Tesla, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to Tesla's Q4 2019 Financial Results and Q&A Webcast. At this time, all participants are on 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker, Mr. Martin Vieca, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Sherry, and good afternoon, everyone. And welcome to Tesla's fourth quarter 2019 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q4 results were announced at about 1 p.m. Pacific time in the update deck we published at the same link as this webcast. During the 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'd like to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thanks, Martin. So Q4 was another strong quarter for the company. Deliveries reached over 112,000 vehicles in a single quarter. It's hard to think of a similar product with such strong demand that it can generate more than $20 billion in revenue with zero advertising spend. We do say that from time to time, and I think it's often overlooked, but to have... The highest demand electric vehicle in the world with no advertising spent is, I think, quite remarkable and speaks to the nature of the product and the fact that the product itself is compelling enough to generate that demand without a bunch of advertising. At our Fremont factory, we were producing at a rate roughly the same as the Numi factory did in its record year of 2006. And obviously, we expect to exceed that significantly this year. This rate of production was achieved before we even started to produce the Model Y out of Fremont. So there's a lot of potential to go beyond that number. For the Shanghai factory, I'd like to say congratulations again to the team in Shanghai on launching Model 3 last quarter and achieving the first deliveries earlier this year. I'm really excited and optimistic about the potential for the Shanghai factory. I think it's going to be an incredible asset to the company. And we also broke ground on the Model Y factory in Shanghai. So a lot of good progress there. Regarding Model Y, it was only 10 months ago that we revealed a Model Y prototype. And now in January this year, we started producing Model Y in limited volumes already. This is thanks to a great effort of our engineering team. And we managed to achieve by far the highest energy efficiency of any electric SUV ever produced. at 4.1 miles per kilowatt hour, which means Model Y four-wheel drive got an EPA rating of 315 miles. This improvement is reflected on the configurator as of today. This is above what we previously stated by a pretty significant margin. And just with great acceleration, top speed, it's really just incredible specs all around. For the Cybertruck, a few months ago we revealed the Cybertruck that went viral. And we tried to build a product that is superior in every way without any preconceptions of how such a product should look. So it's really just from the standpoint of what's the most badass, futuristic, armored personnel carrier that kicks the ass of any pickup truck, basically. That's the goal. We wanted it to look like something that just came out of a sci-fi movie set from the future. The demand has been incredible. We've never seen actually such a level of demand at this. We've never seen anything like it, basically. I think we will make about as many as we can sell for many years. We'll sell as many as we can make. It's going to be Pretty nuts. And I think actually the product is better than people realize even. They don't even have enough information to realize just the awesomeness of it. It's just great. And then stepping back in 2018, from a financial standpoint, free cash flow was break even. But in 2019, we managed to generate more than a billion dollars free cash flow while building a factory in Shanghai in record time and while building parts of Model Y in production. So I think for us to have this level of free cash flow while making massive investments in capacity, while developing new products, while improving the core engineering is a testament to the, I think, incredible performance of the Tesla team. And I'm just so proud to work with such a great team. I'd like to thank the whole Tesla team for their ongoing work on cost control is what has allowed us to get to these compelling financial numbers while at the same time growing the company at an incredible pace. In conclusion, when I think of what we have in front of us the next couple of years, we've got Model Y, we've got Giga Berlin, Tesla Semi, solar glass roof, Cybertruck, some very exciting improvements in back battery technology, full self-driving, got the next-gen Roadster, and probably a bunch of other products we'll come up with, too. It's hard to think of another company that has a more exciting product and technology roadmap. So, super fired up about where Tesla will be in the next 10 years. If you look back 10 years from today to 2010, we will produce approximately 1,000 times more cars in 2020 than we produced in 2010. And we have also solar glass and solar retrofit and Powerwall, Powerpack, all those other things, too. So where will we be in 10 years? Very exciting to consider the prospect.

Thank you very much, Elon. And Zach has some opening remarks as well.

Yeah, thanks, Martin. This past year was truly transformational for Tesla, and I want to thank everyone who's been a part of making this happen. On 2019, a few key points I'd like to highlight. On demand, while we've mentioned this a few times, it's worth highlighting once again. Over the course of the year, we've transitioned entirely from generating Model 3 orders from a reservation backlog to generating new and organic demand. We've also seen a stabilization of Model 3 ASPs, even increasing slightly in Q4. And we've seen an increase in ASPs of SNX after the launch of the longer range versions in Q2. With respect to capacity expansion, we've greatly learned from the development and launch of Model 3 in Fremont and Reno. As a result, we've been able to bring new production capacity onboard faster and with less cost. This is evidenced by the launch of Model 3 in Shanghai as well as Model Y in Fremont, programs that were both launched in under one year. Financially, we have demonstrated multiple quarters of strong cash generation enabled through higher volumes, improvements to capital efficiency, progress on working capital management, and continued improvement in our product and operational costs. And we are able to achieve positive gap net income in both Q3 and Q4 for many of the same reasons that enabled strong cash generation. We've also made progress on recurring and software-based revenue with the implementation of premium connectivity and the beginning of upgrades available for purchase via the Tesla mobile app. Finally, on stock-based compensation, it increased sequentially by $82 million, driven almost entirely by an expense related to the next tranche of the CEO grant. This is a result of our improved expected financial performance of the company, which the CEO stop grant is tied to. As we look ahead to 2020, this again will be an important year for the company. Our task ahead is to execute on the next phase of growth while managing cash flows to support that growth. On Model Y, we expect first deliveries in limited quantities later this quarter and will ramp over subsequent quarters. As mentioned previously, we are forecasting higher gross margins on Model Y compared to the Model 3. This year, for the Shanghai-built Model 3, we expect to achieve run rate production and delivery rates. In addition, we expect to have completed the majority of planned supply chain localization at the factory or in the region. This is one of the most important components to achieve lower production costs for the site. We are also seeing strong order rates for the locally built Model 3 and remain focused on continuing the production ramp and managing costs. We also anticipate significant progress on factory construction of the Shanghai and Berlin built Model Y, which will result in continued increases in capital spending. On operating expenses, I expect an increase over the course of the year to support our growing product pipeline and international footprint. However, OPEX growth should increase at a lower rate than top line revenue. Overall, we believe this will set us up for our strongest annual financial performance yet, with sufficient forecasted cash flows to support investments related to our growth and further strengthening of our balance sheet. For Q1, please keep in mind that the industry is always impacted by seasonality. Additionally, we are in the process of ramping two major products, Model 3 in Shanghai and Model Y in Fremont, which I expect will temporarily weigh on our margins. We are also in the early stages of understanding if and to what extent we may be temporarily impacted by the coronavirus. At this point, we're expecting a one to one and a half week delay in the ramp of Shanghai-built Model 3 due to a government-required factory shutdown. This may slightly impact profitability for the quarter but is limited as the profit contribution from Model 3 Shanghai remains in the early stages. We are also closely monitoring whether there will be interruptions in the supply chain for cars built in Fremont. So far, we're not aware of anything material, but it's important to caveat that this is an evolving story. However, we have more than sufficient cash to continue our expansion plans while further strengthening the balance sheet. Thank you again for your support, and we will turn to questions.

Thank you. We are going to take the first questions from retail investors compiled by Say Technologies. So the first retail investor question is, since solar is required for all new home constructions in California, do you have any substantial orders for solar glass roofs from any of the large California home builders that you can share? What's the 2020 target for the number of solar glass roof installations in California?

Well, I think we are seeing, primarily from a small base, exponential growth in demand and output for the solar glass roof. So it's difficult to predict what the number will be this year, except that the demand is very strong. And we are working also not just through Tesla installers, but also through new home builders and through just the roofing industry in general, where there's in North America on the order of 4 million new roofs per year. So we see a lot of interest, and so it's just a question of refining the installation process, getting lots of crews trained to do the installation, but over time I would expect a significant percentage of of new roofs to beat something to use solar glass in one form or another. It's really going to be a choice of do you want a roof that is alive with power or dead without? And I think people will want a live roof that generates power and looks good and lasts a long time and it's the future we want. So it will be a significant product but because it is a new and quite revolutionary product and there's a lot of challenges to overcome. But they will be overcome, and this will be a major product line of Tesla. And the Buffalo factory is doing great. So, yeah.

Thank you. Second question from retail shareholders is, will you release the Tesla wild-hailing network app before full autonomy and change the terms of Tesla insurance to allow owners to be drivers on the network? If so, when will this happen? might want to target California Air Force first. Also a good place to add superchargers.

Sorry, that sounds like more question than one. Yeah, it's a bit of a bundle, yeah. Well, I think it probably will make sense to enable car sharing in advance of the sort of giant robo-taxi fleet because the car sharing can be done before of full self-driving is approved by regulators. So it's probably something that we would enable before the full sort of rubber taxi fleet is enabled. And it sounds like there were some other questions bundled in there.

Superchargers at airports?

Oh, sure. Yeah, probably we'll have superchargers at airports. We'll have superchargers wherever we see that there is a need for superchargers.

And then on the insurance part of the question, It is our intent to allow people to put their cars into ride sharing or the FSD network using Tesla insurance. That's not currently the case, but by the time that this is available, it's our intent to get that ready.

Okay. Thank you. Uh, the next question from retail investors is how many California owners are currently insured with Tesla insurance? What's the target for Tesla insurance in 2020? When will you start significant to significantly leverage the data you have from the fleet to lower the cost of your coverage? Will we get premium discount of certain percent? Yeah, I mean, go ahead.

Yeah. So Tesla insurance is currently available in California. A couple of things that we're working on on this front. The first is to expand it to other locations and we're preparing the regulatory processes, preparing our processes to go through the regulatory processes in those locations. We're also working on the processes to continue to adjust our rates in California, which also have to go through regulatory processes, as insurance is quite heavily regulated. And that's where we're spending our time focusing on Tesla insurance right now. There's a significant amount of innovation, as we've discussed before, in this space, exactly getting to the intent of what the question. Here is a using our technology to reduce rates, and this will be rolled in over time.

The last part of the question was, will there be a discount for using autopilot with our cars? Oh, yeah. Yeah.

There will be.

Yeah. The rate card for California Tesla insurance already considers the safety features associated with autopilot.

Right. But I think it would make sense for us to close the loop on higher use of autopilot really reduces the insurance costs. It lowers the probability of injury. I think insurance is going to be quite a major product of Tesla over time. The amount of money that people spend on car insurance is a remarkably big percentage of the cost of a car. You can lease a Model 3 right now for $400 a month, but a typical owner in California will be paying you know, somewhere between $100 and $200 a month in insurance. So we're talking about something which is maybe a quarter to half of the cost of the lease of the car is insurance. And a lot of that insurance cost is just because insurance companies don't have good information about the drivers and that there's no good way to provide feedback where, you know, it's a very poor feedback mechanism in terms of the insurance rates versus the actual way that the car is being driven, whereas we can do that in real time. It's a fundamental information advantage that insurance companies don't have.

Thank you. The next question is, you set expectations that you would be feature complete on FSD by the end of 2019. Can you please provide an update on when will we see this with end users, where are you in retrofitting the FSD computer to older models?

Well, I mean, to be precise, I said I was hoping it would be future complete with FSD by the end of last year. We got pretty close. You know, it's looking like we might be future complete in a few months. But future complete just means, like, it has some chance of going from your home to work, let's say, with no interventions. It doesn't mean the features are working well, but it means it has above zero chance. I think that's looking like maybe it's going to be a couple months from now. What isn't obvious regarding AutoPAD and full self-driving is just how much work has been going into improving the foundational elements of autonomy. The core autopilot and Tesla autopilot software and AI team is very strong and making great progress. And we're really only beginning to take full advantage of the autopilot hardware, the FSD hardware. So I think the The apparent progress as seen by consumers will seem to be extremely rapid, but actually what's really gone on in my head seems like having the foundational software be very strong, having a really strong foundation. And then a really fundamental thing is moving to video training. So in terms of labeling, labeling with video and all eight cameras simultaneously. This is a really, in terms of labeling efficiency, arguably like a three order of magnitude improvement in labeling efficiency. For those who know about this, it's extremely fundamental. So that's been great progress on that.

Thank you. And the last retail investor question comes from Kendall. Since most retail investors seem to understand Tesla better than analysts and are risking a larger part of their own personal wealth on Tesla, doesn't it make sense to take mostly questions on these earnings calls from us via SA? Do you even have to answer questions from analysts?

Well, I guess we don't have to. I do think that a lot of the retail investors actually have deeper and more accurate insights than... many of the big institutional investors and certainly better insights than many of the analysts. It seems like if people really looked at some of the smart retail investor analysts and what some of the smaller retail investors predicted about the future of Tesla, there would you'd probably get the highest accuracy and a remarkable insight from some of those predictions.

Okay, so now let's switch to institutional questions. The number one question is, you have spoken previously about Shanghai Giga being 65% lower CapEx per unit of capacity. Have you learned to do anything better or different from an OpEx perspective? NEVS, what kind of impact might we expect on the long-term gross margin?

The Shanghai factory has been a quite remarkable cost experience across all line items of COGS for the Model 3 there. We have talked a lot about the CapEx premium of capacity being lower, but you can basically run down the entire list of COGS between labor cost, a material cost due to localization, so it's opening up suppliers that would not have made economic sense from the states. Localizing the supply chain flows into inbound logistics and outbound logistics costs as well, so we're not shipping cars from California over to China. And then that has a corresponding savings on our lower import-related costs. And there's a slide in the shareholder letter that shows the layout comparison between our Fremont facility here in California and also the Model 3 factory in China. And the simplification in terms of the flow is pretty evident from that layout. And that cascades itself into all sorts of savings for the operations of the facility. And so if you add all of this up, our internal estimates are a pretty significant reduction in the cost of Model 3 in China relative to Fremont. But I think it's also important to keep in mind that the cost of the Standard Plus in that we're selling out of Shanghai is also lower than that of the similar car coming out of Fremont, from a price perspective. And so, and I've said this on previous earnings calls, I think it's fair to expect the margin coming out of the Shanghai facility to match the same margin for the vehicle in Fremont.

Yeah. I think there's a pretty big fundamental efficiency gain that Tesla has by just making cars, especially the affordable cars, three in a white, at least on the continent where the customers are. You know, it kind of makes sense. It's like what we're doing or have been doing in the past was really pretty silly in making cars in California and then shipping them halfway around the world to Asia and Europe. And this created a lot of cost because you've got to ship those cars, so you've got a lot of finished goods sitting on the water or waiting at the port or going through customs. You've got tariffs. transport. And then the factory complexity in California is very high because you've got different regulatory requirements in China, North America, and Europe. So we've got three different types of cars that are being built. It's very complex. And just having a factory in China, a factory in California, a factory in China, a factory in North America, a factory in Europe will Just that alone is a massive improvement in our fundamental operating efficiency. That, I think, is made up to be fully appreciated.

And also on working capital.

Yeah, absolutely.

Okay, the next question from institutional investors is, Given the recent run in the share price, why not raise capital now and substantially accelerate the growth in production, i.e., building gigafactories, investment in supercharger, and customer service?

Well, we're actually spending money as quickly as we can spend it sensibly. So if there's any sensible way to spend money, we are spending it. There's no artificial holdback on expenditures. Anything that I see that is... looks like it's got good value for money, the answer is yes, immediately. So we're spending money, I think, efficiently, and we're not artificially limiting our progress. And then despite all that, we are still generating positive cash. So in light of that, it doesn't make sense to raise money because we expect to generate cash despite this growth level?

No, I completely agree with that. I think some of our learnings during the Model 3 launch period where we grew too quickly and with too much complexity, and it held back our ability to continue to scale. And part of the journey that we've been on in 2019 is to unwind a series of unintentional bad processes that kind of accumulated in the company over time. And so that's kind of what contributes to the reduction in OPEX over the years as we get smarter about that. And now we've laid a good foundation, I think, and I agree with Elon that we're not holding back on the growth. I mean, we have two products, two vehicle products launching right now, and that will consume much of the bandwidth of the company to stabilize those over the course of the year. And then looking into next year, we have even more products launching, more factories. So we want to be smart about how we spend money and grow in a way that's sustainable so we don't fall victim to the mistakes I think we made a year and a half or so ago.

Yeah, absolutely. Okay, the next question we've already answered regarding autopilot timelines. So the following question would be, Can we please talk about cost control and OPEX sustainability in terms of growth versus gross profit growth? How did we achieve the recent OPEX trends, and how should we think about OPEX needs as we grow both vehicles and geographic workloads?

Yeah, I commented briefly on this in my opening remarks. We did see an increase in operating expenses from Q3 to Q4. even excluding the portion of that attributed to stock-based compensation. And when you double-click into that growth, it's supporting the Model Y program and also Shanghai program as well. And so I think we, as a company, are now at the point where we've learned a lot on cost efficiency, as I've just mentioned, and we've unwound a number of the processes that were not in the right place, including automating the things that need to be automated. And we'll continue on that journey But I think we're at a point now where OpEx will start to take up, at least if you look annually from 2019 to 2020, to support our international footprint and then the growth of the company. Our job is to grow that significantly slower than the pace of growth of revenue to improve the operating leverage, which we're very, very focused on.

Okay. And the last question from investors is, The sales of Model SMX have stayed flat for several quarters. The main reason is that they still use 18650 batteries. When will SMX use 2170 batteries? Manufacturing capacity of 18650 may be used for battery storage systems instead.

Sure. Well, actually, the core chemistry inside the 18650 cell has improved many times over the years. So it's really just a form factor as opposed to a core technology. So it's I think we're pretty happy with where the energy content is selling, the improvements in efficiency of the vehicle. We're rapidly approaching a 400-mile range for the Model S, for example. So it won't be long before Model S has a 400-mile range. Drew, is there anything you want to add to that?

No, other than to say that the 18650 lines have been running smoothly for a really long time. And in a world where cell supply is fueling growth or part of the fuel of growth, I don't see a reason to turn that cell supply off.

Yeah. Actually, the Model S and X actually have more range than we are currently stating on the website. We just haven't gotten around to updating, I guess, the EPA-certified number. But the actual range of the Model S and X are above what the website says they are.

That's true.

Yeah. Yeah, the existing cars that are being made.

It's actually been that way for a little bit of time.

Yeah, it must have been somewhere in the 380s or something like that.

Thank you very much. Cherie, let's go to the Q&A on the phone.

Thank you. Again, ladies and gentlemen, to ask a question, please press star 1, and we ask that you please limit yourself to one question and one follow-up. Our first question comes from Adam Jonas with Morgan Stanley.

Hi, everybody. And I actually agree. The retail questions were excellent, actually. So, Elon, do you see potential for Tesla vehicles to be fitted with user terminals that are compatible with the Starlink constellation in the near or medium-term future?

Well, it's certainly something that could happen in coming years. If there's no plans through it this year, the focus of Starlink is really for high-bandwidth, low-latency connectivity for homes and businesses and, I guess, aircraft and boats and that kind of thing. But the antenna for that high-bandwidth, low-latency thing is sort of about the size of meat and pizza, which you could put on a car, but I think is more bandwidth than you would really need. I mean, technically, you could buy one and just stick it on the car. Yeah, it'll work.

It pays for any time. Maybe just as a follow-up, for my follow-up, how would, assuming that we get the antenna form factor and cost down to a point where that could be integrated into the roof of a car, for example, cost-effectively and aerodynamically, et cetera, how would compatibility with a Starlink antenna architecture theoretically improve the Tesla customer experience or the capability of the network?

Well, I think actually the most possible would just use the cellular connectivity, just use 5G. That would be the recommendation, certainly in any cities or something like that. But if you're out in the countryside and there's not good cell connectivity, then you could connect with a Starlink antenna. And you don't need to have gigabyte level or level connectivity, you can probably, you know, 20, 30 megabits is probably fine. And you can have much smaller antenna. So yeah, I guess it could be good for, you know, making sure there's connectivity and outside of major cities and that kind of thing. But I mean, that's a, yeah, sort of, I'd say, relatively obtuse. It's not, you know, I'm not thinking about it very much, to be honest.

Thank you. Let's go to the next question.

Thank you. Our next question comes from Dan Gals with Wolf Research.

Hey, good afternoon. Thanks. So hoping you could give us some guidance on what CapEx is going to be this year and kind of as I look to model out the business long term, is there a rule of thumb that we can use for capital expenditures per unit of production capacity or some sort of rule of thumb like that?

I don't think we want to tell you, I don't think we want to say what our CapEx is going to be this year necessarily. Except to say that, as I said earlier, we're spending money as fast as we can spend money in sensible ways. So it's definitely not artificially limited. And we will spend a lot of money this year, for sure. The challenge comes in finding efficient ways to actually deploy the capital. That's the harder part than deciding on a capex number, really.

And I think we always find ways to become more capex efficient per unit of capacity. We challenge the teams to always become more efficient. And so we see a reduction per unit in terms of capex.

Absolutely.

It's definitely the right metric.

Yeah, it's a good, yeah. I think there's so much at Tesla where the core technology is improving radically that maybe you wouldn't necessarily notice as an end customer. Or some of them where you'd notice, some of them you wouldn't, but it's just there are these things that have a big effect on the efficiency of the company. Like our internal applications team that kind of builds the Tesla internal operating system and improves the sort of core automation of the company, that makes a big difference to our productivity. But you wouldn't necessarily – you would see it effectively in healthier financials, but you wouldn't necessarily notice it as an end customer.

Okay, got it. Maybe I could follow up. I mean, you're kind of operating cash flow, EBITDA is annualizing at $4.5 billion. right now, you know, as I look out to the future, you know, I'm kind of guessing that that could fund somewhere around, you know, 200,000 to 250,000 units of capacity a year, which would be maybe a 30% CAGR over five years. I mean, is that something that's feasible for you guys to execute on, on a consistent basis, you know, a level of capacity building that large?

We're heavy for more than 30%, yeah.

Yeah, I think the math, I'm not sure the math that you've done, but I think our internal plans are faster. And just back on your first question, we will have additional detail on CapEx in the 10K. But back to the growth rate, I mean, one thing to keep in mind is that the Shanghai facility, we do have a loan facility. in place to support that growth, so that helps. And then as our production volumes increase, that generates more cash from the business as well. That allows us to continue to fund additional factories. So I wouldn't necessarily view it as limited as you described it.

Yeah, I think a few years ago I said, I think I don't know when it was, but a few years ago, I said my estimate is that Tesla would grow at an average rate of in excess of 50%. My soul holds that belief.

Thank you. Let's go to the next question.

Our next question comes from Gene Munster with Loop Ventures.

Good afternoon and congratulations on the progress. First question related to Cybertruck. You mentioned you'll sell as many as you can make. Can you remind me how many you think you can make and any thoughts on the cost of production for making those cyber trucks.

Yeah, I think we don't comment on those detailed numbers except the demand is just far more than we could reasonably make in the space of, you know, I don't know, three or four years or something like that. So the thing we're going to be really focused on is increasing battery production capacity because That's very fundamental, because if you don't improve battery production capacity, then you end up just shifting unit volume from one product to another, and you haven't actually produced more electric vehicles. So that's part of the reason why we have not, for example, really accelerated production of the Tesla Semi, because it does use a lot of cells. And unless we've got a lot of battery cells available, then say like accelerated production of the Tesla Semi would then necessarily mean making fewer Model 3 or Model Y cars. So we've got to really make sure we get a very steep ramp in battery production and continue to improve the cost per kilowatt hour of the batteries. This is very fundamental and extremely difficult. So we'll I said we're going to do like kind of a battery day just to kind of explain more about this and what our plans are. I think probably it's going to make sense to do that after the end of this quarter because I think it's going to be kind of an intense end of quarter as it was last quarter. So, you know, tentatively sort of in the April timeframe, we'll do a battery day and kind of go through what the challenges are. How do you get from here to, I don't know, a couple thousand gigawatt hours a year or something?

Great. I'll look forward to that battery day. Elon, you also mentioned in your prepared comments about other products that may come up, and the only vehicle not announced for Master Plan Part 2 is a high-passenger density vehicle. Any light that you can give us regarding that project?

Yeah. Going back to what I just said, we've got to improve the total battery capacity. Otherwise, we add complexity, but we do not improve the number of vehicles on the road. So what we do, some sort of high-capacity vehicle at some point, probably, but we need to make sure we've got the batteries to make cars that are already on our off-late. And it's just generally true, and I've seen some sensible comments by ARK Invest where they're pointing out that really people do prefer to drive in their cars mostly by themselves. And the average number of occupants in a car, I think, is like 1.2. And maybe with autonomy, maybe it'll go to 1.4. Maybe. But I'm not sure if it even goes there. So will it make sense for us to do sort of a mini-man or sort of Sprinter-like man at some point? Probably. But like I said, we've got to solve this battery. We've got to scale battery production to crazy levels that people cannot even fathom today. That's the real problem.

Thank you. Let's go to the next question, please.

Our next question comes from John Sager with Evercore ISI.

Hey, guys. Thanks for taking my call. I want to talk about the differences between the Model 3 and the Model Y beyond the sort of 10% rule of thumb just around cargo and size. Are there other features that are going to differentiate the two models? And then as a follow-on to that, you've talked in the past about how Model S sales grew with the introduction of Model X. So are you planning on setting up your production facilities to align with that thesis that essentially Model 3 sales will expand alongside the introduction of Model Y?

You know, we're not quite sure what's going to happen. But it is true that Model X, the introduction of Model X actually increased Model S sales. Because people would come in and look at the Model X and they'd like, say, okay, you know, I prefer the sedan model. And we're worried that X sales would cause S sales to drop, but they actually cause it to increase. So, you know, from our standpoint, we're not too worried about demand. We're worried about production. You know, let's make sure we get that production ramp going and reach volume production as soon as possible with the Model Y. And it's hard to predict what that means, that the S you know, the exponential part of the S-curve of production. But production pretty much always follows this S-curve, or it's kind of like a hooky-jokey S-curve. And, you know, you can easily predict what it's going to be like in the beginning because it's slow, and it's easy to predict what it's going to be like at the end, but that intermediate portion of the S-curve is very difficult to predict. So that involves a massive amount of hard work and just reacting fast to issues that arise. So I think we're just going to go as fast as we can with Model Y and make sure it's a great product. I think there are some things that will differentiate it, but not something we want to talk about in this call. And I think when people do a teardown of the Model Y, I think they'll be impressed about some of the things they see.

And just to add to that, I think it's important to keep the Model Y launch in context of the next 18 to 24 months. What we're working on here between Berlin and Shanghai and Fremont is to have 3 and Y locally produced in all locations. And so Model 3 is expanding. As Model Y is expanding, there may be ups and downs of various factories as we get to the journey of having these products on the major continents.

Yeah. Also, the rule of thumb of 10%, I think you need to see it. When you see the car, you'll realize that it's not just a 10% different car. It's not just that. there's more change happening like to the customer's perspective as well.

Thank you. Let's go to the next question, please.

Thank you. Our next question comes from Colin Rush with Oppenheimer.

Thanks so much, guys. Can you speak to the pricing strategy in light of the China price reductions as well as the mission to increase EV adoption? Is there a target for gross profit or operating profit on a per vehicle basis that we should be thinking about or how should we really frame that for ourselves?

Yeah, I mean, we're trying to make the cars as affordable as possible, as fast as possible, while maintaining reasonable, while still being at least a little bit profitable and growing the company like crazy and having good free cash flow and accumulating our cash balance. Zach, anything you want to add?

No, I think that's very fair.

Yeah.

I mean, our order rate supports the pricing that we have right now. We're working very hard to reduce cost. and expand production because we feel from the data it's pretty clear that there's a lot of interest in our products. And so what we're working on is to increase production, increase availability of the products with time. And the price reduction in China is kind of the first step towards this global localization, more accessible price. And we'll continue to work on cost reductions in China as we do in Fremont and grow production.

Yeah, the thing that's really going to probably just have a profound effect on our financials is high volume and high margin, obviously. And that high margin part comes from autonomy. So do people buy the full self-driving package or not? And do they buy it worldwide or only in certain places? For example, our autonomy is not as good in China as it is in the U.S., so a very small percentage of people buy the FSD package in China. But as we fix that, then we'll see a much higher percentage of people buy it. And as we get closer to full self-driving, that's just going to become more and more compelling. So that's, from a financial standpoint, that's the real mind-blowing situation is high volume, high margin because of autonomy.

Okay. And then just shorter term, you know, there's significant discussion in the industry around moving to higher voltage on the powertrain. And then, you know, some challenges around the supply chain's preparedness to support that. You know, separate from the battery pack, since we'll talk about that in a couple of months, can you speak to the areas of focus on powertrain technology-driven cost reduction over the next 12 to 24 months that we should be thinking about?

Well, powertrain is pretty damn good. I mean, it's way better than anything else out there by a country mile. You know, it's worth noting, for example, that the Model S has, like, 100 kilowatt-hour pack. The Taycan has 100, no, like 95 kilowatt hour pack. The Model S is steadily approaching 400 miles range. The Taycan has 200 miles range. So we must be using that energy pretty efficiently, and the powertrain is a big part of that.

I would just say the focus is on cost on the powertrain. When we're thinking about technology innovations, it's how do we continue to drive the cost down?

Yeah.

And, you know, that's true. Voltage is maybe one angle, but there are certainly others that just enable more power density and lower cost.

Applied powertrain is, like, mind-blowing, I think. Yeah. Coming out later this year, end of the year, probably. That's our goal, get the applied powertrain out end of the year. And then it's going to be like, this is like alien technology. It's insane. I didn't even think we could do – yeah, I mean, honestly, I thought, well, there's no way. Let's kick ass. It's an engineering team. Tell us a little about hardcore engineering.

Great. Let's go to the next question, please.

Our next question comes from Emmanuel Rosner with Deutsche Bank.

Hi. Good evening, everybody. So in your slide deck, you had the comments around – average selling price being, uh, stable, uh, or thereabouts in 2020. Can you maybe walk through some of the. Puts and take how you see sort of like that, uh, metric evolve. Obviously you have the model Y, which probably would have initial, you know, higher pricing, and then by the China model trees at a lower price. So I guess what are the puts and takes for what you would see as sort of like stable ASP in 2020?

And our, you know, I think the price is better and better.

I don't know.

We don't want anybody to comment on prices and stuff. I think we'll adjust according to what the demand looks like. Right now, it looks pretty good. Maybe that'll change. Who knows?

But I think the way you described it is fair. Relative to the current Model 3, China Model 3 pricing is slightly lower. and our Model Y pricing is public on the website, so you can see that it's clearly slightly higher than what Model 3 is out of Fremont. How the mix of those three products nets out over the course of the year, we'll see, but I think it's probably fair at the moment to assume the mix of those stays fairly stable in terms of ASP when you average them together.

Yeah, I mean, the affordability of our car in China improved radically because of, you know, for a very... tariffs have mostly gone away, purchase tax exemption, local pot supply, not having to spend a bunch of money to transport it over the ocean. So the affordability is not in date for our car in China.

Thank you. Let's go to the next question, please.

Thank you. Our next question comes from Dan Lady with Credit Suisse.

Hi. Good evening. Thank you for taking the questions. I just want to follow up on the question on capital raises. So given the cheaper cost of capital, and this is a real competitive advantage for others, why wouldn't it make sense to raise capital to either pay down debt or to pursue acquisitions, especially bolt-ons that could help you accelerate capabilities in autonomous or battery technology?

I mean, if you know of any acquisitions, we'd love to hear about them. Yeah, sure. Sounds great. Who should we acquire?

Well, given the importance of autonomous, I imagine that this is an area that you would want to accelerate if you view it as a crucial competitive advantage.

We're not aware of any one that we'd want to acquire.

And debt pay down?

Alluding the company to pay down debt doesn't sound like a wise move.

Okay. I think the broader... There's been a couple of versions of the question over the course of the call. I think what we're saying more broadly is that as we look forward on the cash generation from the business relative to what our plans are, we are not constrained.

Yeah, we're going to pay down the debt just, you know, as time goes by. And we paid down half a billion dollars worth of debt last quarter. So we'll just keep steadily paying it down. And, yeah. So... Yeah, I'm worried. But yeah, I don't think we have anything more to say on that part.

Okay, thank you. Let's go to the next question, please.

Thank you. Our next question comes from Pierre Ferrego with New Street Research.

Hey, thank you for taking my question. I wanted to come back on batteries, and if I look at the end of this year, you should have 800,000 units in production capacity for cars. So that's, if you add to that Model X and Model S, it means you need only north of 60 gigawatt hour of battery production capacity. So where do you stand now and how do you get there? And then it looks like your competitors or those who would like to compete with you seem to be struggling to to grow battery capacity. So if you can just take us through what you're doing differently, why you're confident you can do that and it looks like nobody else can.

Well, you know, I guess, you know, a lot of people sort of made fun of us for not, like, you know, being able to grow, you know, both cars and both capacity. And it's like now that it turns out actually even the pros have trouble with it, you know. It's pretty hard. So the fact is we've already demonstrated massive growth in cell production capacity at Gigafactory Nevada. And you have to go from the cells to the modules to the pack. So it's not just cell capacity, but also module and pack capacity. So we've just gotten pretty good at that. And we've worked well with key partners like Panasonic up Panasonic relationship has been excellent. They've been a great partner with us for many years. We've added some additional partners at a smaller scale with LG and CATL. And, you know, I will have more to talk about this in detail in Battery Day. Like I said, probably, you know, probably April. We've got a very compelling strategy. I mean, we are super deep on cell. Super deep. And sell through battery. Sell module battery. I mean, Drew, is there anything you want to add to that? I think you said it all. We are super deep.

Yeah. It's a core focus.

Rabbit hole goes down pretty far. Seven days a week. Yeah, we're doing seven days a week, yeah. Battery production. Man, do we know a lot about batteries. Jeez.

I can see that. The only thing I would add is, you know, we do have a decade-plus of experience of not just, like, what a cell should be, but how to integrate it into the product, and that's really helpful.

Yeah, absolutely, and how to manage the cell and the module and the battery and through different weather conditions and different environmental and different charge regimes, and, wow, we really know a lot about batteries. Yeah. It's the next level.

All right. Okay, thanks. And Zach, maybe a quick mundane follow-up for you, if that's all right. Can you give us a sense of the impact of the ramp of Shanghai on your cars in Q4?

Yeah, we were negative gross margin on the products that we built in Q4. But the team in China, I think, did a great job managing costs during the launch. And so there was a slight drag associated with it, but not terribly significant.

Okay, and let's go to the last question, please.

Thank you. Our last question will come from Joseph Osha with JMP Securities.

Further to the conversation around cell technology, I'm just wondering if you can comment on what the plans are for the Maxwell technology that you acquired, either as a capacitor or a dry cell or what have you. Thanks.

Well, like I said, we're going to talk about this in battery day. which is probably April, and then a lot of these questions will be answered. I think it's going to be a very compelling story that we have to present. I think it's going to actually blow people's minds. It blows my mind, and I know it. So I think it's going to be pretty cool.

Maxwell, that UltraCap technology is kind of part of the plan?

It's an important piece of the puzzle, yes. I think some of the sort of retail investors have managed to put together several pieces of the puzzle. They seem to have the most insight.

I shall have to read the blogs more. Thank you. All right. You're welcome.

Thank you very much, everyone, for all of your good questions, and we will speak to you in another three months. Thank you. Thank you. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.