Tesla, Inc.

Good afternoon, everyone, and welcome to Tesla's first quarter 2023 Q&A webcast. My name is Martin Vieja, VP of Investor Relations, and I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q1 results were announced at about 3 p.m. Central 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 use the raise hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thank you, Martin. So just a Q1 recap. Model Y became the best-selling vehicle of any kind in Europe and the best-selling non-pickup vehicle in the United States. And this is in spite of a lot of challenges in production and delivery, so it's a huge credit to the Tesla team for achieving these great results. It is worth pointing out that the current macro environment remains uncertain. I don't think I'm telling anyone anything people don't already know. especially with large purchases such as cars. And while we reduced prices considerably in early Q1, it's worth noting that our operating margin remains among the best in the industry. We've taken a view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles over time will be able to generate significant profit through So we do believe we're like laying the groundwork here, and then it's better to ship a large number of cars at a lower margin and subsequently harvest that margin in the future as we perfect autonomy. This is an extremely important point. Let's see, regarding the Cybertruck, we continue to build alpha versions of the Cybertruck on our pilot line. for testing purposes, it's a great product. And we're completing the installation of the volume production line at Giga Texas. And we're anticipating having a delivery event, a great delivery event, probably in Q3. As with all new products, it'll follow an S-curve of You know, so production stops out slow and then accelerates. So the cyber trucks are no different. So it's, you know, there's tremendous amount of demand for the product, obviously. It is, in my view, a fantastic product, a Hall of Famer. But as with all new products, it takes time to get the manufacturing line going, and this is really a very radical product. It's not made in the way that other cars are made. So let's see, with regard to Megapack, we're making great progress. Our energy storage deployment reached nearly four gigawatt hours in Q1. It's by far the strongest quarter ever. And this growth was achieved thanks to the ongoing ramp at our megafactory in Lathrop, California. There's still some way to go to reach the full run rate of 40 gigawatt hours per year. And then we additionally announced the start of a new mega factory in Shanghai. So we were, as we've expected, the stationary storage growth actually will significantly exceed the vehicle growth. Regarding autopilot and full self-driving, we've now crossed over 150 million miles driven by full self-driving beta, and this number is growing exponentially. I mean, this is a data advantage that really no one else has. Those who understand AI will understand the importance of data, of training data, and how fundamental that is to achieving an incredible outcome. So, yeah. So we're also very focused on improving on neural net training capabilities, as is one of the main limiting factors of achieving full autonomy. So we're continuing to simultaneously make significant purchases of NVIDIA GPUs and also putting a lot of effort into Dojo, which we believe has the potential for an order of magnitude improvement in the cost of training. And Dojo also has the potential to become a sellable service that we would offer to other companies in the same way that Amazon Web Services offers web services, even though it started out as a bookstore. So I really think that, yeah, the Dojo potential is very significant. In conclusion, we're taking a view that we want to keep making and selling as many cars as we can. Despite this being an uncertain macro environment, this is a good time to increase our lead further and we'll continue to invest in growth as fast as possible. Once again, I'd like to give a huge thanks to Altas employees worldwide for doing an incredible job again. And, yeah, super appreciate it.

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

Yeah, thanks, Martin. I want to start by congratulating the Tesla team for record vehicle production and deliveries. And I also want to congratulate our energy storage team for record volumes as well. There's three main points I want to make. First, automotive gross margin and operating margin reduced sequentially, but as Elon mentioned, these remain at healthy levels. in particular automotive gross margin was impacted by a few factors since our discussion on the last earnings call which include additional action taken in the second half of the quarter to improve vehicle pricing and one-time items most notably warranty adjustments on older snx vehicles as well as increased deferred revenue for certain autopilot features as we transition technologies progress on vehicle cost reduction continued in q1 with meaningful improvements on logistics and the beginnings of some commodity cost reductions starting to be realized. Per unit costs for Austin and Berlin improved as well, driven by record volumes. However, these factories still provide a margin headwind and will likely continue to do so until after we reach and stabilize at our intended volumes. Note that Q1 was our third quarter and our multi-quarter plan to move to a more regionally balanced mix of build and deliveries. As I've mentioned previously, this results in lower deliveries and production within a quarter due to a higher volume of cars in transit at the end of the quarter and has an associated impact on quarter ending free cash flows. This was particularly prevalent in Q1 for S and X as we begin exporting cars for international deliveries. Second, our storage business is starting to take shape and this is exciting to see after many years of investment and focus. This business is growing as a percentage of the businesses of the company's revenue and reached its highest level yet in Q1, driven by an increasing rate of deliveries for our mega pack products. We're also making progress on storage profitability, generating our highest gross profit yet in the quarter. Third, I want to reiterate the philosophy by which we're operating the business this year. Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses. We plan to continue to invest heavily into our future plans, which include the Cybertruck, Next Generation Platform, in-house self-production, energy storage business, and our autonomy and AI-enabled products. And we plan to do this while keeping the business financially healthy and industry leading. To accomplish this, we need to remain focused on cost efficiency and working capital, and in particular, unwinding the strategic inventory buildup left over from the pandemic. I want to conclude by thanking the Tesla team again, as well as thanking our suppliers and our customers.

Thank you very much. And let's go to investor questions on SAI.com. The first one is, what is the process to make auto pricing adjustments? What variables do you consider? How frequently do you review pricing?

Do you want to take that, Ilan, or do you want me to take it?

My apologies, sorry, I was on mute. Yeah, I think this is not something that we can really talk about. It's just we do our best to evaluate the production output, macroeconomic conditions, and we make a decision. But it's, yeah, and this is something you'd like to add, Zach.

No, I think that's right. I mean, as a team, we review where we stand globally on a weekly basis and certainly can't get into the details of the reasons why certain decisions are made. but it is something that's very actively managed by a subset of the leadership team.

Thank you. The second question is, do you still believe Tesla Energy will be bigger than Otto, and when will you provide more formal guidance on Megapack and overall Tesla Energy?

Yeah, I should just clarify, bigger than Otto from the standpoint of, like, total gigawatt hours deployed. So it's possible automotive revenue may be higher, but gigawatt hours I think will be probably higher with stationary storage. If you just look at what's needed to transition the world to a sustainable energy economy, there is more stationary energy storage needed than there is mobile energy storage. And we are seeing growth of stationary storage well in excess of automotive. So that is in line with expectations.

Yeah. And on the guidance part of the question, and maybe, Martin, we can combine this with the next question, which is on guidance for margins. Just have a single comment there. You know, I think we are, we will get to the point where we, as a company, provide guidance on the storage business. I say storage as a combination of both the MegaPak business and the Powerwall business. Relative to total revenues of the company, it's still fairly small. And the business has a lot of volatility currently, both in terms of volumes as well as financials, just given the small volumes and kind of diversification of the customer pool there. But as this business grows and smooths out, I don't think we're that far away from it. You know, I think including these volumes on our day two, production and deliveries release is something that we'll start doing. And then we can talk more formally as a business about our expectations over the coming year. I think it'll be a few more quarters before we get there.

Thank you. The next question, as you said, was already answered. So let's go to the battery question.

Oh, sorry. Just one other thing I wanted to mention on margin. You know, while we're not providing specific guidance there, let me just decide expectations of where we think this business will go in terms of margins. Probably generally in the ballpark of what we've seen historically on the vehicle business. We generally look to mid 20% gross margins for any program that we launch. And so we're not there yet on this business, but that's where we're working towards.

We're hopeful to get there later this year, but that's not a promise. That's an aspiration.

Thank you. The next question is, how well are 4680 cells meeting the expectations described on the battery day? How long will it be until the cells meet those goals?

Drew? Yeah. So, on battery day, we established a cost down roadmap through 2026 across five areas of effort. There was the cell design we discussed, anode and cathode materials, the structural pack concept, and the cell factory itself. We've been making progress across all these aspects since then. For the cell factory, the Texas 4680 factory, we, you know, are partway through building and commissioning and installing and operating, will be 70% lower capex per gigawatt hour than typical cell factories when fully ramped in line with what we described on battery day. And we're continuing to further pursue densification and investment reduction opportunities in future factory buildouts like in Nevada. On the cell design, we're in production with not only the first generation tableau cell we unveiled on battery day, but a second more manufacturer version in Texas today. On the cathode material side, we have a number of activities underway per the battery day roadmap. For lithium, our Corpus Christi lithium refinery breaks ground this May. Our goal is to start commissioning portions of the facility before the end of the year. The refinery uses the sulfate-free spodumene refining process with reduced process cost, no acid or caustic reagents, lower embodied energy, and actually produces a beneficial byproduct that can be repurposed in construction materials We discussed all of these concepts on battery day. Same with cathode precursor. We successfully demonstrated a lower process cost, zero wastewater precursor process that we described on battery day at both lab and pilot scale and are in the detailed design phase for incorporating this technology into the front end of our Austin cathode facility. On cathode production, we are 50% equipment and 75% utilities installed at our new cathode building in Austin. with our goal to begin dry and wet commissioning this quarter and next quarter with the target to produce first material before the end of the year. Structural pack, we saw big improvements with pack manufacturing with the 4680 cell and the structural pack concept, 50% lower capex and 66% smaller factory for the same output in gigawatt hours per year. You know, we do believe structural as a concept is a good one. It's simpler. We'll continue to structurally load the cells and use the pack as the floor of the vehicle while iterating the design to closer to B-level execution of this A-level architecture in future programs. And zooming out for the 4680 team, Q1 was all about cost and quality. We made significant improvements in both areas. In Texas, production increased 50% quarter over quarter. Through yields increased 12%, and Cato peak rate increased by 20%, and through yields improved by 20%. Altogether, the team accomplished a 25% reduction in COGS over the quarter, and we are on track to achieve steady-state cost targets over the next 12 months. And going forward for the rest of the year, the priority one is yield and cost for the 4680 program as we steadily ramp production ahead of Cybertruck next year.

Thank you very much. The next question is, what do you anticipate 2023 automotive gross margins ex-credits will be at the company's current pricing levels?

Yeah, I can start off on this one. You know, this is a difficult environment to make a projection like this. You know, there's a lot of macro uncertainty. There's also headwinds and tailwinds. You know, this is basically a question I think that's asking about our viewpoint on where costs will go. And within costs, there's a set of costs in which we do control, a set of costs in which we're kind of subject to what's going on in the macro world. Within the bucket of things we control, you know, most of the cost down that we're working on is around ramping our Austin factory, stabilizing that, And then doing the cost optimization work once we get to our intended volumes there. And a part of the cost journey in the Austin factory is, as Drew mentioned, the 4680 cell, which is an input into our Austin COGS. And so, you know, as the 4680 program improves over the course of the year on cost, as Drew mentioned, and then the non-cell portion of the factory improves, we see a pretty good trajectory in the Austin facility. A similar story exists in the Berlin factory. It does not have 4680 as an input, but for that factory, the journey to complete localization is still ongoing. And so over the course of this year, as volume increases, more localization occurs, you know, we do see a good path to cost reduction in the Berlin factory as well. In existing factories, too, we talk about this one, I recall, so I don't need to rehash it. the expectation is that every existing factory improves all of their key metrics and we continue to see the progress there um uh you know there's you know there's also a handful of other costs in which we have influence but you know the philosophy here is that progressively going across every cost bucket that we can um within the world that we don't control you know the two major costs there being logistics which fortunately is moving in our favor And I think our supply chain team has done a great job both on logistics optimization and taking advantage of reduced spot rates where they can. So thank you to our supply chain team. And then there's the commodities world, which has been a huge page point in our cost structure over the last, say, two years or so. And we're still kind of at the maximum of paying for commodities in our cost structure. um to kind of maximize it maxed out in the second half of last year we did start to see in q1 a little bit of improvement um we think there'll be a little bit more improvement in q2 but um the theme has dropped a lot it's worth mentioning that space lithium has dropped significantly yeah and and that's that's the piece that we expect to see more impacts on in q2 And generally, as a company, we do expect commodity prices to come down and have a more meaningful impact in the second half of the year. Yeah. So, you know, this is our approach. How that nets out, I mean, it's just a lot of risk, and we'll have to see how the year progresses.

Thank you. The next question is, how has global order intake tracked since the most recent round of price cuts?

I think the overall thing we can see is that orders are in excess of production.

Thank you. And maybe the last question from investors. Can you give updated specs and pricing for Cybertruck and any new features that will make it to production?

Well, I think we'll save that for the Cybertruck handover, which will hopefully be around the end of Q3 this year. And one thing I am confident of saying is that it's an incredible product. It's a Hall of Famer, I think. And a product like this only comes along once in a long while. So people will not be disappointed at all. It's amazing.

Great. Thank you very much. And let's go to analyst questions. We'll start with Alex Potter from Piper Sandler. Alex, go ahead and unmute.

Can you hear me? Yep. Yes. Okay. Perfect. So, first question was on Lathrop. Obviously, it's great to see the growth there. I'm just wondering when you think that facility might be closer to full utilization? Are you just sort of deliberately working your way up the S curve there? Demand, obviously, isn't the limitation. So, what are the steps, I guess, to unlocking full utilization there?

Sure. There are some classic, you know, factor around aspects of what's going on in Lathrop. Two phases of the CapEx there, we phased some of the General Assembly parts of the facility. But in addition, we also have ramps with our suppliers that we are following. So, both on the cell side and on the power electronic side. And we will see that unlock in the latter half of this year with those inputs. So, the overall facility was phased with the second phase of CapEx coming on towards the end of this year.

Okay, great. And then I guess my second question is on your ability to serve other markets out of Shanghai. Obviously, the facility in Berlin should be opening up your ability to, I guess, allocate more vehicles to Southeast Asia, Australia, other areas. I'm just wondering, what are the regions you think you're maybe not yet serving effectively? What are your timelines for addressing some of those gaps in your regional exposure? Thanks.

Yes, that's a good question because there are still many parts of the world that we do not yet serve with respect to vehicles especially. So we do expect to open up new markets around the world. And while those markets are not necessarily individually gigantic, they do add up to, you know, if you add up a whole bunch of markets, they do collectively sum up to something significant. So it's high time that Tesla offered its cars to the rest of the world, and that is something that we intend to do.

Okay. Thank you very much. Let's go to the next analyst, George from Canaccord. Go ahead and unmute.

Hi. Thanks for taking my question. I was wondering first if you could discuss your FSD take rates and whether you've seen any significant positive or negative change there. And also, given that you've reduced the prices for your vehicles, do you think you need to do that for FSD as well?

Thanks. I'll decline to answer the details on the FSD take rate, but it's a tricky price in question because The value of a car that is autonomous is enormous. So in a way, the price right now is an option value on an autonomous vehicle, and that value will ultimately be very significant. And, you know, it's really – yeah, I mean, for those that are using the FSD beta, I think you can see the improvements are really quite – You know, there'll be a little bit of two steps forward, one step back between releases for those trying the beta. But the trend is very clearly towards full self-driving, towards full autonomy. And, you know, I hesitate to say this, but I think we'll do it this year. So that's what it looks like.

Thank you. Maybe on the dramatic change we've seen in EV-related commodity prices, do you think that's a reflection of any recent overcapacity in mining and refining, or is that sort of a coincident indicator on global EV demand, and how do you expect those prices to kind of track over the next several quarters? Thank you.

And I wish I had a crystal ball to answer your question. I don't know if we can provide a question that would have any value, really. I think we're in uncertain times. And if somebody's got a crystal ball they can lend me, I'd really like to borrow it. But, you know, these are uncertain times. You know, my guess is this, you know, economics told me whether for about a year or so, And then roughly 12 months and then, this is my guess, it's just pure speculation. Stormy weather for about 12 months and then provided there are no major geopolitical wild cards that show up, that things start getting sunny around spring next year.

The only thing I would say on the like EV materials They're not all super liquid, and some of them, for example, like, less than, like, single-digit percentage of the market is actually traded on the spot market. And not only are they not super liquid, there's not, like, storage isn't particularly facile for all of the materials. So, like, small mismatches in supply and demand drive, like, large price swings, not really real price swings, but just, like, temporarily large price swings. So it's hard to read into those price swings on it.

Well, this time, by the way, we are seeing, you know, as Yohan mentioned, quite a bit of softening in the lithium carbonate market. This was, you know, six months ago, we were trading at like $85,000 a ton. And today's spot price is about 26. So there's been a dramatic decrease in that. Of course, we were able to take advantage of low lithium pricing earlier on with fixed price contracts. And we find that this is going to be another opportune moment to basically extend that into the later half of the decade. But, you know, the quantities we're procuring were not as impacted by the spot market because we have those contracts in place. And we're just going to be going and doing more of that. The other thing that's happening is because of the price spike, a lot of the companies that are in this business are becoming more ambitious about finding more upstream resources and exploring locations in Africa as well as South America. So that's also helping the macro situation of pricing.

Yeah. On the lithium front, to emphasize, the choke point is much more on refining capacity than it is on mining. Lithium is actually very common throughout the world, including in the U.S., and it's just a very common element on Earth is lithium. So it's much more a question of where's the refining capacity, and can the refining capacity keep up? That's really what matters more than refining. Where is the lithium ore? It's everywhere, basically. I think that same question also extends to refining of the cathode and to some degree refining of the anode. And this is why we've, at Tesla, we're building our lithium refinery capability at Corpus Christi and our cathode refinery outside of Worcester. I hope other companies do the same thing. We'll have by far the most lithium refining capability and the most cathode refining capability in North America, I think probably more than everyone else combined by a lot. So can other people please do this work? That would be great. We're begging you. We don't want to do it. Can someone please? Instead of making a picture sharing app, please refine lithium. Mining and refining. Heavy industry. Come on.

It's fun. It's actually fun. Yeah, yeah.

Exactly. It's real. We're here. Ready to buy. Tesla's not doing this because we want to do it. We have a lot of We have a lot of fish to fry, obviously, but we're doing it because others aren't doing it, and we wish others would do it.

Awesome. Thank you very much. Let's go to Emmanuel Rossner from Deutsche Bank. Hey, Emmanuel, can you hear me?

Hey, can you hear me?

Yeah, we can.

Yep. Perfect. Thank you so much for taking my question. Maybe your first question for Ilan on your pricing strategies so if i understand your message you're saying uh you know tesla feels it's worth maximizing the volume increasing the size of the fleet um as fast as you can because you'll be able to monetize this over the the life cycle of the vehicle could you be a little bit more specific around ways you would be able to monetize sort of like this existing fleet um in the future uh obviously i think autonomous seems to be a big piece of it by minus my understanding was that robotaxi would probably be for the next generation vehicle, not the existing one. So I guess in which ways would you monetize it?

Sorry, the robotaxi terminology can be a bit confusing because that's sort of like a generic term for our next generation vehicle. And we obviously are working on next generation vehicle. It's going to be very compelling. This is just not the time to talk about it in detail as a product. So we internally call it robo-taxi. But really, all of the vehicles that have hardware 3, which is the vast majority of our fleet, we believe will achieve full autonomy. So they will be like a Model 3 or Model Y would be a robo-taxi, a robotic taxi. So yeah, that's to the best of my knowledge that we believe the current hardware can achieve full autonomy. Okay.

Understood. And then maybe a question for Zach, back on the automotive gross margin. So I think, I guess, a few months ago, you know, even after major price cuts, you felt pretty strongly that, you know, 20% automotive gross margin was still, you know, probably a reasonable floor. Obviously, the macro has, you know, gone worse and additional price cuts have happened. Is there anything else that has changed in terms of the outlook? Is it just Is it the macro deteriorating? Is it the competitive landscape? Anything else that sort of like makes you think differently around, you know, the full year? And is there a way, therefore, to frame a floor?

Yeah. You know, about half of the miss against that previous conversation last quarter is attributed to adjustments we made in pricing in the second half of the quarter. um yeah i guess you could argue that that lowers the floor in a sense um we've also made pricing adjustments so far this quarter you know so that brings brings it down further um about the other half of the myth in q1 was attributed to things that are non-recurring so i mentioned these in my opening remarks uh it's a warranty adjustment for cars that were previously produced, but not part of the pedigree of cars we're building now. And some autopilot related deferrals as we make some technology changes here that those deferrals should get recognized once some of the software catches up. So those two things are non-repeating. So hopefully that helps answer your question.

Yeah, I mean, there's really two macro factors that are tricky. The biggest thing, The interest rate. So if there's a very high Fed rate or interest rates are very high, that is – every time that the Fed raises interest rates, that's equivalent to increasing the price of a car. It makes the cars less affordable because people are able to buy cars as a function of what they can afford on a monthly basis. So that's – So it's just almost directly equivalent to a price increase is any kind of interest rate increase. Then the other factor is whenever there's uncertainty in the economy, people will generally postpone big new capital purchases like a new car. So there's a natural human reaction. So, you know, if people are reading about layoffs and whatnot in the press, they're like, well, they might be worried about they might be laid off, so then they'll be naturally a little more hesitant than they would otherwise be to buy a new car. Now, this is just the nature of the auto industry. But there will be a tremendous amount of pent-up demand for new cars. But it goes through cycles.

Thank you. Let's go to Ben Calo from Baird. Ben, go ahead and unmute. Hey, guys.

You know, Elon, when you talk about many fish to fry, you talked about Dojo being a product that you can sell outside of Tesla. How do we rank all the things you have going on in the economic environment? I mean, like heat pumps and everything else you have going on versus investing in the vehicle businesses.

Um, I'm not sure I fully understand your question, but the, the, you know, I, I look at dojo as like, uh, kind of a long shot bet, but if it's a long shot bet that pays off, it'll pay off in a very, very big way. Um, but potentially, you know, yeah, potentially in a very, very big way. Like, you know, um, in the multi-hundred-billion-dollar level. But the thing is, like, you know, still put it in the long-shot category, but long-shot with a multi-hundred-billion-dollar, you know, potential outcome. And so it's a bet worth making, but not one you can sort of say, like, you know, take it to the bank type of thing, although these days take it to the bank. It's maybe not as secure as it used to be. So... us who are big believes in heat pumps, and that is on our list over time is to do a really good heat pump for homes and commercial offices and stuff. And we have the technology, it's really good, but it's a back burner item. It focuses very much on vehicles, autonomy, stationary storage, basically solving sustainable energy and solving autonomy, which would be, like I said, solving autonomy, if we're able to have a fleet of several million vehicles that with a software update can be potentially worth several times their original value, that will be, if that happens, that will be the, and I think it will happen, That'll be the biggest asset value increase in history, I think.

Thank you. Let's talk pricing. A lot of pundits talk about the pie and losing share or gaining share. But how do you guys look at pricing versus the EVs or the ICE vehicles, or does that not come into the equation? Sorry to ask about pricing again. Thank you.

No, it's really just like, you know, every day we get a daily real-time update of how many cars were ordered yesterday, how many cars were produced yesterday. We must have, like, if there's a company that's got more real-time data than Tesla, you know, I'm not sure there's any company on Earth that has better real-time data than Tesla, except maybe SpaceX, Starlink, you know. So... Because we don't have to, you know, for the other car companies, they will make the cars, send them to the dealers, then the dealers will sell the cars, and then it takes quite a long time for them to get the data back to actually figure out how many cars were sold. Whereas we know how many cars were ordered yesterday throughout the world. So our finger on the pulse is real-time and does not have latency, whereas the other car companies have a lot of latency in their data. As does the government. The government has a lot of latency in the data. So we're just looking at and saying, okay, you know, what does it take to achieve a clearing price for our vehicle production? And then we make a pricing change and we see what happens immediately. And adjust course. So we're adjusting course. We're thinking about it literally every day, seven days a week. Every seven days a week, I look at that email, and so does the rest of the team. We try to make the least dumb decision that we can. On balance, I think our decisions are pretty good. Sometimes they'll be dumb, but on average, they're, I think, better than the rest of the industry.

Just to add on the question about EV market share or ICE, This comes up a lot. I think a lot of the public debate is around this concept of EV market share. We don't look at it that way.

We look at it as .

It's the car market, not the EV market. And actually, the mission of the company requires internal combustion engine cars to be switched over.

electric vehicles so that's what we pay attention to yeah yeah i said that last time too you just we gotta you guys gotta stop looking at it as the evv market it's how many cars are we selling just start looking at it that way all cars all cars all cars will be evs it's uh you know it's gonna you know i've said this for a long time we'll look back i don't know assuming civilization's still around in 20 years um we'll look back on internal combustion engine vehicles the same way we look back on external combustion engine vehicles, which is like a steam engine. A steam engine is an external combustion engine vehicle. And, you know, there's still a few around. They're kind of quirky and, you know, kind of cool collector's items. That's how gasoline cars will be in the future.

Thank you. Let's go to Colin Rush from Oppenheimer. Colin, go ahead and unmute, please.

Thanks so much, guys. Can you talk a little bit about how much of the actual cost structure is variable on these vehicles? And if you could give us a range on plus or minus the lithium cost within those contracted volumes that you're seeing.

Again, we'd really love to have a crystal ball here, but we don't have it. Depending on what timescale you're looking at, Most of the car is variable. So most of the car costs are variable. And probably, if I were to guess, I think we will see improved costs from suppliers. You know, yeah, I think we will. That is our expectation.

And we're already starting to see that, Elon, I think you had mentioned before that we anticipated a crash in the lithium prices. And some of that has flowed through by way of lithium carbonate reductions into battery costs. And the same thing will happen with lithium hydroxide. The length of the supply chain matters also, because what we're talking about is very far upstream. So by the time it, you know, makes it into the battery, it'll be several months. But, you know, beyond just the commodity pricing, as Zach mentioned earlier, we're also very focused on other metrics that make production very efficient. For example, detention and demurrage, air expedites. I think our air expedites are down 90%. Detention and demurrage is down 93% from the peaks. That can be hundreds to thousands of dollars per vehicle. So, we're sort of attacking all vectors and becoming very efficient.

Okay. And then my follow-up is really around stationary storage demand on the utility scale. I mean, obviously there's a gigantic queue for, you know, interconnection in the U.S. And can you talk about, you know, the volume of quotation you're seeing at this point around stationary storage for that renewables queue on a global basis and how much of that is converting into actual sales?

Drew, you want to take that?

um i mean it yeah i don't that's also not exactly how we we look at it really um we're not like yeah we're not engaged in the interconnection queue like we're focused on renting mega pack as as quickly and efficiently as we can and we have you know visibility into the pipelines of you know a variety of different renewable energy and and just pure stationary storage developers and we also develop our own projects and we're mostly just We're being selective in trying to pick the project that best fits our mission and our objectives.

Yeah, again, this is not a product call, but we'll have something. I mean, we're making improvements on many fronts, including MegPack. So I think some of those improvements will improve the speed at which you can connect the Megapacks to the grid.

Thank you. The next question is from Mark Delaney from Goldman Sachs.

Yes. Good afternoon. Thank you for taking the question. Do you still see 2 million units as an upside case for volume this year, and is the gating factor for reaching 1.8 million or 2 million units in 2023 still supply chain, as was mentioned on your last conference call, or is it more about at this point?

Well, you know, if you have a crystal ball economy, back to the crystal ball situation, These are volatile times. From a production standpoint, if things go well, we've got a shot at 2 million vehicles this year. But that is the upside case. And we feel comfortable with 1.8. And we'll just have to see how this year unfolds.

That's helpful. Thanks. And then the company has spoken at the investor day and then for the past conference calls about opening up its Can you speak to some of the feedback you've been getting from both Tesla owners and non-Tesla owners and how the ramp of the charging network may progress from here? Thanks.

Andrew, you want to take it?

Yeah. So, as you may have seen, we opened our first V4 post in Europe and our Magic Dock post in North America in Q1. And that is indicative of the direction we're heading with universal compatibility for all vehicles, no matter where the charge port is, et cetera, in all major markets. And we're going to continue to roll out those sort of improved offerings as we build new stations. You know, we're always... balancing our ability to serve our own customers with our ability to serve new customers when doing that. I think we've been able to balance it rather well. For example, in Europe, 50% of all of our supercharging stations are open to all EVs, and we've been able to do that without any increase in wait times at all for anybody. So we're going to continue to take a similar approach as we do this in North America and China over the coming quarters.

Okay. Thank you very much. Let's go to Rob Lash from Wolf Research.

Hi, everybody. I just wanted to first just follow up on your comments in your letter about leveraging your cost position as others struggle with unit economics and also taking into account the lifetime revenue. Actually, in a way that most other automakers will never see, just given your service network and supercharging and other attributes. Can you just maybe give us a sense of how far you'd be willing to take this? Are there brackets around the range of initial margin that you'd be comfortable with? And again, any color that you might provide on the updated range of margins that you'd expect in the auto business?

I think we may have answered this question or tried to answer this question a few times, but it's difficult to say what the margin will be. It depends on what the macroeconomic environment is like. For example, if the Fed were to lower the rates, that would be super helpful for the Fed. If they raise them, that just raises the interest costs that buyers have to pay for to buy a car so it reduces affordability and that therefore reduces demand. So it's, but if, you know, like if we look past say this year or like could go, you know, sometime next year, middle next year. So I think things are looking really, I think, you know, like I said, well, you know, we'll bet if there's some, you know, major geopolitical wildcard that turns up. But in the absence of that, I think, I would be very optimistic about the middle of next year and the next year.

Just to add to Elon's comments, just two other points. You know, what's really important for us this year, in addition to just managing the day-to-day of the business, is also investing in, as Elon mentioned, what 2024 and 2025 will look like. And so, you know, using the cash generated from the sale of products today and reinvesting that, this is very important for us. I think that what happens to margins over the next couple of quarters only matters in the context of what that means for our ability to reinvest into 2024 and 2025. And we have a lot of space before that becomes something that we have to revisit, our investment plans. And so, you know, we're... planning to keep the business healthy. But I just want to caution folks about reading too much into what happens over the near term here is we're very focused as a company on making sure that when we exit this macroeconomic situation, this company is positioned in the best possible way. Yeah, exactly.

Just to elaborate on on that point, though, that revenue, the long term lifetime revenue that you're targeting from each vehicle is massive. So if you took that to the extreme, it would seem that you'd be comfortable with a relatively low initial margin. Am I misinterpreting that or is that exactly right? That is exactly right. Okay. And normally in a recession when consumers feel less financially secure, actually price elasticity deteriorates. Just based on your pulse-taking as a consumer, do you have a view on elasticity of demand?

Well, I can't emphasize enough the whole just fundamental question of affordability. For most people, their ability to buy a car is a function of can they make monthly payment or not. And, you know, so like I said, if interest rates are really high like they are right now – then in some cases people can't get a loan at all. So it's – and I think probably banks are pretty – not leaning forward in providing loans, I expect, these days. So, you know, so that's – but there is quite a powerful story here when you – you know, going back to something that was alluded to a moment ago, or mentioned a moment ago, that Tesla is in a uniquely strong strategic position because we're the only ones making cars that technically we could sell for zero profit for now and then yield actually tremendous economics in the future. but through autonomy. No one else can do that. I'm not sure how many of you will appreciate the profundity of what I've just said, but it is extremely significant.

Thank you. Let's go to Adam Jonas from Morgan Stanley.

Hi, everybody. So, first, Elon, good luck with tomorrow's launch at Boca Chica.

We definitely can't have too much luck in the rocket business, that's for sure.

Incredible. So now that you've gotten to know the Twitter architecture kind of intimately well over the past six months, what can you tell Tesla stakeholders about how an X.com or super app could be potentially accelerative to Tesla's business model?

Well, I don't know. I guess it could potentially make it easier to buy cars. So, but we are starting somewhat off topic here. Okay.

All right.

You know, do I think there's some benefit? I think probably there's some benefit, yeah.

I get it, Elon. So, just as a follow-up on manufacturing, you're a student of history. You'll know that back in 1913, Henry Ford introduced the moving assembly line in Highland Park, Michigan, and the price of a Model T, which had already been undercutting cars around that time, fell another 70% or 80%, and hundreds of rival car companies went bust. I'm wondering if history is repeating itself here, Elon, and that the recent pattern of cuts with you is way ahead of the cost curve compared to competition? It seems like it's a calculated strategy, not just in reaction to competition or changing supply demand in the market, but could we catalyze some Darwinian forces in the EV market?

Well, I mean, we're not trying to say take pricing actions in order to be deliberately to deliberately undermine competitors or anything like that. We really don't think about competitors that much. We just look at, you know, do people like our cars? How can we make the product better? Can they afford our cars? And, you know, the sort of the things like improving service and whatnot. But actually, we do have this unique strategic advantage that we're making a car that if autonomy pans out, and we think it will, where that asset is actually will be worth a hell of a lot more in the future than it is now. So it is technically possible to sell it at zero profit, but still have the net present value of future cash flows associated with that asset be very significant. Yeah.

And service and charging and insurance and all these other ongoing revenue streams that other companies don't have.

Yeah. Yeah. Certainly, we want all EVs to succeed, too. We just want to say that. We're not in, like, some malicious attacks to try to discourage everybody.

Definitely not. We're, like, opening up superchargers. We've made our patents available for free. So, it's like we're trying to be helpful here, you know. So, we're not trying to – we're not out to destroy competitors or anything like that. We're trying to help competitors, frankly, in any way that we can.

Thank you. Let's go to Dan Levi from Barclays.

Hi, good evening. Thank you. First question, you're ramping supply at Austin and Berlin. So I wanted to understand just how critical it is to further increase volume at those plants just to get the vertical integration benefits in the face of the sort of market with some demand questions. And just broadly, should we generally, I mean, historically you've been operating at the pace at which your supply allows you to produce as opposed to gauging to demand? Should we generally expect that you're going to continue to produce at your whatever the max capacity that you're allowed within your supply constraints, regardless of what the broader economic environment is just to continue to get that volume out there?

Yes, I mean, there could be, like, obviously a macro shock that is so severe that, you know, people just stop buying cars for some reason. But in the absence of that, we will continue to grow output at a rapid flip.

Great. Thank you. And then just on the margins associated with Austin and Berlin, you mentioned Austin and Berlin have a margin drag until you reach intended volumes. I don't know if you can disclose what those volumes are. then maybe you could just remind us of what the margin profile of Austin and Berlin will look like versus Shanghai once you get the vertical integration benefits in place.

Well, probably one-half would be quite as good as Shanghai. Shanghai is hard, you know, has a very efficient cost structures, obviously the lowest cost structure in the world. But we do expect to be, make significant improvements in Austin and Berlin and continue to make improvements in Fremont as well. So, yeah.

We've increased, this is Roshan, we've increased our localization efforts. So that will then drive down our days on hand requirements. We've made 10% quarter-on-quarter, you know, improvement in days on hand. So we continue that path as a localization.

Okay, thank you very much. And our final question comes from Philip from Jefferies.

Yes, good evening. Thanks for taking the question. It's slightly longer term. I completely agree with your comments that we should look at Tesla in terms of auto market share, not EV market share. But I'm just wondering, as you build up the market share globally, is there a limit to the direct selling business model as you practice it? And should we think about going forward, you need to look into the agency or using importers to basically develop market share more smoothly, I guess, globally. And so, in other words, is there kind of a fell by date for the direct business model as you practice it today?

It seems to be working well so far.

Because we hear different feedback from customers who miss the human interaction or unhappy with the service. And I'm just wondering if you're seeing some growth pains in there that would lead you to change. You're not seeing that.

Well, I mean, we're always going to have some growing pains where at times, and it depends on which geography we're talking about, where sometimes service is behind sales, sometimes it's ahead of sales. You know, this is, I mean, Tesla's growing, I believe, faster than any company in history that makes a large complex manufactured object. So, you know, these are, if you're trying to match, it's always difficult to match exponentials. So, but, but, I think it is helpful to have the feedback loop with service because that means we feel the pain of service and then we can adjust the design to make the car need less service. And I think that gives us the right incentive structure because the best service is no service. The car doesn't break. And, you know, Whereas if you have, say, a dealer network that is reliant upon service as a revenue, then you arguably have a misalignment of incentives, where they're making money on service. But actually, the best thing for the consumer is the car doesn't need servicing.

And on that front, if I can follow up, have you worked out, I mean, for many of your traditional competitors, A fair amount of profits for them comes from sending spare parts and servicing. You don't have that in your profit structure. And have you worked out the deficit you have compared to your peers?

Yeah, actually, this one's something I could wax on about for a while because really people have been... I understand that the best short-selling argument against Tesla for as long as time was the fact that Tesla does not have an existing fleet and that the auto industry, the reason incumbents succeed and newcomers fail, the biggest reason is that the incumbents have a large fleet and they're able to sell new cars at close to zero margin and then sell spare parts at a very high margin, sort of, you know, razors and blades type thing. And so the only way to actually succeed, for newcomers to succeed, is to have a product that is so compelling that people are willing to pay a premium over the incumbent product. And in the absence of electrification and autonomy,