Tesla Q1 2022 Earnings Call Transcript

Participants

Corporate Executives

• Martin Viecha, Director, Investor Relations
• Zachary Kirkhorn, Chief Financial Officer
• Elon Musk, Chief Executive Officer
• Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering
• Lars Moravy, Vice President, Vehicle Engineering

Analysts

• Dan Levy, Credit Suisse Group AG
• Rod Lache, Wolfe Research
• Pierre Ferragu, New Street Research
• Trip Chowdhry, Global Equities Research
• Alex Potter, Piper Sandler Companies
• Colin Langan, Wells Fargo & Company
• Mark Delaney, The Goldman Sachs Group, Inc.

Presentation

[Martin Viecha, Director, Investor Relations at Tesla]

Good afternoon, everyone, and welcome to Tesla's First Quarter 2022 Q&A webcast. My name is Martin Viecha, 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 3:00 PM 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 and 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.

Before we jump into Q&A, Zach will have some opening remarks. Zach?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. Thanks, Martin. Just to start off here. Q1 was a challenging but extremely successful quarter for the company. Despite numerous supply interruptions, including shutdowns at our Shanghai factory and nearby suppliers due to COVID, we've continued making progress and achieved our best ever vehicle deliveries.

Last quarter, we demonstrated a series of new financial records, including revenue, gross margins, operating margin and bottom line profitability. GAAP automotive gross margin reached 32.9% and for the first time exceeded 30% when excluding regulatory credits. Higher pricing continues to positively impact our financials as we make progress delivering cars and our growing backlog. Note that for most vehicles our delivery wait times are quite long, thus cars delivered in Q1 generally carried pricing set in prior quarters and at levels lower than cars being ordered today.

Our per unit vehicle cost increased as well. Inflation, raw material prices, expedites and logistics costs continues to impact our cost structure. Factory shutdowns also occurred with little to no notice, hence we are unable to take action to plan those interruptions in a cost-efficient manner. Additionally, we saw slight mix shift towards more profitable vehicles, including Model Y. We also recognized a one-time benefit of $288 million from credit revenue relating to a regulatory change in the US CAFE penalty, without which credit revenue would've declined compared to the same period last year.

Energy business has continued to be impacted by macro conditions more severely than the vehicle business. Our storage products are need of chip supply and new import processes have impacted supply of certain components for solar systems, which is reflected in our solar volume for the quarter.

Opex as a percentage of revenue continues to reduce, driven by higher revenue, lower stock-based comp expense and other items. As a result of our ongoing improvements in operating leverage, we achieved a record operating margin of over 19%. Note that commissioning cost for our factories are in R&D as Berlin started production in late March and Austin in early April. These costs will be in automotive COGS going forward, given these factories are now producing customer saleable cars. Our free cash flows have remained quite strong, yet were impacted by working capital related to lower-than-planned production. Additionally, we have reduced our debt, excluding product financing, to nearly zero.

Looking ahead in the immediate term, a few things to keep in mind for Q2. First, we've lost about a month of build volume at our factory in Shanghai due to COVID-related shutdowns. Production is resuming at limited levels and we're working to get back to full production as quickly as possible. This will impact total build and delivery volume in Q2.

Second, as I've mentioned before, Austin and Berlin are just starting their ramps and thus those inefficiencies will start to flow through our gross margins in Q2. Third, we do have higher ASPs in our backlog, which will help to offset some of these headwinds. We continue to drive towards further strengthening of our financials in the second half of the year and believe our 50% or above growth rate remains achievable for the year.

I want to conclude by thanking the Tesla team, our suppliers and our new customers for a great first quarter.

[Martin Viecha, Director, Investor Relations at Tesla]

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

[Elon Musk, Chief Executive Officer at Tesla]

Sure. Some of my remarks will be redundant with Zach's, but it's maybe worth repeating. Q1 was once again a record quarter on many levels, reaching the highest deliveries, profit and an operating margin of 19%. This was despite a lot of chip shortages, many logistics challenges and an overall difficult quarter. So I'd really like to congratulate the Tesla team on achieving record profitability and an output despite many, many difficult headwinds. And especially the Tesla China team in our Shanghai factory, they really had significant challenges due to the COVID shutdowns and nonetheless have been able to output a tremendous number of high-quality vehicles. And we are already back up and running with the Shanghai factory.

So, as Zach said, we remain confident of a 50% growth in vehicle production in 2022 versus '21. I think we actually have a reasonable shot at a 60% increase over last year. So, let's see.

We began production, as you all know, with Giga Berlin and Giga Texas in the past few months, so with two fantastic factories, with great teams and they are ramping rapidly. Now, with new factories, the initial ramp always looks small, but it grows exponentially. So, I have very high confidence in the teams at both factories and we expect to ramp those initially slowly but, like I say, growing exponentially with them achieving high volume by the end of this year.

So, we're also working on a new vehicle that I alluded to at the Giga Texas opening, which is a dedicated robotaxi that's highly optimized for autonomy, meaning it would not have a steering wheel or pedals. And there are a number of other innovations around it that I think are quite exciting, but it's fundamentally optimized. It's trying to achieve the lowest fully considered cost per mile or cost per kilometer, accounting everything. And so, it's, I think, going be a very powerful product where we aspire to reach volume production of that in 2024. So I think that really will be a massive driver of Tesla's growth. And we remain on track to reach volume production of the Cybertruck next year.

Let's see. So basically, once again, I'd like to thank the Tesla employees for their hard work, but also I'd like to thank our suppliers who've really gone the extra mile. We have an amazing supplier group and I would say a heartfelt thanks to the suppliers that have really worked day and night to ensure that Tesla is able to keep the factories running.

And we're really at the early stage of our journey. We only crossed 1 million units in the past 12 months recently, and we aspire to head to 20 million units a year, so we're basically 5% along the way towards our goal. And we are growing very rapidly year-over-year and remain confident of exceeding 50% annual growth for the foreseeable future for basically several of the next years, I mean, so -- yeah.

And then there's of course Optimus, which I was surprised that people do not realize the magnitude of the Optimus robot program. The importance of Optimus will become apparent in the coming years. Those who are insightful or who listen carefully will understand that Optimus ultimately will be worth more than the car business and worth more than FSD, that's my firm belief.

So -- and then of course insurance is growing well. We expect to address the part shortages that limited our progress with batteries and solar, so expect batteries and solar to also grow well this year.

And basically, the future is very exciting. I have never been more optimistic or excited about Tesla's future than I am right now. Thank you.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you very much. Let's go to the first investor question.

Questions and Answers

[Martin Viecha, Director, Investor Relations at Tesla]

And the investor question is, Elon has historically provided FSD timelines with not optimal accuracy. We love it that's optimism for 2022 release, but is there any data Tesla can share with investors to help them make their own conclusions on progress being made, interventions per mile driven or any other data?

[Elon Musk, Chief Executive Officer at Tesla]

Sure. Well, with respect to Full Self-Driving, of any technology development I've ever been involved in, I've never really seen more kind of false dawns or where it seems like we're going to breakthrough but we don't, as I've seen in Full Self-Driving. And ultimately what it comes down to is that to solve Full Self-Driving, you actually have to solve real-world artificial intelligence, which nobody has solved. The whole road system is made for biological neural nets and eyes. And so, actually when you think about it, in order to solve Full Self-Driving, we have to solve neural nets and cameras to a degree of capability that is on par with and/or really exceeds humans. And I think we will achieve that this year.

The best way to reach your own assessment is to join the Tesla Full Self-Driving beta program where we have over 100,000 people right now enrolled in that program and we expect to broaden that significantly this year. So that's my recommendation is, join the Full Self-Driving beta program and experience it for yourself and take note of the rate of improvement with every release. And we put out a new release roughly every two weeks. So -- and you'll see a little bit of two steps forward one step back, but overall the rate of improvement is incredibly quick. So, that's my recommendation for reaching your own assessment is literally try it.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. The second question is, how much of an impact will the production shutdown in Shanghai have in Q2? What is the timeline for localizing the Model 3 in Europe? And how will different models be prioritized in Berlin?

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, we did lose a lot of important days of production and there are sort of upstream supplier challenges where a lot of suppliers lost many days of production. But Tesla Shanghai, Giga Shanghai is currently back with a vengeance. So, I think notwithstanding new issues that arise, I think we will see a record output per week from Giga Shanghai this quarter, albeit we are missing a couple weeks. So that means that most likely vehicle production in Q2 will be similar to Q1, maybe slightly lower. But it's also possible we may pull a rabbit out of the hat and be slightly higher, but it should be roughly on par. But then, Q3 and Q4 will be substantially higher. So, it seems likely that we'll be able to produce over 1.5 million cars this year. That's my best guess.

And the Model 3, it's important for the new factories to be focused on -- and have the least amount of complexity and variation, which is why Giga Berlin, Giga Texas are focused on the Model Y. From the point at which you have a factory complete and you're making a small number of units to the point where it's producing high quality vehicles and volume is sort of nine to 12 months from start of production. So, hopefully we're getting better at that ramp, so maybe it's a little less. But to get to sort of the 5,000 a week level has typically taken us around 12 months from start of production.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. The next question is, how much raw material exposure do you have measured roughly in percentage of cost of goods sold, for example, in a given quarter versus one to two years out, both direct and indirect? Separately, how do you think about price increases versus prioritizing higher mix vehicles going forward?

[Elon Musk, Chief Executive Officer at Tesla]

Actually, on the price increase front, I should mention that it may seem like maybe we're being unreasonable about increasing the prices of our vehicles given that we had record profitability this quarter. But the waitlist for our vehicles is quite long and some of the vehicles that people order, the waitlist extends into next year. So, our prices of vehicles ordered now are really anticipating supplier and logistics cost growth that we're aware of and believe will happen over the next six to 12 months. So that's why we have the price increases today because a car ordered today will arrive, in some cases, a year from now. So, we have a very long waitlist and we're obviously not demand limited. We are production limited -- very much production limited.

[Martin Viecha, Director, Investor Relations at Tesla]

And what was your exposure?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. Just to add to what Elon was saying, there is different ways to calculate raw material exposure. And I think the simple way, we estimate anywhere around 10% to 15% of our cost structure exposed to raw materials.

And just to clarify a couple things on that. So, we've been experiencing increases in costs in general but also raw materials for a number of quarters now. That pace picked up in Q1, so last quarter. And what we're seeing for Q2 is slightly higher than that as well. And as indices move, it doesn't impact us immediately or directly. In some cases, we have contracts with suppliers, but then as those contracts expire, we have to renegotiate them, so there can be a lag. In some cases, our contracts do directly reflect movement in commodity prices and raw material prices, but the timing in which that Tesla pays for that has been largely associated with that as well based on the contract.

And so, to Elon's point, what we're trying to do here, because it's quite an unprecedented situation of raw material movement and all of these various lags and uncertainty around renegotiating contracts is, we're trying to anticipate where things will go and make sure that the pricing that we have put in place at the time that those raw material cost increases hit us that they align and that the company can remain financially healthy in various scenarios as we look out over the next four quarters.

[Martin Viecha, Director, Investor Relations at Tesla]

Okay. Thank you very much. The next question is, why does Tesla continue to buy dealership laws on a state by state basis versus taking it federal? Separately, why isn't Tesla a 800-volt architecture in its vehicles? What are the advantages or disadvantages?

[Elon Musk, Chief Executive Officer at Tesla]

Sure. From a Tesla standpoint, obviously we would like to have federal legislation that allows direct sales in all states, but we have not seen willingness on the part of the Congress to enact such laws that override state laws. So, unfortunately we have to fight it on a state by state basis.

And, Drew, do you want to answer that 800-volt question?

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah, sure. On the 800-volt thing, yeah, so it's really a case-by-case thing. For the smaller platform vehicles like 3 and Y, there's some wins and losses with 800 volts, not everything is better. And so we look at that platform and we're not like ignoring the reality that you could go to a higher voltage, but there's nothing really encouraging us to do so on that platform. It's really about mass and power. And as you look at bigger vehicles, there are some advantages on those bigger vehicles.

[Elon Musk, Chief Executive Officer at Tesla]

And I would just quantify that, basically our estimate is that like going for 400, so 800 volts might save $100. So it's not really moving the needle.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

And you're changing many things?

[Elon Musk, Chief Executive Officer at Tesla]

Yes, exactly.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

From the charging infrastructure all the way through the entire vehicle system.

[Elon Musk, Chief Executive Officer at Tesla]

Yes.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

To get maybe $100.

[Elon Musk, Chief Executive Officer at Tesla]

Yes, exactly. So, I mean, the US/Europe, 110 volts household power -- or voltage. And then, in your most -- like sort of 220, but really it doesn't make that much of a difference in appliances. We're pretty much as well in, say, Europe as we do in the US. So, the advantages are small and the cost is high. Like say, like long-term, like years from now, does it makes sense to probably move to an 800 volt architecture? I said that it probably, but it really needs a very big vehicle volume to pay for all the costs of changing from 400 volt to 800 volts. And then if -- do you want to continue with the...

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

I was going to say that 100 volt is also kind of like a spreadsheet exercise.

[Elon Musk, Chief Executive Officer at Tesla]

$100.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Sorry, $100 is roughly like a spreadsheet exercise, like that you have to get through the full program to the end to see that maybe it's been whittled away to $50 or less.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

On bigger vehicles where you're talking about higher power on the charging side or higher power from the battery to the power electronics or you need more torque, so the current requirements go up. There's little bit more semiconductor and actual conductor savings of going to the higher voltage. And so we do consider that for Semi and Cybertruck. But for the 3, Y platform, where we've got everything running and the benefit is questionably small?

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, it's basically zero for robotaxi.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah, for robotaxi. Yeah, it doesn't make sense.

[Elon Musk, Chief Executive Officer at Tesla]

No, no. Sorry. No, this [Indecipherable]

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Sounds good.

[Martin Viecha, Director, Investor Relations at Tesla]

Okay. Let's go to next question. Next question is, how are the current 4680s performing versus expectations set during the Battery Day in terms of expected range increase and dollars per kilowatt hour?

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. We're working in all the areas we shared on Battery Day. And we have sort of consistent progress across all those areas towards achieving the five-year cost trajectory goals for the costs within our control. But we do not control all the commodity costs. So that's an exception I need to call out. Similar to Model 3, it will take us several years to get rate and yields to the point where everything that we've discussed is achieved. Our priority was on simplicity and scale during our initial 4680 and structural battery ramps. And as we attain our manufacturing goals, we'll layer in new material technologies we are developing and higher-range structural pack revisions.

[Elon Musk, Chief Executive Officer at Tesla]

I think, maybe in a nutshell, I think probably it's fair to say that 4680 as a structural pack will be competitive with the best alternatives later this year. And we think we'll exceed the best alternatives next year.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. We have some good existent proofs, right? Like we built the facility here in Texas. We know how much we spent on capital equipment in the facility and its more than 5x-plus than prior technology installations. So we're saving huge on capex. On utilities and personnel, we know what those loads are and how many people are needed around what is basically a highly optimized factory. And we have massive reductions in both of those. So, the cost model is well understood. It's really about rate and yield, which will come in time, as Elon said, over the course of this year and next.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. And the next question is, how does Tesla plan to secure raw materials required to scale to extreme size?

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. So, this is something we think about quite a lot. It depends what extreme size means. But certainly if you're looking at like, say, the 5 million, 10 million, 20 million vehicle levels, you really have to analyze the sort of macroeconomic, like what is the tonnage of lithium that you need, of nickel, of iron phosphate, of graphite, separators, electrolytes, or look like you really just think of just macro tonnage. And we think about this for the world as a whole because just we want to figure out what are the limiting factors for accelerating the advent of a sustainable energy future. And whatever those limiting factors are, Tesla will take action on those limiting factors.

So right now, we think mining and refining lithium appears to be a limiting factor. And it certainly is responsible for quite a bit of cost growth in the cells. It's, I think, the single biggest cost growth item right now, certainly on a percentage basis. Although just for those who don't totally know this, the actual content of lithium in a lithium-ion cell is maybe around 2% or 3% of the cell.

[Martin Viecha, Director, Investor Relations at Tesla]

So, 5 kgs a car?

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, exactly 5 kg. It's not -- it's called a lithium-ion cell, but by far the most expensive and heaviest item in the cell is the cathode. So that's the nickel or the iron phosphate. So, we're looking carefully at all of the raw materials and trying to figure how we can accelerate the total amount of raw materials needed to transition the world to sustainability. And I think that we don't have enough time on this call to really go through all those details, but we are thinking about these things and we think we'll have some exciting announcements in the months to come.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

One thing I want to call out is like we're also committed to recycling at all of our cell factories. We're recycling 50 tons a week right now in Reno and ramping to 150 with all of that reclaimed material going directly back into our cathode supply chain. So, we're looking at the beginning- and end-of-life needs here.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah.

[Lars Moravy, Vice President, Vehicle Engineering at Tesla]

And that's true. Like -- since Reno, we built Gigafactory and we started doing that with batteries. But as we built newer factories or vehicles, for example, Giga Texas where we are today recycles all of its non-yielded or scrap aluminum from the stamping shop directly into the casting shop. We re-grind and modestly pick those out. And so we're really concerned about raw materials, not just mining them and consuming them, but when we get them in the door, using all 100% of them.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, Lars. That's a great point. So, we're installing sort of a melt furnaces for aluminum, like for the Model Y that we've built here at Giga Texas has both a front and a rear body casting. So we're casting almost two-thirds of the body. And then that's cast as high-pressure diecast aluminum. And so, we can take both scrap from the casting machine and the gating that comes out and put that -- just really toss that back into the aluminum melting pot. And as Lars was saying, also take any stampings and any other aluminum scrap and also throw that in the melting pot. In fact, we've also figured out that we can use wheels from practically any car.

[Lars Moravy, Vice President, Vehicle Engineering at Tesla]

[Indecipherable]

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, yeah. So we're going to be recycling the cast aluminum wheels from legacy gasoline cars as well and throwing that in the melting pot for our aluminum cast body of Model Y and also what we're going to sort of cast the rear body in all vehicles over time. But actually maybe not SX, but 3 Y.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. At what rate do you expect Berlin and Austin to ramp relative to Shanghai? Are you able to leverage learnings from Shanghai or are the processes substantially different in the new factories?

[Elon Musk, Chief Executive Officer at Tesla]

Ramp production is faster at Shanghai because we have learned a lot. And we've now been through the -- we basically have veteran teams that have seen the 3 Y ramp, the Y ramp especially, in multiple locations. And we're obviously sharing what we've learnt and so we don't want to get complacent or entitled, but this should be a faster ramp because we have learnt more and we've done a lot to simplify the production process of Model Y. But that should lead us to a faster ramp in Texas and Berlin.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

We also had good structural and casting. About 30% less robots than we expected to almost double the capacity for body, for example, reducing the number of robots but doubling our capacity in a lot of areas.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, right. The body line for the structural pack is, if you have a structural pack and front and rear castings, the body shop size drops by over 60% relative to the standard way of making a car.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

And that tags into generally assembly and everything else because we have the structural battery, the floor as battery. You put the seats on the battery and then we put that in the car, so it's actually between 10% and 50% less stations in GA because of the general assembly start. So really, I think about this in the way that we think about cars. If you're waiting for the best Tesla, you're going to be waiting forever. If you're waiting for a best answer, you're also going to be waiting forever because every new factory is better than the last one because we take all the learnings and throw it into the new.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. Next question is, at Cyber Rodeo, Elon mentioned that a futuristic driverless robotaxi vehicle is on the roadmap. When can we expect more details on the product offering to be unveiled? Is this something that people can own or will this be only offered by Tesla as a service?

[Elon Musk, Chief Executive Officer at Tesla]

So I think we want to hold off. We don't want to jump the gun on an exciting product announcement too much. So, I think we'll aim to maybe do a product event for robotaxi next year and get into more detail. But we are aiming for volume production in 2024.

[Martin Viecha, Director, Investor Relations at Tesla]

All right. And maybe the last question from investors is, what is the current run rate of 4680 cell production at Fremont and at Giga Texas? Will you expect run rates of 4680 to be in Fremont, Giga Texas or Berlin at the end of the year?

[Elon Musk, Chief Executive Officer at Tesla]

Well, Berlin is using the 2170 non-structural pack, so they're not constrained by 4680. They will transition to 4680 hopefully later this year, but current Berlin production does not require that. We also have, just as a risk mitigation, 2170 non-structural pack capability here at Giga Texas as well. But if things go according to plan, we will be in volume production with 4680 at some time perhaps towards the end of the third quarter and certainly in the fourth quarter. Hope that portion is accurate, true?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. And the other thing I would add is like, with the China COVID shutdown and the semiconductor bottlenecks we had through Q4 and hence a little bit in Q1, we have sizable cell inventory at the moment and excess cells to support the 2022 volume targets you described. So that gives us the ability to be pretty deliberate in the 4680 ramp where we can maximize the learning step by step, take engineering downtime to upgrade key pieces of equipment and modify the structural pack design to improve reliability, all while achieving what you just said so.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. 4680 is not a risk to achieving 1.5 million vehicles produced this year. But it would become a risk next year if we do not solve volume production by early 2023, but we're highly confident of doing so.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you very much. Let's go to analyst questions now. The first question comes from Dan Levy from CFSB. Please go ahead and unmute yourself.

[Dan Levy, Analyst at Credit Suisse Group]

Hi. Good evening. Thank you for taking the questions. First, maybe you can just talk through or address what some of the drivers of cost improvement were in the quarter. Was it just further improvements within Shanghai or in Fremont, anything around sort of ongoing Kaizen that you've talked about in the past? Maybe you could just talk through what you benefited from in the first quarter.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Sure. I mean, at a high level, cars produced in Shanghai do carry a lower cost structure than cars produced in Fremont. And so, as our mix of cars shift towards Shanghai, the average cost is positively impacted by that. We're also seeing some progress in manufacturing efficiencies in Fremont, particularly on the S and X side as volume increases improves there. Expedites has been a huge story for the company. Q4, we had massive amounts of expedites. Q1 was still quite large, but we did make progress bringing that down some.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. Kudos to the Fremont manufacturing team and our associates there, because we're achieving record output at Fremont.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. The Fremont team is doing a tremendous job. It's absolutely since five [Phonetic] quarters.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

It's hard to underweight, like you should expedite situation with the crazy logistics that occurred with COVID, I mean, that...

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. And to Elon's point, the Fremont team and also the Shanghai team has been extremely dynamic with the unpredictable nature of our part arrivals, and our supply chain team, in particular the production planning portion of supply chain, we often get very little notice when there's part shortages coming, and it's kind of a scramble a couple of days before that part is supposed to arrive to figure out how to get it here. And so, the amount of Herculean effort that goes out to produce a quarter like Q1 and even the quarters before that is absolutely immense.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

I mean, it's like the saying in the military o it's like amateurs talk about tactics, professionals talk about logistics when it comes to war.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. So there were some inherent cost improvements, as I mentioned, but there's also offsets that we've talked about previously on raw materials, commodities. Outbound logistics continues to remain a challenge despite a ton of efforts to increase capacity there and bring those costs down.

[Dan Levy, Analyst at Credit Suisse Group]

Great.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Sorry. Go ahead.

[Dan Levy, Analyst at Credit Suisse Group]

Yes. Thank you. Second question. One of the initial goals of Model 3 way back when was to have an EV that was affordable for a wide portion of the market. And we know prices are much higher now just given the supply constraints. Prices are higher for all other automakers. We know that there is inflation that you're battling through and some of that needs to be passed through to price the vehicles. And you're going to be supply constrained for the foreseeable future. So it's sort of a moot point. But given the goal long-term of making EV's more widely available to the masses over time, how do you look at the progression of prices over time?

[Elon Musk, Chief Executive Officer at Tesla]

We absolutely want to make EVs as affordable as possible. It's been very difficult with the -- I mean, I think inflation is at like a 40 or 50-year high. And I think the official numbers actually understate the true magnitude of inflation. So -- and that inflation appears to be likely to continue for at least the remainder of this year. When we're talking to suppliers, suppliers are under severe cost pressure. So, yeah -- in some cases, we're seeing suppliers request 20% to 30% cost increases for parts from last year to the end of this year. So there's a lot of cost pressure there. That's way we raised our prices because when things are this uncertain with respect to inflation, which we know is high, then we've got orders that go out a year or more in some cases, then we have to anticipate those cost increases. But I think especially with robotaxi and autonomy, I think will end up providing consumers with by far the lowest cost per mile of transport that they've ever experienced. With robotaxi, maybe 5 to 10 times lower cost per mile, it's really quite substantial.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

And therefore, accessible to everybody.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah. If you look some of our projections, it would appear that a robotaxi ride will cost less than a bus ticket, a subsidized bus ticket, or subsidized subway ticket.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you very much. Let's go to the next question from Rod Lache from Wolfe Research.

[Rod Lache, Analyst at Wolfe Research]

Hi, everybody. I'm trying to just parse out your comments about the inflation and constrained supply in battery feedstocks and the initiatives that you are working on internally to secure these materials. It sounds like you're optimistic about Tesla's ability to solve this for Tesla. But do you see this as a constraint on EV adoption more broadly?

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, absolutely. What's sort of keeping our cost down, at least in the short term, is that we have long-term contracts with suppliers. But those long-term contracts will obviously run out and then we'll start to see potentially significant cost increases. But at a macro -- sort of looking at the world as a whole and saying, okay, what does it take for earth to transition to sustainable energy faster? It's fundamentally -- the fundamental limiting factor is the output of basically cell output -- at what rate can the amount of cells increase the gigawatt hours per year. That is the fundamental limiting factor. So -- and that will move as fast as the slowest, least lucky element of the whole supply chain.

Currently, we see that as being a challenge with lithium. And to be clear, it's not that there is a shortage of lithium ore in the world. Lithium is present almost everywhere. It's a very common element. However, you still need to dig up the ore, dig up basically the clay with the lithium and then you need to go through a whole series of refinement steps. And that's a lot of industrial equipment that's needed to refine lithium ore to lithium that can be used as lithium hydroxide or lithium carbonate in a battery cell.

So, we think we're going to need to help the industry on this front, but the industry is growing fast. I certainly encourage entrepreneurs out there who are looking for opportunities to get into the lithium business. Lithium margins right now are practically software margins. I mean, I think it's literally, this is -- Zach, correct me if I'm wrong, but I think we're seeing cases where the spot lithium price is 10 times higher than the cost of extraction. So, we're talking 90% margins here. Can more people please get into the lithium business? Do you like minting money? Well, the lithium business is for you.

[Rod Lache, Analyst at Wolfe Research]

So, interesting. So, I guess, we'll stay tuned to see what happens from that. My second question is, it's impressive to see just a modest increase in cost per vehicle -- cost of goods sold per vehicle, given what we've seen in terms of commodities actually. And from here you have a lot of savings opportunities with 4680 cells and the cell manufacturing changes, the anode chemistry, structural packs, giga castings. Are you suggesting that even those may not be sufficient to offset the inflation that you're seeing and that you're going to need additional pricing as well in addition to those specific initiatives that you've called out?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Well, we hope we don't need to increase the pricing further. The current pricing is anticipating what we think is the probable growth in costs. And if those growth -- if that growth in cost is not materialized, we actually may slightly reduce prices. So we don't currently anticipate making significant price increases, but obviously we don't control the macroeconomic environment. If governments keep printing vast amounts of money and if there are not significant increases in lithium extraction and refinement and other raw materials such that everyone's competing for a limited amount of raw materials, then obviously that will drive prices to high levels. So, if you have a crystal ball and can tell us what the future is going to be like, we'll adjust accordingly. But the current prices are for a vehicle delivered in the future, like six to 12 months from now, so this is our best guess.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

But I think if you zoom out, like as you said, our mission is to accelerate the transition to sustainable energy. So we are looking with our existing suppliers and others to figure out how to grow all of these raw materials as quickly as possible to not slow down the transition.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

And whether that means we have to get directly involved in some cases or not comes down to the counterparty and their willingness to expand at the rate we think they should be able to expand. And that's similar to what we've done with everything else, like we built the Gigafactory in Reno because it needed to be done.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

And so we will do what needs to be done to not slow down the transition. And affordability is a goal. Because if it's unaffordable, it's going to retard the growth of what is inherently a good thing, that we can't have that as an outcome.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. The next question comes from Pierre Ferragu from New Street Research.

[Pierre Ferragu, Analyst at New Street Research]

Thanks. Can you hear me well?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah. Q: Great. I'd like to ask here some questions about free cash flow. So, first, maybe in the long run, Elon, if you look at your performance and your growth model and your growth ambitions, I did the math really quick and I see you guys sitting on $400 billion, maybe $500 billion of cash at the end of the decade. And I was wondering if it's something you have given some thought about [Speech Overlap]

[Elon Musk, Chief Executive Officer at Tesla]

A -- Elon: But that might be like, if inflation keeps going crazy, $500 billion might be like $20 billion today. I don't know. So we'll see what $500 billion buys you in a decade, but it might be a lot less. So, I don't know if we'll -- that seems like a lot of cash. I don't know. We'll try to do something useful with it. I mean, exactly what, I don't know. So really that's not a problem, that's for sure.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

I think we have to take this one step at a time. And so, we have investments that are happening right now to get Austin and Berlin up and running. And then, as Elon mentioned, installing capacity for robotaxi production. And there's some decisions, as Elon alluded to, to share in the future about what the economic model looks like. What the economic model looks like for robotaxi. And so, the way Elon and I have discussed this is...

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Can we just -- everyone just mute.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. So, our focus is to get to the point where robotaxis are on the road, Optimus is in use, get the economic model for that dialed in,and then evaluate the size of cash flows at that point and make decisions then as to what's next.

[Martin Viecha, Director, Investor Relations at Tesla]

Okay. Pierre, do you have a follow-up question?

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Let's move on.

[Martin Viecha, Director, Investor Relations at Tesla]

All right. Let's go to the next one. The next question comes from Trip Chowdhry from Global Equity Research.

[Trip Chowdhry, Analyst at Global Equities Research]

Thank you. Two questions I have. First is regarding the Cybertruck. I was wondering, like in terms of number of parts, how would Cybertruck compare with a traditional pickup truck in terms of number of parts? The second question I have is on Gigafactory Nevada spots. Will we have any production of vehicles in that factory or all the future production will happen in Giga Austin? Thank you.

[Elon Musk, Chief Executive Officer at Tesla]

I'm not sure if we've actually done a comparison of Cybertruck parts versus regular truck parts. Lars?

[Lars Moravy, Vice President, Vehicle Engineering at Tesla]

I mean, if you want to go down, like it depends on the kind of part, we still have cells.

[Elon Musk, Chief Executive Officer at Tesla]

That doesn't count.

[Lars Moravy, Vice President, Vehicle Engineering at Tesla]

But if we don't count that, the simplicity of our structure is significant versus a traditional pickup truck or any other vehicle. Like, as we've talked about, the Giga castings, we save hundreds of parts there.

[Elon Musk, Chief Executive Officer at Tesla]

I mean, the entire rear or half of the car is one casting.

[Lars Moravy, Vice President, Vehicle Engineering at Tesla]

And so, Even so with the Cybertruck. And the doors, for example, we have an exoskeleton design where the door is very thick and it takes the side load from impact. So we don't have the door reinforcements, we don't have the [Indecipherable]. So to your point, having kind of done because I don't often look back at all technologies to decide how I'm doing, I check that once in a while. But in general, our architecture is always removing to reduce complexity, reduce parts, and reduce parts count. I would say, ignoring the battery cells, we are probably 20% to 30% less.

[Martin Viecha, Director, Investor Relations at Tesla]

All right. Okay. Thank you. Let's go to the next question.

[Elon Musk, Chief Executive Officer at Tesla]

Do we expect to expand? Yeah, we do expect to expand Giga Nevada. There's a lot of room for expansion there. And we do expect to increase output from Nevada. But by far, the biggest increase in output will be from Giga Texas.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you very much. The next question comes from Alex Potter from Piper Sandler. Alex, can you hear us?

[Alex Potter, Analyst at Piper Sandler Companies]

Yes, hi. Martin, can you hear me?

[Martin Viecha, Director, Investor Relations at Tesla]

Yeah.

[Alex Potter, Analyst at Piper Sandler Companies]

Okay, great. So, first question I had was the extent to which other plants outside of China are insulated from any further upstream supply bottlenecks that we may have in China. Obviously if this COVID-19 lockdown thing gets out of hand, clearly that's going to continue impacting Shanghai. But is there a point at which it could actually also impact other facilities?

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, if it were to continue, there are some parts that are sourced in China that apply worldwide and that would impact production elsewhere. But all indications are that Giga Shanghai is back in production at fairly high levels already and so our suppliers. So we don't think this is going to be a big deal.

[Alex Potter, Analyst at Piper Sandler Companies]

Okay. Thanks. Second question. Obviously the higher profitability you guys have been able to experience over the last couple quarters, a lot of that is reflecting "real improvements". Another part of it is because we're no longer paying you, Elon, as much as we were. So I'm wondering the extent to which you and the Board are in the process of contemplating another one of these long-term compensation packages, which in the past have seemed to work out quite well. Thanks.

[Elon Musk, Chief Executive Officer at Tesla]

There are no discussions currently underway for incremental compensation for me.

[Martin Viecha, Director, Investor Relations at Tesla]

Thank you. The next question comes from Colin Langan from Wells Fargo.

[Colin Langan, Analyst at Wells Fargo & Company]

Great. Can you guys hear me?

[Martin Viecha, Director, Investor Relations at Tesla]

Yeah.

[Colin Langan, Analyst at Wells Fargo & Company]

Just a follow-up, sorry, to keep going on the raw material issue on the battery side, but obviously seems pretty important. How quickly can raw material supply be built? Because my understanding is, it takes many years to build that out. So, are we just sort of phasing? When do we think we see a lithium shortage or a nickel shortage? And is there even enough time to build that sort of mining capacity in place?

And then related, how quickly can you switch to like LFP for the nickel issue?

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. I mean, I'll take the LFP question. Like, it says so in our letter, but like half of our products were LFP last quarter, which shows how quickly we were able to respond to -- well, honestly it wasn't because of a raw material shortage. But just because it seemed like the right thing to do, we could change our cathode chemistry. And there's more to be done on the cathode side and we are actively pursuing it to give us substitution flexibility in response to market conditions between the other cathodes that are out there that can be competitive in our vehicle, so which there are many options.

So, I guess, what I would say is, specifically on the cathode side, like flexibility is the way we're going to achieve this. And not all of the materials that go into cathodes are actually, first of all, hard to secure, like through mining or refining, and second of all, in many cases, are like very plentiful already, like huge scale. And if all of the batteries in the world use those cathodes, it's less than a 1% increase in total annual output. So that's the cathode side.

I think, Elon already spent a lot of time talking about lithium. It really depends on the resource. Some resources like just getting rocks out of the ground, expanding the amount of rocks that you're getting out of the ground is maybe a little bit of paperwork and some additional sort of blasting and trucking operations. The refining is maybe where there's -- it's a little bit more chunky to bring it on line, but also the refining doesn't -- it's not like an oil refinery, it's a much smaller operation to refine lithium out of spodumene or liquid, like a brine or a salt pond evaporation. So, you're talking about a time scale of one to two years. And it's not like we haven't been talking to all of the lithium suppliers out there for many years. They have a lot of projects already in the pipeline to come online this year and next.

Some of what's going on in the lithium market this year doesn't actually have truth to bear to the like fundamentals of supply and demand, which is also a little frustrating. But, yeah, if we look past this year or next year, into 2030 when we need 15 to 20 terawatt hours of this stuff to get on the growth trajectory -- stay on the growth trajectory we're on, we need everybody to do more in the lithium space than they currently are. I don't know if that answers the question.

[Colin Langan, Analyst at Wells Fargo & Company]

Yeah.

[Martin Viecha, Director, Investor Relations at Tesla]

Fantastic. Thank you very much. So, let's go to the last question from Mark Delaney from Goldman Sachs.

[Mark Delaney, Analyst at The Goldman Sachs Group]

Yes. Good afternoon. And thank you very much for taking the question. I was hoping you could comment on your latest thoughts about potentially opening up the charging network in the US to non-Tesla orders. I mean, certainly really important to have a good experience for Tesla owners in terms of wait times and charge installs. But Tesla is able to have enough capacity, it could be a really good way to bring other vehicle owners into the Tesla network, perhaps help Tesla to sustain its network benefits and maybe make more people likely to buy Tesla vehicles in the future.

[Andrew Baglino, Senior Vice President, Powertrain and Energy Engineering at Tesla]

Yeah. As Elon has said and as we've publicly committed, yeah, we do plan to provide third-party vehicle access all over the world, not just in Europe, where our original pilot was. And we are working on solutions in North America, which is a little bit more problematic with our connector being different than others, but we are moving in that direction.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah, I think there's nothing more to be said on that, but we're -- yeah, we want to do the right thing with respect to the whole system.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

And we're going faster on adding chargers. With the growth of the cars that we're producing and then anticipating what you were discussing, overall charger capacity is really important. And so, the pace of our investment in supercharging has accelerated.

[Elon Musk, Chief Executive Officer at Tesla]

Absolutely.

[Mark Delaney, Analyst at The Goldman Sachs Group]

Okay. That's helpful. And for my second question, could you share any more details on Tesla Insurance in particular as you roll it out in more states? Are there any metrics you can share on what take rates have been like? And how do profitability margins on the insurance offering compared to the corporate average? Thank you.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

So, we just launched Tesla Insurance for real-time insurance in Virginia, Colorado and Oregon earlier this week. Maybe one step that I'll share. So, Texas is our longest-standing real-time insurance market. But based upon the information that we have, Tesla is the second largest insurer of Teslas in the State of Texas. And possibly by the end of this quarter, maybe early next quarter, we'll be the largest insurer of Teslas. And so, the customer reception to this has been quite positive. And I was reading social media on Monday after we launched in the three new states, a lot of folks who are reporting their stories of saving quite substantial amounts of money relative to their previous insurance. And so, we're quite encouraged by that. And we're working as quickly as we can to get to 80% of customers having access to a Tesla Insurance product by the end of this year in the United States, at which point we'll pivot our attention to expansion outside of the US.

The other thing I'll say on insurance is, with these three new states, the model is different because we are now the underwriter and we are also now holding the risk. And so, with those states, we are a fully vertically integrated provider of insurance from systems and financials. With respect to the financials of the program, it's still very early. And so, as the program gets more scale, happy to share more information on that.

[Elon Musk, Chief Executive Officer at Tesla]

And once I noticed that we are seeing that the -- having real-time feedback for driving habits is actually resulting in Tesla owners driving the cars in a safer way, so -- because they can see the -- they get real-time feedback on, okay, this is affecting my insurance rate or it isn't. And so, when people see it -- they can see a real-time score, they realize, if I make the following changes in my driving habits, then I pay less in insurance, then they have a very -- like a real-time feedback loop for driving -- for safer driving and an incentive to do so. So, it is -- actually what we're seeing is, it is causing people to drive their cars in a safer manner, which is also net good.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

It's safer on average, what we see in the data, to Elon's point, and premiums are lower. We see that in the take rate data. We have extremely high retention for customers who experience the product. And I think I've talked about this in the past, but this has become a real passion program for us for these benefits. It's bigger than just the economics. We're trying to do a good thing here for our customers, save people money and make the roads a little bit safer.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah. I think it improves just overall macroeconomic efficiency. It's also a feedback loop for Tesla because we see if there is crash, both large or small, like we sort of see exactly what that caused. And then, we think about how can we change the design of the car or the software in order to minimize the probability of that accident. Most accidents are minor, but how those accidents occur less frequently? And how do we make the repair associated with that accident super fast? Like aspirationally, it would be like a same-day repair of a collision, which is night and day difference compared to sometimes having to wait for a month while insurance claims are settled and figured out -- because Tesla is also doing collision repair.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Yeah, the feedback loop is instant.

[Elon Musk, Chief Executive Officer at Tesla]

Yeah.

[Zachary Kirkhorn, Chief Financial Officer at Tesla]

Right. So, I mean, we do claims management in-house. And so, we receive the notification that there's an accident, we work to prepare the estimate. And we can, with the support of our customers, use our collision centers to do the repair. And so, it's full end-to-end visibility. And all of that, to Elon's point, we can then identify areas of cost inefficiency, feed those back to our engineering teams or elsewhere, software teams, actually improve the product. This lowers the cost of insurance, improves reliability of the product. So, it's a full circle.

[Elon Musk, Chief Executive Officer at Tesla]

Yes. And basically, the customer experience is just vastly better because if there's an accident, there's no argument. We'll repair it immediately. And this is as compared to arguing with an insurance company and then a claims adjuster and then a collision repair center and this can be a nightmare basically. So we're trying to turn a nightmare into a dream with Tesla Insurance.

[Martin Viecha, Director, Investor Relations at Tesla]

Fantastic. Thank you very much. Unfortunately that's all the time we have for this quarter. So, thank you very much for all your great questions and we'll speak to you again in three months.