Tesla, Inc.

Ladies and gentlemen, and welcome to the Tesla Q1 2018 financial results and Q&A and webcast call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference may be recorded. I would now like to introduce your host for today's call, Mr. Martin Vieca, Senior Director of Investor Relations. Sir, you may begin.

Thank you, Cherie, and good afternoon, everyone. Welcome to Tesla's first quarter 2018 Q&A webcast. I'm joined today by Elon Musk, J.B. Straubel, Deepak Ahuja, and Doug Field. Our Q1 results were announced at about 1 p.m. Pacific time in the update letter 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 1 now if you would like to join the question queue. Before jumping into Q&A, Elon has some opening remarks. Elon?

I think our letter says most of it. But I think we're going to spend extra time on Q&A and try to answer as many questions as possible. I think we should really answer. So we're going to go as long as there are good questions to answer. The thing I'm most excited about is the rapid increase in output. We've got just in the last 24 hours at Gigafactory managed to achieve a sustained rate of over 3,000 packs per day, sorry, per week, and actually reached the peak hour if extrapolated outward, would be a rate of over 5,000 cars per week. Obviously, you can take a peak hour and assume every hour is as good as the peak, but if you can achieve it even once in an hour, then with continued refinement of the system and improved operational uptime of the machinery, it means that you can achieve that sustained rate with more refinement. So you spend essentially a month or two improving the operational uptime, and the system as a whole will be able to do well over 5,000, I think. And what's interesting is that, at least in the case of pack production, we were able to do this with minimal capex. And I think in general our understanding of production is improving dramatically, exponentially in fact, and we're seeing ways to achieve improved volume with dramatically less capex. By simplifying the production line, by really engaging all of our associates, no matter how junior, in improving the way that parts are made. It's amazing how everybody's got good ideas, just needs to solicit those ideas and implement them. And then making ongoing design improvements so that when we discover that something is not well designed for manufacturing, that we very quickly change that part design and introduce that into the flow. One of the things we've also found is that there's some things that are very well suited to manual operation and some things that are very well suited to automated operation. And the two should not be confused. So I should be clear that the vast majority of the test production system is automated. However, as I mentioned in a tweet a few months ago, We did go too far on the automation front and automated some pretty silly things. One example would be we had this sort of ironically foolish. We had these fiberglass mats on the top of the battery pack. They're basically fluff. So we try to automate the placement and bonding of fluff to the top of the battery pack, which is ridiculous. So we had FlufferBot, which was really an incredibly difficult machine to make work. Machines are not good at picking up pieces of fluff. Hands are way better at doing that. So we had a super complicated machine using a vision system to try to put a piece of fluff on the battery pack. One of the questions asked was, do we actually need that? So we tested a call with and without and found that there was no change in the noise volume in the cabin. So we actually had a part that was unnecessary for which the line kept breaking down because FlufferBot would frequently just fail to pick up the fluff or put it in a random location. So that was one of the silliest things I found. We were also, and this still remains to be fixed in a lot of cases, but we were overgeneralizing the design. So, for example, the current battery pack has a port for the front drive units, which we then put a blanking plate, a sealed blanking plate on So essentially, we punch a hole in it, then put a blanking plate over the hole, and do that for all rear drive unit cars, which is kind of crazy. We've added cost. We've added a manufacturing step. We've added a failure mode for something that is unnecessary. So that is an example of something that's changed. Anyway, the result is we've had a radical improvement in production. Battery pack production went from taking seven hours to make a pack three weeks ago to under 70 minutes now. So just to show that really radical improvements are indeed possible. We also saw enormous improvement in zone four of module production. This, I should point out, is a fully automated zone. And we're able to also achieve a sustained rate of 3,000 vehicles a week. So we're actually slightly ahead in battery module and pack production than expected. And with some work at the Fremont vehicle plant, primarily in the general assembly area, I'm confident we will very soon exceed the 3,000 mark. in Fremont. So we're already there in the body shop, which is also almost entirely automated, where we weld up the body. They were already capable of over 3,000 cars a week. And then a general assembly with some improvements, which will include reduction, at least I should say temporary reduction in automation in a few places, then we should be over 3,000. So basically I'm feeling really good about the Tesla production of Model 3. And I'm very proud of the work the team has done. It's been an amazing amount of hard work and sacrifice by some very talented people to achieve this outcome. It's worth noting the you see a chart in the Model 3 market share versus competitors in mid-size premium sedans. We are almost the best-selling sedan in the United States in this category as of April, and we will certainly be there in May. And that's something really odd. I mean, we'll be there in May, and then and they'll really be there later this year. In the third quarter, I think there's a good chance Model 3 gets maybe close to a majority market share of midsize premium sedans. 40% seems likely, and maybe a majority market share later this year. This is coming from a standing start against a lot of established brands who have far more sales outlets than we do. So this is very encouraging. Oh, and yeah, as the letter says, I'm feeling quite confident about achieving gap in income and positive cash flow in Q3. This is not, you know, a certainty, but it does appear quite likely in my view. We are going to conduct sort of a reorganization, restructuring of the company this month. and make sure we're well set up to achieve that goal. And in particular, the number of third-party contracting companies that we're using has really gotten out of control. So we're going to scrub the barnacles on that front. It's pretty crazy. We've got barnacles on barnacles. So there's going to be a lot of barnacle removal.