Q3 2020 Tesla Inc Earnings Call
[music].
Ladies and gentlemen, please standby your conference will begin momentarily once again, ladies and gentlemen, please standby.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Tesla Q3, 2020 financial results in Q1, a webcast at this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Mr. Martin Vietnam Senior Director of Investor Relations. Please go ahead Sir.
Thank you Shirley and good afternoon, everyone welcome to <unk> third quarter, Twentytwenty Q1, a webcast I'm joined today by Elon Musk Zach record corn and a number of other executives. Our Q3 results were announced at about one P.M. Pacific time in the update deck, we published at the same link as this webcast.
During this call we will discuss our business outlook and make forward looking statements. These comments are based on our predictions and expectations as of today actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the FCC during the.
During the question and answer portion of today's call. Please limit yourself to one question and one follow up. Please press star one now if you would like to join the question queue I'd be.
Before we jump into the queue and <unk> you don't have some opening remarks give them.
Thanks Ben.
Alright, So Q3 was our best quarter history, which achieved a record production deliveries record revenue record net income, both GAAP and non-GAAP and record free cash flow of $1.4 billion.
This is really due to the amazing execution by the Tesla team.
I could not be more proud to work with such a great group of people I'm, just really pick up performance across throughout the world.
Of course, we have a battery day, so we're hosting.
Sure I'll plans for how we can expand the future and improved core battery technology for of course cell technology at the form factor level chemistry level and I'm like most significantly at the manufacturing technology level.
It's what I call it a bit in the past is that I think that says is long term competitive strength will be primarily manufacturing. This is counter intuitive, but I am quite confident this will be what what happened.
Okay, Alright, so we presented what the team is working on for a long time, well batteries, we'd want to step back and really rethink batteries from scratch.
But first principle thinking just look at those are the fundamental physics and say what.
Growth in compare to.
Other parts of the market just say from a public standpoint, if you will.
What's the upper limit of physics wasn't sonic ideal perfect sell and how close can you get there and Ah, but that was our aspiration and I think we've.
We've got a pretty good approach that we're supposed to get better over time.
So we went through all the matrix solutions for everybody.
Important part of exercising production and well continue to elaborate on that and just recursively improve the core cell and battery technology.
The result, we think in a few years will be batteries that cost half as much and where the capital expenditures required are a third or less what they are today and.
And we expect a gigabyte Lynn will see yeah first a battery cell production line at scale.
Regarding the full self driving beta release or the.
The Motorparts game or again, just to really all star team.
I spent a lot of time with the with your team and there's still a lot of really talented people on that team Uh huh.
Worked incredibly hard to make the tickets get the beta release out so just really like to thank them for their hard work and it's just it's just a very smart people. So.
I think we would we're starting very slow in part due to spray cautiously because the world is like a complex messy place and so we were yeah. We put it out there last night and then we'll see how it goes and then.
Probably released it to more people this weekend or early next week.
And then just gradually step it up and so we have a hopefully a wide release by the end of this year.
And of course, as a system to collect more data and I'd be it becomes more robust.
So.
It's sort of like you know.
How does Google was a search engine get better is because everyone is programming it by asking questions. All the time and clicking on to take the lakes. So it's got this great feedback, we and that makes it a an extremely effective a search engine and its the same thing for autonomy and having on the order of a million cars.
That are providing feedback and and specifically feedback on it was on screens corner case situations that you just can't even come up with in simulation. Oh. This is the thing that is really valuable it looked like the.
But the <unk> Dod the obvious stuff, obviously, I think a good situation <unk> corner cases.
Only reality can give you that so.
Oh, that's a bit but we're able to say, okay, we need to train the system on this corner case situation.
Uh huh.
And look for example, so we can we can then.
<unk> those examples and improve its.
Im very esoteric corner case.
And.
And.
Well, it's important to emphasize that this is a generalized ah you're on.
Neural net based approach there is.
There is no need for high definition maps or a cell phone connection. So the car. This system is designed such that even if you have no conductivity whatsoever and youre in a place that you have never been to before and know Tesla has ever been there the cars should still be able to drive just like a person.
That is the system that we are developing and aiming to release this year.
Then in terms of capacity build out that we're making progress on.
Oh, three major factories, we're continuing to expand Shanghai significantly, which is going incredibly well to test the China team is just.
It was just.
I mean incredibly good.
Okay.
Super Smart work hard it's like I'm always amazed by how much progress the telx attach and he makes a it's a battle reasonable expectations.
And then were under construction in Berlin, and Texas and Austin.
So.
Also making good progress there.
Yes, Chris it's a real gun well I should make point that for Berlin and Austin.
We do expect to start delivering cars from those factories next year, but because of the exponential nature of of Oh, the spool up a manufacturing plant, especially one with new technology.
It will start off very slow at first and then Ben and then.
Become very the optimal recovery logic, just in general manufacturing follows the S curve and.
Yeah.
And I think it's a nice people that it's been a lot of time manufacturing kind of think that once you have a factor you can just sort of turn it on and it's at capacity, but it will typically take.
About 12 to 18 months to reach capacity.
And that is a very fast a period of time, especially for new technology.
Ah So, yes, I'd say 12 to 24 months even so.
Generally what I see is the management manufacturing capacity is.
Underestimated they're getting.
For quite some time I've been at sometimes overestimated because this is an estimate of it goes exponential to linear to logarithmic.
And.
It's it's actually incredibly hard thing just bringing a production plant.
You bought my take on it if it could you actually think of it like you've got to first.
Schieffer approximation 10000 unique parts or processes, all of which operate on an S curve and and.
With a bunch of uncertainty and you can just slide 10000 S curves on an X axis and that's what bring a large automotive plant is like.
Which one is which one is the <unk>.
The laggard, which one leader.
It's very difficult to tell and its constantly changing.
So.
It it's really one of the most difficult challenges I've ever seen.
So let's see incursion. Thank you.
Well, we've achieved would not be possible without the incredible hard work of tens of thousands of tests on quite employees and old people that our suppliers as well like thank our suppliers.
We continue to grow as fast as we can while focusing on cost control and and improving quality and ultimately be the best company will be that which makes great product at an affordable price and that is that's our goal.
I think I've never felt more optimistic about the future of Tesla than I did I do today.
I'd like to thank investors, who have stuck with us through thick and thin. This is a I think there's just a lot more good stuff to come.
All right with that we can move to questions.
Thank you Lynn I think ER, our CFO soccer corner, some opening remarks as well, okay sure I'm, sorry, Yeah thing fine.
Overall, our financial health continues to rapidly improve with Q3 being another great quarter on nearly all dimensions as the line has mentioned on that.
On that on our net income we achieved our fifth sequential quarter of profitability at bats, net income and nearly double digit operating margin.
Two things that are important to notice that context for Q3 profitability from.
First the regulatory credits business was stronger than our expectations and we are tracking to more than double this year compared to last.
Second as a result in the right at the market cap of the company the second and third tranche of the CEO grant vested during the quarter. Additionally, we have begun extensive one more tranche, resulting in roughly 300 million of combined period expense.
I think it's reasonable to view the quarter, excluding both these items to get a true sense of the health of the core business.
Automotive gross margin, excluding regulatory credits it increased materially from 18.7% to 23.7%, but some of our programs achieving creating greater than 25% gross margin keeping.
Keep in mind that inefficiencies related to factory shutdowns affected our margins in Q2.
We continue to reduce our manufacturing and operational costs.
We're also seeing benefits from the ongoing upward trend of locally built and delivered cars, which has increased from under 50% at the beginning of last year to over 70%. Most recently, which is a core component of our cost reduction strategy.
We're also seeing financial benefits from improved vehicle reliability across the fleet across the fleet.
Services and other margin approved yet again, driven by our used vehicle business in it and efficiencies in our service operation.
In the energy business, we achieved record storage deployment aided by the positive reception of the Mega pack in parallel products as production and deployments grow I just.
Additionally, our solar deployments doubled and were continuing to make progress on that front.
On cash flows our cash balance increased to 14 and a half billion, which includes free cash flows of 1.4 billion our highest yet.
Our operating cash flows were 2.4 billion.
Including a 600 million benefit from working capital as we've made progress on days of receivables and inventory. Despite a reduction in days of payables not that.
Note that the majority of our operating cash flows are driven by the strengthening of our core operations.
Capital expenses grew to 1 billion driven by model lineup and in Shanghai, Berlin, and often asked.
As for previous investments in model, three Shanghai and model lie in Fremont lift stacking. These programs to have already fully paid for their respective investment by the end of this year.
Looking forward to 2021 and 2022, we have revised our expectations for capital spending by two to two and a half billion. Once you have ample liquidity and expected cash flows to fund.
This is driven by an increase in source scope for certain factories, including battery cell manufacturing as well as investments to enable greater capacity expansion in the future.
While we expect a return on our investments to remain very strong keep in mind that with additional scope and location specific cost. The payback of these investments maybe slightly longer than what we saw in model three in Shanghai and model line Fremont.
Financing cash flows were four and a half billion as we reduced use of our working capital lines offset by a 5 billion equity raise in September.
That we're currently expecting over a billion in early convert pay downs in Q4, primarily associated with the 2021 conversions, but also our 2022 and 2024.
Looking forward, we remain focused on strengthening the core fundamentals of the business.
We are increasing production to meet demand, reducing costs, including localization driving higher efficiency across the business and tightening our cash conversion cycle.
Paying tremendous progress on this front over the last year and a half.
Were also aiming to achieve our original 2020 guidance of 500000 deliveries. Despite the operational interruptions earlier in the year while this.
While this goal remains a genuine challenge we believe it's possible the tight execution across the company.
So congratulations again to the Tesla team for a great quarter, and a great year I'll hand.
I'll hand, it over to RJ Johnson, who joined Tesla early on here and it's meeting our energy business for a few comments.
Thank you Jack first I would like to also think congratulate the team on a job well done.
Q3 was a strong quarter for the energy business and were poised for continued strong growth in energy storage and so.
Hi, Good pack is going to be a large groups thing for the business and deployments will continue to expand rapidly as a product reaches full capacity we have more.
We have more demand than supply to 2021, and we continue to ramp of chronic to match unprecedented demand across the globe through 2023 and beyond our order.
Our order book is rapidly filling up through 2023 in a multiple gigawatt hours skill.
Large scale solar plus storage is now more cost effective than traditional fossil fuel generation in many locations across the <unk> just trying.
This trend will continue as we remove costs, which will further displaced existing and new fossil fuel generation. This is true for standalone storage as well.
Many customers are utilizing auto bidder to maximize returns as we optimize our hardware and software with advanced real time bidding strategies. They continue to outperform the market were deployed.
For power will we see continued strong demand for residential storage as customers seek increased reliability and backup home generation.
We have a very large backlog of powerful orders and we continue to invest to increase capacity to fulfill customer orders.
We're just now capturing the full power of customer cited solar plus storage its customers in some jurisdictions are providing services back to the grid when they don't need to consume energy where have backup power.
Massive potential to reduce system cost and make the grade more efficient globally.
In the United States, we lowered our residential solar retrofit price to $1.49 cents, a watt after tax incentives, which is the lowest in the industry right.
We're able to do this by leveraging our online vehicle ordering infrastructure, which substantially reduce the soft cost associated with sales and marketing as a result, our fixed costs remain relatively flat as our volume is efficiency increase leading to increased profitability in the retrofit business.
We're using the same methodology across the energy the entire energy business, including service to capitalize on the technology backbone of the company.
Solar roof is especially exciting as we've gained significant experience over the last year and the installation process, which is a key enabler to scale the business we.
We've recently demonstrated our ability to complete solar roof.
In installation in just one day you. Please now still requires one to two days to remove the existing route.
Apparent for the solar roof installation clearly there will be a range of installation times based on size complexity weather and other factors overall, our reduced installation time provides a better customer experience and will enable the business to grow exponentially scale effects allow for increased efficiency.
In closing we believe the energy segment is poised for strong growth as we continue to focus on increasing scale, while reducing cost to maximize profitability.
I want to thank the team again for their hard work and look forward to another strong quarter ahead of us.
Thank you very much everyone, let's begin with questions from the first.
The first question from retail shareholders is the it's the.
It's just we're planning to start 46, 80, so production or bigger Berlin at the same time as vehicle production concession will share more information on what products will use the battery cells from the pilot line in Fremont.
Uh huh.
Yes did you want to pick up.
Sure Yeah, we will incorporate 46 city design solutions into many applications in time across both energy and vehicle and we.
And we can use our our pilot production facility in Fremont to support the new factory in Berlin as it ramps.
Yes.
Thank you all right let's go.
Let's go to the next question, which is a question number two from a retail shareholders does Tesla tablets cell design to allow for significantly higher peak charging rates does it improve the required taper occur.
Yeah the fun.
The fundamental limitation on charge rate and lithium ion batteries is avoiding lithium plating on the anode and while the tablets architecture helps avoid overheating because it's a more current architecture.
Hi, continuous charge rates it doesn't change the anode plating story.
Electro design and material choice more directly determines the maximum charge rate and how to avoid that was in place.
Okay. Thank you very much the third question from retail is.
As the be able to try to be transferred to go to our next vehicle or pay a transfer fee.
It would add the broad it would add to that brand loyalty. It the same way gaming companies and cellphone companies keep you in their ecosystem by letting you transfer purchases upgraded hardware.
Upgraded hardware.
Yeah, I think well get well give it some thought.
Yeah.
Okay.
The fourth question is what are the remaining constraints to be sold for solar installations to ramp significantly.
Carl Yes.
Probably.
On the solar of engineering and installation the base.
The biggest constraint right now unsold room ramp is getting enough installers onboard and trained and and experience. We made a lot of progress on this in Q3 and were continuing to hire them.
The next opportunity.
Is improving the material flow on the job site, we've talked about there's a lot in the factory as well, but setting up the right packaging coatings. So that every every installer on the group has the parts they need at their fingertips.
Also we've had great response from third party roofing contractors as they are ramping up installations for solar roof on their customer homes, which is a big source of future growth.
Thank you yeah.
No I mean, here's the way to think about a product.
My pay yeah.
I have to say I think.
What do you want to look look like.
When you look around the neighborhood in future.
That gave now you know what do you want.
What what products and we're going to make your life better.
What what future do you want.
I think the future, where we've got beautiful roofs.
Generating energy that are tough and risk tougher resilient and better in every way than a regular route.
And alive with energy.
That's for the future we want.
Uh huh.
Solar roof.
There's a killer product.
This will become obvious next year.
Thank you and the last question from retail shareholders is you recently referred to Tesla as a conglomerate of startups other than men.
Other than manufacturing electric cars, what do you suppose will be the most valuable business units within the slower. The next five to seven years could you envision any of them ever spinning out from Tesla.
Well I think about this today.
Yes, it was probably.
It's probably in excess of a dozen startups effectively in Tesla.
Hi, every major product line is a start up.
Every every new big new plant due to startup and sometimes.
Sometimes frankly, we grapple in less than a few times before things and.
But.
But even things like.
<unk>.
Service and sales are our setups other car companies Oems they don't own their sales and service. So we had to create our service network, we had to create our sales delivery network we have.
We have to do this in.
40 countries.
Both languages.
So if people don't they don't really even know much about is our internal applications team, but that writes the core.
Technology that one of the company.
We are not dependent on.
Hi software.
Like for those who understand what this means this is a very big deal.
And my how does look to for the great work of the until applications team.
They are what they let the nervous system.
The operating system the company that has operating system.
[music].
Extremely fundamental.
And ups insurance is a substantial source insurance could very well be.
On a 30, 40% of.
Of the.
The value of the car business frankly.
And as we talked about before with a much better feedback loop.
Instead of it being statistical it can be a specific obviously somebody is going to have to choose our insurance.
[music].
But I think a lot of people.
Sure it it's going to cost less than to be rather so why would you.
Then the whole autonomy thing is the startup of the computer chip we did on your computer chips for the start up.
Hi.
Obviously cells.
ER sort of.
Designing and making our own power electronics for the drive units.
Design manufacturing our own Motors' chief.
Chargers the supercharger network is a start up.
The thing I think that people just don't really understand about Tesla is that.
It's it's a whole chain of startups, they like what do you do that before.
Yeah, we did it now.
Yeah, I mean, I think so far we have not.
Well, maybe been a bit slow with some other startups, but.
I don't think we've had any any of them fail. So.
So so far so good.
No plans to spend anything out that the cells can but added complexity.
Thank you very much Oh, let's go to the institutional investor questions. The question number one is as a bridge to the round Pell hailing network could you leverage the insurance product to give customers the ability to rent out their vehicles via via the App.
Thereby enabling the car to make money for them. So basically proprietary version of two Roe.
We think we're going to focus on.
Between the robot taxis system. So you can just basically it sounds like that's a that's a sub that's it's really quite a small subset of the overall rubber taxi or rubber car thing, where you can have the car be autonomous for you.
You can have the carvey share with friends and family you can add removed from the network you're going have to be entirely in the network I mean, if you're an abrupt driver you used to be managing you know a fleet of tank cars.
So it seems like a you know shep.
Shepherd pending with what type of thing it's like.
You just get more when we'll leverage.
So.
Yes, I think so.
So that's that's sort of what we could do that.
We could do that wouldn't be very difficult, but we will just be focused on just having an autonomous network.
Has sort of element so we were left and Abu Dhabi.
Yeah.
Thank you and the second question from Institutionals is residential energy use accounts for roughly the same magnitude of carbon emissions as road transport.
Today's boilers and Aircom units are profoundly I'm sexy.
Could you elaborate on the hands, but a track advances with the Y. I could also find use in a domestic system.
Yeah.
Yep go ahead drew.
I was just going to say I mean, I think one of the things we focus on with the model line now all three pump system was.
Learning how to build a tightly integrated system capable of moving heat to and from anywhere really powertrain battery cabin the environment in outside ambient temperatures all the way down to like negative 20.
I see so 30, c. and that's definitely applicable to.
ER to the.
To the home needs of heating and cooling, though the home and the water in your house, So certainly applicable.
Uh huh.
Yeah absolutely.
I think that the hit if we keep up in the car being able to use the battery is both a thermal and electrical energy reservoir is very significant same thing could be applied to a home or with the what.
Water heater, so at end the battery pack and so of course.
So I think there's potential for an integrated home system that Canada is power generation storage.
Hi, heating cooling air filtration.
Yeah water purification.
And you know really tight package.
We don't actually have like a prototype or anything but I think conceptually that is something that would be probably good to have.
Thank you and the third question from institutional is.
He is meeting your long term volume targets requires price reductions that preclude you from achieving youre, a low double digit stated margin targets for the autos business, whether you still reduce prices accordingly.
Well we did.
Where do we want to make our cars more affordable and it's very important to separate out affordability from value for money. It's the cars cars too expensive or didn't given products too expensive and people don't have enough money in the back half they simply can't buy it no matter what the value proposition is so it is important to lower the prices in order to such that people can literally just have enough money.
To buy it I did nothing relax for a desire for our products, but we do like for affordability and so we have to improve the affordability of our hearts. So they are not out of reach for people, we want to bring them more and reach over time, but also improve our costs are.
Cost of production.
Get hopefully a little bit better every year sort out sometimes a lot better.
And.
I mean in terms of margins I go all of these margins are going to look pretty.
Comically small when you factor in autonomy.
Yeah.
Two things I'll add to that.
Without a doubt I mean were moving forward to push as much volume as we reasonably can.
I sent you on talk too early or kind of how the S curve and the timeline of incremental factories looks like and so we're moving full speed ahead with as much volume as we can be reasonably move forward with.
The second comment I'd make is if you just look at the journey as a company over the last year and a half we have grown volumes and ground gross margin.
Despite a number of price reductions over that period of time, and we've kept opex fairly stable during that period of time as well and so the key is it's what do you Wanna mention too I mean, we have to improve the affordability of the vehicle I mean, we have to also continue to make progress improving the cost structure of.
Not only Cogs part of Opex, which we've demonstrated over the last year and a half I think quite successfully and.
And improve the value of the vehicles at the same time. So in addition to reducing the cost of the car or making the card better and that's the formula to sell the volume that's what we're focused on.
Thank you very much the fourth question from institutional is is that the one at what point do you expect to have enough internal or external battery capacity to start ramping up stationary storage deployments again.
Yeah, we're we're ramping up stationary storage a lot.
So.
I mean its.
Proximately definitely we expect as approximately double next year so.
That's pretty good.
And Ah hopefully, we can accelerate that in years to come.
And approximately doubling it this year too so the girl yeah.
Yeah, I mean, if you if you just keep doubling things pretty soon you hit the master the universe and will need to start turning stupid.
Turning Jupiter and yourself.
[laughter].
The last question from institutional is manufacturing is hard delays happen what contingencies do you have in place to ensure the bottlenecks that you might encounter while renting internal cell production will not preclude you from the from your ability to hit your model why production volume targets in Berlin in Texas.
Yeah. So I think it's what we're trying to de risk <unk> 2021, so that there's.
You know almost no dependency on our internal cell production.
Its very first of all I'd be in total cell production will help us ramping 22, but we're not dependent on it for 21.
And to de risk the manufacturing system itself that was one of the reasons why we located our pilot production facility here in Fremont. So we can rapidly iterate on manufacturing scale of challenges provide rapid feedback to the design of both the product and the equipment.
Yeah, I know our pilot line is pretty big as pipelines go it's a it will be in the top 10 cell factory is on Earth I believe yeah.
That's true as a subscale one yeah. So.
Thank you very much and now we can go to questions from analysts lime tree.
Thank you again, we remind you to please ask one question and one follow up question. Our first question will come from Rod Liz Shea with Wolfe Research. Please go ahead.
Everybody I'm just.
Just wanted to ask about the targets from your your battery day looks like you could be approaching something like 20 million vehicles by 2030, if you hit those goals.
Could you maybe share with us a little bit more about a mid term target like where would you be by 2025, and maybe give us a little bit more insight into the investment required to get there just to put that extra two to two and half billion dollars per year and into context.
Yeah, I mean, I think the tricky thing with current predict things midway through next potential is that you you know if things are doubling every year or even just growing 50%. Then if you shift the one you know plus minus one here. It has a huge effect on b the number.
So it sounds like while you the massively exceeded all massive we undershot, but it's actually what's going on is in.
I try to ask her.
So a whole bunch of.
Pretty big Escos.
Well that integrate into a gigantic Oscar.
So that's why it's difficult to predict the metal and one thing for sure. We would hit 20 million vehicles, but it just seemed like a good goal to have because that would mean that were replacing one of us into the global fleet per year.
And so it's difficult to say that we're yeah, we're really changing the world if were not.
Switching up 1% of the global fossil fuel vehicles.
I mean, it's there.
<unk> I'm not sure that we can make that argument unless we.
Yes.
Change at least warm set of vehicles per year. So that is that's where the to the 20 million vehicle for your comes from it's like 1% or 2 billion vehicles, which would be the global fleet currently the global feed is going so far.
I agree with bigger in the future.
So Pat you know, it's hard to say it's like.
On our map an S curve too.
A $20 million 20, 20 million vehicle targeting 2030 <unk>.
Louis lighter around it and see what that number looks like <unk> <unk> <unk> that that would give you about as much insight as we have.
Okay.
And just secondly.
If solid state lithium batteries were to become viable could you just maybe yeah. Just pass along your perspective on that and would you be able to re purpose most of what you're putting into place for changes in technology.
Yeah, I mean, asking the first.
The bill.
The cell production system is.
His failed.
They'll be agnostic on anode cathode electrolyte separate that kind of thing it's.
We could change and we will change and upgrade the.
All aspects of the sell so.
So.
Oh, we could for example, make our phosphate or a nickel manganese or something like that.
It's great it's quite adaptable.
So I wouldn't I wouldn't say, it's just way too much worry about but lets them like a pure lithium anode is.
I mean, no it's not as good as it gets.
As great as it may sound.
Yeah.
Okay.
Yeah, Volumetrically and you're not getting all that much.
Okay.
Yeah, Yeah, because if you've got nothing on the selling outside he got and just played out within its gotta. It's got to go somewhere so you could have room for it Oh, yeah lithium.
Yes, volumetrically dense in the pure metal form that is in Turkey related into silicon. So it's kind of.
It's kind of hard to understand but that that's that's the truth and and then as we showed in our presentation. The old the total energy costs that we're talking about is only at a dollar or two per kilowatt hour. So the value of like we're moving in a material isn't super hi, either.
So yeah.
Yeah, I totally agree on [laughter], yeah exactly.
But if it should turn out that if your lithium and what is the right move that would simply that we know Paul.
Agreed.
All right. Thank you.
Thank you next go to next question. Please.
Next question will come from Colin Rusch with Oppenheimer. Please go ahead.
Thanks, So much guidance, you're talking about insourcing or number of processed foods can you talk a little bit about which process is you're moving in house and equipment and your plan to make yourself versus a house and they want to be part of the trucks.
Alex.
Sorry are you talking about b for cell manufacturing or something or.
[laughter] pressure as well as on a malls they talk about it in terms of the Capex budget that you mentioned earlier talking about you know the number of process that's come in in house.
And which equipment you're planning to make yourself first that's fine.
Okay, well I mean, Tesla is absurdly vertically integrated compared to other auto companies or up basically.
Basically with any company or.
The <unk>, we have a massive amount of internal manufacturing technique.
Technology that we that we built ourselves where we literally make the machine. We in fact, we redesigned its like okay. What are the thing we want to make decided machine that will make that things when we make that machine. This is what it was this.
This makes it quite difficult to copy Tesla, which we're not actually all that opposed to people, calling us, but it's quite difficult because you can't do a catalog engineering you can't just I'll pick up the supplier catalog I'll get one of those machine where that machine bingo I've known to have a you have to be there isn't a catalog.
Okay. So we've made the machine that made the machine that makes the machine.
[laughter] no no we went out and we don't get carried away here, but.
And quite frankly, we would like to outflows less that would be great. Because then if we could outsource for taking that we're doing and I. Suppose that then we can take those people and I think we're going to have them do something else.
But.
Yeah, it's like we just make a crazy amount machinery internally.
This is helpful. So not well understood.
<unk>.
If you just walk around the factories get us out for.
And yeah, I mean, I don't know if this is like a smart move, but I feel like hey, if we're trying to make progress and nobody's got the machines that we need where we've got to make it. So so we do.
Okay. Second question is really around the balance sheet is really change that's around awfully landing a lot more a lot more cushion on at this point you know obviously, there's opportunities around insurance so drop out some of the cost of ownership as well as financials. You know how are you guys thinking about that as you move into trying to accelerate demand a little bit on your part.
So how about your access to capital and Amazon. So are those other products, yeah, it's not changing from where you've been in the past.
Yeah were something like insurance is a good example of a product that's basically made by our internal applications team. So.
So we're just we're just we made an insurance product being connected to the car to look at the beta calculate the risk is all internally, there's basically internal software application.
It's pretty low capital.
But it has very high return.
I don't know what we're trying to spend money at the fastest rate that we can possibly spend it and not wasted.
That's our current plan.
And so.
It's quite hard to spend money without wasting it.
Or just you know what I'm really just trying to not waste too much of it frankly, we will certainly weigh some of it.
Trying to waste and up wastes too much of it this is a very difficult.
But otherwise, we just try to spend money.
Quick as possible in a way that is sensible and.
Yields more valued than it costs.
Thank you. Our next question will come from Adam Jonas with Morgan Stanley. Please go ahead.
Hey, Ron a question on light, our if lydall were totally free.
Would you want to use it in your cars neared.
Near term would that tax significantly help caslen the training of your neural network for FSD.
I mean totally free.
Probably not.
I think probably I I think even if it was free we wouldn't put him on.
Okay, Let's follow up then Amazon appears to be investing and building and.
And autonomous or electric transport network of some elk through some organic investments, but also you know sue acts of war Arabian et cetera, what advice would you give jeff basis.
And his endeavor.
Well I don't know how much he cares about this but I guess it sure is investing a lot of money here.
I mean, I think you eat up for me. It's about four if you would care about autonomy in each books on vision because entire wrote system is based on.
Based on past optical so you have to sell a passive optical or if you have a self driving system that is generally solution.
And once you so passive optical youve solved self driving so why bother with anything else.
Thanks Ilan.
You're welcome to the next question please.
Next question will come from P.S. Africa with New Street Research. Please go ahead.
Hey, you're saying so that's all taking my question is are you seeing for the one you haven't talked like much about like the Cybex right today, and I was wondering or know how and the ramp of that product keeps looking like when we when we should see or the products hitting the road.
And how fast do you expect to rent Williams.
And I have a quick for sure.
Sure.
Absent the studio actions last Friday with friends and team just gone over but just <unk>.
[music].
It's sort of what sort of sort of show improved improvements to the cyber truck. They were generally with that you're actively we we really aimed to make the car that is delivered better than the car that is unveiled has always taught me crazy. It calculates would unveil. These also looking cars.
[laughter] you high grade can't wait till they make that and then that the car they actually make it.
Like much worse.
And that is it's like really disappointing so.
And we will always want to make the car that we deliver it to be better than the car we unveil.
And that's.
That's the goal with this I would work so there's like a lot a lot of small improvements compared to what was unveiled at.
As you know I think is going to be better than what we showed.
Okay.
And.
Yeah. It's it's that's cool like it can be made and and Austin. So it's kinda you're dependent on completing that factory and they are obviously new technologies with the.
<unk>, hi, hardness or.
Uh Huh armored exoskeleton.
This is.
I have never been done before so they'll be they'll probably be some challenges along the way.
No. It isn't it's something that's extremely high hardness and difficult to scratch or dance, if it's a little difficult to form a.
So it's.
This manufacturing challenges there that's why so cleaner.
Although it also looks good I think full theater standpoint.
Yeah, but if all goes well we.
We'll be able to do some sort of a truck deliveries towards the end of next and towards the end of next year yeah. So.
But it's difficult to predict I'd say, there's probably a lot of deliveries in 22, and some deliveries towards into next year, if things go well.
Okay.
And now I'm trying to get a sense of how Mexico is going to look like so if I look at your production capacity at the end of this year, it's getting to be almost 850000 units.
On an annualized basis, and you'll get you to increased capacity in Shanghai right open badly and you say to get you don't they're not always seen as well, so you're probably going to end the year.
It's both a million units and so am I right thinking next year, we should expect you to delever.
Like somewhere like between 840000 in 1 million or college during the year.
Yeah, well yeah.
Yeah, well, yeah, we'll provide guidance on 2021 after next earnings call.
I mean, it's it's in that facility.
Yes, you're not far off.
Thank you.
Hi, Thanks.
Thank you. Our next question will come from Dan Levy with Credit Suisse. Please go ahead.
Hi, Good evening. Thank you just wanted to start with a question on the quarter that maybe you could give us a sense of where Directionally model why and China model three gross margin was in the quarter relative to Fremont model three and then just little more color on the gross margin in the quarter was there.
Just purely a function of higher volume or was there also a FSC revenues just puts and takes on the gross margin in the quarter.
Sure on your question about FSD.
Hi, there was a small amount of that Oh deferred revenue release is not particularly material in that $10 million range for the quarter.
With respect to product margins.
What we're seeing across the board. It's just continued reduction in cost really across every product Shanghai continues to make good progress there.
Model line cost is also coming down quite quickly Athens ramps that we've guided in the past that model like cost should be roughly equivalent to the model three filton Fremont cost, it's not quite there and it's also been a moving target as model three female cost comes down model I also have to sometime with that.
But we're generally seeing strange and Shanghai marginal on the strength and model why margins and not too far off as it were seeing strength in model three frame on NFX margins overall for the quarter I think it was quite a good story for the products.
Great Great. Thanks, and then just a follow up I wanted to ask.
How about your your strategy in Europe, and I think your strategy. Generally then you cut costs about allows you to cut price and you can generate the extra volume and I think that's what we're seeing in China.
You said that a lot of T.. That's that's a good example, so once you ramp in Berlin, what's a reasonable expectation of what pricing might look like in Europe, and how flexible are you going to be on pricing you know to generate incremental that credit. So you know our margins out of the gate thought a little low but you know longer then used for the right.
That's that you know will help to offset that.
<unk>.
Yeah, but what I think I would say generally to the question is I mean, what we've been in a position for for some time now where we are right prioritizing where in the world we sent our production.
And you know there's different factors to that depending upon when different product changes are made with the logistics routing looks like different things going on in different markets, but we are in a position where we need to prioritize.
Hi ideas I mean, what we're trying to do it as fast as we possibly can you get production up higher it's not that we're not in a position of needing to prioritize again.
<unk> they are yeah.
I think that gets at the sentiment of your question.
Okay, Let's go to the next question please.
Next question will come from gene Munster with live ventures. Please go ahead [laughter] good deal.
Did you mean a question on the semi your if you could just walk us through the development of Mega Chargers put tiering and maybe just how you think about autonomy for Tesla semi and what how you envision that impacting their broader trucking industry beyond just TV.
Well it actually dropped do you want to Esa.
Yeah, we continue the development of the semi and in particular or May got Chargers, we realize that the 350 kilowatt to our are still that we might be looking for cars is not going to be enough for semi so were looking for something much more.
Powerful than that.
They can achieve essentially be charging at <unk> and the same I I is a union during a break during your driving time. So that you can drive until the next break yeah. So there is no usable or efficient time wasted for charging the same Mike that's.
That's the goal.
We're working with other parties to make sure that there is news tendered infrastructure that would be able to be deployed for all customers. Yeah. That's probably all I can say at this point yeah.
Yes, yeah, when I was working on it.
Sorry go ahead.
And just as we're not working in isolation, yeah. We're trying to we have to invent it because it doesn't exist channel, but we're trying to invent something and that could be helpful for everybody.
Yeah, just as a note on the sort of same way, but that the semitest consume a lot of cells. So it's you know quote you for.
Four to six times more than a passenger vehicle medco five yeah. There's fiveish times. So if we are still constrained. It is it kinda, it's difficult to ramp up semiconductors ourselves.
So we need to solve to sell constraint before ramping semitest significant volume that's the only real constraint on semi progress.
And you know just what we've found over and over again, we're just we just kept running into cell. So production limitations and then we're just taking things out a one pocket of putting them in another.
So.
But it does it we just need more cells. So that we can do more stationary storage more vehicles.
Well vehicle age.
That's correct, yes, the <unk>.
We need more so so I think makes sense. Okay question. Just if you think about you've talked about robot taxi and how you think that's.
I think that's going to impact kinda humans moving around how do you think about semi impacting.