Tesla Memo: Gross Margin Lost, Tesla May Continue to Lower Prices

Telephone Conference Transcript

(1) CEO and CFO Remarks

ELON

• Revenue: Q2 revenue was approximately $25 billion, making Tesla the best-selling car globally in Q2, surpassing Toyota Corolla and Volkswagen Golf.
• Operating Profit Margin: Despite high interest rates and macro uncertainties, we managed to achieve an operating profit margin of around 10%.
• 23-Year Delivery Target: We continue to target delivering 1.8 million vehicles this year.
• Q3 Outlook: Although we anticipate a decrease in production volume in Q3 due to some factory upgrades causing temporary shutdowns.
• Robotaxi: We believe there is unlimited demand for Robotaxi, so we need to produce it. This itself is a revolution.
• FSD:
• In the long run, we believe autonomous driving will only push production beyond limits. We need data from millions of vehicles to train our neural networks. The more training data we have, the better the results. Tesla collects more data from these vehicles than all other companies combined, possibly accounting for 90% or a significant portion. We have outstanding capabilities in the three areas of unique data, computing resources, and software.
• Dojo significantly reduces the cost of neural network training. With Nvidia chips and Dojo, we see a tremendous demand for training resources. We believe we may achieve the internal neural network training capacity of 100 exaFLOPs by the end of next year. So far, we have driven 300 million miles with FSD beta. 300 million miles will soon look small, and soon it will be tens of billions of miles, then hundreds of billions of miles. We see a clear path to full self-driving that is 10 times safer than an average human driver.
• For Tesla's Full Self-Driving system (FSD), just like our North American charging standard, we are very willing to license the complete autonomous driving software and hardware to other car companies. We have had preliminary discussions with a major automaker planning to use Tesla's FSD.
• Tesla: First production vehicle rolled off the line. This is the first truck with four doors, over 6 feet long bed, and fits in a 20-foot garage. We expect deliveries to begin later this year.
• Charging Stations: On other highlights, our global Supercharger network now has around 50,000 stalls and over 5,000 locations. Ford, GM, 80S, and many other OEMs are using Tesla's charging stations, helping accelerate the electric vehicle revolution for other car companies.
• Battery Materials: Progress is going well with new lithium refining plants and cathode material facilities.

Zack:

• Our AI development is clearly entering a new era, and our other businesses such as Megapack and Supercharger stations are becoming significant contributors to overall profitability this quarter.Q2 is another record-breaking quarter for production and deliveries, as well as record-breaking revenue and profits for Energy and Services and other businesses. The most important priority is to ensure that we continue to heavily invest in core technologies that can drive long-term value for the business. This includes increasing spending on AI-related technologies such as fully autonomous driving, robots, and new products like the Cybertruck, leading to an increase in R&D expenses. This also includes continuing to invest in capacity expansion, not only in car factories but also in Supercharger stations, internal applications, and battery processes, as we continue to make meaningful capital expenditures to lay the foundation for the future.

• Secondly, we continue to strive to achieve production targets for our automotive and energy businesses, but more importantly, to achieve this goal in a way that generates funds to sustain our pace of R&D and capital investments. This requires us to emphasize reducing unit costs in each key business while improving operational capital such as raw materials, production process inventory, and accounts receivable. In the second quarter, we made appropriate progress in these areas. Specifically, in our automotive business, despite price reductions at the beginning of the quarter, our gross margin showed a moderate decline but remained healthy. We recognize that we have achieved improvements in unit costs in almost every category, including material costs and commodity prices, manufacturing costs, and logistics, and we continue to rapidly increase production speed at our factories in Austin and Berlin. For our energy business, especially in the Megapack project, we improved gross margin and gross profit. It should be noted that the capacity of storage projects often fluctuates depending on the type of project and specific revenue recognition.

(II) Q&A

1. What is the situation with the 4680 battery? Battery outlook?

• (According to the analysis by the autoevolution website, the 10 million battery cells are the total production of 4680 batteries by Tesla's Texas Gigafactory since a year ago, which can power 11,500 electric vehicles)
• The 4680 battery (Cybercell) that will be produced in Texas for the Cybertruck will adopt the silicon-based negative electrode and high-nickel positive electrode mentioned at the presentation. With the mass production of Cybercell batteries at the end of this year and early next year, a satisfactory level of cost can be achieved.

2. Tesla's energy storage products? Energy storage revenue model?

• Megapack continues to demonstrate strong demand worldwide, with profit margins in a reasonable range that align with the company's target profit margins. Currently, Tesla has installed over 500,000 Powerwalls.

3. Profit from AutoBidder?

• There is software profit, and it is a driver for hardware sales, but currently, it contributes a small portion of the revenue. AutoBidder orders in Australia, Texas, the UK, and California continue to grow, and it is expected that Tesla's dispatched energy will exceed 6GWh next year.

4. How much revenue comes from IRA? Impact of battery raw materials reduction on per vehicle cost?

• In terms of raw material prices, the risk has been hedged through long-term contracts, but it is not 100% linked, so there is exposure. In addition, cost factors include: 1. Economies of scale, 2. The Austin and Berlin factories will reduce costs, but the production cost of Model Y is still relatively higher.

5. Is it allowed to transfer FSD between vehicles?

• Transfer is allowed starting from the third quarter.

6. Tesla order delivery time, price, and production capacity?

• Tesla's production growth rate depends on the bottleneck of production capacity, and it is necessary to consider whether the supply chain can keep up.
• Tesla has good demand and applies many new technologies, which makes it different from other cars.
• Small-scale deliveries will be made by the end of the year, and mass production will be achieved next year.

7. Integrated casting, high maintenance costs, will the costs be transferred to consumers?

• It is a misconception that traditional structures are easier to repair. Integrated casting can reduce costs and accelerate production. There is a dedicated team studying repairs, and there is insurance coverage. In the future, maintenance of vehicles with integrated casting will be cheaper and more convenient.

8. How many Optimum robots have been produced? When will they perform valuable tasks?

• About 10 units. Optimum robots share the same hardware as cars.
• However, there is no ready-made supplier that can produce robot actuators, so the company needs to design and integrate joints, motors, drivers, and sensors to support mass production.
• The first version of the Tesla-designed actuator robot will be available around November, initially for use in their own factories to demonstrate its capabilities, and next year it will be used for some useful tasks in the factories.
• In the future, humanoid robots can be combined with brain-machine interfaces to assist people with disabilities.

9. Q2 order volume, order conversion rate, MoM changes?

• No other car company can achieve real-time response in order management and production. The company integrates order information and production status from global factories on a weekly basis.
• Currently facing challenges of economic uncertainty and rising interest rates, but optimistic about the long-term investment value of Tesla.

10. During the price reduction process, can the gross margin stabilize or return to previous levels?

• Short-term fluctuations do not affect long-term development. In the short term, sufficient cash flow is needed to invest in products and technology, and in the long term, cost reduction needs to be continued, with a high focus on working capital management.
• The company is in a capital-intensive industry and also has good cash flow, which is rare.
• The company will maintain a stable operating strategy in the next few quarters: not controlling the level of gross margin, but ensuring a balance between product supply and demand, and ensuring that business development meets expectations.

11. Investment in FSD and DOJO, when will we see the return brought by AI?

• Next year, we will invest over $1 billion in DOJO, which is a necessary investment for achieving autonomous driving, used for video training. The progress of training is difficult to predict.

• We are also adopting NVIDIA hardware, which can supply us with sufficient GPUs. Autonomous driving is 10 times or even 100 times better than human driving, making driving safer. The biggest limitation to achieving autonomous driving is computing power.12. How much gross margin will be sacrificed to achieve a 50% annual growth rate by reducing prices?

• Considering that every car we produce will have autonomous driving capabilities in the future, if they can all operate autonomously and be shared like Airbnb, their value would be tremendous, possibly more than 5 times the current value. Therefore, sacrificing gross margin in order to produce more cars is worthwhile.

13. Regarding autonomous driving, when will a version with significantly improved penetration rate be launched on existing vehicles? Will FSD be priced lower?

• We are optimistic about the timing of achieving Full Self-Driving (FSD). The reason for our optimism is that we are making rapid progress in FSD, and the learning curve seems to be increasing. FSD will be even better this year.
• The current price of FSD is very low, with a one-time purchase price of $15,000, which is not high. Consumers also have the option to subscribe on a monthly basis.
• As mentioned earlier, the value of cars with autonomous driving capabilities will increase significantly, so the price is not expensive.

14. What is the operating system of Dojo?

The software of Dojo is a combination of open-source and customized software.

15. Can the current price achieve the target sales volume of 1.8 million? Will there be further price reductions?

We cannot control the macro environment. If the macro environment is stable, the price will also be stable; otherwise, further price reductions may be implemented.

16. What are the potential risks to production capacity due to geopolitical factors?

Currently, there is geopolitical tension worldwide. The company mitigates risks by building factories in various locations around the globe.

17. When will the cost per vehicle be lower than $36,000?

• It is difficult to determine, as it is mainly influenced by factors such as commodity prices and supply chain costs, which are hard to predict.
• Last year, there was significant inflationary pressure, but this year, commodity prices have fallen. There is great potential to reduce costs in Austin and Texas, with a focus on increasing production and cost reduction.

18. How much will the factory refurbishment and shutdown affect production output?

It is difficult to quantify the exact amount, but the impact will be limited.