Q3 2021 Tesla Inc Earnings Call
As a company setting new records on each of the most important financial metrics for Q3.
Overall, we delivered just over 240000 cards, 20% higher than last quarter, and 70% higher than the same quarter last year.
We were also able to achieve an annualized production run rate of over 1 million cars.
Towards the end of the quarter the.
The increase in production rate has primarily been driven by further ramping of the model Y at our Shanghai factory.
Additionally, we have made great progress increasing production volumes of model S and have recently started to ramp in deliveries of model X. It.
It will take a bit more time to get this program back to prior volume.
Volumes, but based on demand, we are targeting to exceed historical production levels.
We have also completed the transition of our Shanghai factory as our main export hub. This has enabled us to supply more vehicles to the North America market and to introduce a model y to Europe.
Due to part shortages and logistics.
It takes variability we have not been able to run our factories at full capacity it.
It's important to note that while we have roughly doubled deliveries year to date. This has been exceptionally difficult to achieve I want to thank our supply chain team for their incredible work in our production teams for showing impressive flexibility as we make adjustments real time.
This team's expertise in the chip industry across all tiers has made a huge difference when managing through these challenges.
Additionally, we never reduced our production forecast with our suppliers as we're adding capacity as quickly as possible.
I want to thank our suppliers for their dedication and partnership to Tesla.
Despite these increases.
Production and generally higher prices, our backlogs are continuing to grow an average of customer wait times are extending.
The only practical way to address this in the immediate term is to do everything we can to build more cars on our existing production lines, which is where we're focused.
Similar dynamics are also playing out in our storage business as we were.
We're working to expand Powerball and Mega pack production as quickly as parts himself allows us to do so.
Additionally, we have made good progress on the in House battery manufacturing program and we're excited to have expanded the full self driving beta program tomorrow customers.
Financially our auto gross margins reached 35% on.
On a GAAP basis, and just under 29%, excluding regulatory credits, which was our strongest yet.
This benefit primarily comes from higher volumes, particularly out of the Shanghai factory increased mix of the model Y as we've and we've made good progress increasing model that's volume.
The model that has now returned to positive gross.
Margin and we expect this to increase with higher production and the ramp of model X.
As was the case in Q2, there were some net benefit from pricing actions. However, this remains small in the context of other contributors.
Please keep in mind that given backlog it will take time for the impact of recent changes to flow through our financials.
Note that we are also not yet recognizing additional revenue from the FSD Beta program.
Supply chain challenges, including Expedites continued to provide cost headwinds as was also the case with FX this quarter.
While we are seeing an impact from the rising commodity and labor costs. We have also been adjusting pricing, which should help to compensate.
Overall as I mentioned in our last call. Our P&L continues to benefit from the marginal profitability of each incremental unit with higher fixed cost absorption.
As a result of the great progress on margins volume and appropriate management of overhead costs, we were able to achieve an operating margin of just under 15% exceeding.
The long term guidance, we've laid out previously.
On cash we generated record operating cash flows of $3 1 billion and continue to invest heavily in the build out of manufacturing Supercharging and service capacity.
So continue to retire at high interest rate debt, including the early settlement of our 2020.
Five senior notes of $1 8 billion during the quarter.
As we look forward, we're clearly quite a bit ahead of the pacing required to achieve our target annual growth rate of 50% this year Q.
Q4 production will depend heavily on availability of parts, but we are driving for continued growth.
We are also nearing.
I believe our first production cars in Austin in Berlin, It's important to stress while the first production car is an important milestone. The hardest work lies ahead in the ramp.
Please keep in mind that we were pushing the boundaries on new product and manufacturing technologies at the factories, which makes it difficult to predict the exact pace of the ramp.
Hearing of factories will also partially lay on our margins as we work towards volume production.
Overall I'm very proud of what the team has accomplished and I'm excited for our next phase of growth into Q4 and into 2022.
The team has done a tremendous job improving our financial health in a short period of time, while also continuing to pursue.
Improve our precision and pace of execution.
Yeah.
Thank you very much and we will now take questions from institutional and retail shareholders that we posted on our website.
The first question is when should we expect the first vehicles to be delivered with 46 80 cells.
Yeah. Thanks Martin.
Early next year.
Our non cell perspective, structural battery crash range and reliability testing.
Are on track to be complete this quarter testing to date has gone well.
The Fremont manufacturing line is on track to support however, similar.
What as I said before this is a new architecture and unknown unknowns may exist still.
Our top priority is ensuring quality and what we deliver.
And from a cell perspective, we're comfortable with the design maturity and manufacturing readiness matching the pack timeline I just mentioned.
Thank.
You very much.
Second question from institutional Investor comes.
And do you still expect to start production of the $25000 model in 2023, what are the biggest hurdles from now until then.
Thanks Harlan.
Yes, we're working on a strategy to increase.
Our production rates as quickly as possible I think exact focus to that well.
We're doing this well.
Trying to have the least amount of incremental complexity to the business.
We don't want to add any new vehicles to our lineup when we're generally in a cell constrained world.
While there is still more runway to grow these existing products.
We are focused on model Y expansion and also in Berlin ramping S and X further in three months to restore to past levels. While also growing three and Y production in Fremont in Shanghai.
As we've mentioned before after model Y in Austin, our next product launch will be cyber truck and that timing of course depends on increasing solar capacity, both from our suppliers and through our.
So as well as many other headwinds we faced in supply chain.
And completing are currently full plate of products on the table.
Thank you very much. The third question is with FSD beta training datasets set to explode exponentially as software is released to a wider and wider audience are there any early.
Takeaways with regards to how quickly versions can iterate and we pushed out from biweekly to weekly or even daily.
Okay.
At this point it is not so much about how much data can we collect but how quickly can we process the data we've collected.
This is where <unk> comes in as we mentioned on.
<unk> <unk> with <unk>.
Substantially faster training computer and do Joe we will be able to iterate more often than we do now.
For instance, say the training and that takes one day instead of one week. It makes a huge difference in our ability to push out more updates, but realistically. There is a whole lot more of that comes into play when iterating.
Software updates the whole infrastructure from top to bottom, including testing and validation.
We set up for faster iteration to daily updates are not really realistic for now.
Thank you very much.
The next question is can you provide an update on future model development and how much diversity in your fleet will be necessary to achieve.
$1 billion in annual volumes, the best selling cars in the world today only fell slightly over 1 million units. So is it possible to achieve 20 million units with just Sx three why truck and the 25000 railcar.
Thanks Martin.
As we've mentioned before we've seen record growth in both model three and model y.
Segments, where model III is currently the best selling luxury sedan worldwide.
We mentioned at our shareholders' meeting model Y is poised to be the best selling vehicle in the world.
<unk> continues to break modes, and new vehicle segments, and we hope to do so with each new product.
As we've said publicly we will eventually expand the vehicle lineup to get to larger volumes and we believe.
That we will need to be in all major segments across small midsized large sedans, Suvs and trucks to do so along with of course, a massive space of Robo taxis.
Thank you very much.
The next question a question from retail shareholders.
What is tesla's goal for vehicle production capacity for the four current factory.
It is three months Shanghai Austin in Berlin by 2024.
Yes, I think Barton.
Our goal as a company here is to grow.
On an average pace of 50% per year.
And and so you can extrapolate that.
That out.
There may be some periods of time in which were well ahead of that there could be some periods of time despite.
Despite F effort best efforts were slightly lower than that.
But that that remains the long term goal of the company.
In infra.
In Fremont Chino, where we're continuing to push the.
The boundaries of what's possible there over the last 12 months, we've done about 430000 cars of production.
And you know based upon everything that we know in the factory, where the bottlenecks are what the potential is.
We're targeting to increase that another 50%.
I think that.
That will be a difficult call, but that's the goal that the internal team has and theyre going to continue to push on that.
Yeah, as we look towards Shanghai.
We're continuing to push the boundaries there and we continue to ramp production there as well so most recently the ramp up the model y which.
Our biggest contributor of volume.
Three we.
We will continue to ramp that factory.
And.
Yeah, and our plans there with time.
Hard to keep growing the capacity in that factory.
Austin in Berlin are interesting factories, because you know our first iteration.
In Q paucity, there are on model y, but we've intentionally set these factories in locations in which they have a quite a significant amount.
Amount of land and ability to expand.
And so you know, we'll take model Y at these factories.
We're trying to get to 5000 cars a week as soon as we can.
Okay, and we'll continue to push beyond that potentially even getting to 10000 cars a week at those factories.
And then we will add cyber truck here in Austin and continue to grow from there.
So you know our goal is to get to millions of cars per year over the next couple of years and then ultimately in the long term be able to achieve.
And the million cars per year.
We're gonna grow as quickly as is feasibly possible with an eye towards a 50% annual growth rate.
Great. Thank you very much.
The next question is what is your view on the tightening regulatory environment for F is the in the investigation and broad data requests by <unk>.
Do you have today.
None of the recent nominees to NHTSA has been publicly critical of purposes, including engaging with short sellers online how will you manage these environments.
Okay.
Thanks Barton.
As we have been for years, we always engage with knits and other worldwide regulatory bodies to share our knowledge and to work with them on our approaches unbilled.
On both active and passive safety.
There are ongoing regulatory inquiries, taking place all the time and especially on the subjects like FSC that are at the cutting edge of technology development.
These investigations to my team and myself are always cooperative as much as possible, we expect and embrace the scrutiny of these.
Products and know that the truth about their performance and the innovations or products have will ultimately be all that matters.
Indiana and as I've said on previous calls, we take safety as a top priority in all of our designs.
This is because our primary motivation is coming from a team of incredible engineers designing software and hardware that save lives and prevent injuries.
<unk>.
In doing so we will continue to be transparent to the public on how our technology is both developing from an autopilot safety data the latest of which we just shared interest.
And the shareholder.
Update.
Can also.
Your interview a wide variety of customer post F. A fever videos on social media.
Okay.
Right.
To add to that I mean, as Lars and safety is extremely important for Tesla.
It's the right thing to do and if you look at various independent testing and regulatory testing of our products you can see the work of.
Our incredibly talented engineers in the results of those tests.
And you know our goal in developing a safety oriented software around the car.
To continue to go beyond what the hardware is able to provide.
If you can prevent a crashed from happening that's the safest way to manage this.
And I think at a macro level here, what we're seeing and this is entirely understandable and expected is that the automotive industry is going through a transition from the traditional car as we know that to more of a computer software oriented.
Sensor suites around them that can manage.
I think it's beyond just what the driver managers.
And and regulatory bodies are understandably, so or are interested in understanding how to regulate in this environment and this is no exception to that.
As Lawrence mentioned here.
I think this is a great thing.
We're excited to partner.
And we will work collaboratively with all regulatory bodies are cool, who wanted to go on the journey to the transition to a software oriented vehicle.
Thank you very much.
The next question is service remains an issue with appointments available weeks or even months out Likewise supercharger wait times are becoming.
Becoming compatible at some locations what concrete steps as Tesla taking to improve the customer experience in these two key areas.
Yeah, I'll I'll take the service part of the questions or you can take the Supercharging part.
We have seen an increase in.
In services.
Wait times throughout the summer.
And a couple of things that have contributed to that based upon the information that we had.
The first is that and I think this is kind of a not they're not unique to us.
Is that the return to some census normalcy.
See you in a post pandemic world.
And I think more quickly than most people expected.
And and what we're seeing here is that the number of miles that people are driving has increased.
There may have been some demand for service during 2020 are in the early parts of 2021 that customers put off and said.
Sort of a catch up that's a term that that has increased demand for service.
At the same time in the macro environment here.
Logistics moving parts sourcing cards.
Become increasingly more difficult, which is well known issue in the world right now.
As well as the challenges.
As in the labor market.
And so there's kind of the simultaneous increase in demand for service, where the ability to supply that service has been impacted for the reasons I mentioned.
And so we saw an uptick primarily in Europe, and North America and service wait times over the course of the summer.
And we've been working extremely hard since then to address this.
And we've seen our wait times come down.
That's just not the case in every location, but if you think about it from regional average perspective, we are seeing improvements there.
We remain super focused on adding adding locations.
And so.
Over the last year, we've grown our physical footprint of service centers by 35%, we have grown our footprint of mobile repair by over 40%.
We're also adding staffing as quickly as we can in the areas that are most impacted by the imbalance of supply and demand for service.
I think the most important.
Part about all of this is and we said this on calls before them.
The best service is no service.
And so.
We have been incredibly focused as a company.
On.
The initial quality of our vehicles and reliability of our vehicles.
And we've seen pretty.
Substantial improvements in both of those metrics.
Over the long term and over the last couple of quarters.
So it is something that remains on our minds. We monitor this very closely but hopefully that's a helpful explanation into the context in what we're doing.
Yeah and on the supercharger.
Side Supercharging team monitors congestion and planned expansion to ensure customer experience with minimal wait times.
Alongside the growth in our vehicle fleet, while we certainly have work to do in expanding capacity and some congested areas average congestion on the network has decreased over.
For the past 18 months.
Nonetheless, we're not standing still we are at.
Executing accelerating expansion plans globally.
The network has doubled in the last 18 months and we're planning to triple it over the next two years.
And even so on an individual site basis to come.
Existing congestion more quickly where it is isolated and problematic we expedite local relief sites deploy mobile Super Chargers, and we try to introduce pricing strategies that encourage more off peak usage to avoid the waiting.
Thank you very much.
Just one thing to add on Supercharging.
Yes.
Matt if you haven't experienced our latest generation of battery packs that can handle fast charge rates in combination with.
250 watt kilowatt charging stations.
Pretty incredible.
And this is a really important component to supercharging capacity.
Because.
The faster you can charge.
The more charged sessions that you can have on an individual post.
The better the customer experience is as you're going on a long term journey.
Because you'll supercharging times or lower.
So this is a really important part of the strategy Supercharging team has done a great job rolling things out.
But it requires a combination.
Nation up close to 250 kilowatt charging in our latest generation of battery packs.
We've also maintained an.
And ongoing roadmap on software improvements Ah dynamic routing to avoid busy Super Chargers that that's actually really helpful. We take the real time business of the stations into account when choosing where to navigate people on.
On a road trip and then beyond that we're also continuing to improve their trip planner itself and how it estimates how much energy people use so its not too conservative and I can be able to charge more than they need to which is another thing that can.
Total trip.
Great. Thank you very much. The next question is this.
It's just not considering any other ideas other than FSP with real world AI that can bring additional software revenue that Tesla is not consistently considered building interesting games around efficacy data.
Yeah.
Okay.
Sure.
At AI day, we did talk.
There are potential future outwear dojo could be used as a neuro and that training platform for other companies.
It's not a focus of ours. Today is we are fully subscribed on dojo with our internal uses we do expect to continue to improve the in car experience in the context of FSD.
Great things here and maybe last question from.
Talk about my shareholders is potash F&B take rate how has the FSA take rate change since the introduction of monthly subscription are there any plans to increase the FSB pricing is why they're released becomes imminent.
I'll take the second part of the question first.
Well, we won't be providing any portfolio.
Some are some commentary on our pricing strategy or what may happen here.
Over the near term with respect to the first part of the question.
It's been an interesting thing for us to impact within the company.
What I was saying just as a general statement before I make a couple of specific comments is that.
Forward looking you know the things that we learn on the FSD subscription today and are not necessarily all that relevant.
Ken This is really more of a platform.
For when FSD data does until I released and the features and functionality become more accessible to more customers.
The second thing that I'll note is that.
If you look at the pricing the monthly pricing of FSD subscription and then you compare that to the cost.
Of either rolling FSD option into your lease or your alone.
On a monthly basis, the most economical way for our customers to enjoy the features of full self driving.
Is through purchasing.
Thompson and rolling it to their financing.
And as a result of that what we've seen in the data is.
Not what we are unable to detect a change in the upfront and take rate of FSD. When people purchase cars, we have seen quite a bit of activity.
Folks carry us to experience, but the software has to offer.
Arthur.
And subscribing to it and enjoying it to that rate.
But again as I said at the beginning I think what we've seen so far on office subscription.
It's not terribly relevant.
We'll see how that plays out in the future as we continue to release more features.
Thank you very much and now let's go to Andy.
Alex questions I, just wanted to remind everyone to click on the our raison button. If you want to ask a question.
The next question comes from peer for a group from.
New Street research.
Here feel free to Amit your mic and correct.
I think your mic is muted.
Yeah.
Yeah.
Yeah.
Okay Wow.
Peer works on that let's go to the next analyst.
The next question comes from Joseph Spak from RBC.
Okay.
Okay.
We cannot hear you can you click on mute.
Okay.
Okay.
Sure.
While while the.
The team is working on that let's just go back to say it up for questions.
So the next say dotcom question is.
Kim Tesla allowed for FSC to be transferred to another vehicle at a fee something less than 10-K early adopters.
Doctors are paying the price if they want to upgrade their vehicle you lose the value on the trade.
And the trade in and now you have to buy them at higher costs.
Sure.
Oh.
I don't think that this is widely known by.
We're already actually doing a sentiment of what this question is asking.
If you trade any of Tesla.
To Tesla.
Is it a difference in price that we pay for it and trading that has FSB compared to one that doesn't.
And instead of his opinion that we paid to repurchase the F. S. T that money can then be applied towards.
The purchase of a new car.
So we hear that feed that quite a bit and we see it on social media, we see it in the forums et cetera and and.
And so this already does exist.
Not directly in the form here and we don't call it out explicitly in the trade and potentially that we have increased the price of their trade.
And as a result.
And hopefully that clears this up because we do actually do that.
Okay.
And the next question is.
Iran.
Elon said that we get an update on cyber truck in November a year ago, but it hasnt happened and we know there are a lot of updates and.
William.
Show up the new and improved cyber truck.
Yeah. Thanks, Martin can get a lot of questions on cyber attack.
We've been busy detailing the <unk> act to achieve the prototype version, we share with customers while back.
<unk>.
As you may have seen recently in social media, we've built a number of alpha.
Will you currently testing those to further mature the design.
And while those point out a few key additions like rear scare. There are also a number of smaller or less visible improvements, though the product is largely true to the initial vision.
We will continue to work through the product and the beta stages that we're in now.
US to launch that.
By next year.
Okay.
You very much.
We just promoted peer to our presenter.
Can you hear me.
Yes, we can hear you amazing I'm very impressed that you manage to figure that out.
Right.
We are too thank you.
Yeah.
Anyway.
My question I actually I'm very intrigued by what you guys are doing on the insurance policy.
And so you have now in the market in.
In Pixar and insurance products for which the premium varies.
As a function of the safety score of the driver and so I'd love to hear you about that you must have some initial data points, so that market's reaction Wes yesterday.
And from there could you tell us about how you think you're going to distribute that is that we need to go through.
Your installed base very easily you always are going to be like a heavy marketing push and then maybe tell us about your expansion plans.
1000 next geography is what's the timing of how fast.
Is that business line Nike to grow in the next few years.
Yes, thank you peer.
I'm extremely passionate about.
Our insurance product, we have a terrific team here at Tesla.
So I've been spending a lot of time developing that and probably listening to the call. So.
We're pretty excited so far appear so.
So I mean at the highest level here, we entered the insurance market.
Tenants unintentionally.
I would say our customers are coming to us complaining that the price in traditional insurance was too high.
And it was reducing the affordability of the Tesla.
And part of her journey here at Tesla is we want as many people as possible to be able to afford our products that's extremely important to achieving.
The mission of the company and if you look at the pricing of insurance as a percentage of what somebody's monthly payment as it is quite high.
And we spend extreme amount of effort and manufacturing to take $5, our bom cost out here or $10 out somewhere else.
If we can get.
You know 510 20 $30 out on a monthly payment you can calculate what that means in terms of reduction of.
The price of the car if you finance it and the leverage is improving insurance cost is huge in terms of affordability.
And so that's kind of the context by which we stepped.
It does.
And as we started to do more research.
Essentially the tools by which the.
Insurance is traditionally calculated.
Our optimized based upon the existing data, but the existing data is limited.
So therefore, there's a focus on things like merit.
Marital status or age or other.
Other attributes like that you know accident history is a good one et cetera.
But what what essentially happened here is our customers who are low risk.
And don't actually filed many claims and of overpaying.
On the insurance relative to their cost that overpayments than it does to riskier customers, who are essentially being subsidized.
And you know as we looked at that and we looked at the data. We thought. This this just doesn't seem like it's fair.
Uh huh.
Because our cars are connected because they are essentially computers.
It's on wheels, Theres enormous amounts of data that we have available to us to be able to assess.
The attributes of a driver who's operating the car and let others attributes correlate with safety.
Because we do get a signal when a car has been in an accident.
So we've been spending our time.
Looking looking at you know hundreds of different variables.
Also looking at billions of miles of driving history, and we've been able to fit our model.
At.
That is able to predict with decent accuracy the probability of collision over a period of time.
And in the model is not perfect right. The model is a function of the data that we have available that data set continues to grow we continue to experiment with new variables, but we do have a model that that that works pretty well so far.
And from that model being able to predict frequency of collision.
Collision, we can then align that against the price curve.
And we can have in the individualized pricing.
Integrated into the car integrated into the App integrated into that customer's experience with a feedback loop back to the customer on how they are driving after every drive the attributes that they were successful.
Colon are unsuccessful on and the types of things that they can do to improve their safety.
So that's what we have developed.
We then included the safety score as a part of the S. S deep data enrollment program.
Where we have almost 150000 cars currently using safety score.
I believe the latest data is over 100 million miles of driving.
So we've been able to go back and analyze that data.
And we've learned two things coming from that the first is that the probability of collision for a customer using a safety score versus not it's 30% lower.
And that's a pretty big difference it means that the product is working and customers are responding to.
The second thing that we've looked at is what is the probability of a collision based upon actual data as a function of a driver safety score.
And that is aligning with her models most notably.
Topped here of safety compared to lower tiers.
Those are.
Multiple acts difference in probability of collection based upon actual data.
So this is a very new and very exciting frontier for us and I know that was long winded, but I.
We spent a lot of time on this and we put a lot of thought into it.
Specifically with respect to the rollout.
The insurance industry in the U S is intensely regulated and its regulated on a state by state level that means that we require regulatory approvals from each individual department of insurance at each individual state.
Texas is the first state that.
And I do want to thank the Texas insurance regulator regulators here, you've been great to work with we have a roadmap of of additional states. We will launch the product in the states as we receive regulatory approvals and our goal is to be in every major market in which we have Carson.
Hum.
We want who we did a soft launch in Texas.
It was the last week yeah.
And.
What we're seeing in initial take rate data is that if you can.
Compare that to what we're seeing in California.
We're off to a good start here.
No.
We're very excited about it we're excited about individual risk based pricing. We're excited about the ability for folks to become safer and as a result, save money and it feeds into our priority of our company.
Of building the safest products in the world.
Yeah, if I could.
Really exciting.
So I think for the engineer he came to secure financing.
Taking your own safety into their world to it's basically so thanks for that guys.
[laughter].
Thank you Pierre do you have a follow up question.
No I think I'm fine thanks.
Taking the time.
Fascinating is very interesting.
Yeah.
Yes.
Thank you very much and the next question comes from Joseph Spak from RBC.
Okay.
Yeah.
Thanks can you hear me.
Yeah, we can hear perfect.
Sure sure Zack.
As you noticed you noted.
Low teens operating margins just how is your medium term target now despite a number of challenges and they're not fully utilization from the plan. So.
How are you thinking about that target now and does it go lives.
Youre driving prices.
Price down further and to unlock more demand invest another initiatives or or does that target you need to change and then longer term do you have an aspirational gross margin target has the mix of software and hardware changes.
Yeah.
We have achieved.
It was actually exceeded our long term guidance on an.
On our operating margin target.
So we're very pleased to see that.
And then as we look out over the next quarter in the next year.
There's kind of there's a number of puts and takes.
Financially for the company.
You know the the launch of Austin in Berlin will have ramp inefficiencies there.
For some period of time until we get those factories up and running.
So that's likely to put some downward pressure on our margins as those factories ramp.
Those are the ramp those as quickly as possible, but as Jim mentioned earlier.
There are a number of unknown unknowns that we need to work through.
We are kind of also in this.
Uncertain environment with respect to cost structure. So we are seeing cost increase on the commodity side.
We're getting feedback from our suppliers as we are seeing ourselves.
The impact of.
Labor shortage, and then logistics and expedite costs just continue to be a part of our story here.
And it's uncertain how that will unfold.
You know, it's our hope that these things stabilized exactly when that happens it's difficult to predict.
And we have been adjusting pricing in line.
With those changes in cost.
Uh huh.
No.
We'll see we'll see how that unfolds over the course of the next year.
So it's difficult times gross margin to say where that will go.
You know for those reasons.
With respect to operating margin, we've been very focused.
Just as a company on managing our overhead expenses and operating expenses.
And operating expenses as a percentage of revenue has been declining and I expect that trend to continue to happen.
And I think the net of all of this is hopefully that we continue to make progress on operating margin.
Over the next four or five quarters.
As we see kind of afford you know the business up until this point is kind of largely been hardware automotive business with a little bit of software on top of that.
As full self driving matures.
Take rates increase if we are to raise pricing on that.
There's considerable upside both on gross margins and operating margin as that comes to light.
As the business starts to become more of a mix of a hardware based company and a software based company.
So we feel optimistic about the journey very optimistic about the journey as we look over into the long term just a little bit difficult.
The next four to five quarters.
It will continue to update on earnings calls as we learn more information.
There's just a lot of uncertainty in the world right now.
Okay.
Thank you Joe do you have a follow up question. Yes. My question is just you.
You mentioned L P packs globally for <unk>.
Our standard range models.
You know my understanding is that all comes from from China is that they continue to go forward plan or do you want to model.
These and other risk factors around the world.
Yeah, certainly our goal is to localize all key parts of the vehicles.
On the continent at least the continent, if not closer.
Where the vehicles are.
Our produced so that that is our goal and we're working with you know internally and with our suppliers to accomplish that goal and not just at the end assembly level, but you know as far as trained as possible.
Thank you very much.
And the next question comes from Colin Langan.
From Wells Fargo.
Okay.
Okay.
Okay.
Colin are you able to mute.
Okay.
We are waiting for that let's go to the next one.
Oh, yes, sorry, yes, we can hear now perfect sorry about that okay.
Yeah, just actually kind of following up.
On the question before you mentioned commodities are rising and when I look at a lot of the key raw materials and a battery of Copel.
Nicole I'll, let him all up 40% and I know you guys have done a good job of getting long term contracts to sort of mitigate that impact I mean have you seen so far any impact from that spike and if not I mean any sense of when that raw material headwind might actually show up or has shown up.
Yeah.
We have seen an impact on our primary exposure right now is around nickel and aluminum nickel NFL aluminum and non cell.
And you know we have a mixture of contracts with various suppliers you know some materials, we contract directly at near full exposure to price fluctuations.
We do have a number of long term commitments and long term contracts in place. We also have contracts, where there's some amount of cost sharing based upon the movement of indexes.
And and so you know as as these have been moving some of those costs have been flowing through to us.
It's not a substantial amount of cost, but it's not small.
But as we look towards the next year.
I certainly hope it doesn't play out this way, but it's possible that.
We continue to see more of cost headwinds as a result of these movements.
I, it's difficult to say precisely, but you know the volatility.
Increases are just substantial so substantial.
And there are certain suppliers that maybe.
Maybe up to a certain point have been absorbing some of the increase.
And as contracts expire there or we have to renew and extend them well after it turned to negotiations and so you know what what we have to do as a company.
And what we are intensely focused on is we need to be continuing to drive down the cost of our products, which we have been doing.
And we have to overcome cost increases that are outside of our control.
So whether that's a resourcing components or redesigning components.
Finding ways to be more efficient.
Two manufacturing.
We have no choice, but to continue on that path and be even more aggressive in the light of the macroeconomics here some diversification.
Right.
It doesn't need to be nickel cobalt or perish.
The other option.
Colin do you have a follow up question.
Yeah.
Okay.
Okay, Let's go to the next one the next question comes from Colin Rusch from Oppenheimer.
Hey, guys can you hear me okay.
Yeah. We can hear you perfect can you talk a little bit about your ear strategy around anode materials and your ability to leverage that into a reduction on the cathode side performance from our balance sheet.
Sure I don't know that.
I'm going to get into too many specifics but.
I guess first one thing I would say is.
Unlike the commodities discussion, we just had like the anode materials are not really in the same situation just in terms of what their consistent considerate components are so theres theres less of a.
Our focus on like rapidly changing them, one way or the other because they are generally stable.
On commodities.
There isn't exactly like a tit for tat were like get a better and a.
Useless cathode like that there's a fundamental ratio that you need to maintain.
For the sale of the function.
So I guess zooming out the primary focus on the energy side.
That we have is just ensuring that it doesn't in any way that we were able to continue to reduce the cost of the anode without competing on the long term cycling cycle ability of the product.
It can also help with energy density and energy like sort of.
Improve the energy density of the and how do you improve the energy density of the cell not not directly one to one because you have to pack more catheter energy and it gets better.
And that's a focus as well, but but the trade spaces is just sort of cycling versus versus.
On day, one cost.
That's super helpful. And then just around the vehicle pricing strategy, obviously, there's a lot of flexibility.
Flexibility there for some customers and not can you just talk a little bit about the process.
Ron vehicle pricing and how quickly do you expect to change that and adjust as.
You see some of these commodity prices flow through the cost structure and you look at hillenbrand dynamics for vehicles.
Yeah pricing has been a really difficult thing for us over the last couple of quarters.
And in what where.
Part of that part of the challenge is well.
Sure.
The great thing that we're seeing in the space right now.
Is.
There appears to just be quite a profound awakening.
The desirability for electric vehicles.
And to be totally Frank has caught us a little bit off guard.
And.
You know that in that kind of awakening and change in consumer sentiment.
I'm sure there's lots of reasons that go into it but folks want to buy an electric car and folks one of my task one right now.
It's very exciting for us and at the same time.
And we have installed capacity to build more cars.
But we're constrained by a number of dynamics as we've talked about in great detail.
And we are putting an extreme effort to build as many cars as we possibly can.
It's hard to overstate how extreme the efforts are it's quite the grind.
We're trying as hard as we can.
To maximize that capacity and to be able to meet the demand that we're receiving.
But the net net of all of this is that we're not able to increase production capacity fast enough.
So.
At the same time, we are seeing a macro.
Macroeconomic cost impacts.
<unk> on our structure as we've discussed previously on the call.
So we're trying to think through.
How many order the car now it'll it could be delivered in some cases.
And depending upon the car and which factory could be couple of months could be a couple of quarters.
And the timing and.
Which we build that car will be just you know just before that car gets delivered and what will the world look like at that point and so we're trying to think through how the cost structure is evolving how does how does pricing need to change with that what are the supply dynamics in the space.
The other thing that I'll just note on pricing is.
That company.
Companies change pricing all the time.
The difference is that when Tesla changes pricing, it's extremely transparent.
That's not always the case otherwise.
And you know, sometimes our pricing will increase sometimes that pricing will reduce.
Sometimes to the public or pricing changes may not.
To make logical sense, but.
You know there is a strategy that we work behind the scenes as we're balancing supply and demand is where I'm also trying to balance various shortages on parts that we're trying to manage wait times all of that goes into the optimization here.
Okay.
Thank you very much. The next question is from Brian Johnson from Barclays on.
Brian. Please go ahead and you can on mute.
Okay.
Okay.
Okay.
Tesla thing.
Oh yeah.
Yeah.
By the way Greg to hear there's a team that Tesla is not just a one person show.
I wanted to drill down a bit more on F. S D.
In December of 2020, and a business insider interview in Germany.
Leaders said that he expected level of five.
The army by December and within a year, so that would be now.
Yet you know we look at the progress in FX B.
And some of the issues you see on Youtube and it looks very much like a level two plus system network buyers.
Vigilance as in factor disclaimers.
So I guess three questions kind of one what is the timetable to get to level four at least capability, we can deal with the regulatory stuff later.
Two you know what is the criteria for Zach for you to release revenue deferred revenue around FSD and it's having a level two system.
And that leads monitoring enough to release that deferred revenue.
And then three you know maybe you could talk a little bit more about how you plan to work with the new.
With the folks at niche who care to be.
Asking some questions. They have three requests out to you regarding information.
System down the level to around these capabilities. So that's a state.
Yeah.
You know things will take them in order.
You know it's difficult to be specific on the timeline.
Uh huh.
I'm proud of the team is working extremely.
<unk> Award.
Iterating on every version we're being extremely transparent you know through the release of that's the public customers who are posting information online.
You know when you are using full self driving and you're going through the iterations you can feel the progress.
And for those who don't have it in their cars and social media.
Streaming is excellent at getting a sense for how that's progressing.
And the team is moving quickly.
Every iteration with every update.
And they're working very hard on that.
On your second question about the criteria to release deferred revenue.
Hum.
The way that this works is.
We have made certain commitments as as to what this product can offer at the time that a customer has purchased that and so what we have to assess is you'll have we met those commitments.
And is the software.
Widely available to the folks that we've made those commitments to.
Is that within a certain geography.
And you know given that F. D is still currently in the beta phase its invitation only and it's limited.
We have not deemed that to be appropriate for recognition of deferred revenue.
And we will continue to evolve this will continue to monitor it within the finance team.
Right.
To see when we get to the milestones in which were comfortable releasing.
On the NIM question, Lars do you want to take that sure I mean, as I said earlier.
We always cooperate fully with the.
On the regulatory bodies and any sort of <unk>.
Resolution they may have particularly related to.
At our systems when they came out with the standard General order in July we were quick to respond to that and one of the first and only company is capable of actually meeting the needs of that report, we continue to send that information to them.
As required.
And as this has occurred.
And with the additional investigation.
As I said, we do meet with.
With the great through Saturday and will work through them one by one to make sure that all the facts come out and it says well informed about our strategies for both active safety in this case, but also passive safety.
Cause you guys remember we released.
Updates to.
They are back and restraint system last week to model why are you using or fleet data, we worked closely with us on that.
And they worked for me in the loop before we did it so.
I think these kinds of things will continue to happen in the new regulatory space with Zach discussed them as we move towards a software based vehicle in.
They were happy to be a part.
Sure.
Thank you very much and the next question comes from trip Chowdhry.
Okay.
Yeah.
Q a very good quarter I had two quick questions first is regarding <unk>.
The two upcoming factories in Berlin in Austin.
That journey to effect is different from each other and maybe in the layout design Assembly lines and the second question is related to cyber truck.
Who is the supply and we keep looking at.
If you look at the exoskeleton steel.
Is the supply for that material sufficient.
Andre immediate ramp up.
Say in 'twenty three 'twenty four time for cyber truck that's all for me.
Yeah sure. So obviously as we've noted in the past we developed our own.
Our own stainless steel grade for the serious I retract to meet both the durability encourage or requirements required for an.
[noise] World.
With this raw material and others as drew mentioned, we continue to look at multiple sources.
Have made some early sourcing decisions or not but I think we'll keep that one.
Internal and we've already began.
<unk> testing and so that you know ruling stainless isn't so different from any other material.
Automotive was just about how hard the rollers are to get to that hardness level and just.
Just like every manufacturing process, we put in for every new vehicle will work with our suppliers and vendors to make sure those timelines who supply them with uneven demand of our customers.
And on the differences between us and in Berlin.
Materials there are some there largely associated with the different sort of building architectural choices that were you know how.
It happened to occur.
Collaboration with like local.
Codes and other sort of governing requirement that drives the differences in the architecture between locations.
In general, though like we're trying to progress the manufacturing system as a system and make sort of logical like.
Path defined <unk>.
Improvements from factory to factory and in some cases.
There was an improvement identified between like decisions for.
Austin, the other Berlin, or vice versa, and so there might be a slightly newer iteration of one part of the factory in one place than the other but it's all part of a.
Like our path forward.
The factory that builds the machine to machine that builds the machine Sir.
Thank you very much and the last question comes from.
What door Schreiner from Canaccord.
Can you hear me.
Yes, we can hear you.
Thanks for taking my question.
So Brandenburg and I'm just wondering if you could.
If you could estimate.
Carry costs.
German perspective.
Alright, I guess in two parts of one when do you expect do you still expect production coming on in 'twenty. One. So you know a couple of months left in December.
And.
How do you see that margin impact.
Martin.
And I do have.
Good question.
Sure.
So it remains our target in both Austin and Berlin to be able to build their first production cars before the end of the year.
We've talked about this or that the unknown unknowns new factories.
Function designs, new technologies, new locations, new REIT <unk>.
Teams.
So there is a quite an execution journey ahead of us.
But that remains our target and all of our plans are oriented around that.
Four.
Therefore, we should not expect for us to deliver cars by the end of 2021 from these factories, even if we do produce some.
So homologation regulatory reasons, and we'll want to make sure that we build up some number of cars that are that we're confident in the quality and the customer experience around them.
Yeah.
The second thing that I'll say and I mentioned this in my opening remarks is because of the newness here.
It's extremely difficult for us to be precise in what the ramp will look like.
And.
It's possible things things, if the stars align and things move quickly.
Well that we're spending the bulk of next year working on ramping these factories and it's just very hard to say and we will continue to update you all three of these calls and through other forums.
As to how that then impacts our margins that is also difficult because that is a function of the ramp which is uncertain.
The benefit.
Let's pause here, which is different than the ramp up these factories compared to other factories.
If you think about the percentage of our total cost structure in any given quarter.
Associated with new ramps, we have the Fremont factory that's running.
Generating stable and growing margins there. The same is also true.
In Shanghai.
So I.
I expect we'll see some amount of headwind on margin from these ramps.
Assist entirely dependent on how quickly we're able to ramp and what uncertainties come up during the process.
Sure. So on a margin per car, but I would I would suspect though if you're.
Your carrying cost is full right now on.
And then as you start producing vehicles, it's going to.
The margin lift or from where you're at right now no.
And we are carrying some amount of cost associated with the factories today.
And so the incremental cost associated with turning their factories and that's not 100% of the factory.
If that's what you're getting at in your question, Yes, that's what I was getting at.
Yeah. We also actually saw a very similar dynamic to this when they were launching a model that's earlier in the year.
So you know when.
When in fact, Atlanta product starts launching them and then of course cost of goods sold starting to activate depreciation starts to activate.
There's a bit of a movement in the P&L as to where that cost resides. So yes, I mean to some extent Brandenburg and auditing costs are already flowing through our P&L, but we still need.
To continue staffing and ramping and incurring all the operating costs associated with the factory that we're not spending right now.
Fantastic. Thank you very much everyone for all your questions.
And we will see you again in three months, Thank you very much and goodbye.
Okay.
Hum.
Okay.
Okay.
Got it.
Okay.
Uh huh.
Okay.
Okay.
[music].
Yeah.