Tesla, Inc.

This is the operator. Today's conference is scheduled to begin shortly. Please continue to stand by and thank you for your patience. © transcript Emily Beynon Pardon me, this is the operator. Today's conference will begin momentarily. Thank you for your patience and please continue to stand by. Thank you. Thank you. Ladies and gentlemen, thank you for standing by. Your conference call will begin momentarily. Thank you for your patience and please continue to stand by. Thank you. Thank you. Thank you. And pardon me, this is the operator. Our conference will begin momentarily. Thank you for your patience. Thank you. Thank you. Good day, ladies and gentlemen, and thank you for standing by, and welcome to the TESLA first quarter 2021 results and Q&A website. At this time, all participants are in a listen-only mode. After the presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now hand the conference over to your speaker today, Martin Vieca, Senior Director of Investor Relations.

Thank you, Carmen, and good afternoon, everyone. Welcome to Tesla's first quarter 2021 Q&A webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 1 p.m. 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 1 now if you would like to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Great. Thank you. Q1 2021 was a record quarter on many levels. Tesla achieved record production, deliveries, and surpassed a billion dollars in non-GAAP net income for the first time. And we've seen a real shift in customer perception of electric vehicles, and our demand is the best we've ever seen. So this is, we're used to seeing a reduction in demand in the first quarter, and we saw an increase in demand. That exceeded the normal seasonal reduction in demand in Q1. So Model 3 became the best-selling midsize premium sedan in the world. In fact, I should say the best-selling luxury sedan of any kind in the world. The BMW 3 Series was for the longest time the best-selling premium sedan. It's been exceeded by the Tesla Model 3. And this is only three and a half years into production and with just two factories. For Model 3 to be outselling its combustion engine competitors, I think this is quite remarkable. In the past couple of quarters, we delivered roughly a quarter million Model 3s, which translates to an annualized raise of half a million per year. When it comes to Model Y, we think Model Y will be the best-selling car or vehicle of any kind in the world. probably next year. I'm not 100% certain next year, but I think it's quite likely. I'd say more likely than not that in 2022, Model Y is the best-selling car or truck of any kind in the world. With regard to full self-driving, full self-driving beta continues to make great progress. There's definitely one of the the hardest technical problems that exists, that's maybe ever existed. And really, in order to solve it, we basically need to solve a pretty significant part of artificial intelligence, specifically real world artificial intelligence. And that sort of AI, the neural nets need to be compressed into a fairly small computer, a very efficient computer that was designed, but nonetheless, you know, a small computer that's using on the order of 70 or 80 watts. So this is a much harder problem than if you were to use, say, you know, 10,000 computers in a server room or something like that. This has got to fit into a smallish brain. And this... I think with the elimination of radar, we're finally getting rid of one of the last questions. Radar was really, it was making up for some of the shortfalls of vision, but this is not good. You actually just need vision to work. And when vision works, it works better than the best human, because it's like having eight cameras, it's like having eyes in the back of your head, the sides of your head, and and three eyes of different focal distances looking forward. And processing it at a speed that is superhuman. There's no question on my mind that with a pure vision solution, we can make a car that is dramatically safer than the average person. But it is a hard problem because we are actually solving something quite fundamental about artificial intelligence. We basically have to solve real world vision AI. And we are. And key to solving this is also having just a massive data set. So just having well over a million cars on the road that are collecting data from very sort of corner case rare situations. Yeah, it's sort of like So many weird things in the world, like a truck carrying a truck, or a car with a kayak on the roof, where the kayak has a little weight dangling from the front of the kayak in front of the car. And yet the car must ignore this and just look at the road. So it's really quite tricky, but I am highly confident that we will get this done. So yes. This quarter, and I think we'll continue to see that a little bit in Q2 and Q3, so Q1 was had some of the most difficult supply chain challenges that we've ever experienced in the life of Tesla. Insane difficulties with supply chains with parts over the whole range of parts. Obviously, people have heard about the chip shortage. This is a huge problem. But then in addition to that, for example, We had quite a bit of difficulty scaling drive unit production in China because we were unable to get critical engineers there because of COVID quarantine restrictions, which meant that Tesla Worldwide was dependent on drive units made at our factory in Nevada. So that was a very challenging situation. mostly out of that particular problem. But that's just two of many challenges. So the team's really good, done an incredible job dealing with really severe supply chain shortages. So let's see, with respect to the Model S and X, there were more challenges than expected in developing the Plaid Model S, what's called the Palladium program, which is the new version of Model S and X, which has a revised interior and a new battery pack and new drive units and new internal electronics and has, for example, a PlayStation 5 level infotainment system. There's just a lot of issues encountered ensuring that the new battery was super safe was quite hard. There was more energy in a smaller case. So it took quite a bit of development to ensure that the battery of the new SX is safe. And we're trying to get all the in the car slowly. for the past few months, but we're just stacking them up in the yard and just making refinements to the cars that we build. But we do expect to ramp Model S production. It's not delivering them probably next month. And then to be in sort of fairly high volume production for the S and Q3 and to start delivering Model X and Q3 as well. So, I think as we ramp up, I think probably the demand for the new SX will be quite high. So, it's really just going to be a question of ramping supply chain and internal production processes. So, probably we're going to aim to produce over 2,000 SX per week, perhaps, if we get lucky, upwards of 2,400 or 2,500. This, again, is contingent on global supply chain issues, which are just a lot of factors outside of our control here. But I do think these things will get sold, so it's just a matter of time. And then we'll be doing a little over 2,000 SX per week. It's a great car. It actually costs us less to produce, a little bit less to produce. But it is a superior product. So in conclusion, there's a lot to be excited about in 2021 and 2022. We're building factories as quickly as we can. Both Texas and Berlin are progressing well. We expect to have initial limited production from those factories this year and volume production from Texas and Berlin next year. At the same time, we're continuing to ramp production of Model Y in Fremont and Shanghai. In the background, we're continuing work, developing work on the semi-cybertruck, the roadster, and other products. Thanks to everyone at Tesla who made this year a huge success. Now on to questions.

Thank you very much. We have some remarks from Zachary Kirkhorn as well.

Okay. Yeah, thanks, Martin. Thanks, Elon. So congratulations to the Tesla team on breaking multiple records in the first quarter of 21, as Elon had mentioned, which is typically the most difficult of the year for many reasons. To summarize the quarter, I think it's best understood by three key items. First, we successfully launched and began the ramp of Model Y in Shanghai, achieving positive gross margin in the first quarter of production and receiving a great reception from the markets. Second, as Elon mentioned, although we began the production process for the Model S during the quarter, we had not yet begun customer deliveries. The reduction in Model S and X deliveries from Q4 to Q1 were a meaningful headwind to free cash flows and profit generation. For example, we incurred an estimated $200 million of direct P&L impact relating to this program in Q1, the majority of which is reflected in COGS. And that's before even considering the impact of lost revenue and profits as a result of the transition. And as Elon mentioned, we expect the first deliveries to begin shortly. Third, as we continue to work through the instability of the global supply chain, particularly around subunit doctors and port capacities, while the Tesla team in partnership with our suppliers did tremendous work keeping our factories running, we did experience high expedite costs in the quarter, and they were also higher than they were in Q4. with some minor interruptions to production over the course of the quarter. We believe that this landscape is improving, but it does remain difficult and it's an evolving situation. If we double click within net income, auto gross margin excluding credits improves sequentially and year over year. This is in spite of the cost mentioned for S and X and expedites and a reduction in global ASPs. as our cost structure as a company is reducing at an even faster pace. So as we look out over the course of the year, we feel optimistic about our gross margin strength, particularly as some of these headwinds we're experiencing start to be resolved. On services and other margins, these have recovered and are trending towards profitability, aided by strength in the used car business, operational improvements in service, and additional service revenue opportunities that help absorb fixed overheads. On energy growth margins, these remained negative for a second quarter. This is driven by solar roof-related ramp costs and winter seasonality in the lease BPA business. We continue to manage through a multi-quarter backlog on Powerwall. We're working as fast as we can to increase production, and this will aid in profitability of this business as those volumes increase. On operating expenses, these increased for Q1, which is driven by our investments in technology and growth. In particular, for R&D, this includes the structural battery pack and 4680 cells, investments in the new SNX, and our neural net and silicon investments. On the SG&A side, we're setting up infrastructure and support for both China and EMEA in anticipation of volume to come there. And as I've said before, our plans show that we remain on track for sustained industry-leading operating margins. Double-clicking on cash flows, we continue to generate positive free cash flows, and this was despite the significant working capital headwinds from S&X. Additionally, we are making progress reducing various forms of debt. We also invested $1.5 billion in Bitcoin during the quarter, then trimmed our position by 10%. which contributed to a small gain in our Q1 financials. Taking a step back, we've generated $8 billion in operating cash flows and $4 billion in free cash flows over the past four quarters. As we look forward, our plans remain unchanged for long-term growth of 50% annually, and we believe we're on track to exceed that this year as we got into last quarter. Global demand remains meaningfully higher than production levels, and so we're driving as fast as we can to increase our production rates. As we think about Q2 and Q3, these quarters should largely be driven by execution on S and X, as we've discussed, continued ramp of Model Y in Shanghai, and the associated cost reductions of these programs. And we expect profitability and cash generation to evolve over the course of the year in line with those improvements. And then as we get towards the end of the year, our story will pivot towards the launch and ramp of our newest factories in Austin and Berlin. So there's certainly no shortage of exciting things for us to work on and look forward to. Thank you. And we'll open it up for questions.

Thank you very much. And we'll first take a retail questions from, uh, say a website. The first question is how is dojo coming along? Could dojo unlock an AWS like business line for Tesla over the next few years?

I'll jump in here.

With respect to JoJo... Sorry, my apologies. I was on mute.

Go ahead, Elon.

I was just basically saying that although right now people think of Tesla as a car company or perhaps an energy company, I think long-term people will think of Tesla as much as an AI robotics company as we are a car company or an energy company. I think we are developing one of the strongest hardware and software AI teams in the world. Certainly, we are prepared to be able to do things with full self-driving that others cannot. And if you look at the evolution of what technologies we developed, we developed them in order to solve the problem of self-driving. So we couldn't find a powerful enough neural net computer, so we designed and built our own. The software out there was really quite primitive for this task, and so we built a team from scratch and have been developing what we think is probably the most advanced real-world AI in the world. And it sort of makes sense that this is kind of what needs to happen, because the road system is designed for a neural net computer, our brain. Our brain is a neural net computer. And the entire road system is designed for vision with a neural net computer, because it's designed for eyes in the brain. And so if you have a system which has very good eyes, You can see in all directions at once. You can see three focal points forward. But it never gets tired. It's never texting. It has redundancy. And its reaction time is superhuman. Then it seems pretty obvious that such a system would achieve an extremely high level of safety, far in excess of the average person. So that's it. That's what we're doing. Then DOJO is kind of the training part of that. Because we have over a million cars, and perhaps next year we'll have two million cars in active use, providing vast amounts of video training data that then needs to be digested by a very powerful training system. Currently, we use... It's Tesla training software. We developed a lot of training software, a lot of labeling software to be able to do surround video labeling, which is quite tricky. This means all eight cameras simultaneously at 36 frames a second per camera labeling video over time. wasn't any tool that existed for this so we developed our own labeling tool then taking it a step further obviously the you know the holy grail is auto labeling so now we're we're getting quite good at order labeling where we do we do where that the trainers train the training system um and and then the system auto labels the data and then the human labelers just need to look at the labeling to confirm that it is correct and perhaps make edits. And then every time an edit is made, that further trains the system. So it's kind of like a flywheel that's just sort of spinning up. And really, the only way to do this is with vast amounts of video data. So then we need to train this efficiently. So Dojo is really a... It is a supercomputer optimized for neural net training. We think Dojo will be probably an order of magnitude more efficient on say, I'm not sure what the exact right metric is, but say per frame of video, we think it'll be an order of magnitude more cost efficient in hardware and in energy usage. per frame of video compared to a GPU based solution or compared to the next best solution that we're aware of. Um, so then, then, you know, possibly that could be used by others. Um, it does seem as though over time, I mean, just as an observation, I think basically just the fact that, um, neural net based computing or, um, you know, uh, AI based computing, is more and more of the compute stack. Conventional computing, perhaps heuristics-based computing, is still going to be important, still going to be very important, but it will become, the neural net will become a bigger and bigger portion of compute. Anyway, that was a long story, but I think, yeah, probably others will want to use it too, and we'll make it available.

Thank you very much. Let's go to the second question from retail investors. The recent price changes on solar roof have been discouraging for customers and investors. Could Tesla share more about solar roof challenges and if the outlook has changed at all, i.e. 1,000 roofs per week?

Yeah, first of all, I should say that the demand for the solar roof remains strong. So despite raising the price, the demand is still significantly in excess of our ability to meet the demand to install the solar roofs. So production has gone fine, but we are choked at the installation point. We did find that we basically made some significant mistakes in in assessing the difficulty of certain roofs, but the complexity of roofs varies dramatically. Some roofs are to be literally two or three times easier than other roofs. So you just can't have a one-size-fits-all situation. If a roof has a lot of protuberances or if the roof sort of the core structure of the roof is rotted out or is not strong enough to hold the solar roof, then The cost can be double, sometimes three times what our initial quotes were. So in those cases, what we've obviously opted to do is to refund customers their deposit. But what we cannot do is go and just lose a massive amount of money. We've just got to provide a refund of the deposit. But what is most important about the solar situation, which I tweeted about this past week, is that we're shifting the whole sort of solar situation, the solar power wall, basically solar plus battery situation, to there's only one product, or there's only one configuration. Every house, we will not sell a house solar without a Powerwall. That solar could either be solar retrofit, you know, with conventional panels put on a roof, or it can be the Tesla solar glass roof. But in all cases, it will have the Powerwall 2. Technically, this is, it's actually Powerwall 2 Plus, if you will. The plus refers to a higher peak power capability. Basically, all power rules made since roughly November of last year have a lot more peak power capability than the specification on the website. They have about twice the power capability, roughly. It depends on how you count power, but about twice the peak power and about, you know, the steady-state power of the specification of the website. The energy is the same, but the power is roughly double. All installations will have a power wall, and the difficulty of the installation will be much less. It will be much easier because the power from the solar roof, solar glass roof or the solar panels will only ever go directly into the power wall. And the power wall will only ever go between the utility mains, between the utility and the main power panel of the house. Which means you never need to touch the main circuit breakers of the house. You never need to touch the house circuit breakers. Effectively, almost every house therefore looks the same electrically instead of being a unique work of art and requiring exceptional ability to rewire the main panel. So this is extremely important for scalability. It's the only way to do it, really. And this also means that every solar power wall installation that the house or apartment, whatever the case may be, will be its own utility. And so even if all the lights go out in the neighborhood, you will still have power. So that gives people energy security. And we can also, in working with the utilities, use the power walls to stabilize the overall grid. So let's say that there's like there was in Texas, there was a peak power demand. And that peak power demand, because the grid lacked the ability to buffer the power, they had to shut down power. There's no power storage, no good power storage. However, with a whole bunch of power walls at houses, we can actually buffer the power. So if the grid needs more power, we can actually then... with the consent obviously of the homeowner and a partnership with the utility, we can then actually release power onto the grid to take care of peak power demands. So effectively, the Powerwalls can operate as a giant distributed utility. This is profound. I'm not sure how many people will actually understand this, but this is extremely profound and necessary because we are headed towards a world where as we were just talking about earlier, where people are moving towards electric vehicles. This will mean that the power needs at homes and businesses will increase significantly. There will need to be a bunch more electricity coming somewhere. In fact, if you go to full renewable electricity, we need about three times as much electricity as we currently have. These are rough numbers, but you roughly need twice as much electricity if all transport goes electric, and then you need three times as much electricity if all heating goes electric. So basically, this is a prosperous future, both for Tesla and for the utilities. And in fact, If this is not done, utilities will fail to serve their customers. They won't be able to do it. They won't be able to react faster. And we're going to see more and more of what we see in California and Texas of people seeing brownouts and blackouts and utilities not being able to respond because there's a massive change going on with the transition to electric transport. And we're seeing more extreme weather events. This is a recipe for disaster. So it is very important to have solar and batteries at the local level of the house. In addition, it is important to have large battery storage at the utility level so that solar and wind, which are the main forms of renewable electricity, that electricity can be stored because sometimes the wind doesn't blow. Sometimes it blows a lot. Sometimes it blows too much, and sometimes it doesn't blow enough. But if you have a battery, you can store the energy and provide the energy to the grid as needed. The same goes for solar because obviously the sun does not shine at night, and sometimes it is very cloudy. And so by having battery storage paired with solar and wind, this is the long-term solution to a sustainable energy future. And as I said, this really needs to occur both at the local level and at the utility level. If it doesn't occur at the local level, what will actually be required is a massive increase in power lines, in power plants. So they'll have to put long-distance and local power lines all over the place. They'll have to increase the size of the substations. It's a nightmare. This must occur. There must be solar plus battery. It's the only way. So, yes.

Thank you very much. And the next retail question is, Master of Coin, can you tell us anything about Tesla's future plans in digital currency space or when any such major developments might be revealed?

Sure. Thanks, Martin. So as I noted in our opening remarks and we've announced previously, so Tesla did invest $1.5 billion into Bitcoin in Q1, and then we subsequently sold a 10% stake in that. We also allow customers to make vehicle deposits and final vehicle purchases using Bitcoin. And so where our Bitcoin story began, maybe just to share a little of the context here, Elon and I were looking for a place to store cash that wasn't being immediately used, try to get some level of return on this, but also preserve liquidity. You know, particularly as we look forward to the launch of Austin and Berlin and uncertainty that's happening with semiconductors and port capacity, being able to access our cash very quickly is super important to us right now. And, you know, there aren't many traditional opportunities to do this, or at least that we found in talking to others that we could get good feedback on, particularly with yields being so low and without taking on additional risk or sacrificing liquidity. And Bitcoin seemed at the time and so far has proven to be a good decision, a good place to place some of our cash that's not immediately being used for daily operations or maybe not needed until the end of the year and be able to get some return on that. And I think one of the key points that I want to make about our experiences in the digital currency space is that there's a lot of reasons to be optimistic here. We're certainly watching it very closely at Tesla, watching how the market develops, listening to what our customers are saying. But thinking about it from a corporate treasury perspective, we've been quite pleased with how much liquidity there is in the Bitcoin market. So our ability to build our first position happened very quickly. When we did the sale later in March, we also were able to execute on that very quickly. And so as we think about kind of global liquidity for the business, and risk management, being able to get cash in and out of the markets is something that I think is exceptionally important for us. So we do believe long term in the value of Bitcoin. So it is our intent to hold what we have long term and continue to accumulate Bitcoin from transactions from our customers as they purchase vehicles. You know, specifically with respect to things we may do, there are things that we're constantly discussing. We're not planning to make any announcements here. and we're watching this space closely. So when we're ready to make an announcement on this front, if there's one to come, we'll certainly let you all know.

Thank you. And the fourth question from retail investors is, does Tesla have any proactive plans to tackle mainstream media's imminent massive and deceptive clickbait headline campaigns on safety of autopilot or FSD, perhaps specialty PR job of some sort?

Well, I'll take this one, guys. From the safety side, I continue to say if Elon is driving the point at all. Go ahead, Elon.

Please go ahead. I think it's special with just going through the facts of the – I mean, specifically, there was an article regarding a tragedy where there was a high-speed accident in Tesla. And there was really just extremely deceptive media practices where it was claimed to be autopilot, but this is completely false. And those journalists should be ashamed of themselves. Please go ahead, Lars.

Yeah, thanks, Elon. So I was just saying we're committed to safety in all our designs, and that's number one in what we do here. Regarding the crash in Houston specifically, we worked directly with the local authorities, NTSB and NHTSA, wherever applicable and whenever they reach out to us for help directly on the engineering level and whatever else we can support. In that vein, we did a study with them over the past week to understand what happened in that particular crash and what we've learned from that effort was that Autosteer did not and could not engage on the road condition as it was designed. Our adaptive cruise control only engaged when a driver was buckled and above five miles per hour, and it only accelerated to 30 miles per hour over the distance before the car crashed. As well, adaptive cruise control disengaged the car slowly to complete to a stop when the driver's seatbelt was unbuckled. Through further investigation of the vehicle and accident remains, we inspected the car with NTSB and NHTSA and the local police and were able to find that the steering oil was indeed deformed, leading to the likelihood that someone was in the driver's seat at the time of the crash, and all seat belts post-crash were found to be unbuckled. We were unable to recover the data from the SD card at the time of impact, but the local authorities are working on doing that, and we await their report. As I said, we continue to hold safety in high regard and look to improve our products in the future through this kind of data and other information from the field.

Okay, thank you very much. Let's go to the next question from institutional investors. The first question is proponents of alternative grid storage technologies claim that lithium ion is unsuited for long-term storage at scale due to vampire drain. Could 4680 cells address this limitation? Is the limitation even relevant for charging the energy equation? Yeah.

Just let me jump in on the vampire drain. That's definitely not the issue. A good lithium ion cell self-discharge is less than 0.001% of its energy per day. So the vampire drain is maybe not . As mythical as vampires. Yeah. Yeah, I think the challenge with seasonal storage is your value proposition drops from hundreds of useful full cycles per year to less than maybe 10 or maybe even less than five cycles per year. So it's just a different type of technology altogether that would make sense, given that it's more than an order in a magnitude different use case.

Yeah. We've got a long way to go before we're dealing with seasonal technology issues. But certainly a way to deal with seasonal technology would be to have wind and solar occurring on the side of more subtly latitudes, but then across a variety of longitudes. So essentially, like let's say in the U.S., for example, if there was a You know, I'm not sure if you'll understand that you can actually power the entire United States with just sort of a hundred, roughly a hundred mile by hundred mile grid of solar. Sometimes people don't quite understand like, well, how much solar is needed to power the United States? Almost, almost nothing of the, of the, of almost any country in the world. The solar incidents is, a gigawatt per square kilometer. This is insane. In fact, if you took the clear area, just the area for nuclear power plants, the area that is considered not usable because a nuclear power plant is there, in most cases, if you just put solar there, it would generate more power than a nuclear power plant. This is because they typically have pretty wide clear areas. So if you have, say, 25% efficient solar panels, and then those are 80% efficient in how they're laid out, you're going to do about 200 megawatts per square kilometer. Therefore, five square kilometers is a gigawatt, which might be a typical sort of power plant. It's really not much area at all. And a lot of places can have wind and solar in place. So anyway, it's entirely possible to power all of us with a small percentage of Earth's area. And then to transmit that power through high voltage DC lines, no new technology. You don't need like room temperature superconductors. This is another myth. Room temperature superconductors, almost irrelevant in my opinion, almost irrelevant. Low cost, long distance power lines using copper or aluminum, very important. So heating is I squared R. So that's current squared times resistance. So as you increase voltage, you can drop the current dramatically. and drop the heating dramatically to the point where it is of minor relevance. Like maybe you lose 5% to 7% with a high voltage DC power line, something like that. So I want to clear, no new physics is necessary. No new materials are necessary. We just need to scale this thing up. The technologies exist today to solve renewable energy. And sometimes people say, well, why don't we do it? That's because the energy basis of the earth is gigantic, super mega, insanely gigantic. So you can't just go and do a zillion terawatts overnight. You've got to build the production capacity for the cells, for the battery cells, for solar cells. You've got to put that into vehicles. You've got to put that into stationary storage packs. You've got to put that into solar panels and solar glass roofs. And you've got to deploy all this thing, all this stuff. But it is certainly the case that we can accelerate this, and we should try to accelerate it. And the right thing to do, I think, from an economic standpoint, and I think almost any economist would agree, is to have a carbon tax, just as we have a tax on cigarettes and alcohol, which we think are more likely to be bad than good. And we tend to tax fruit and vegetables less. The same should be true. We should tax energy that we think is probably bad and support energy we think is probably good, just like service and alcohol versus fruits and vegetables. It's just common sense. On the plus side, I'm not suggesting anyone be complacent, but sustainable energy, renewable energy, will be solved, it is being solved, but it matters how fast we solve it. And if we solve it faster, that's better for the world. Thank you very much. There's no question in my mind whatsoever that the energy storage problem can be solved with lithium ion batteries. Zero. I want to be clear. Zero. I think the bias will tend to be towards iron-based When people say lithium, I do think lithium must be a big constituent of the cells. It's more like 1% to 2% of the cell is lithium. The main part of the cell is the cathode. The main mass and cost in the cell is the cathode. For high-energy cells, like, for example, what we use in most cells is have nickel-based lithium-ion cells. which have higher energy density, longer range than iron-based cells. However, stationary storage, the energy density is not as important because it's just sitting on the ground. And so I think the vast majority of stationary storage will be iron-based lithium ion cells with an iron phosphate cathode technically. But I think the phosphate part is unnecessary. It's really just iron or nickel. Unnecessary in the terminology. Just think of it as iron or nickel. And there's an insane amount of iron in the world. More iron than we could possibly use. And there's also more lithium than we could possibly use. Basically, there is no shortage of anything whatsoever in iron phosphate lithium ion cells.

Thank you very much. Let's go to the next question from institutional investors, which is, you've suggested that between a 5x to 10x improvement is achievable in the automotive production versus the first Model 3 line on the first principles physics analysis. Where does Berlin sit relative to that limit?

I think we're still quite far away from it. I mean, the thing to bear in mind with production is for those who have never done production, they just don't understand how insanely hard production is. I want to be very, very emphatic here. Prototypes are trivial. They're child's play. Production is hard. It is very hard. Now you say production is... at large scale with higher liability and low cost? Insanely difficult. What Tesla achieved on the automotive side was not to create an electric car. The truly profound thing on the car side is that Tesla was the first American car company to achieve volume production of a car in 100 years and not go bankrupt. So this is I basically, myself and many others at Tesla, had to basically have several aneurysms to get this done. It was so hard. You have no idea. So anyway, and the thing about making a large, complex, manufactured object is, let's say you have, to our approximation, 10,000 unique items. If even one of those items is slow, that sets your weight. Just one. matter how so trivial we've had uh production production stuff because of carpet in the trunk we have production stuff because of usb cable at one point for the model is the we literally raided every electronics store in the bay area for for a few days there Nobody could buy a U.S. vehicle in the Bay Area because we went and bought them all to put them in the car, literally. And there's like hundreds of stories like that. So anyway, solving those constraints and a logistics problem that makes World War II look trivial. I'm not kidding. The scale is insane. You know, we're talking millions of cars, massive global supply chain, 50 countries, thousands of regulatory regimes. It's insane. So, yeah.

Thank you. And the last question from a traditional investor is, master plan part two talks about an urban transport vehicle that is smaller than traditional bus with greater aerial density achieved by removing the central aisle. Do you have any updates to share on this goal? Not at this time. Okay, thank you very much. So let's move to analyst Q&A.

Thank you. First question is from Pierre Ferrago with New Street Research. Your line is open.

Hi, guys. Thanks a lot for taking my question. I'd love to get actually an update on what you presented on the battery day. In the last six, seven months, I was wondering how much progress you've made on that from first in terms of process development. So how are things coming together on your pilot line? Are you getting to the kind of production throughput you were aiming for. And second, actually, on your production ramp. So I was wondering in which sites you're ramping production capacity for the 4680 cell and where you stand on ramping up that capacity as well. And I'll have a quick follow up on energy as well, if that's possible.

Well, so we have the We have a small sort of pilot plant, which is still big by normal standards. We expect to have like a 10 gigawatt per year capability in Fremont, California. And we've made quite a few sales. We're not quite yet at the point where we think the sales are reliable enough to be shipped in cars. But we're getting close to that point. And then we've already ordered most of the equipment for battery production in Berlin and then much of it for Austin as well. So we're really down to the nitty-gritty elements. But overall, I think we still feel quite optimistic about this achieving volume production of the 4680 next year.

Yeah, thank you. Just one thing I would add is there's been a lot of questions about yields. Actually, I noticed people asking about that. The yield progress has been really strong every day, and we were really still in commissioning phase with most of the tools. to the point where we're confident that the yield trajectory aligns with our internal cost projections. We did talk about yield also at Battery Day, which is one of the reasons why it's useful to check in on that. You know, it takes a while, as Elon just mentioned, to go from prototype to production. And it's not just parts, it's processes, it's equipment. But as we've matured those pieces of the process equipment, we've gotten to where we need to be on the yield side.

Yeah, and basically, this is just a guess because we don't know for sure, but it appears as though we're about 12, probably not more than 18 months away from volume production of the 4680. Now, at the same time, we are actually trying to have our cell supply partners ramp up their supply as much as possible. So this is not something that is to the exclusion of suppliers. It is in conjunction with suppliers. We want to be super clear about that. This is not about replacing suppliers. It is about supplementing suppliers. We have a very strong partnership with CATL, with Panasonic, and LG. Our request to our strategic partners for cell supply is please supply us with as much as you possibly can. Provided the price is affordable, we will buy everything that they can make.

Yeah. Yeah. And specific to that, we're on track to more than double the supplier capacity over the next 13.

Yeah. Exactly. We do expect from suppliers willing to First thing, you've doubled the cell output next year versus this year.

Yeah.

Okay. And I had a quick follow-up on maybe, Zach, for you on your energy business. So I understand, like, the negative gross margin with solar roof, but I was wondering, you know, what do gross margin look like there when you look at the storage business and where are you, what's your ambition in terms of gross margin in the in that business. I guess it's going to grow in the mix in coming years, so it's important for long-term modeling.

Yeah, we're seeing a lot of… We're aiming for comparable margins in storage as in vehicle, but it is important to bear in mind that vehicle is more mature than the storage. We already are at good margins with the Powerwall, but some additional work is needed for the Megapack to achieve good margins. Yeah. Drew, what do you think?

Thank you.

Yeah. Sorry, just jumping in, Elon. Absolutely agree. Powerwall is mature. We've been producing Powerwall 2 for three years now, and we're at good margins there, but Megapack has more room to go to achieve our targets.

We have a clear runway for improving the cost per megawatt hour of the Megapack.

Absolutely. Yes, we do.

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

From Rod Lackey with Wolf Research. Please go ahead.

Hi, everybody. I was hoping maybe just first you could talk a little bit about how you're thinking about the rollout of version 9 of FSD. the transition of the subscription model. It sounds like some of this is about to roll out next month. I'm not sure if that's the subscription model, but maybe you could just spend a little time talking about how impactful you expect that to be.

Go ahead, guys.

Yeah, we're working on getting FSD subscription out. There's a couple of internal technical dependencies, but from a business model perspective, that's aligned. And we're hoping to roll that out soon. The key thing that I say here, there's a lot of potential for recurring revenue based on an FSD subscription. If you look at the size of our fleet and you look at the number of customers who did not purchase FSD upfront or on a lease and maybe want to experiment with FSD, This is a great option for them. One of the things we'll need to keep an eye on is a potential transition from cash purchases of FSD subscription over to cash purchases of FSD who may move over to FSD subscription. And so there could be a period of time in which cash reduces in the near term, and then as the portfolio of subscription customers builds up, then that becomes a pretty strong business for us over time. But we're hoping to get this launched pretty soon and see what the response is to it.

Okay, great. And I was hoping, Zach, maybe you could just talk a little bit about OPEX. There was a noticeable increase, even excluding SBC, obviously a lot going on this quarter. But can you maybe just talk a little bit about how we should be thinking about that going forward?

Sure. Sure. On the R&D side, what we're seeing, as I mentioned in my opening remarks, is kind of a convergence of a series of programs that are happening. And our R&D OPEX spend kind of correlates to where we are in the product lifecycle on different programs. And so we're kind of at the tail end of investments in what we call internally palladium, which is the new Model S and Model X. And so we expect that to decrease over time, but it was high in Q1. for a lot of the reasons that Elon had mentioned. We're also getting very heavy into 4680 development that Drew and team are working on and the associated structural battery pack that goes along with that. These are new technologies, not only new to Tesla, but new to the industry. We're investing heavily there on an R&D side to work out those kinks. Spend in those areas should continue over time as we continue to work through the development cycle of those. And then I also mentioned, you know, Elon talked a bit about, you know, Dojo and the potential there. So from neural net investments and custom silicon investments, these continue to be areas that we spend on and make investments in. On the SG&A side, you know, the business is pivoting very quickly to be global. And China is ramping quite quickly. And we're trying to make sure that we are staying ahead of the volume so that we have the right sales capacity, store capacity there, local investments in IT and others to manage the growth, such that as the growth comes, the execution challenges are smaller than maybe in similar periods of growth that we've seen in the past. And so we're making investments there ahead of the growth. And overall, as we look at OPEX as a percentage of revenue over the course of the year, we do expect to see a substantial drop from 2020 to 2021. as the volumes in the latter part of the year pick up.

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

Thank you. From with Credit Suisse, your line is open.

Hi. Good evening. Thanks. Two questions. One is on COGS. I think we've gotten from Battery Day a pretty good feel about the potential for COGS reduction related to powertrain, but I'd like to get a sense of the path to reducing COGS X powertrain. You'd still need a meaningful reduction on that front to make the math work on a $25,000 vehicle. So what levers do you have to reducing your cost X powertrain? Is it just more scale, better supplier pricing, or is it just based on ongoing cost reduction?

I mean, I think what would be above?

Yeah, I mean, on the vehicle side, there's plenty of opportunity as well. Obviously, building a car like a Model S is quite complex and has various moving parts. Model 3 and Model Y were steps of improvement in that. But when you look at some of the other advancements that we're including in the Model Y factories into Austin and Berlin, we've reduced the body part count by as much as 60% and the part cost money. So we continue to find optimizations there as well as we get economies of scale when we start to talk about the volumes we're considering worldwide with four factories building the same vehicle. So both of those things on the vehicle side will improve our COGS as well, and the powertrain continues to be integrated into that.

Great. And then just related, you know, as we see Berlin and Austin ramp, I'd like to just get a sense on the comparison of Fremont versus the new capacity. Obviously Fremont's non-optimized because you bought, you know, the old new facility, you had to retrofit that to your needs. So maybe you can give us a sense of how your new capacity is going to differ versus Fremont. What are the areas that you have efficiencies that you previously didn't have? And maybe, you know, how much does that add up to improved COGS over time to help you achieve that $25,000 vehicle?

We don't want to talk too much about future product development. Earnings calls are not the right place to make major product announcements. We'll get there. We'll talk about it later.

All right, thank you very much. Unfortunately, this is all the time we have for today. Thank you very much for dialing in and for listening, and we'll speak to you again in about three months. Thank you. Thanks, Aaron.

This concludes today's conference call. Thank you for participating. You may now disconnect.