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CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page1of22
TeslaMotors(TSLA)EarningsReport:Q12016ConferenceCallTranscriptThefollowingTeslaMotorsconferencecalltookplaceonMay4,2016,05:30PMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
JeffEvanson;TeslaMotorsInc;InvestorRelationsJonMcNeill;TeslaMotorsInc;PresidentofGlobalSales&ServiceElonMusk;TeslaMotorsInc;Chairman,ProductArchitect&CEOJBStraubel;TeslaMotorsInc;CTOJasonWheeler;TeslaMotorsInc;CFO
OtherPart icipants
JamesAlbertine;StifelNicolaus;AnalystColinLincoln;UBS;AnalystColinRusch;Oppenheimer&Co;AnalystPatArchembault;GoldmanSachs;AnalystBrianJohnson;BarclaysCapital;AnalystAdamJonas;MorganStanley;AnalystJoeStack;RBCCapitalMarkets;AnalystRyanBrinkman;JPMorgan;AnalystJohnMurphy;BankofAmerica;AnalystRodLache;DeutscheBank;AnalystCharlieAnderson;Dougherty&Company;AnalystEmmanuelRosner;CLSA;AnalystBenCallow;RobertW.Baird&Co;AnalystDanaHall;BloombergNews;AnalystPhilLeBeau;CNBC;AnalystAlexSage;Reuters;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
WelcometotheTeslaMotorsfirstquarter2016financialresultsQ&Aconferencecall.
(OperatorInstructions)
Asareminder,thisconferenceisbeingrecorded.
Iwouldnowliketoturntheconferenceovertoyourhost,Mr.JeffEvanson.Mr.Evanson,youmaybegin.
Jef f Evanson (InvestorRelations):
Thankyou,Operator.Goodafternoon,everyone.WelcometoTesla'sfirstquarter2016Q&Awebcast.
I'mjoinedtodaybyElonMusk,TeslaChairmanandCEO;JBStraubel,ourCTO;CFOJasonWheeler;andJonMcNeil,PresidentofGlobalSales,Service,andDelivery.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page2of22
OurQ1resultsannouncedintheupdateletteratthesamelinkasthiswebcast.Asisusual,thisletterincludesGAAPandnon-GAAPfinancialinformation,andreconciliationsbetweenthetwo.
Duringourcallwewilldiscussourbusinessoutlookandmakeforward-lookingstatements.Thesearebasedonourpredictionsandexpectationsasoftoday.Actualeventsorresultscoulddiffermateriallyduetoanumberofrisksanduncertainties,includingthosementionedinourmostrecentlyfiledForm10K,nowattheSECwebsite.
We'regoingtostarttoday'scallwithsomecommentsbyElon,followedbythequestionandanswerperiod,andduringtheQ&Atime,pleasetryandlimityourselvestoonequestionandonefollow-upsowecangiveeveryoneachancetoaskaquestion.
SowhileElonismakinghisremarks,ifyouhaven'tdonesopleasepressstaronenowtogetintothequeuetoaskaquestion.
Elon,I'llturnitovertoyou.
ElonMusk(Chairman,ProductArchitect&CEO):
Thankyou.
Ithinkthemostimportantpointherethatwewanttomakeisthatwe'readvancingtheModel3buildplansubstantially,andjusttheoverallvolumeplan,withTeslaaimingtogettothehalfmillionunitperyearrunratein2018insteadof2020.
AndthisisbasedoffthetremendousdemandreceivedfortheModel3whichIthinkisactuallyafractionoftheultimatedemand,whenpeoplefullyunderstandwhatthecar'scapableofandareabletodoatestdrive.Sothisisprobablythebiggestchangestrategically.
Also,Teslaisgoingtobehell-bentonbecomingthebestmanufactureronearth.Thusfar,Ithinkwe'vedoneagoodjobondesignandtechnologyofourproducts.
TheModelSandXaregenerallyguardedbycriticaljudgesastechnologicallythemostadvancedcarsintheworld.We'vedonewellinthatrespect.
Thekeythingweneedtoachieveinthefutureistoalsobetheleaderinmanufacturing.WetakemanufacturingveryseriouslyatTesla.It'sthethingweneedtoobviouslysolveifwearegoingtoscaleandscalerapidlyandmakethecarsmoreaffordable.
Ireallywanttosendthemessageouttheretothebestmanufacturingpeopleintheworld.Wewantyoutocomejoinourcompany.
AndthatisgoingtobetheprimaryfocusofTesla,howdowegetsupergoodatmakinglargecomplexobjects?That'sthemostsalientpoint.
It'seithergetwrappedupinabunchofshort-termissues,butIthinkintermsofwhatmattersinthefuture,Ithinkthat'sthemostsignificantthing.
Overallontheshort-termstuff,ourquarteroverquarterstuffIthinkhasimprovedquitesignificantly.
ObviouslyModelXproductionincreasedbyafactoroffivefromQ4toQ1,andwecontinuetomakehugestridesinvolumeandqualityofthevehicle,andI'mpersonallyspendinganenormousamountoftimeontheproductionline.
Mydeskisattheendoftheproductionline.Ihaveasleepingbaginaconferenceroomadjacenttothe
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page3of22
productionlinewhichIusequitefrequently.
Thewholeteamissuperfocusedonachievingrateandqualityatthetargetcost.Ifeelveryconfidentinusachievingthatgoal.
Withtheincreaseinramp,wedofeelcomfortableassumingthe80,000to90,000deliveriesthisyear.Therateofimprovementwitheachpassingdayisverysignificant.
Finally,I'dliketothankGregReichowwhowasourheadofproductionfortremendouscontributionoverthelastfiveyears.Contrarytoreports,GregisstillatTesla,he'sstillwiththecompany,andhe'shelpingwiththetransitiontosomenewleadership.
WehavesomeIthinkexcitingannouncementscominginpossiblythenextfewweeks,inadditiontotheTeslamanagementteamontheproductionside.Ifeelreally,reallyexcitedaboutwherethingsareheadedinthatdirection.
Withthat,let'sgotoquestions.
QUESTIONS&ANSWERS
Operator :
JamesAlbertine,Stifel.
JamesAlbert ine (Analyst-StifelNicolaus):
Great,thankyousomuch.Elon,thankyouforthatintroduction.There'snodoubtyouhaveanincredibleundertakinginfrontofyou.CanyouhelpusunderstandsomeofthekeyobstaclesandhowweshouldconsiderthoseobstaclesbetweennowandyouranticipatedlaunchoftheModel3inlate2017?Whetherit'saP&Ladjustmentthatweneedtomakealongtheway,butcanyouhelpuschoreographhowthat'sgoingtotakeplace?
ElonMusk(Chairman,ProductArchitect&CEO):
Sure.WiththeModel3asImentionedonthelastcall,we'rereallytryingtotakealotoflessonslearnedfromModelX.WhereModelX,weputalotofbellsandwhistlesonModelXandalotofadvancedtechnologiesthatweren'tnecessaryforversiononeofthevehicle.
WithModel3we'rebeingincrediblyrigorousaboutensuringthatwedon'thaveanythingthatisn'treallynecessarytomakeaverycompellingversiononeofthecar.
Wealsohaveamuchtighterfeedbackloopbetweendesignengineering,manufacturingengineering,andproduction.AndsoanewelementofModel3can'tbeapprovedunlessmanufacturinghassaidthatthisiseasytomanufactureandthattheriskassociatedwithmanufacturingislow.
Therearemanywaystoskinacat,andit'sremarkablehowyoucanachievethesameobjectivewithahugelyvaryingdegreeofdifficulty.Youcantakeananalogyandsay,ifyouwantedtokillafly,youcankillaflywithathermonuclearweapon,withaMOAB,withacruisemissile,withamachinegun,oraflyswatter.
Theendresultisthesame,butthedifficultyisconsiderablymoresignificantfromonetotheother,andthecollateraldamageisconsiderablymoresignificant.
SohavingproductionbereallyfundamentaltothedesignoftheModel3Ithinkisveryimportant,andthenmakingsurewe'renotaddingextraneousfeaturestothe3,thatareunnecessarytoachievethe
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page4of22
productionvolume,isalsoextremelyimportant.
Attheriskofthisbeingmisinterpreted,andprobablytherewillbesome[indiscernible]articlesthatdo,Ithinkitisworthexplaininghowmanufacturingacomplexobjectwithseveralthousanduniquecomponentsactuallyworks,andwhatdatesarerelevant.
Inordertoachievevolumeproductionofacar,anewcarwithseveralthousanduniqueitems,youactuallyhavetosetatargetdateinternallyandwithsuppliersthatisquiteaggressive.Andthatisthedatethathastobetakenseriously.
Thedate,I'msurethiswillleak,it'shardtokeepasecretreally,thedatewearesettingwithsupplierstogettovolumeproductioncapabilitywiththeModel3isJuly1nextyear.
Now,willweactuallybeabletoachievevolumeproductiononJuly1nextyear?Ofcoursenot.
Thereasonisthatevenif99%oftheinternallyproduceditemsandsupplieritemsareavailableonJuly1,westillcannotproducethecarbecauseyoucannotproduceacarthatismissing1%ofitscomponents.
Nonetheless,weneedto,bothinternallyandwithsuppliers,takethatdateseriously,andthereneedtobesomepenaltiesforanyone,internallyorexternally,whodoesnotmeetthattimeframe.
Thishastobethecasebecausethere'sjustnowaythatyouhaveseveralthousandcomponents,allofwhommakeitonaparticulardate.
Therealityisthatthevolumeproductionwillthenbesomenumberofmonthslater,aswesolvethesupplychainandinternalproductionissues.
Butitisabitofaconfusingthing,anditdoescreatesomechurnbecausepeoplearelike,wellwhat'stherealdate?
YouhavetotaketheJuly1dateseriouslyinorderforsomedateafewmonthslaterorseveralmonthslatertoactuallybetherealdate.That'sactuallyhowithastowork.
SoinorderforustobeconfidentofachievingvolumeproductionofModel3bylate2017,weactuallyhavetosetadateofmid-2017andreallyholdpeople'sfeettothefireinternallyandexternallytoachieveanactualvolumeproductiondateoflate2017.
Soasaroughguess,Iwouldsaywewouldaimtoproduce100,000to200,000Model3sinthesecondhalfofnextyear.That'smyexpectationrightnow.
WhatIwouldsaytoanyonethatisthinkingaboutorderingaModel3,nowisagoodtimetoactuallyplaceyourreservationorplaceyourorder,becauseyoudon'thavetoworryaboutplacingyourorderandreceivingitfiveyearsfromnow.
Ifyouplaceyourordernowthere'sahighprobabilityyouwillactuallyreceiveyourcarin2018.SoI'dreallyrecommendthatanyonewhowantstoreceivetheircarin2018placetheirorderverysoon.
JamesAlbert ine (Analyst-StifelNicolaus):
Elon,thankyou.AndifImayasafollow-up,canyougiveussomereferenceasto,again,mostgenerouslyyouwouldthinkifyousaidtheendfourthquarter,orsorry,yousaidfourthquarterof2017,sothesixmonths,atitsmostgenerouscalculation,howdoesthatcomparewiththevolumeproductionagreeddatefortheModelX,justasanexample?
Andthenhowdoesthisflowwithyourcashneeds?Asyou'vearticulated,itseemsyou'vewalkedbacka
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page5of22
littlebitfromthepriorquarter'sdiscussionaroundcashflowpositiveandnoneedforcapitalmarketsraise.Itseemsliketheremaybeaneedhere,ifyoucouldjustarticulatehowthetwofittogether,that'dbehelpful.Thanks.
ElonMusk(Chairman,ProductArchitect&CEO):
It'salwaystemptingforpeopletoreasonbyanalogyinsteadoffirstprinciples.AndthatwouldbethemistakeofassumingthatanythingtodowiththeXproductionhasbearingontheModel3.
Theyareverydifferentprogramswithcompletelydifferentapproaches.SoIwouldnottrytoextrapolatefromthat,anymorethanitwould'vemadesensetoextrapolatefromtheRoadsterwhenweweremaking600carsayear,to20,000carsayearwiththeModelS.
Sointheroadstercasewewentfrommaking600carsayearin2010,whereLotusmadethebodyandchassis,wemadethepowertrain,andwedidfinalassembly.ItwasafarsimplercarthantheModelS.
Wetoldpeoplewe'regoingtogettoarunrateof20,000carsayearwiththeModelS,despiteitbeingavastlymorecomplicatedcarandacarwherewemadethewholecar,notjustthepowertrain.
IfyouweretoextrapolatefromtheRoadsterexperience,youwouldbecompletelywrongabouttheModelSoutcome,andmanypeoplewere.That'swhyIwouldsayXisnotrelevant.
Asfarastheincreasedcapitalrates,wellobviouslyifyoudoubleyourplannedvolume,youcan'texpectthecapitaltostaythesame.Ithinkourcapitalefficiencywillactuallyimproveonapercarbasis,butobviouslyitcan'tstaythesame.
JamesAlbert ine (Analyst-StifelNicolaus):
Thankyousomuch.
Operator :
ColinLincoln.
ColinLincoln (Analyst-UBS):
Thanksfortakingmyquestions.Justtofollow-up,you'vehadissueswiththe[act],there'smanagementchanges.Whatgivesyoutheconfidencethatthe500,000,that'saprettyamazingjumpintonextyear,whatgivesthatconvictionthatthat'sgoingtobepossibleby2020?
ElonMusk(Chairman,ProductArchitect&CEO):
Youmeanby2018.
ColinLincoln (Analyst-UBS):
Yes,2018,yes.
ElonMusk(Chairman,ProductArchitect&CEO):
Firstofall,Ithinkwe'vegotanexcellentteamatTeslainproduction,andwe'readdingworld-class[aces]inproductionwitheachpassingweek.
Itisahugeadvantagetohave,it'sfairtosayit'sprobablythemostcompellingproductprogramintheworldwiththeModel3.I'mnotsurewhatwouldbemorecompelling.Ithinkthere'sagoodargumentthatModel3isthemostcompellingprogramonearthfromamanufacturingstandpoint.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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Soourabilitytorecruittopmanufacturingtalenttothemostcompellingproductonearthisverystrong.Wefindtheresponsetobeextremelygoodwhenwecallpeopleup.
Sobasedontherateatwhichwe'readdingworld-classmanufacturingexpertise,andsomeofthethingsthatIknowwe'regoingtoannounceinthefuture,IfeelhighlyconfidenttheModel3isgoingtobewellexecutedasaprogram.
Yes,that'sit.Youwanttoaddsomething,JB?
JBStraubel(CTO):
Yes,ifImightjustadd,youmentionedthisbrieflybefore,butthedesignofthevehiclelendsitselftohigh-volumeproductionveryefficiently.AndIthinkthat's--
ElonMusk(Chairman,ProductArchitect&CEO):
--designedformanufacturing.
JBStraubel(CTO):
Absolutely.Andthat'ssomethingwe'redoingeventoday.Thosedesignsarefirmingup,sothisissomethinghappeningfar,faraheadoftime.
Andthesecondpointwouldbethequalityandthemotivationofthesuppliersinvolvedintheprogram--
ElonMusk(Chairman,ProductArchitect&CEO):
Yes.That'smassivelyincreased.
JBStraubel(CTO):
Everysupplierwantstobeinthisprogram.
ColinLincoln (Analyst-UBS):
Gotit.AndifIcouldaskafollow-up,obviouslycostisgoingtobeanimportantfactorwhen3launches.Ithinkyou'veindicatedthatyourbatterycostwith(Packer)now,under$190perkilowatthour.Howdoyouthinkthatcomparestotheindustry,wheredoyouthinkit'llbebythetimetheModel3islaunching?
ElonMusk(Chairman,ProductArchitect&CEO):
We'retryingtocommentonindividualcomponentcosts,andthat'sfairlyproprietary,it'slikegivingawayourplaybook.
ButIthinkit'sprettyobviousthatwewillexceedanyoneelseintheworldinscaleeconomieswiththeGigafactory,andwe'reveryconfident[indiscernible]toexecuteonthatfront.
Ijustdon'tknowanyonewhointermsofintrinsiccostsisgoingtobeclosetowhattheGigafactorycanproduceonacostperkilowatthourbasis.
ColinLincoln (Analyst-UBS):
Anycoloronwhenwethinkthe190howmuch[indiscernible;yearof]declineandtheGigafactory[AudioCuttingIn/Out]30%?
ElonMusk(Chairman,ProductArchitect&CEO):
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page7of22
Nextquestion.
ColinLincoln (Analyst-UBS):
Thankyouverymuch.
Operator :
ColinRusch,Oppenheimer.
ColinRusch (Analyst-Oppenheimer&Co):
Thankssomuch.Asyoulookatthisacceleratedplanforproduction,whatcanweexpectonOpExspendingtosupportallofthosecarscomingoutalotfasterthanyoupreviouslyexpected?
JasonWheeler (CFO):
ThisisJason.WeupdatedourguidanceonOpExfortheyearalittlebitintheletter.Wetalkedabout20%lastyearandmovingthatrangeto20%to25%for2016.Sothere'sobviouslygoingtoneedtobemoreOpEx.
However,atthesametime,youseehowweimprovedquarteroverquarterintermsofOpEx.Weweredown$12millionfromQ4,down3%.Sothere'sarenewedfocusinthehallshereatTeslaonmakingsurethatwearemanagingcostsextremelyeffectively,andallofouremployeesgetthatandarecontributingtothat
ElonMusk(Chairman,ProductArchitect&CEO):
Yes.Andouroperatingleveragemeansfixedcostrelativetothevariablecostisgoingtoimprovedramatically.
JasonWheeler (CFO):
Yes,absolutely.Wetalkedalittlebitaboutthisonthecalllastquarter.Thepotentialforoperatingleverageismassivewithproductionscaling.
ColinRusch (Analyst-Oppenheimer&Co):
Great.AndthenElon,whatdoyouneedtoseetomoveyourdeskoutofthefactory,it'sadramaticthingtotalkabouthavingyourfactoryandyoursleepingbagthere.Soobviouslythereweresomethingsyouwereconcernedabout.Butwhatareyougoingtowanttoseetogobacktoadifferentlocation?
ElonMusk(Chairman,ProductArchitect&CEO):
Mydeskhasfrequentlybeeninthefactory,sothisisnotsomenewthing.OntheModelSrampmydeskwasalsointhemiddleofthefactoryatthesideofthebodylineforayear.
SoImovemydeskaroundtowhereverthemostimportantplaceisforthecompany,andthenIsortofmaintainadeskthereovertimetocomeandcheckinonthings.ButIsuspectprobablybytheendofthisquartermostofmytimewillnotbespentonthefactoryfloor.
Operator :
PatArchembault.
PatArchembault (Analyst-GoldmanSachs):
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
©2014TheStreet,Inc.Al l R ightsReserved Page8of22
Thankyou,goodafternoon.GettingbacktothecapitalrequirementfortheexpandedModel3production,appreciatetheguidancethatyou'veprovidedforthisyearfromaCapExperspective,that'shelpful,butmaybethisisaquestionforJason,canyousharewithusmaybewhatatotalcapitalcostestimatemightlooklikefortheModel3program,nowthatyou'vegotahandleonwhatyou'revolume'sgoingtobe,orwhatyouwanttoproduceto?
JasonWheeler (CFO):
Yes,acouplethingsthere.We'veprovidedsomebreadcrumbs,likeweupdatedourCapExguidanceto,wehadguidedat$1.5billionlastquarter,andwethinkit'llprobablybe50%higherthanthatfor2016into2017.
Andinto2017we'renotgoingtotalkaboutthatrightnow,buttheotherthingtopayattentiontoisourCapExforthisquarterwas$216millionwhichwasa47%decreaseoverQ4.
Alittlebitofthatiswhatwetalkedaboutlastquarter,wherealotofthebiginvestmentsforModelXhadalreadybeenmade,butalsowe'rejustreallyfocusing,asElonhassaid,oncapitalefficiencyandmakingsurethatweareinvestinginthehighestandbestusesofcash.AndIthinkthoseprinciplesarewhat'sgoingtoguidetheModel3program.
PatArchembault (Analyst-GoldmanSachs):
That'sagoodstartingpointtoworkwithforus,weappreciatetheupdateforthisyear.Maybethewaytotakethequestionistokindofunderstandwhenthepeakspendingperiodsaregoingtobe?Ifyou'relaunchingthroughmiddleofnextyear,isitagoodideatomaybeextendtheamountofcapitalyouseespendinginthebalance[ofrecorders]throughthesecondhalfofnextyear,andthenclearlywiththelaunch,thattapersoff,isthatarightwaytothinkaboutit?
Secondtothat,IwouldprobablyaskthesamequestionjustontheR&Dfront,whendidthosecostsspikeinthetimeframeofthatprogram?
JasonWheeler (CFO):
Sure,Ithinkyou'rethinkingaboutittherightway,thewayyou'velaiditout.YoucanuseModelXandModelSintherampofcapitalforthoseprogramsasawaytothinkaboutModel3.
OntheR&Dpieceofit,thatisabigdriverbehindourupdatingofourrangeto20%to25%OpExin2016,sowe'llstarttoseealittlebitofthatinthesecondhalfofthisyear,andthencertainlysomemoreintothefirsthalfof2017.
PatArchembault (Analyst-GoldmanSachs):
Gotit.IfIcansqueezeinonelastone,justonthesourcing,isthischangingyourstrategyofworkingwithsuppliers?You'vedonealotin-houseforallyourproductssofar,butobviouslythisisaverydifferentkindofvolumenumberyou'retalkingabout,soareyouthinkingaboutchangingthelevelofverticalintegration,andhowdoesthatworkintosortoftheongoingcapitalrequirementsforthisprogram?
ElonMusk(Chairman,ProductArchitect&CEO):
No,Ithinkwe'reactuallygoingtoincreasetheamountofverticalintegrationthatwehave.Ithinkit'sveryimportantforustohavetheabilitytoproducealmostanypartonthecaratwill,becauseitalleviatesriskwithsuppliers,where,goingbacktoif2%ofsuppliersaren'tready,wecan'tmakethecar.
Havingtheabilityinternallytoadaptandmakethat2%ofpartsinternallyreallymassivelyreducesrisksassociatedwiththeproductionramp.ThatIthinkisaveryimportantthing.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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Nowifwegettoasteadystate,andmaybewetalktoasupplierandtheycandoaveryefficientjobofmakingthatpart,wehavenoproblemtransitioningfrominsourcetooutsource.
Ourgoalisnottoinsourceforthesakeofinsourcing,butIwouldratherseeinsourceifwethinkthatithasmeaningfulimprovementonscheduleorcostorquality.
Oneofthechallengeswefaceisthatforalotofthesupplychain(theyarebeingmatched)tothetimeframeofthebigOEMs,andTeslajustmovesalotfasterthanthebigOEMs.Andsoifthey're[beingmatched]tolikeasix-yeardevelopmentcycle,andweareonatwo-orthree-yeardevelopmentcycle,itjustdoesn'tconnectproperly.Somesupplierscanhandlethatandsomecan't.
PatArchembault (Analyst-GoldmanSachs):
Itcertainlyseemstolimitsomeofthepeopleyoucouldworkwith.Thanksfortheclarification.
Operator :
BrianJohnson,Barclays.
BrianJohnson (Analyst-BarclaysCapital):
Yes,goodevening,afternoon.Iwanttotalkalittlebitaboutsomeofthemilestonesyouseeintermsofthisaccelerateddevelopmentinthelaunchof,thescaleupoftheModel3?Firstitlookedlikeintheproxythatthealphaprototypewascompletedasofwhenitwasfiledafewweeksago,soafewquestions.One,whendoyouexpectthebetaprototypetobeachieved?Whendoyouthinkyou'llhavefirmspecsforbothyourinternalpartsoperationsandforyourexternalsuppliers?
Andthenintermsofthecapital,doyousee,twootherquestions,whenwouldyouseeraisingcapital,ifatall,tomeetthis?Andthenfinallygiventhevolumeoftrade-offdecisionsyou'retalkingaboutmakingbetweenmanufacturingdesignengineering,doyouseeanyroleforaCOOtype,similartowhatyouhaveatSpaceX,toaccomplishthistimeline?
ElonMusk(Chairman,ProductArchitect&CEO):
Okay,that'slike17questionsinone.
BrianJohnson (Analyst-BarclaysCapital):
Youcansendustheprojectplan.
ElonMusk(Chairman,ProductArchitect&CEO):
Fromanengineeringstandpoint,we'realmostcompletewiththedesignofModel3.Andinfacttheprototypethatwasdrivingatthe[motor]eventendofMarchwasactuallyusingtheproductiondrivetrain.
SoIthinkwefeelprettygoodaboutengineeringcompletionofthelastitems,probablywithinsixtoeightweeks,thereabouts.Sowe'recompletingfinalreleasefor[tooling]nolaterthantheendofJune.
Thatleavesroughlyninemonthsforthetoolstobemanufactured,whichIthinkisanachievabletimeframe,Iguessforsomesuppliersanachievabletimeframe.Youcanhaveahumanbabyinninemonths,andyoucanprettymuchmakeatoolinninemonths.Sothat'sourexpectation.
SothenyouwanttohavepartsorproductiontoolingstartinginAprilnextyear.Sowe'vegotthreemonthsofvalidationforanominalstartofvolumeproductioninJuly.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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Again,it'sanominalstartandit'sadatethatweinternallytakeseriouslyandthatsuppliersneedtotakeseriously,butitisonewhereinevitablytherewillbesomesmallnumberofitemsthatcauseslippage,suchthattheactualdateofreachingvolumeproductionissomenumberofmonthsafterthat.
Thisissimplyinthenatureofthings.It'sunavoidable.Andifyoucouldtellmewhatthosepartswouldbe,wewouldbeabletotakeactionnow.It'seasierwhatthesethingsareinhindsight,notinadvance,andsometimestherearethingsyoudon'texpecttobeaproblem.
Teslaisalarge,complexbusiness.Idon'twanttocommenttoospecificallyon(indiscernible).
BrianJohnson (Analyst-BarclaysCapital):
Okay.DoesthisimplyasimilaracceleratedschedulefortheGigafactory,whichalwaysseemedtiedtothe2020halfmillionunitgoal?
ElonMusk(Chairman,ProductArchitect&CEO):
Itdoes.JB,doyouhavesomethingonthat?
JBStraubel(CTO):
Aswe'vediscussedpreviously,thisisasmallpartofwhytheGigafactorywas,weacceleratedsomeofourplansthereandwe'restillontracktohavefirstcellproductionstartingattheendofthisyear,sothatwe'llbeabletorampuptomatchtheModel3scheduleaswell.
ElonMusk(Chairman,ProductArchitect&CEO):
Again,IwanttoemphasizesomecommentsthatImadeearlierintheearningscallwhichisTeslaisreallyhell-bentonbeingtheworld'sbestinmanufacturing.ThisisabigdealandIthinkit'stherightthingtodo.
Becausewhatwe'retryingtodoisgetasmanyelectriccarsontheroadaspossible,andwhat'sthelimitingfactor?Wellit'sproduction.
Howcanwescaleandscaleefficiently?Andsoweneedtofigureouthowtobetheworld'sbestinmanufacturing,that'swhatwe'regoingtobehell-bentondoing.
BrianJohnson (Analyst-BarclaysCapital):
Okay,thanks.
Operator :
AdamJonas.
AdamJonas (Analyst-MorganStanley):
Elon,onourmathyourcombinedfleetofModelSandXaredrivingmorethan3millionmilesaday,soinjustonedayyourcarsdoabout2XthedistancethatGoogle'sdoneintheentirehistoryoftheirself-drivingcarproject.
Nowwhileyourcarsaren'texactlysensor-encrustedChristmastreeswithtensofthousanddollarsofequipmentlikearetrofittedGooglecar,it'sstillalotofmiles,andI'mjustwonderingifyoucouldexplaintotheinvestmentcommunitywhatkindofadvantagethisgivesTeslaintheraceforsustainabletransportinaccident-freedriving,insomecommercialfinancialtermsifyoucould?Thanks.Orevenengineeringterms.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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ElonMusk(Chairman,ProductArchitect&CEO):
Ithinkyou'veprettymuchaskedthequestionandansweredit.Dataiseverything,really,whenyou'retryingtosolvetheautonomoustransportproblem,andhavingmillionsofmilesperdayofdataaccumulating,andthenasthefleetgrows,thatgrowsproportionatetothefleetisincrediblyhelpful.
Particularlyaswegotolong-termfullyautonomousdriving,thatthat'sgoingtorequirequitealotofregulatoryoversight,andIthinkinorderforregulatorstobecomfortableapprovingthat,they'regoingtowanttoseeaverylargeamountofdata,maybebillionsofmilesshowingthatthecarisunequivocallysafeinautonomousmode,comparedtomanualmode,inawiderangeofcircumstances,incountriesallaroundtheworld,withdifferentrulesoftheroad,andwaysofbehavior.
It'llhavetobesomethingstatisticallysignificant,likebillionsofmiles.
AdamJonas (Analyst-MorganStanley):
Okay,wellthatleadstomyfollow-up,whichisoncehighvolumesofstatisticaldataforyourautonomousmilesarecollectedandanalyzed,IhavethisimageifyouandsomeCEOsofotherautocompanies,andCEOsofothersoftwareandtechhardwarefirmstestifyinginCongressabouttheurgentneedtoreplacethesedangerouspurelyhuman-drivencarsontheroadwithavailable,affordable,andproven,evenL2,L3technology,orsemi-autonomous,that'sreadyforintroduction,todramaticallyimprovetheepidemicoftrafficfatalities.It'slikeanationalpublichealthandsafetypriority.
AmIcrazy,Elon,aboutthattypeofroleforpeopleinyourpositiontoplay,armedwiththedataempirically?AndifI'mnotcrazy,thenhowsoondoyouthinkitwouldtakefortechfirmslikeyoutohaveasufficientquantityandqualityofdatatobeabletomakesuchascientificallyprovencase?Thanks.
ElonMusk(Chairman,ProductArchitect&CEO):
Teslawillargueforautonomousdriving,butwe'renotgoingtoargueagainstmanualdriving.AndIbelievepeopleshouldhavethefreedomtochoosetodowhattheywanttodo,andyes,sometimesthosethingsaredangerous.
Butfreedomisimportant,andifpeoplewanttodrive,evenifit'sdangerous,theyshouldbeallowedtodriveinmyview.Butthentheautonomoussafetysystemsshouldbeinthere,suchthatevenifyou'reinmanualmode,thecarwillstillaidyouinavoidinganaccident.
AdamJonas (Analyst-MorganStanley):
Okay,great,thanks.
Operator :
JoeStack.
JoeStack(Analyst-RBCCapitalMarkets):
Thanks,goodafternooneveryone.AlsowantedtofocusontheadjustintheGigafactoryplans.Ibelieveoriginallyyouindicatedabout15gigawatthoursperyearwereearmarkedforEnergy,andwithModel3demandclearlyrobustandlikelymorerobustthanyouoriginallyplanned,I'mwonderingifthatmovessomeofthoseTeslaEnergyambitionstothebackburner,doesitacceleratetheneedforasecondGigafactory,ormaybeperhapsyoufoundawaytosqueezemoreoutoftheexistingone?
JBStraubel(CTO):
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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Ithinkthesimplestansweriswehavealotmorecapacityatthatsitethantheinitial35and15gigawatthoursthatwediscussed.
That'spartofwhywe'vesoaggressivelymadesurewehaveextralandandextraspacearoundthesite,sothatwecancontinuetoexpand.Andwewon'tneedtorobfromTeslaEnergyplansinordertomeettheModel3schedule.Wedefinitelyhaveawaytosolveboth.
JoeStack(Analyst-RBCCapitalMarkets):
Andareyouwillingtoprovideanupdatetothoseinitialtargets?
ElonMusk(Chairman,ProductArchitect&CEO):
Notyet.MaybeinoneortwoearningcallsfromnowIthinkwe'llbeabletoshedmorelightonthat.Butyes,asJBwassaying,we'regoingtomakesureTeslaEnergyisnotconstrainedbyvehicleneeds.ThegrowthrateofTeslaEnergyis,ona[indiscernible]basis,goingtobefargreaterthanthegrowthrateincars.
JoeStack(Analyst-RBCCapitalMarkets):
Thankyou.
Operator :
RyanBrinkman.
RyanBrinkman (Analyst-JPMorgan):
Great,thanksfortakingmyquestion.WecanallnowseewiththeModel3pre-ordersthatyouareentirelycorrectthatthereistonsofdemandforthecar,justlikeyou'vebeensayingallalong.
SoIthinkaboutamonthagowhenyoustartedtweetingthosepre-orders,theinvestorandpartssupplierconfidenceinyourabilitytoramptohalfmillionunitsrightfullyskyrocketed.
Withthatsaid,fromasupplyperspective,sometimesyouhaddifficultyinachievingdeliverytargetsbecauseofissuesandsmoothlyincreasingcapacityandassembly,andyou'veshownastrongpreferenceforemphasizingqualityoverquantity.
Soisthereanythingthat'schangedonthesupplysideoftheequationthatshouldalsobeconfidence(fulfilling,building),maybelessonslearnedfromthelaunchofXorsomeotherfactorthatshouldgiveconfidenceinyourabilitytobeata200,000to400,000unitannualrunrateofModel3productionapproximately14monthsfromnow?
ElonMusk(Chairman,ProductArchitect&CEO):
Again,IwanttoemphasizethattheJuly1dateisnotadatethatwillactuallybemet.Itisanimpossibledate.However,itisadateweneedtoholdourselvestointernally,andweneedtoholdsuppliersto.Butitisanimpossibledatebecausethe6,000,7,000uniquecomponentsintheModel3,andthatwouldassumethatallofthemarriveontime.
Justlikeacollegetermpaper,they'realwayslatetermpapers,butyoustillhavetohaveadeadline,anditneedstobereal,onewithconsequencesifadeadlineisnotmet.
Butitabsolutelywillnot,theprobabilityofitoccurringisincrediblylow,ofactuallyachievingonJuly1,butnonethelessitisadatewehavetotakeseriously.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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Iexplainedthatatsomeriskofthisbeingmisinterpreted,buthopefullyyouwouldappreciatethatI'mtryingtoexplainhowitneedstoworkandhastoworkthatway.There'snootherwaytodoit.
AndthethingsthathelpusgettherearedesigningModel3formanufacturing,withmanufacturing,engineering,andproduction,andsupplychainallinaverycloseloop,andmakingsurethatwedesignedthecartobeeasytomake.
Thatweiteratewithsuppliersandaskthemhow,ifwe'regivingthemadesignthat'seasytomakeoronethat'shardtomakeorhowdowereducerisk,improveit,andmakeiteasiertobuild.
ThisisreallyfundamentallydifferentfromSandX.TheSwasthefirstcarwereallydesignedourselves.Anditwasallaboutjusttryingtomakethecartoworkinthefirstplace.XwasbasicallybuiltoffoftheSplatform,butthenevenmorecomplicated,sounfortunately,evenhardertomake.
TheModel3isthefirstcarTeslaiscreatingthatisdesignedtobeeasytomake.Thisisreallyafundamentaldifference.
AndthenImentionedalsoincreasingthescopeofourin-houseabilities,sothatifthere'sasupplierthatisn'tabletodeliverontime,wecanscramblefastandproducethatcomponentin-house.
RyanBrinkman (Analyst-JPMorgan):
Okay,that'shelpful.Thankyou.
Operator :
JohnMurphy.
JohnMurphy(Analyst-BankofAmerica):
Goodafternoon,afirstquestiononthecapitalneeds.Itlookslikethere'salittleover$400millionleftontheABLandgiventhepre-ordersorthereservationsfortheModel3,itseemslikeyou'llhaveatleastanother$400millionflowingininthesecondquarter.Sojustcurious,asyoulookatthatkindofcashpotentialorliquidityandpotentialinflow,doyoureallythinkyouneedtodoacapitalraisethisyear,orcouldyougetbywiththosesourcesofcash?
ElonMusk(Chairman,ProductArchitect&CEO):
Idon'tthinkwewanttorelytoomuchoncustomerreservationmoneyasopposedtocapital.Maybethereisabufferorsomethingbutnotasaprimarysourceofcapital.Soit'sgoingtomakesenseforustoraisesomeamountofmoney,somecombinationofequityanddebt,andtomakesurethecompanyhasagoodbufferofcashonhand.Ithinkit'simportantforde-riskingthecompany.
JasonWheeler (CFO):
ThisisJason,theonlythingI'daddtothatis,wediddraw$430millionontheABLthisquarter.Alotofthatwaswehadalargeamountofcashintransitattheendofthequarter,ourdeliverieswerealittlebitback-endloaded,andasthosecarsweredeliveredinearlyApril,wewereabletopayasignificantportionofthatback.
ElonMusk(Chairman,ProductArchitect&CEO):
Yes,IthinkmostpeoplearefamiliarwiththeAssetBackedLine,butit'simportanttosaywhyisthatdifferentfromgeneraldebt?
Unlikeotherautomotivecompanies,Tesladoesn'tshiptodealers.Weshiptocustomers.Sowebuildthe
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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carstoorder.Thecariscompleteandit'sgoingtoaknowncustomer.
Soreallytheonlyriskassociatedwiththatisifliketheshipsinksorsomething,orthetruckthat'scarryingthecarscrashes.
ButtheABLis,theAssetBackedLineisbasicallyfinishedgoodsintransittoknowncustomers.It'snotlikegeneralcorporatedebt.It'sIthinkmoreappropriatelythoughtofasaslightincreaseincostofgoodssold.
JohnMurphy(Analyst-BankofAmerica):
Okay,that'shelpful.AndthenifIcanaskjustonefollow-upfromanotherquestion,asyoulookattherampwithsuppliers,isthereanyrecoursetosuppliersthatdon'tmeetthatstarterproductionnextyear,oranypointoftheproductionschedule,orisitreallyjustyoucancelthebusinessandmoveontoanothersupplier?
ElonMusk(Chairman,ProductArchitect&CEO):
We'llbeaskingforfirmcommitmentsfromsupplierstomeetthattimeframe.
AndI'mmeetingpersonallywiththeteamfromthatsupplierwhoisgoingtoexecuteonthetask,soIhavenotjustthecommitmentoftheCEOorgeneralmanagerofthatsupplier,buttheactualteamthatwillexecuteontheproduct,andwewanttoconfirmthatwefeelconfidentintheactualteam,andbasicallywe'reaskingfortheATeamfromtheAsupplier,andacommitmentfromthatATeamthattheyintendtoworkharderthantheyeverhaveonanyotherprogram.
Andifthey'rewillingtodothat,thenweworktogether.Otherwise,not.
JohnMurphy(Analyst-BankofAmerica):
Andrecourseiftheymisstargets?
ElonMusk(Chairman,ProductArchitect&CEO):
Yes.AlongthewaywewillbeassessingprogressandourconfidencelevelthatsupplierswillmeettheJuly1target.Ifitlooksliketheywillnot,we'llhaveaconversationwiththem.Ifourcomfortleveldropsbelowacertainlevel,theywillnotbeasuppliertoTesla.
JohnMurphy(Analyst-BankofAmerica):
Great,thankyou.
Operator :
RodLache.
RodLache (Analyst-DeutscheBank):
Heyeverybody,acoupleofquestions.One,distributionandfranchiselawsintheUShavealwaysseemedlikethereareinitiativesthataregoingtoneedtobedealtwithatsomepoint.Doesthistrajectoryforcetheissue,oristhissomethingyoucanaccommodateevenwiththedistributionconstraints?
ElonMusk(Chairman,ProductArchitect&CEO):
Firstofall,it'sworthemphasizingthatthewholedealershipthingonlyappliesintheUS.Wedon'tcarry
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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thatissueanywhereelseintheworld.
What'shappeningisdealersareusinga(indiscernible)legislationthatwasoriginallyputinforajustpurpose,whichistoprotectthemfrompredatorypracticesfromthefranchisor,andthenusingitforanunjustpurposewhichistopreventdirectdistribution.Webelievethatinthelong-termjusticewillprevail.
RodLache (Analyst-DeutscheBank):
Okay.Butisthereaviewthatyoucanactuallyachievethisevenundertheconstraintsthatexisttoday,oristhatsomethingthatyoudoneedtoaddressinordertoachievethisplan?
ElonMusk(Chairman,ProductArchitect&CEO):
Webelievethatthatisnotaconstraintonourabilitytoachievetheplan.
RodLache (Analyst-DeutscheBank):
Okay.Thesecondquestionis,I'massumingthatconcurrentlywiththisplanthere'skindofalonger-termplanforgrowth,andthatthere'sgoingtobeaFremontNumber2,andIthinkyoualludedtofurtherexpansionofGigafactory.
Canyougiveusasenseofwhatyou'reaspiringtointermsofthetrajectorybytheendofthedecadeasyou'vedonebefore,andJason,Iknowyoudidn'twanttogetintodetailsonprojectspending,butitwouldbehelpfuljusttopassalongsomethoughtsonwhatneedstogointothecompanyintermsofinvestmentinordertogetthatsortofthingout.
Isitreasonabletoassumethatthenewlevelofspendingthatwe'reseeingrightnowissomethingthatweshouldassumeasbeingasustainedlevelgoingforward?
JasonWheeler (CFO):
Sure.Idon'twanttogointothedetailsofwhatwethinkthetotalcapitalcostisgoingtobefortheModel3program,butcertainlyaswecontinuetoramp,there'sgoingtobemorecapitalrequirementsofthecompany.That'sjustafact.IdeallyI'dliketofundasmuchofthataspossiblewithcashflowfromoperations,sothatisreallythefocusthatwehaveintheshort-term.
ElonMusk(Chairman,ProductArchitect&CEO):
It'sfairtosaythere'sprobablya2020targetforvolumeisclosertoamillionvehiclesin2020,orsomethinglikethat.
RodLache (Analyst-DeutscheBank):
Okay.Great,thankyou.
Operator :
CharlieAnderson,Dougherty.
Charlie Anderson (Analyst-Dougherty&Company):
Thanksfortakingmyquestion,justatwo-parterontheModel3reservationholders.IimagineformanyofthemthiswastheirfirstinteractionwithTesla,andmaybethefirsttimetheywenttoastore.AndIwonderasyou'velookedatthatbaseifthereisanypotentialtoupselltoanSorXintheinterimwhiletheywaitfortheircar,ifyouhaveaprogramsorplantoaddressthat?
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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Andthensecondarily,Iwascuriousifyouhaveanycoloronthegeographicsplitofthereservationholders?Thanks.
JonMcNeill(PresidentofGlobalSales&Service):
ThisisJon.Intermsofyourfirstquestiononwhetherornotthereservationholders,thiswastheirfirstinteractionwithTesla,justabout93%ofthereservationholders,thisistheirfirstinteractionwithTesla.Soit'sasuper,supermajorityofanewclientbaseorcustomerbaseforTeslaandit'sexciting.
Itwasexcitingwherewewalkedthelines,withpeoplewaitinginlineatthestores,andtheywereexcitedtobecomepartoftheTeslacommunityandfamily.
Andthedemographicsoftheowners,we'renotgoingtosaymuchaboutthat,buttheyareabitdifferentasyoucanimaginethantheModelSandtheModelXownerstodate.AnditpresentsanexcitingnewmarketforTeslaaswell.
AnditshouldbenotedthesefolksarenotinterestedjustonlyinTeslaMotors,butalsoTeslaEnergy,becausethepricepointoftheTeslaPowerwallisanaccessiblepricepointformanyofthesefolks,andsothey'reexpressinginterestinboth.
IntermsofSandXasabridgetoModel3,wearetalkingthroughandthinkingthroughthat,becauseasElonmentionedearlier,thequickestpathtoreceivingaModel3isbeingaTeslaowner.We'veagreedthatTeslaownersarereceivingpriorityintermsofproduction.
AndsoyoucanrunthemathIjustmentioned.It's93%arenewtoTeslaand7%ofthereservationholdersareTeslaowners.Andthefastestwaytogetaproductionvehicleevenin2017isthroughTeslaownership,andsowe'refindingthatthere'sagoodconversionrateoffolksthatarecomingintotestdriveanSoranX,whoareModel3reservationholders,andaremotivatedtobeTeslaownersnow,sothattheycanreceivetheirModel3earlier.
ElonMusk(Chairman,ProductArchitect&CEO):
Animportantpointworthmentioning,wewerefairlyworriedaboutwhatwouldhappenwiththeModel3announcement.Woulditcauselikesomeabigdropin,say,ModelSsales?Itseemstohavehadtheoppositeeffect.ItseemsasthoughSdemandhasincreased.
JonMcNeill(PresidentofGlobalSales&Service):
Ithasincreased.IthinkyousawtheSdemandnumberinthefirstquarterwas45%upyear-over-year,andthatdemandcontinues.
Charlie Anderson (Analyst-Dougherty&Company):
Thankssomuch.
Operator :
EmmanuelRosner.
EmmanuelRosner (Analyst-CLSA):
Hi,goodafternoon.Iwantedtoaskyouguysaboutanyearlythoughtsontheneedformanufacturingextension?Obviouslyifyouaredoing500,000unitsby2018,Ithinkthat'stheoriginalcapacityoftheFremontplant,sodoyouneedtostartthinkingaboutanadditionalplant,andinthatcontext,anythoughtsontheglobalexpansionyouwerementioning,obviouslyverystrongincreaseinModelSorders
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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inAsia,forexample.Anythingyoucouldsharewithusatthispoint?
ElonMusk(Chairman,ProductArchitect&CEO):
Ourplansforinternationalexpansionandestablishmentofnewplantsarespeculative.Wehaven'tmadeanyfirmdecisions.
ButsomeofthethingsarejustsortofcommonsensethatmanufacturingcarsinCaliforniaandthenshippingthemallaroundtheworldisnotaveryefficientthingtodo,particularlyasyougotomoreaffordablevehicles.
Soatsomepointit'sgoingtomakesensetohaveaplantinEuropeandaplantinChinaandprobablyplantsinotherpartsoftheworld.Sothat'skindofthenaturalthingyou'dexpecttodo.Itwouldn'tmakesensetoshipcarsfromCaliforniatoEuropeorCaliforniatoAsiainthosevolumes.It'snotanefficientwaytogo.
AndparticularlyaswesaturateonFremontvolumeintermsofsatisfyingdemandinNorthAmerica,justtosatisfydemandinNorthAmerica,forourfutureproductlineupwe'regoingtoneedmorethanoneplantinNorthAmerica,justtosatisfyNorthAmericademand.
EmmanuelRosner (Analyst-CLSA):
Right,sowhenwethinkabouttheseextracapitalneedsthatyou'realludingto,inadditiontoobviouslythecostoftheModel3development,areyoualso[campaigning]aspartofthattoraisethemoneyforanextrafactorytotheextentthatjustbeyond2018youwouldalreadyneedsomeextracapacity?
ElonMusk(Chairman,ProductArchitect&CEO):
Idon'tthinkwe'llberaisingmoneyfornewfactoriesbeforeweaddvolumeproductionfortheModel3.AndthenasJasonwassayingearlier,we'lltrytofindasmuchofthisaspossiblefromoperatingcashflow.
EmmanuelRosner (Analyst-CLSA):
Gotit,thankyou.
Operator :
BenCallow,RobertW.Baird.
BenCallow(Analyst-RobertW.Baird&Co):
Thanksalot,Ihave18questions.ThefirstoneIhave,ModelXproduction,whereareweatrightthere,becausewe'vegotalltheseconsumerreportsissues,andIthinkthat'salittlebackdatedbutcanyoutalktousaboutthe[state]productionofthat?
NumbertwoontheGigafactoryandthebatterysizefortheModel3,Ithinkeveryone'sdividingby80kilowatthoursor75kilowatthourstothenumberofcars,andhowdowethinkaboutactuallytheModel3batterysizeandwhattheGigafactorycouldsupport?
AndthenthethirdquestioniswhyisBobLutzandJimChanos,theykeeponsayingsuchnegativethingsaboutyouguys.WhatdoyouhavetodotogetthedissenterstoactuallybelieveinTeslaalittlebit?Thankyou.
ElonMusk(Chairman,ProductArchitect&CEO):
Ifeelconfidentthatwearegoingtohitthe2,000vehicleaweektargetbytheendofthisquarter,of
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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whichontheorderof40%areX.That'sourinternalplanandwhatweexpecttomeet.
There'snoquestiontheXisaverydifficultcartomanufacture.IthinkunquestionablythemostdifficultcartomanufactureintheworldandBobLutzwouldagreewiththat.Ithinkhesaidsomethingtotheeffectthathethoughtitwasn'tmanufacturable,orsomethinglikethat.
It'scertainlymanufacturable,it'sjustahardthingto[indiscernible]for.
Sowehavesomeinternalmilestonesthatwe'veachievedthatI'mprettyexcitedabout.Fridayat3amweachievedourfirstflawlessproductionoftheModelX,wherewewentthroughthewholeproductionprocessandhadzeroissues.Thatwasagreatmilestone.
(MultipleSpeakers)
Celebratingwiththeteamat3amFridaywasgreat.
Nowwe'restartingtogetseveralinarowthatareflawlessand…
(MultipleSpeakers)
--veryquickly,and(we)feelprettygoodaboutthetrajectoryofthatfact.
Asforconvincingallthenaysayers,thatwillbasicallybenever.There'salwaysgoingtobenaysayers.
(MultipleSpeakers)
WhatIfindironicaboutthenaysayersistheverysamepeoplewilltransitionfromsayingitwasimpossibletosayingitwasobvious.
I'mlike,waitasecond.Wasitobviousorimpossible?Itcan'tbeboth.
BenCallow(Analyst-RobertW.Baird&Co):
Gotit.AndtheModel3battery,we'reallanalystshere.Westaredownastraw,dividingby75kilowatthours.IsthattherightthingtodowiththeModel3,orshouldwehavealowernumberlike40kilowattsor45?
Andthenyou'vegottheguywiththeVoltmakingthatcar,sayingthatit'sgoingtobeaheadofyouguysandsellforcheaperthanyou,andsohowdoIthinkaboutGMbeingabletomakeacarcheaperthanyou,versusmakingamarginonaTeslawithalowerbatterycost?Ifthatmakessense.
ElonMusk(Chairman,ProductArchitect&CEO):
We'renotgoingtogetintorealspecificsonbatterypacksize,butIthinkit'sfairtosaytheaveragebatterysizeforthe3willbelessthan75-kilowatthours.
BenCallow(Analyst-RobertW.Baird&Co):
I'msorry,whatwasthat?
ElonMusk(Chairman,ProductArchitect&CEO):
Theaverageenergycontentofa3packisstillgoingtobelessthan75.Itdoesn'treallyneedtobeanywherenear75toachievetherangeof215miles.Wedon'twanttogetintothenitty-gritty,it'sprobablyunwise.
JBStraubel(CTO):
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
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Youprobablydon'tneedtofixateonthe35gigawatthours.We'replanningtheGigafactorytomeettheproductionneedsoftheenergythatweknowthecarswillneed.Sothere'snotaprobleminscalingthatasweneedto,soobviouslyinternally,weknowthemathandweknowwhatweneedtodoandwe'reontracktodoit.
BenCallow(Analyst-RobertW.Baird&Co):
Iguessmy18thquestionis,I'mnotacarguy,soIhaveyouguyshaving40,000unitsoftheModel3in2017.Fromyourcommentary,itseemslikeIneedtoraisemynumbers,buthowdoIthinkaboutthatrampupfromzeroto500,000over,let'spushitfrom2018on?Doesitgofromzeroto500,000overtwoyearsoroneyearorhowdowethinkaboutthat?
ElonMusk(Chairman,ProductArchitect&CEO):
Obviouslyifwe'resayingthatTeslawillhavetotalvehicleproductionontheorderof500,000carsin2018,[can't]bemorethantwoyearstogetthere.
ProductionrampslooklikeanS-curve.It'sextremelydifficulttopredictwithprecisiontheearlypartoftheS-curve.IntheearlypartoftheS-curve,itstartsoffveryslowandthenitincreasesexponentially,movestoalinear,andthenmovestoalogarithmic.Soit'sreally…
(MultipleSpeakers)
…incrediblydifficulttopredictexactlywhattheshapeofthatS-curveis.
Andthat'swherethingsgettricky,becauseyouendupputtingquarterlyresultskindof(bracketing)somewhereonthatS-curve,anddependingonwhereyouareinthatS-curve,itcanactuallylooklikeabigdifference,butactuallyitcouldbeashiftofa[BackgroundNoise]becauseoftheexponentialnaturethebeginningoftheS-curve.
BenCallow(Analyst-RobertW.Baird&Co):
My19thquestion,canyoumake(15%,50%)grossmarginonit,or20%grossmargin,orhowdoyouthinkaboutmarginonit,becausepeoplethinkyoucan'tmakeit(BackgroundNoise)profitably.
ElonMusk(Chairman,ProductArchitect&CEO):
We'rehighlyconfidentthatitcanbemadeprofitably,anddesignformanufacturingandeconomiesofscalearethekeystoachievingthatoutcome.
GMisnotaimingforanythingnearthevolumesthatweare.Anddespitebeingabigcompany,theireconomiesofscalearegoingtobedrivenbywhateverelementsareuniqueintheirEV,andweknowforafactthattheywillnotgettheeconomiesofscalethatwewillbeatforModel3.
BenCallow(Analyst-RobertW.Baird&Co):
Great,thankyou.
Operator :
DanaHall.
DanaHall(Analyst-BloombergNews):
Hi.Whatisthemixin2018ofthe500,000cars?It'scombinedS,X,and3.Shouldwethinkofitaslike300,0003,orwhat'sthemixofthosethreevehicles?
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ElonMusk(Chairman,ProductArchitect&CEO):
Idon'tthinkwe'vegotanamazingcrystalballtofigureoutexactlywhatit'sgoingtobe.Ifeelconfidentaboutthetoplinenumber,butthemixinternally,itisdifficulttofigurethatout.Maybeit'ssomethinglike100,000to150,000SandX,andthenmaybe300,000to400,000of3,Idon'tknow.It'sreallyhardtosay.
DanaHall(Analyst-BloombergNews):
Hardtosay?Okay.Andthenifyoutrytoattracttopmanufacturingtalentasyoubegintoramp,haveyougivenanythoughttotryingtohireaCOO?I'mjustthinkingaboutyourpersonallifebetweenTeslaandSpaceXandsleepinginasleepingbagandworking90hoursaweekbetweentwocompanies.SpaceXhasagreatCOOandhashadonesincethecompany,foryears,butTeslaneverhas.
ElonMusk(Chairman,ProductArchitect&CEO):
ThescopeofTesla'spresentactivityisbroaderthanSpaceX.SpaceXismoreofapuretechnologycompanyanddoesnothavethesales,service,andfleetmanagementandcustomerfinancingandallthatsortofstuffthatTeslahas.
ObviouslyJonMcNeillhasthatroleatTesla.Myfocusisprimarilyontechnology,design,andmanufacturing.SoIthinkwecertainlycanexpecttherewillbeannouncementsinthefutureaboutsomegreatexecutivesjoiningtheranks.
DanaHall(Analyst-BloombergNews):
Great,thankyou.
Operator :
PhilLeBeau.
PhilLeBeau (Analyst-CNBC):
HiElon,Ihaveaquestion,itwasabout10minutesago,youmadereferenceto1millionvehiclesin2020.Isthataproductiontarget,aproductiongoal,orahypothetical?I'mjustlookingforsomeclarificationthere.
ElonMusk(Chairman,ProductArchitect&CEO):
That'smybestguess.Ifwe'rehalfamillionin2018androughly50%-ishgrowthfromthere,thenit'sprobablyaroundamillionin2020.
PhilLeBeau (Analyst-CNBC):
Anddoyouhaveanestimateastohowmanyproductionplantsyouwillneedinordertomakethathappen?
ElonMusk(Chairman,ProductArchitect&CEO):
Ithinkitisactuallyfeasible,maybenotadvisable,butfeasibletodoitwithjustFremontandtheGigafactory.WeactuallybelievethattheFremontandtheGigafactorycouldscaletoamillionvehicles.Whetherthat'sactuallywiseisaseparatequestion.
AsIsaidearlier,it'sgoingtomakesensetodolocalizedproductionatleastonacontinentbasis,otherwiseyourlogisticscostsendupbeingquiteextreme.Yourlogisticscostsstartbecomingabiggerandbiggerpercentageoftotalvehiclecosts.
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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That'sreallywhymanufacturersbuildtheircarsforalocalmarket.Theybuildcarsforamarketinthatmarketbecauselogisticscostsassociatedwithshippingoneandahalftotwotonvehiclesaremassivelythegreaterthan,say,shippingalittleconsumerelectronicsdevice.
PhilLeBeau (Analyst-CNBC):
Great,thankyou.
Operator :
AlexSage.
AlexSage (Analyst-Reuters):
Hi,canyouhearme?Elon,yousaythatyou'recallingouttothebestmindsofmanufacturingtojoinTesla,butatthesametimeGoogleandApplearegivingoutthesamecall.IwonderwhatyouwouldsaytothesepeopletohavethemjoinTeslaovertheseothercompanies?
ThesecondquestioniswhetheryouhadanytakeawaysintermsofyoursuppliersintermsofthisHoerbigerexperience,andhowyoucanholdthesesuppliers'feettothefireonsomeofthesemorecomplicatedtasksthatthey'reaskedtofulfill?
ElonMusk(Chairman,ProductArchitect&CEO):
Inresponsetoyourfirstquestion,I'mnotsureyou'reappreciating--AppleandGoogledonotmanufacturethingsthemselves.
AlexSage (Analyst-Reuters):
Right,buttheyarehiringmanufacturingpeople.
ElonMusk(Chairman,ProductArchitect&CEO):
Todowhat?
AlexSage (Analyst-Reuters):
That'sagoodquestion,buttheyarehiringmanufacturingpeople,peoplewithmanufacturingexperience.
ElonMusk(Chairman,ProductArchitect&CEO):
Teslabelievesstronglyinmakingthings.Theydonot.That'sfine.It'saphilosophicaldifference.
Webelievethatmanufacturingtechnologyisitselfsubjectto[transmatter]innovation,andinfactwebelievethatthere'smorepotentialforinnovationinmanufacturing,thanthereisinthedesignofthecarbyalongshot.
Nowthisisjustaphilosophicaldifference.Perhapswearewrong.Butwebelieveinmanufacturingandwebelievethatacompanythatvaluesmanufacturingashighlyaswedoisgoingtoattractthebestmindsinmanufacturing.
AlexSage (Analyst-Reuters):
Okay.
Jef f Evanson (InvestorRelations):
CompanyName:T eslaMotorsIncCompanyTicker:T SLASector:ConsumerGoodsIndustry:Automotive
EventDescription:Q12016EarningsCallMarketCapasofEventDate:30.68BPriceasofEventDate:222.56
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Ithinkthat'sallthetimewehave.
AlexSage (Analyst-Reuters):
Thesupplierquestion?
ElonMusk(Chairman,ProductArchitect&CEO):
Idon'tunderstandwhoyouarereferringto.
AlexSage (Analyst-Reuters):
Hoerbiger?
ElonMusk(Chairman,ProductArchitect&CEO):
Notfamiliarwiththatname.
We'recertainlygoingtodoourbesttoensurethatwehavehighconfidenceinthesuppliersontheModel3program.Thosethatdidn'tperformverywellon,say,priorprogramsareunlikelytobeselectedfortheModel3program.
Operator :
AtthistimeIwouldliketoturnitbacktoMr.JeffEvansonforanyclosingremarks.
Jef f Evanson (InvestorRelations):
Thankyoueveryoneforjoiningustoday.We'lltalktoyouinaquarter.Byebye.
ElonMusk(Chairman,ProductArchitect&CEO):
Allright,thankyou.
Operator :
Thisconcludestoday'sconference.Youmaynowalldisconnectandhaveawonderfulday.
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