network for fsd?
Elon Musk
I mean, totally free? Probably not. I think, probably. I think even if it was free, we wouldn't put enough.
Analyst
Okay, let's follow up then. Amazon appears to be investing and building an autonomous or electric transport network of some ilk through some organic investments, but also Zoox, Aurora, Rivian, et cetera. What advice would you give Jeff Bezos in his endeavor?
Elon Musk
Well, I don't know how much he cares about this, but I guess he sure is investing a lot of money in it. I mean, I think he also needs to vote for if you care about autonomy. And he's focused on vision because the entire road system is based on passive optical. So you have to solve passive optical to have a self driving system that is a generalized solution. And once you solve passive optical, you've solved self driving, so why bother with anything else.
Investor Relations
Thank you. Let's go to the next question, please.
Operator
Our next question will come from Pierre Faragu with New Street Research. Please go ahead.
Analyst
Hey, thanks a lot for taking my question. A very simple one. You haven't talked that much about like the cybertruck today and I was wondering how like the ramp of that product is looking like when we, when we should See the product hitting the road and how fast you expect to ramp volumes. Can I have a quick follow up? Sure.
Elon Musk
I was in the studio actually last Friday with Franz and the team just going over. Some improvements to the cybertruck. Generally at Tesla, we really aim to make the car that is delivered better than the car that is unveiled because it always drove me crazy. Car companies would unveil these awesome looking cars and you're like, great, can't wait till I make that. And then the car they actually make is like much worse and that is just, it's like really disappointing. So, man, we always want to make the car that we deliver be better than the car we unveil. And that's the goal with the cybertruck. So there's like a lot of small improvements compared to what was unveiled. I think it's going to be better than what we showed and yeah, that's cool. It's going to be made in Austin, so this can depend on completing that factory. And there are obviously new technologies with the high hardness kind of armored exoskeleton. This has never been done before. So there'll probably be some challenges along the way. Obviously something that's extremely high hardness and difficult to scratch or dent is also difficult to form. So there's manufacturing challenges there. That's why it's so planar. Although it also looks good, I think from a planar standpoint. Yeah, if all goes well, we will be able to do some cybertruck deliveries towards the end of next year. Yeah. So it's difficult to predict. I'd say there's probably a lot of deliveries in 22 and some deliveries towards the end of next year if things go well.
Analyst
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 a million units. And so, so am I right thinking next year we should expect you to deliver like somewhere like between 840,000 and 1 million cars during the year.
Zachary Kirkhorn (CFO)
Yeah, we'll provide guidance on 2021 after next earnings call.
Elon Musk
I mean it's in that vicinity. Yeah, you're not far off.
Operator
Thank you. Thank you. Our next question will come from Dan Levy with Credit Suisse. Please go ahead.
Analyst
Hi, good evening. Thank you. Just wanted to start with a question on the quarter. Zach, maybe you could give us a sense of 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 FSD revenues just puts and takes on the gross margin in the quarter?
Tesla Executive
Sure. On your question about fsd, there was a small amount of deferred revenue released. It's not particularly material in the the $10 million range for the quarter. With respect to product margins, 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 ramp that. But we've guided in the past that Model Y cost should be roughly equivalent to the Model 3 built in Fremont. Cost, 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 Shanghai margins, 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.
Analyst
Great, great, thanks. And then this is a follow up. I wanted to ask about your strategy in Europe and I think your strategy generally has been you cut costs. So that allows you to cut price and you can generate the extra volume. And I think that's what we're seeing in China, the use of lfp. 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 incremental reg credits. So you know, margins out of the gate that are a little low but you know, that are then used for the reg credits that, you know, help to offset that.
Tesla Executive
Yeah, but what I think I would say generally to the question is, I mean, we've been in a position for some time now where we are prioritizing where in the world we send our product 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. 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. There are. Yeah, I think that gets at the sentiment of your question.
Investor Relations
Okay, let's go to the next question, please.
Operator
Our next question will come from Gene Munster with Loop Ventures. Please go ahead.
Tesla Executive (Energy)
Good evening.
Analyst
Question on the semi. Elon, 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.
Elon Musk
Well, actually. Jerome, do you want to answer that?
Elon Musk
We continue the development of the semi and in particular Mega Chargers. We realized that 350 kilowatt 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 powerful than that that can achieve essentially charging as fast the semi as 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 the semi. That's the goal. We're working with other parties to make sure that there is a standard infrastructure that will be able to be deployed for all customers. Yeah, probably all I can say at this point. Yeah, we're not working on. Sorry, go ahead. 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 trying to invent something that could be helpful for everybody. Yeah. Just a note on the sort of semi. The semite does consume a lot of cells. So it's call it four to six times more than a passenger vehicle, maybe call it 5,5ish times. So if we are cell constrained, it is. It's difficult to ramp up the semi because there's no cells. So we need to solve the cell constraint before ramping semi to significant volume. That's the only real constraint on semi progress. And we found over and over again we just kept running into cell production limitations. And then we're just taking things out of one pocket and putting them in another. So we just need more cells so that we can do more stationary storage, more vehicles, more vehicle lines. We need more cells.
Analyst
So makes sense a question. Just as you think about, you know, you've talked about Robo taxi and how you think that's going to impact kind
Tesla Executive (Energy)
of humans moving around.
Analyst
How do you think about semi impacting freight longer term? I mean, is this something that is nice to have and a complement to all of your tech in new markets or do you think that this could be a material business?
Elon Musk
I think it's very material, for sure. 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. The technology that we're putting in semi is identical to what we're putting in the other vehicles. Yeah, it's just bigger and more motors.
Investor Relations
Thank you. Let's go to the next.
Operator
Our next question will come from Ben Callo with Baird. Please go ahead.
Analyst
Hey, thanks for taking my question, Elon. What do you think the biggest structural issue is with the, let's call it old school OEMs, or one or two of the structural issues for them not getting their act together and catching up with you? And then you mentioned what we want the world to look like ahead of us. What do you envision that is like just Tesla or Tesla and Rivian or. Thanks.
Elon Musk
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 what other car companies do, even in the auto segment, is quite a small subset of what Tesla does. So Tesla, we design and build, we're very vertically integrated. So we're designing and building so much more of the car than other OEMs who will largely go to the traditional supply base and like catalog engineering, you know, so it's not very adventurous. 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. The limitations in 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 and you have to make the machine that makes the parts. So Tesla is like, we probably, we might be an order of magnitude more vertically integrated than other car companies. And if we're not now, we certainly will be. And then we also, we also have to create our sales and service and distribution system in something on the report. 40 countries. At some point it will be over 100 countries. Whereas the other car companies do not own their sales and service and distribution. So they kind of assemble parts from a supply base and then hand them to a dealer base. So it's just like, it's not just. 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.
Investor Relations
Thank you. Let's go to the last question, please.
Operator
And our final question today will come from Philippe Houchois with Jeffrey. Please go ahead.
Analyst
Yes, thank you for taking my questions. I've got two.
Elon Musk
The first one for me is try
Analyst
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 in 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 hardware could have been sold at a higher price. I'm just wondering if you have shared views on where the business model is going.
Elon Musk
Yeah, I think you're probably right about that. RJ and Zach, what do you guys think?
Tesla Executive (Energy)
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. It's going to be at the residential level as well as the wholesale level. So you know, Megapack on one end and then Powerwall on the other side. Those two working together in tandem. And the software layer on top of it, Autobidder being that, that really is going to help make the grid more efficient using the hardware, platform and software together.
Tesla Executive
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.
Analyst
Okay, thank you. And the follow up question I had was during the battery day you talked about this cell vehicle integration approach. Very interesting. And when I look at think about looks like this means that the skateboard design that Tesla pioneered and many of your followers are using is going to become obsolete. Or am I not thinking about it the right way?
Elon Musk
It will be obsolete long term. Yes, but I mean, yes,
Elon Musk
several years from now. It's not like existing cars stop having value. It's just that if you have a structural pack where the pack is contributing structural value to the car because of the composite honeycomb effect of sheer transfer between an upper and lower plate, then. And anything that doesn't do that is going to have to have duplicate hardware. It's going to weigh more, it's going to cost more. And then the same goes for the front and rear castings. We're trying to make the car like you'd make a toy if you had a toy model car. It's got to be real cheap and look great. How would you make that? Your cast? That's how it's done. It would be absurd to make it up of tiny little pieces of stamped metal 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. The early rockets and aircraft, they had a separate error shell from the the propellant tanks or fuel tanks. And then they realized 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 rocket. For example, you don't want to put a box on a box, basically, so, you know, which over many years made it basically uncompetitive to have an aircraft that has separate fuel tanks from the wing. The wings need to be fuel tanks. But I wouldn't think of this as like an overnight transition. It's several years. But then, like I said, over time, it just won't be competitive to have a different architecture, in my opinion.
Investor Relations
Thank you very much. Unfortunately, this is all the time we have for the Q and A today.
Elon Musk
Appreciate all your great questions, and we'll
Investor Relations
speak to you again in about three months. Thank you. Goodbye.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Sam.