Tesla Q2 2022 Earnings Call Transcript

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Provided by Quartr
July 19, 2022

There are 12 speakers on the call.

Operator

Good afternoon, everyone, and welcome to Tesla's Q2 2022 Q and A Webcast. My name is Martin Viecha, VP of Investor Relations, and I'm joined today by Elon Musk, Zachary Kirchhorn and a number of other executives. Our Q3 results were announced at about 3 p. M. Central Time in the update deck we published at the same link as this webcast.

Operator

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.

Operator

But before we jump into Q and A, Elon has some opening remarks. Elon. Thank you, Martin. So just as a

Speaker 1

Q2 recap, Q2 was a unique quarter for Tesla due to a prolonged shutdown of our Shanghai factory. But in spite of all these challenges, it was one of the strongest quarters in our history. Most importantly, in June, we achieved production records in both Fremont and Shanghai. And as a result, we have the potential, for a record breaking second half of the year. I do want to emphasize this is obviously subject to Force majeure, things outside of our control.

Speaker 1

The past few years have been quite a few force majeures And it's been kind of supply chain hell for several years. Credit to our awesome Tesla supply chain team for Overcoming, insanely difficult challenges. And, and a huge thanks to the Tesla Shanghai Factory team who sacrificed a lot to get the factory back up and running in June and achieve a record output. So, also making good progress with production ramp with Berlin. We achieved an important milestone of 1,000 cars a week in June And we're expecting, so our Giga Texas to exceed The 1,000 vehicle per week milestone in hopefully in the next few months.

Speaker 1

To be clear, we're currently making the cars with 2,170 sales. And Drew Baglina will address some of the 4,680 questions later in this call. But it is worth emphasizing that we have enough 2,170 cells To satisfy oil vehicle production for the remainder of the year. So we're not dependent on 4,680. 4,680 will be important next year, but it is not important this year.

Speaker 1

That said, we have installed the 2nd generation of Equipment for 4,680 cells in Texas. And, and even at our established factories like Fremont and Shanghai, we continue to expand capacity. Regarding autopilot, we have now deployed FSD Beta with City Street's driving capability to over 100,000 owners. They're very happy with the capabilities of the system and we'll continue to improve it every week. We've now driven over 35,000,000 miles with FSD Beta.

Speaker 1

That's more autonomous miles than any company we're aware of. I think probably more than it might be more than any all other companies combined. So and that mileage is growing exponentially. With regard to manufacturing and technology, about 5 or 6 years ago, we said we wanted to become the best manufacturer in the world, and that that is Somewhat counterintuitively, to some people, what will actually be, I think our strongest competitive advantage. We're super pro manufacturing here at Tesla.

Speaker 1

And in general, we want to encourage Other companies to be super pro manufacturing and in general, I think it is Very important thing to do. We need to make stuff and make it efficiently and that's manufacturing. So we've made a lot of advancements in manufacturing processes, as we now show in the shareholder deck, thanks to our, The largest castings, we make the world's largest castings. We reduced body welding robot count by 70% Per unit of capacity in Orsen and Berlin. So that's, call it roughly Body Shop that is roughly 3 times smaller than what would normally be the case.

Speaker 1

And I should say it's also lighter, cheaper and has superior noise vibration and harshness. So it's good on every level. But this journey is not over. We'll bring another level of simplicity and Manufacturing improvements with Cybertruck and future products that we're not quite ready to talk about now, but I think will be very exciting to unveil in the future. Our safety team also introduced a feature that tension seatbelts if the vision system detects imminent collision, which has never been done before.

Speaker 1

So, you can imagine that if you have a seat belt that, only tensions upon impact, you have very little time to tension The seat belt. If you've got to beat the car is literally got to be crunching to trigger the seat belt tensioner. But because we have vision, we can actually see that a collision is about to occur, with 100% probability before it actually happens. And so we can tension the seat belts, and we can even adjust the airbag deployment because we can see, not just feel. This is a fundamental safety advantage that Tesla's are now able to offer.

Speaker 1

And then this is also an over the air update. So this is something that will be in place in all cars that have at least AP3 hardware. In conclusion, we exited Q2 with stronger a stronger production rate than ever before. Our team continues to focus on cyber truck production readiness Hence, on future platform design. We are expecting to be, still still expecting to be in production with the Cybertruck in the middle of next year.

Speaker 1

And we're very excited about that product. I think it might actually be our best product ever. Let's see. And FSD Beta is on track to be released for all of North American customers before the end of this year. And hopefully if we get regulatory approval, we'll also be releasing it, hopefully in Europe and some other parts of the world.

Speaker 1

We're hosting our AID in a few months. I think people will be amazed at what we're able to show off in AID. So basically, there's a tremendous amount to look forward to in the second half of this year. And I want to thank all of our employees and suppliers for their super hard work during these challenging times. Super appreciated.

Speaker 1

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

Speaker 2

Yeah. Thanks, Martin. I want to start by congratulating the Tesla team on excellent execution during the Q2. Although our production volume reduced sequentially due to COVID related Cutdowns in Shanghai. We made substantial progress in nearly every area of the business and in particular our global vehicle production rate as we exited the quarter.

Speaker 2

Our Fremont factory supported by our Reno team reached new production records. The Shanghai factory resumed full production And our new factories in Austin and Berlin are progressing well through their initial ramps. Additionally, our energy business achieved record gross profit With the highest solar volumes in many years. I want to personally thank the entire Tesla team as I know many of you are listening. You've embodied a remarkable and relentless pursuit of excellence in support of our mission.

Speaker 2

I also want to thank our suppliers for their support during another complicated quarter. On GAAP automotive gross margin, it declined sequentially to 27.9%. The temporary decline in Shanghai production volume Meaningfully impacted margin, including idle capacity and factory restart costs and also had implications on the mix of regional deliveries. Additionally, as discussed on previous calls, we are working through the ramp inefficiencies of our new factories, which are progressing well, But have had an impact on margin as those factories come online. While we continue to see a benefit from higher pricing flowing through, Which experienced some foreign exchange related headwinds.

Speaker 2

Our cost structure continues to experience cost increases from inflation, commodities and logistics. The energy business progressed well in Q2 aided by alternate solar supply coming online and progress on unit economics. Our storage business remains component constrained on both Powerwall and MegaPack, which we hope will alleviate to some extent in the second half of the year. We are greatly appreciative of the patience and flexibility shown by our customers while we work through these challenges. Within operating expenses, Austin and Berlin related start up costs have wound down as these factories have moved into production and their costs are now reflected in automotive COGS.

Speaker 2

Additionally, we converted a majority of our Bitcoin holdings to Fiat for a realized gain offset by impairment charges on the remainder of our holdings Netting a $106,000,000 cost to the P and L included within restructuring and other. We also incurred restructuring charges related to targeted staffing reductions.

Speaker 1

Yeah. Actually, it should be mentioned that, the reason we sold a bunch of our Bitcoin holdings was that we were uncertain as to when the COVID Lockdowns in China would alleviate. So it was important for us to maximize our cash position Given the uncertainty of the COVID lockdowns in China, we are certainly open to increasing upward coin holdings in future. So this should not be taken as some verdict on Bitcoin. It's just that we were concerned about overall liquidity for the company given COVID Shutdowns in China.

Speaker 1

And we have not sold any of our Deutsche Bank. We still have it. We still have our Deutsche Bank.

Speaker 2

Despite these challenges, we were still able to achieve one of our strongest operating margins of 14.6%. Our free cash flows were impacted by working capital related to the Shanghai factory shutdown. However, we expect this will show as a benefit in Q3 As our working capital related cash flows restabilize. As we look ahead and as Elon mentioned, we are positioned for a record breaking Second half of the year, we are quite excited about this. A couple of things to keep in mind as we progress.

Speaker 2

Austin and Berlin ramp inefficiencies We'll continue to weigh on our margins for the balance of the year. However, the impact should reduce as we increase ramp. 2nd, as we've mentioned before, we expect to continue to see recognized global pricing to increase As our backlog flows through, however, macroeconomic related cost increases will also continue to be part of our story. And finally, despite losing more builds in Q3 than expected, we're still pushing to reach 50% growth this year. This target has become more difficult, but it remains possible with strong execution.

Speaker 2

And as Elon mentioned, no more force majeure events for the balance of the year.

Speaker 1

A lot of fortunes here in the last several years. I think that's for sure. Thank you.

Operator

Thank you very much. And now let's go to the questions from investors. And the first question is, Chinese EV manufacturers seem to be doing a better job than their Western Competitors, excluding Tesla, at Innovating in Software and Design. How can Tesla make sure the company is staying ahead of those manufacturers, both within China and outside of

Speaker 3

China. Well,

Speaker 1

the right now, the best Chinese EV manufacturer is Tesla China. We're we're actually doing the best, thanks to our incredible team in China. But I have a lot of respect for the, Chinese, manufacturers and EV manufacturers in particular. I think they will be a force to be reckoned Worldwide, they're very they're smart and they're hardworking. And, I think, anyone who is not Any company that's not as competitive as them will obviously suffer a market share decline.

Speaker 1

So I would say we have a lot of respect for the Companies in China, and then their capabilities.

Operator

Thank you. And the next question is, when will Tesla have a unified vector space for both static and moving object network? Will this be a V11 or later version? If the latter, can you explain what makes it a difficult problem in layman terms?

Speaker 1

Okay. This answer will be understood by 0.0 1% of the audience, I think. Most people don't know what a unified sub practice space would actually mean. It essentially would be, If you can take, if instead of knitting together static and dynamic objects in C plus plus if they can be knit together at the neural net level, Then you don't need to reconcile them within C plus plus heuristics. That is an architecturally better way to that's the most desirable outcome.

Speaker 1

It's, I think it's probably not necessary to achieve full self driving, but it would be A slight improvement in the efficiency of the self driving. And it's certainly something we want to get to. Yeah. The sort of, Nirvana situation is you have surround video, auto labeling Optical static and dynamic objects. And you have then surround video inference With spatial memory as well.

Speaker 1

And that's, I mean, I think we're almost certainly there before the end of the year. Yes. Not sure how many people wouldn't understand that, but Sounds good. I should say also, we are also Confident of improving the frame rate. As we delete some of the legacy neural nets, We think we might be able to get the frame rate of the all the cameras Maybe up to 36 FPS, which is actually a lot of frames considering, say, cameras.

Speaker 1

Certainly comfortably above, 24 frames, which is basically, the movie frame rate of movies.

Operator

Thank you. The next question is, Elon recently tweeted about lowering prices once inflation cools down. Can you elaborate on what do you mean by cooling down and how aggressively the company will lower prices? Or broadly, how do you think about the auto pricing long term?

Speaker 1

Yeah. So since we have there's there's a quite a long wait when somebody orders in our car, That's okay. It's like 6 months in some cases it could be up to a year. We have to anticipate what the probable inflation rate is over that period of time. So that's what we're trying to do.

Speaker 1

When on the or if we see indications that the inflation rate is declining, then we would not need to increase our car prices. It's possible that there could be a slight decrease in car prices, but this is fundamentally dependent Macroeconomic inflation, it's not something we control. If I were to Yes, and I wouldn't take this with a grain of salt. I think inflation will decline towards the end of this year. We're certainly seeing Prices of commodities trending lower, but take it with a grain of salt.

Speaker 1

This is making Economic prognostication is fraught with error. I don't know if you guys want to, Yes. Do you want to say anything about it?

Speaker 4

We're certainly saying, I mean, it's kind of a whole spectrum. On the battery metal side, for example, the price of lithium has really shot up. We used to be $11 a kilogram to more than $80 a kilogram. But not every situation is that bad. So it's kind of a spectrum.

Speaker 4

Carbon Steel, Aluminum

Speaker 5

Carbon Steel and Aluminum has started trending down. We will see the benefits of it's only probably later part

Speaker 1

of this year or early next year. Yeah. But I think that's just like For most commodities, we're seeing a downward trend towards the end of this year or next year. Some commodities, the Processing of lithium is insane. I'd like to once again urge entrepreneurs to enter the lithium refining business.

Speaker 1

The mining is relatively easy. The refining is much harder. So the Lithium is actually a very common, sort of very like lithium pretty much everywhere. But you have to refine the lithium into battery grade Lithium carbonate and lithium hydroxide, which has the extremely high purity. So it is basically like minting money right now.

Speaker 1

Sure. That's like software margins in lithium processing right now. So I would really like to encourage once again entrepreneurs to enter the lithium refining business. You can't lose It's licensed to Permian.

Operator

Thank you. The next question is, You made the right economic call before most on inflation when you diversify into Bitcoin. It has since shown it's not much of a hedge in the real world test in the last few months. How do you think about it as an asset over long term and what do you need to see to change your view?

Speaker 1

Well, you know, Tesla is, Tesla's goal is to accelerate the advent of sustainable energy. You know, we're not really, cryptocurrency is a sideshow to the sideshow. So it's, you know, we're not, carbon currency is also something we think about a lot. We think a lot about scaling production And accelerating the advent of sustainable energy, which, the record heat waves around earth So to emphasize the urgency of that transition. So that is what we're trying to do, is Make, so electric vehicles and solar and, stationary storage battery packs, are the 3 pillars of a sustainable energy future, Just like solar and wind for energy generation, stationary battery packs, for storage of the solar and wind energy because of its intermittency And then electric vehicles, the 3rd pillar.

Speaker 1

And if if those three things are solved, we have a sustainable future for civilization. And The fundamental good of Tesla and the reason we're doing this, or which certainly my primary motivation here, is to, to have the Day of sustainable energy comes sooner. That's our goal. We're neither here nor there on cryptocurrency.

Operator

Thank you. The next question on 4,680. Elon noted that 4,680 plus structural pack is not yet optimized. Can you please share the general path of 4680 and structural packs in terms of cost efficiencies and compared to the traditional 2,170 pack? Will cost improvements be mostly due to scale or do we need to solve some technical issues?

Speaker 3

Yeah, do you want to do the architecture? Yeah.

Speaker 1

So structural pack where we get dual use of the battery of the cells as structure and as as energy storage in the same way that an aircraft gets dual use of the wing as a fuel tank and as a wing Is, I think unequivocally from a physics standpoint, the superior architecture. It's the a architecture. Now, because it is new, we will, you know, we'll start off getting, I don't know, aspirationally a C within an A architecture. But the potential is there for to get radically better and then unequivocally better, than a battery pack, which is carried like a sack of potatoes. So,

Speaker 3

yeah, and we've gained the perspective through putting our first structural pack in production that It is actually the AI architecture. Yeah. Like before we did that, it was a hypothesis that was backed with a lot of modeling and First principle is analysis, and now we've actually built it and are more confident

Speaker 1

in that assertion. Yeah. So exactly. So the structural pack, Even the C and the architecture is beating the nonstructural pack. And so Over time, it will, with further refinement, be substantially superior to a car that is Carrying a battery pack as though it is cargo.

Speaker 1

And this is like I said, it's very, very much, very analogous to the Early days for aviation where where fuel tanks were initially carried like cargo until they realized actually you should get dual use of the fuel tank As a wing and as fuel tank. And that makes the planes lighter and better. And the same is true of electric vehicles.

Operator

And on cost improvements, Are they due to scale or about solving technical issues?

Speaker 3

Both. Yeah. It's always both.

Speaker 1

Yeah. I mean, but really the two things that improve cost are economies of scale and And Core Technology.

Speaker 3

Yeah, I think technically she's not the right. Technically she's like, technology. Getting to the optimal design, right? Like you always start with some excess. Some people might call it fat, but that's not really what you think it is initially.

Speaker 3

It's that you don't know how lean you can get until you've Done it a couple of times.

Speaker 1

Yeah. I mean, there's some platonic ideal of the perfect product, where the atom is you have exactly the right atoms in there in exactly the right position. And you asymptotically approach this platonic ideal. And, but it takes a lot of effort over time to figure Actually, what is what is the Platonic Ideal? And then, to actually gradually approach that.

Speaker 1

Yeah. I

Speaker 3

mean, you might need to create a new alloy, then you need to figure out how to cast it, then you need to ramp the casting machine of the new alloy. We did.

Operator

Yeah. I've done

Speaker 3

it for rotors. We've done it for like passing. So like, yeah, but it doesn't take time.

Speaker 6

Constant improvement is something we're used to here and it's something like we've done with our vehicles and our designs since the beginning. I mean, even, You know, we were talking a couple of weeks ago, like the first version of the front casting that we made that went into the early vehicles is like Model,

Speaker 1

you mean Model S days?

Speaker 6

No, no. I'm talking about like our first Model S. Oh, yeah. We've since we've ordered more dies because we need more dies for more production, we've saved like 4

Speaker 1

or 5 kilos of mass And

Speaker 6

just in Dye iteration, and that's something we do at Tesla, like quite regularly, and we'll continue to do. So like, we're not happy with a C, Like maybe we're at

Speaker 1

a C plus now because we've got to keep going. It's a B- ish on the rear casting. But this will transfer for improvement with the casting. So the casting is already way better than The rear body casting is really way better than the way it was done in the past where you've got Yeah, 120 different parts that are welded together or bonded together, but with different alloys And then you have to put sealant in between all the various parts, for water ingress and, noise. So, we're already Way better than that with current casting, but there's still a lot of opportunities to Reduce the mask of the casting and also extend the casting to include more parts, as well as adapt the rest of the vehicle For the fact that there's a casting.

Speaker 3

Yeah. I was going to say the same thing, right? Like, we're not just evaluating the pack in isolation either. It's the pack plus the body, The integration, we have mass in the right places, we have the cost in the right places and only just the right amount. And I think Yeah.

Speaker 3

We've gone through one iteration. We're doing another one with Cybertruck. I mean, we're taking the learnings And doing, you know, the next version hopefully is a B plus. Yeah. NDA architecture.

Speaker 3

That's certainly its target.

Operator

Thank you. The next question is, how do you feel the progress of FSD is going and does Andre Karpathy's leaving have any significant impact on timelines or potential progress. Well, since Andre was writing all the

Speaker 1

code by himself, you know, naturally things have come to a grinding halt. It's an irony. So Andre is also Andre is awesome and we have tremendous and respect for Andre. You know, he's decided to I think he wants to contribute more to, I think, Core AI at an academic level, and get back to coding individually. So, But we've got a team of, about 120 people in our, software AI Group that are extremely talented and I think we will have I'm highly confident we will solve Full stop driving and it still seems to be this year.

Speaker 1

I know people, they're like, you know, it always says that, but It does seem to be Eitweg. It does seem as though we are converging on installing full self driving this year.

Operator

Thank you. The next question is how is the 46, 4680 ramp going and is Giga Texas producing sales yet?

Speaker 3

Yeah. So we are making progress on 4,680, but right now as Elon mentioned, we are leveraging supplier cells, which we have in sufficient quantity to ramp Texas and Berlin. We expect to ramp total 4,680 production to exceed 1 ks per week by the end of the year, hopefully before, well before. In Q2 at Cato, we fully automated power conveyance for the dry anode electrode tool there, Unlocking major increases in production and improvements in yields, since March because of that, CATO output has grown 35% month over month, each month since, and yields throughout the factory are already at targets in most areas and trending in that And a few others. We did feed learnings from Fremont, sell and pack lines to Texas and Berlin.

Speaker 3

They aren't a carbon copy. Dell design was revved to unlock higher performance and manufacturing simplicity. Manufacturing lines were further integrated and we in sourced additional content. For these reasons, there are some new ramp challenges to overcome in Texas, and Berlin. Specific to Texas last quarter, Cell equipment was fully installed and commissioned and we produced our 1st commissioning car sets of cells through the end of the line.

Speaker 3

Our target for Texas is to begin production this quarter And, aim for Texas to be capable of exceeding CATO weekly output before the end of this year.

Operator

Thank you very much. The next question is, on 4,680 as well, but I think Drew has I covered everything that was in the next question. So the following question is, with regards to the ramp of production in Oslo and Berlin. How is the situation with regards to supply of semiconductors, battery cells and other components? How about cost inflation impacting profitability of these other plants?

Speaker 4

It's Martin. I can take that. So, Tesla procures about 1600 unique pieces of silicon from 43 semiconductor companies. So with a portfolio of that size, There are always challenges. Things are more stable on the latest generation chips.

Speaker 4

We still see some tightness in the older generation semiconductors, especially in the analog and mixed signal space. But we have a line of sight to solve for the volumes being contemplated for both Austin and Berlin. And on the sell front, like Ilan mentioned, We have a comfortable margin, thanks to record output from our partners and have line of sight that matches the plant output from both factories. We've grown cell production significantly on a 12 month rolling basis and have long term contracts with all our partners for key battery metals. So So we don't see any major problems for the components, of course, barring unforeseen COVID related shutdowns.

Speaker 2

Okay. Just to add on the profitability part of the question, Q2 was our largest increase yet over the A handful of quarters on inflation and commodity related increases to our cars. Given your common suppliers or common issues that impact, the broad supply chain. So, you know, I think I had mentioned before That, we have been seeing increases over the course of last year. It ticked up in Q1 and then it ticked up again and the rate of increase was more in Q2.

Speaker 2

So as we look through to the end of the year, what we're seeing is we don't think the inflation related increases in Q3 will be as big Yes, Q2. But as Elon had mentioned, there is uncertainty on pricing here. And we don't have full exposure, as Karen had just mentioned, On every component of cost because we do have some contracts in place but there are some spot buys as well and some contracts being renegotiated. So, you know, we're managing it with pricing, and in partnership with our suppliers, but it does continue to be something that is impacting our financials.

Operator

Okay. Thank you very much. And the last question is, when will the Cybertruck be officially available?

Speaker 1

We're hoping to start blurring them in the middle of next year.

Operator

Great. Thank you very much. And now let's go to analyst questions. The first question comes from Pierre Ferragu from New Street Research. Here, feel free to unmute yourself.

Speaker 7

Hi, guys. Thanks a lot for taking my question. I'd like to ask like a question on 4,680 and the structural battery pack. And I'd love to understand where you stand on the technology and efficiency and energy density roadmap That you described at the Battery Day. So what I'm trying to understand is where do you stand on the architecture of the battery Tells how much silicon do you have in it?

Speaker 7

How much energy improvement have you achieved already so far? And the reason I'm sorry?

Speaker 1

No, go ahead.

Speaker 7

And the reason why I'm asking that is because you have like very smart guys on Twitter who shared experience about trying to fully empty A Model Y from Texas, from Austin. And noticing behaviors and like recharging behavior that suggested that Maybe these cars had like very, very high mileage, very high range and were like artificially limited in range in software. So I'm just kind of trying to understand how much of an edge you're building at the moment with the 4,680 and the structural battery pack on range.

Speaker 3

Yeah. Let me just try to provide like a super straightforward answer. Like, As Elon mentioned before, our priority was really on simplicity and scale during the initial 4,680 and structural battery ramps. So We weren't like putting all the bells and whistles in from day 1, because if so, we would be sort of suffering under A string of serious miracles that we would need to achieve to get going. But, you know, as we attain the manufacturing goals that we've stated, you know, hit the ramp that we need to hit next year, We are certainly planning to layer in new material technologies, and higher range structural paths.

Speaker 3

Like We're not like holding back goodies for some, you know, rainy day

Speaker 1

or something like that. Yeah. Maybe Another way of putting it is that the our focus right now is on the dozens Of little issues that inhibit the production ramp of the 4,680. Some of the more challenging ones have been Feeding the anode and cathode material, because we were using this revolutionary Dry electrode process. But when something's revolutionary, there's a lot of unknowns that have to be resolved.

Speaker 1

So We're confident of resolving those unknowns, but it's very, very difficult. We're making rapid progress on that front. So the first order of business is really, get the basics right, get to High volume and high reliability and then very rapidly iterate within that To enhance the energy density and reduce the cost of the cell. Yes. Totally great.

Speaker 1

Yes. Okay. I'd say we're we are highly confident of a good outcome. It's the exact counterpoint of that is Perhaps, it is of some debate, but, the outcome is not.

Speaker 3

Yeah. And specific to the DRi process, we made A major advance, this past quarter and cater that the team is really excited about and, you know, congrats to the team for achieving that.

Speaker 1

But I should also emphasize that, it is not as though Tesla and Tesla displace our suppliers of battery cells. The Tesla battery cell production is in addition to what our suppliers can do, and we want our suppliers To grow their battery output as fast as they possibly can. And that goes for the entire supply chain. The fundamental rate limiter for the for both transitioning to sustainable energy is how fast Can you grow lithium ion battery output per year? This is the fundamental rate limiter for a transition to sustainability Because you need the batteries for 2 of the pillars of sustainability, the stationary storage and for vehicles.

Speaker 1

So

Speaker 3

Yeah. And I just want to stress that a lot of these, you know, higher energy density technologies are not necessarily scalable. I mean, most of them are not scalable from what I've seen. And so, like, focusing on them is a distraction from the mission. Like, it it really is how do we scale as fast as possible?

Speaker 3

And, you know, we're taking these risks that we've discussed at Battery Day. And our plan is, as we de risk them and they are successful, we want to bring them back To our partners so that they can go faster too because that's all on the mission, right? Like how

Speaker 1

do we accelerate? People often ask me, people often ask me, Is some breakthrough needed in battery technology for the world to transition to sustainability? The answer is no. Even if there was 0 technology breakthroughs, literally 0, from where the technology is right now, We could fully transition earth to sustainable energy. The issue is very much the rate at which the entire supply chain from mining to refining To sell production, how fast can that grow?

Speaker 1

It's growing fast, but the faster it grows, the faster we transition to a sustainable energy Economy.

Speaker 7

This is actually a great exactly where my follow-up is. So, Elon, you always mentioned this 50% per annum sustainable growth target that you guys have. And so my question here is, when we see like the difficulty regarding the commodities, raw materials, Swinging prices. I'm kind of wondering, as you are planning for this 50% per annum growth, If we stand today over the next 5 to 10 years, how much of that do you feel you've secured through your work at Entering into long term contracts and things like that. And you were calling for entrepreneurs to go into the lithium business.

Speaker 7

And so does that mean you don't have enough lithium secured to grow 50% per annum over multiple years? And what's How much of that is secured today and how fast can you improve that basically?

Speaker 1

Well, I think it's very difficult to predict anything 10 years from now. I hope civilization is still around, frankly. I would count that as one.

Speaker 5

It's not that funny.

Speaker 1

Yeah, exactly. Every day. You know, hopefully, we haven't had World War III by then. For the earth. Yeah.

Speaker 1

So, you know, the We do see constraints in refining of the materials necessary for Lithium Ion Batteries. I do want to emphasize this is it is not due to a scarcity of the raw material. You know, in the case of lithium, lithium is one of the most common elements on earth. It's pretty much everywhere. But but but refining of the lithium into ultra high purity battery grade lithium hydroxide and lithium covenant is Quite difficult and requires a massive amount of machinery, and it's a hard thing to scale.

Speaker 1

As what it was also difficult, to create the anode and cathode. I think my guess is maybe 2 thirds of batteries will be Iron phosphate or maybe iron phosphate with some manganese. And there's plenty of there's a ridiculous amount of iron. In fact, Earth is a little bit of trivia. Somebody says, what is Earth made of more than anything else?

Speaker 1

Iron. Iron is the number one ingredient of both IMS. Number 2 is oxygen.

Speaker 3

Yeah. Which is wild. But Yeah.

Speaker 1

Actually, it's basically rust. We've stuck them together. We're a rust ball. That's roughly that's almost 2 thirds of Earth, I think, is Rust. We are like a rusty ball bearing With a little bit of other stuff.

Speaker 1

So, but plenty of lithium. So, anyway, there's not like a shortage of materials. Yeah.

Speaker 3

I mean, but another thing on that LFP thing is it isn't just that there's more access to material That way, the actual refining process is less capital intensive to make a good LFP cathode. And so there's it's not just scalable on the resource side, scalable on the refining side.

Speaker 1

Absolutely. To be clear, There's not, there's no fundamental barrier here. It's simply a rate question, like at what rate Can you scale production? Yeah. And I think we're seeing a very rapid increase in Battery production and the whole supply chain.

Speaker 1

If you were to say today, what are concerns, you know, a few years down the road, I would say one of the concerns is, the machinery to refine the critical, critical ingredients of Lithium ion cells, so the lithium itself, and the and then the, cathode, which as it likes to be Mostly iron phosphate, perhaps with some manganese. I think almost all stationary storage will be Iron phosphate. And then you really just need nickel chemistry for Long range vehicles and like aircraft and that kind of thing.

Speaker 3

Yeah. The other thing I would say is, you know, We are working with our suppliers to ramp their capability as quickly as possible. And it's not like we have a problem in the next year or 2, Specifically to your question, but when we look 10 years out, yeah, we need to do more to accelerate, the growth. And that is why we are making our own investments like we are building a catholic facility here in Texas. This bill is going up.

Speaker 3

You can see it in the flyovers. We're working on lithium refining activity as well ourselves because, you know, The best way to learn how to accelerate something is to do it yourself. So these are the things we're doing, to move it all forward.

Speaker 1

Yeah. If our suppliers don't solve these problems, then we will. Yeah.

Operator

Thank you. The next question comes from Emmanuel Rosner from Deutsche Bank. Emmanuel, go ahead and unmute yourself.

Speaker 8

Yes. Thank you so much. I have a question on your vehicle demand and then a quick follow-up on supply. First on the demand side, are you seeing any sort of pressure in the order book or the pace of new order Well, any sort of like slowdown as a result of the pressures that the consumer is experiencing. Are you worried about it, in light of Your view of the risk to the economy that I think you expressed, Elon?

Speaker 1

Well, right now our problem is very much production. So we have long leads on as anyone can tell if they order our car, You know, if you order Model Y, it will arrive sometime next year. So this is clearly not an issue, For many months for us, our problem is overwhelmingly that of production. So, Yes.

Speaker 4

Okay.

Speaker 2

Maybe just two things to add. Specifically on your question, Are we seeing a macroeconomic impact on our demand? Not that I can tell. Maybe a little, but Tom, maybe. But it's The second thing to Elon's point about backlogs, We have a very long runway with very long lead times here.

Speaker 2

I mean, certainly The world is uncertain and we'll have to see where things go with commodity prices, how quickly we're ranking production, what the state of the world looks like at some point next year. But, the demand is not something we spend really any time talking about.

Speaker 6

Yeah. And

Speaker 1

I think it's Maybe just, once again worth mentioning the that there is difference between, value for money and fundamental affordability. Because sometimes people say, well, if you got all Man, why don't you just raise the price to some, you know, double the price or something? And, this is this is usually expressed by Somebody who's rich. So if but but there's even if you rail value for money to infinity, if somebody does not if I'm curious to not have enough money to buy it, even a product where the desirability is relative to infinity, they simply cannot buy it. So this is why you cannot just raise prices to some arbitrarily high level because you pass the affordability boundary and then the demand falls off a cliff.

Speaker 1

So I do feel like we've raised our prices or we've raised our prices quite a few times. They're frankly at embarrassing levels. But we've also had a lot of supply chain and production shocks and we've got crazy inflation. So I am hopeful this is not a promise or anything, but I'm hopeful that at some point we can reduce the prices a little bit.

Operator

Thank you. Can you give us a follow-up?

Speaker 8

Yes. My follow-up was actually on the supply side. So it was very encouraging to see that You're quantifying your current installed capacity at basically already in excess of 1,900,000 units Installed currently, how quickly do you think that you can fill that capacity?

Speaker 1

Yeah, I think we've got a good chance of exiting this year at 40,000 vehicles a week.

Speaker 2

Yeah. I mean our internal plans are to have the capacity utilized by the end of the year. It takes time to ramp there. It'll be a challenge. There's a lot that needs to happen to get there.

Speaker 2

That's what we're working on.

Speaker 1

Yes. We've had many, 30,000 car weeks, already. So I think A 40,000 car a week is within reach by the end of this year.

Speaker 6

Shanghai and Fremont, As we said last month, we're record production and they're really firing. It's a bad turn, doing really well. So, yeah. But then Austin and Berlin are coming on strong. Theoretically, they I had record quarters last quarter.

Speaker 6

And if we ramp them to the capacity shown in Moltech by the end of this year, we'll be at that rate.

Speaker 1

There's always a lot of uncertainty and, you know, like in the production, it looks like an S curve. And that intermediate part of the S curve is It's very difficult to break that with high certainty. But the end part of the S curve You can say, you know, I think you can have a lot more certainty. And so that's why I'm, you know, confident we'll get to 5,000 cars a week at, you know, in Forsen in Berlin, by the end of this year or early next year. And probably but not certainly 10,000 cars a week at both locations by the end of next year.

Operator

Thank you. The next question comes from Colin Rusch from Oppenheimer. Colin, go ahead please.

Speaker 9

Thanks so much guys. Could you talk a little bit about the pricing strategy around FSD and As you get closer to, you know, this full functionality rolling out and the increased cycle times, you know, how you see that evolving through the balance of this year and into 2023?

Speaker 1

Yes, we will increase the price of FSD Sometime later this year. I think probably just before we go to Wide beta is anyone who wants to use the beta software with all the caveats associated with that You can use it, then it would make sense to increase the price of FSD. The value of FSD It is, I think, extremely high and not well understood by most people. It is basically currently ridiculously cheap, assuming FSD materializes, which it will.

Speaker 9

Great. And then I'll start to belabor a little bit on this battery material side, but in terms of Some of the suppliers in the contaminants, can you be a little bit more specific around some of the elements that you guys see in some of your supply chain That can prove troublesome money yields for the 4680s, particularly around lithium and potential contaminants in either hydroxide or The carbonites that, you guys end up seeing real issues with as you move into production.

Speaker 3

Yeah. I don't really think we have anything to comment on, yeah, the purity specs of lithium on this call right now.

Speaker 1

Contaminants for the 46.8 are not a factor. This is not an issue.

Operator

Okay. Thank you very much. The next question comes from Tony Sacconaghi from Bernstein. Tony, go ahead please.

Speaker 10

Yes. Thank you for taking my question. I have 2 as well. In response to the question around demand, I think, Zach, you said maybe a little and Elon, you said maybe some indication that you might see some pressure on demand. And I'm wondering if that is really just speculation or whether there's any empirical data that you I saw in the last month, whether it be cancellations or order lead times, that led you to make that comment.

Speaker 10

I think anecdotally, if you squint, the lead times have gotten A little lower over the last 4 months in both China and the U. S. That's really the only visibility investors have. So I'm wondering if you could Maybe elaborate on whether that's really just your sort of anticipating there could be some impact Because of high prices or whether there is something anecdotally or quantitatively that you could point to, please.

Speaker 1

I mean, I think we've said this now for many years and it is proven true. Tesla does not have a demand problem. We have a production problem. And we've pretty much almost always had it with very rare exception. It's always been a production problem.

Speaker 1

I think that will remain the case.

Speaker 3

So there's a denominator and a numerator and like.

Speaker 6

As you increase production.

Speaker 1

Yeah, absolutely. As we increase production, more demand is needed.

Speaker 3

Well, it's more just like you can't look at the backlog and state much about demand because we're doing a lot on the other side to change the production.

Speaker 1

We're trying to make the backlog lower, not Longer.

Speaker 6

Building factories and building more companies.

Speaker 1

We don't want a long backlog. That's annoying. It'd be like go to a restaurant and you order

Speaker 6

a burger and you have

Speaker 1

to wait 3 hours. Like that's annoying.

Speaker 3

You want

Speaker 6

to get your burger

Speaker 1

right away. Same with the car. So we want that lead times to reduce.

Speaker 10

Okay. Thank you. No, I was just trying to follow-up on the fact that you both said that maybe you were seeing Demand being impacted a little bit and that was the spirit of the question.

Speaker 1

Maybe I can do that. I'd say like We didn't have like, like because we see daily orders from around the world for our cars, It's actually, it is like a mood barometer of people's confidence in the economy. But one can't read too much into it because things can vary a great deal from one day to the next. Consumer sentiment is all over the map. So, it's managed to press it, frankly.

Speaker 1

So, But we have so much excess demand that is really just not an issue for us. It might be an issue For some other companies, but it is not an issue for us.

Speaker 10

Okay. Thank you. Elon, I'm just wondering a question for you. Tesla has obviously changed dramatically in the last 3 years from mere life or death to a company with Consistent cash flow and industry leading margins. I'm wondering if you can comment on your personal role in the company and whether you see that changing In terms of your role, your commitment and time spent at the company over the next 3 or 4 years.

Speaker 10

I think you said a few calls ago you wouldn't be on calls and Unless there's something unusual and you've been on every call since then, I'm wondering how you

Speaker 1

You've been a lot of unusual things. Let's face it. So So I'm just wondering if you got Basically, if there's only good news, I won't be on the call. But if I have like a, you know, a tough situation like, You know, COVID shutdowns in China, then I think, you know, I'll be on the call, you know, relatively speaking, there's news and if all we have is good news, then I won't be on the call. So, but I'm committed to I mean, I'll work at Tesla as long as I can usefully advance the course of sustainability and autonomy.

Operator

Fantastic. Thank you very much. The next question comes from William Stein. Please go ahead and unmute yourself.

Speaker 11

Great. Thank you very much for taking my question. Elon, in the past, You've given some assessment as to the likelihood that you can achieve success in some of the more interesting AI oriented efforts, not only FST, but also Dojo and Optimus. Perhaps you can give an updated view on those.

Speaker 3

Well, I

Speaker 1

don't I don't want to steal thunder from AI Day. So I think we'll have some exciting news on AI Day That I think will be further ahead than probably most people think. But I don't want to I'd love to answer you, but I think we'll leave that excitement for AID.

Speaker 11

Okay. And perhaps a follow-up if I can. We've heard a lot from others and certainly to some degree from you all about The shortages in semiconductors in particular, we have seen some, big important customers of that Type of product, decide to sort of leverage the ecosystems that exist to make Some of their own in those categories. I'm wondering to what degree you're doing that outside of Dojo In terms of the I guess on the inference side, you're certainly doing that in the car. But what about sort of the more mundane areas like Microcontrollers and the like.

Speaker 11

Is there any internal effort to, to improve supply chain and maybe improve improve other performance, aspects?

Speaker 1

Well, this this letter we've done, we've been working with our suppliers like we don't currently intend to make chips ourselves. We don't think there will be a need to make chips, but we have been working closely with a number of suppliers. Actually just met with 1 of our Our key supplier CEO is right before this call. We had a great meeting. They're going to make major investments in some of the critical chips and Components that we need in the car.

Speaker 1

So, and I'm actually like take take a moment to to thank our key suppliers once again for supporting us through difficult times and they really went above and beyond to support us. So To all the suppliers out there, thanks very much.

Speaker 3

Yeah. And I guess just maybe we don't talk about it Very often, but we do have a lot of custom silicon in the vehicle already.

Speaker 6

Microcontrollers,

Speaker 3

Yes. Some. Battery management? Yes. Some.

Speaker 3

Power electronics? Yes. Some. So we try to go after where there's actually a technical advantage. And in the future, I think we're going to look at where there's a supplier advantage.

Speaker 3

Yeah. Well, even now

Speaker 6

where there's supply chain issues with our tier 1s and tier 2s. You know, Karan and Roshan get into it with us on the engineering side. We find solutions, whether it's alternative chips or, You know, changing the entire structure of the of this this act to make it work. And I think that's an advantage we have that many other OEs just simply cannot.

Speaker 1

Yeah. I think Tesla is as much a software company as it is a hardware company. And so one of the ways that we've been able to address Supply chain issues on on the chip front, is is by rewriting our software to be able to use different chips, or in some cases, Achieved dual use of a single chip, which is even better. And actually, quite frankly, the chip shortage It served as a forcing function for us to reduce the number of chips in the car. Super fact.

Speaker 1

Yes. So it turns out we had More chips than we needed. So, but an adjustment to our software team that we're able to I roll a new chip into the car, write a whole new batch of software for for that chip And, without interrupting production.

Speaker 3

Yeah. And our goal is as we mature and scale the platforms to, you know, integrate More functionality into fewer chips. Like that is the way that it's gone with laptops and phones. It's going that way in cars. And we're trying to do that wherever it makes sense to do it.

Speaker 3

Yeah.

Speaker 1

As quickly as we can. From a supply chain standpoint, do we What do you think about chips and whatnot?

Speaker 4

Yeah. I think, I mean, from a high level, you know, instead of designing and building our own microcontrollers, we're partnering with key partners That understand the architectural requirements and, you know, they'll take the specs and design something for us. We've done that to your point, Drew, in the battery sensing space. We've got some application specific ICs. But, yeah, integrating, reducing the number of components, it makes the supply chain easier, but it also makes the reliability of Stand product better because there's less failure points.

Speaker 4

So that's always been the mantra.

Speaker 5

And at times, we've also got the wafer level and I try to have consume less to achieve the same functionality. So that's something else that we've been looking at in some of the constrained modules that we have faced in the last 6 months. That's good.

Operator

Fantastic. Well, thank you very much. I appreciate all of your questions. Unfortunately, this is all the time we have this quarter, and we will speak to you again in 3 months' time. Thank you very much and goodbye.

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Earnings Conference Call
Tesla Q2 2022
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