At 5:30 a.m. Beijing time on April 21, Tesla held a first-quarter 2022 earnings conference call. CEO Elon Musk, CFO Zachary Kirkhorn and other executives attended the meeting and answered questions from numerous investors.
The questions and answers are extensive
The resumption of work at the Shanghai plant and the impact of the shutdown on the second quarter;
Guidance on ramping capacity at the Berlin and Austin gigafactories;
Inflation, the underlying logic of Tesla's price increases;
Latest progress in 4680 battery production;
Driverless taxis and the benefits they may bring to consumers;
The underlying logic of Tesla's entry into the lithium mining business;
Elon's new CEO compensation plan;
Recycling of waste batteries and waste aluminum products;
The development of the insurance business and the improvement of driving safety that it brings.
The conference is audio only and lasts about 64 minutes. The number of texts in this text is about 16,000. Dear officials, if you feel that the content is helpful, welcome to forward likes, and tip at the end of the article.
Video source: Tesla
Translation & Subtitle: Gravel Villager
Participants
Martin Viecha: Vice President of Investor Relations
Elon Musk: CEO
Zachary Kirkhorn (Zach): Chief Financial Officer
Andrew Baglino (Drew): Senior Vice President, Head of Energy Business
Lars Moravy: Vice President, Vehicle Engineering
Dan Levy: Analyst at CSFB
Rod Lache: Analyst at Wolfe Research
Pierre Ferragu: Analyst at New Street Research
Trip Chowdhry: Analyst at Global Equities Research
Alex Potter: Piper Sandler analyst
Colin Langan: Wells Fargo analyst
Mark Delaney: Analyst at Goldman Sachs
timestamp
00:55 CFO Zach opening remarks
04:22 Musk's opening remarks
Individual Investor Q&A Session
10:27 Progress of FSD
12:44 Shanghai plant due to COVID-19 shutdown
15:28 Will the risk of raw materials continue to increase prices?
18:35 Why doesn't Tesla use an 800-volt architecture?
22: 08 The current performance of the 4680 battery
24:06 How to ensure that raw materials are used
29:02 Capacity ramp-up expectations for the Berlin and Austin plants
31:12 Dedicated driverless taxi type
31: 58 4680 cycle of production of the battery
Institutional Analyst Question Session
33:57 Drivers of cost improvement in the first quarter
37:01 Cost and price increase issues
40:25 Raw material supply, Tesla enters the lithium mining industry
46:33 Plans for the use of cash
49:14 Number of parts for the Cyberterruck electric pickup truck
50:58 Planned expansion of the Nevada Gigafactory
51:52 Impact of Chinese suppliers on Tesla's other factories
52:38 Elon's new CEO compensation package
53: 34 Use of lithium iron phosphate batteries
56:53 The Tesla charging network in the United States is open to non-Tesla owners
58:23 Tesla Insurance is available in more states
Translate the full text
Martin: Good afternoon, and welcome to the Tesla Q&A webcast for the first quarter of 2022 earnings.
My name is Martin Viecha, Vice President of Investor Relations. Elon Musk, Zachary Kirkhorn and a number of other executives also attended the meeting today.
We announced our first quarter results at around 3 p.m. Central Time, with updates posted on the same link as this webcast.
In this conference call, we will discuss our business outlook and make forward-looking comments. These comments are based on our forecasts and expectations as of today. Actual events and outcomes can vary considerably due to a number of risks and uncertainties, including those mentioned in our recent filing with the Securities and Exchange Commission.
In the Q&A portion of today's conference call, please take the initiative to limit the number of questions to one question and one follow-up question. Please use the raise your hand button to join the question line.
Zach will open up before we move on to the Q&A session. Zach。
A concluding speech by Chief Financial Officer Zach
Zach: Thank you Martin.
First, the first quarter was a challenging but extremely successful quarter for the company. Despite numerous supply disruptions, including the shutdown of our Shanghai plant and nearby suppliers due to COVID-19, we continued to make progress and achieved the best vehicle delivery ever.
Last quarter, we presented a series of new financial records, including revenue, gross margin, operating margin and net profitability. Automotive's GAAP gross margin reached 32.9 percent, exceeding 30 percent for the first time when regulatory credits (carbon credits) were excluded.
As we make progress on vehicle deliveries and backlog growth, higher pricing continues to have a positive impact on our financial position. Please note that for most vehicles, our delivery wait times are quite long. As a result, cars delivered in the first quarter, usually accompanied by pricing in previous quarters, are lower than the price levels of cars ordered today.
Although the advertising cost was zero, the day after the "Super Bowl" event, Tesla's order volume increased significantly
Our cycling costs are also increasing. Inflation, raw material prices, expedited and logistics costs continue to affect our cost structure, and plant shutdowns occur almost without notice. As a result, we are unable to take action to pre-plan for disruptions to these operations in a cost-effective manner.
In addition, we're seeing a slight shift towards more profitable models, including the Edamame Y. We also recognized a one-time gain of $288 million in points revenue, which is related to regulatory changes to the U.S. Vehicle Fuel Consumption Average Standard (CAFE) fine. Without this one-time gain, points revenue would have declined compared to the same period last year.
The energy business continues to be affected by macro conditions, which are more severe than in the automotive business. Our energy storage products, our demand for chip supply and the new import process have affected the supply of certain components of our solar system. This is reflected in our solar product production this quarter.
Driven by higher incomes, lower stock-based compensation expenses, and other programs, operating expenses as a percentage of revenue continued to decline. As a result of our continuous improvement in operating leverage, we achieved a record operating margin of over 19%.
Please note that the commissioning costs of our plant are included in the R&D expenses, as production starts in Berlin at the end of March and in Austin in early April. Given that these plants are already producing marketable cars, these costs will be included in the cost of cars in the future.
Our free cash flow remains quite strong, however affected by working capital associated with lower than expected production. In addition, we have reduced our debt (excluding product financing) to almost zero.
Looking ahead to the near term, there are a few things to look out for in the second quarter.
First of all, due to the shutdown related to the new crown virus, our factory in Shanghai has lost about a month of production, production is recovering at a limited level, and we are trying to get back to full production as soon as possible. This will affect total production and deliveries in the second quarter.
Second, as I mentioned earlier, Austin and Berlin are just starting to ramp up capacity, so these inefficiencies will start to affect our gross margins in the second quarter.
Third, we do have a high backlog of demand for bikes, which will help offset these headwinds. We will continue our efforts to further strengthen our financial position in the second half of this year and are confident that our growth rate of 50% or more this year will still be achievable.
Finally, I want to thank the Tesla team, our suppliers, and our new customers for their contributions to a great first quarter.
Martin: Thank you very much, Elon also had some opening remarks.
II Elon concluded his remarks
ELON: Sure, some of my words are repeated with Zach's, but maybe it's worth repeating.
The first quarter was once again a record in many respects, with the highest delivery volume, profit and operating margin of 19%. Although this is a quarter with a lot of chip shortages, many logistical challenges and overall difficulties.
So I really want to congratulate the Tesla team for overcoming many difficulties and achieving record profitability and output. In particular, the Tesla China team at our Shanghai factory did encounter major challenges due to the new crown sealing. Still, they are able to produce a large number of high-quality cars. And our Shanghai factory has been back in operation.
As Zach said, we remain confident that car production in 2022 will grow by 50% compared to 21 years. I think we have a good chance of achieving 60% growth.
Let me think. Obviously, as you know, over the past few months, our Berlin and Texas gigafactories have undergone capacity ramp-ups. We have two fantastic factories, and their great teams, and their production capacity is rapidly increasing. For a new plant, the initial ramp-up of capacity may seem small, but it will grow exponentially. I have a very high level of confidence in the teams at these two factories. We expect these plants to grow slowly initially, but as I said, they will grow exponentially to achieve high production by the end of the year.
The first batch of edamame Y was delivered at the Berlin plant
Let me think. We're also working on a new model, which I mentioned at the opening of the Texas Gigafactory, a dedicated driverless taxi that's highly optimized for autonomous driving, meaning it won't have a steering wheel or pedals. It has some other innovations that I think are pretty exciting. But it's fundamentally optimized... Strive to achieve the lowest cost per mile or kilometer, with everything in mind.
So I think it's going to be a very strong product and we hope to reach mass production in 2024. I think that's going to be a huge driver of Tesla's growth. We will still achieve mass production of electric pickup trucks (Cybertruck) next year as planned.
I would like to thank Tesla employees again for their hard work. I would also like to thank our suppliers, who have gone the extra mile for this, and we have an amazing group of suppliers. I would like to express my heartfelt thanks to the suppliers who work around the clock to ensure that Tesla can keep the factory running.
And we're still in the early stages of this journey. In the last 12 months, we have just surpassed the production of 1 million vehicles. We are eager to achieve an annual production of 20 million vehicles, so we have only achieved 5% of our target. And, we are growing very, very quickly year by year. We remain confident that for the foreseeable future, basically in the coming years, an annual growth rate of more than 50%.
And then, of course, optimus prime. I'm surprised that people don't realize the importance of the Optimus Prime robotics project. The importance of Optimus Prime will become apparent in the coming years. Those who have insight or listen carefully will understand that Optimus Prime will ultimately be more valuable than the automotive business and more valuable than FSD. This is my firm belief.
Then, of course, the insurance industry grew well. We expect to address the shortage of parts that are limiting our progress in batteries and solar, and we expect good growth in the battery and solar business this year as well.
Basically, the future is very exciting. I've never been more optimistic or excited about Tesla's future than I am now. Thank you.
3 Individual investor Q&A sessions
Martin: Thank you very much.
Let's move on to the first investor question. The first investor problem is that elon has historically provided FSD timelines that are not the most accurate. We love his optimism about the 2022 release, but does Tesla have any data to share with investors to help them make their own judgments about the progress they're making, the average amount of intervention per mile driven, or any other data?
ELON: Absolutely.
With regard to FSD, in any technology development I've been involved in, as I've come across in FSD, I've never seen so many false dawns of victory that look like we're going to get a breakthrough, but it's not.
Ultimately, the problem boils down to the fact that to solve FSD, you actually have to solve real-world AI problems that no one has yet solved.
The entire road system is designed for biological neural networks and eyes. So when you think about that, in order to solve the FSD, we have to solve the problem of neural networks and cameras that make them as capable as humans, or more than humans.
And I think we're going to achieve that this year.
The best way to get your own assessment is to join the Tesla FSD beta beta program, which we now have over 100,000 people. We expect this to be significantly expanded this year.
My advice is to join the FSD beta testing program and experience for yourself, with each release note recording the speed of improvement. We release a new version approximately every two weeks. You may see two steps forward and one step back. But overall, the speed of improvement is very fast.
That's my advice to you to get your own assessment, to really try it.
Martin: Thank you.
The second question is, how much impact will the shutdown in Shanghai have on the second quarter? What is the timeline for the Edamame 3 to be localized in Europe, or will Berlin prioritize newer models?
ELON: Well, we did lose a lot of days of important production time. Moreover, there are challenges for upstream suppliers, as many suppliers also lose many days of production time.
However, the Shanghai Gigafactory is making a strong comeback. I think that despite the new problems that have emerged, and despite the weeks we have missed, this quarter we will see a new high in the weekly production of the Shanghai Gigafactory. This means that second-quarter auto production will most likely be similar to the first quarter, perhaps slightly lower. But maybe something magical will happen, a little higher. Let's start by thinking that it's roughly flat.
But then, the third and fourth quarters will be significantly improved. It looks like we have the potential to produce more than 1.5 million cars this year, which is my best guess.
Then, Edamame 3.
For the new plant, it is important to focus on... and with minimal complexity and variation. That's why Gigafactories in Berlin and Texas are focused on Edamame Y. From the time the factory is completed and there is a very low output, it will take about 9 to 12 months to mass-produce high-quality cars. Hopefully, we can do a better job of ramping up capacity, and maybe a little less time. However, from the start of production, to reach the level of 5,000 vehicles per week, it usually takes us about 12 months.
Martin: Thanks.
The next question is, how much raw material risk do you have? For example, roughly measured as a percentage of the cost of sales, compared to one to two years after a particular quarter, including direct and indirect raw material risk. Also, how do you see the relationship between future price increases and prioritizing high-priced hybrid models?
Elon: Actually, on the issue of price increases, I should say that it may seem unreasonable for us to raise the price of our cars, given that we achieved record profitability this quarter.
But our car waiting list is quite long. If people order certain models, the waiting list may be extended until next year. As a result, the prices of the vehicles we order now are actually based on what is currently known, with expectations of cost growth for suppliers and logistics over the next 6 to 12 months.
That's why we have prices going up today, because cars ordered today, in some cases, will not be produced and delivered until a year later. We have a very long waiting list, and we're obviously not limited by demand. We are limited by capacity, very limited by capacity.
Martin: Raw material risk?
Zach: To add to what Elon just said, there are different ways to calculate raw material risk. I think in simple terms, we estimate that our cost structure has about 10% to 15% raw material risk.
I would like to clarify a few issues in this regard.
So far, we have experienced several quarters of general cost increases and raw material price increases. The rate of price increases accelerated in the first quarter, that is, the previous quarter. We expect the second quarter to continue to accelerate.
And as the price index changes, it does not immediately or directly affect us. In some cases, we have contracts with suppliers. But as these contracts expire, we have to renegotiate, so there could be a lag. In some cases, our contracts do directly reflect changes in the price of goods or raw materials. However, based on the contract, Tesla also has a lag in the time paid.
In response to Elon's point of view, what we want to do here is that because of this unprecedented change in raw material prices, and all these different lags, and the uncertainty of renegotiating contracts, we are trying to predict how things will unfold and make sure that our pricing changes are consistent with the timing of how these raw material cost increases will actually affect us. And to ensure that, in all cases, the company will remain financially healthy for the next four quarters.
Martin: Okay, thank you very much.
The next question is, why does Tesla continue to fight dealer laws on a state basis, rather than elevating to the federal level?
Also, why doesn't Tesla use an 800-volt architecture? What are its strengths or weaknesses?
Elon: From Tesla's perspective, obviously, we want federal legislation to allow for direct sales in all states. But we haven't seen congressional willingness to legislate on this to invalidate state laws. Therefore, unfortunately, we must fight on a state-by-state basis.
Drew, do you want to answer the 800 volt question?
Andrew: Absolutely.
With regard to the 800 volts problem, this is indeed a problem that requires specific analysis.
For smaller platform models, such as the Edamame 3 and Edamame Y, there are good and bad use of 800 volts, and it is not only a benefit. For this platform, we have not overlooked the option that high voltages can be employed. But there's nothing that really encourages us to do that on this platform, it's only about quality and power.
For larger models, there are some benefits to doing so.
ELON: Let me quantify it. Basically, our estimate is that the transition from 400 volts to 800 volts could save $100, with little change.
Andrew: And you're going to change a lot of things, you're going to have to change the charging infrastructure until the whole vehicle system, and you're going to save maybe $100.
ELON: That's right.
In the United States, we have 110 volts of household voltage. Then, in other zones, it is likely to be 220 volts. But in reality it doesn't make much difference, and appliances work in Europe and the United States. The benefits are small and the costs are high.
Like I said, it's a long-term option, and in a few years, it might make sense to choose an 800-volt architecture. But this requires a very large vehicle base to offset all the costs of the transition from 400 volts to 800 volts.
Drew, do you want to continue?
Andrew: I just want to say that 100 volts is just a deduction on paper.
Elon: $100.
Andrew: Sorry, $100.
It's roughly a deduction on paper, and you have to go through the whole process to find out that the possible gains have been cut to $50 or less.
For larger models, what we're talking about is that higher charging power, or higher power from batteries to electronic components, or you need more torque, so the current requirements are increased, and choosing a high voltage can save some of the cost of semiconductors and conductors. So, for electric trucks and electric pickups, we do have something to consider. But for the Edamame 3/Y platform, all the mechanisms are already in operation with little benefit.
The body shop of the Berlin Super Factory
ELON: Yeah, for driverless taxis, the revenue is basically zero.
Andrew: Yeah, it doesn't make sense for driverless taxis.
Martin: Okay, let's move on to the next question.
The next question is, how does the current 4680 battery perform in terms of expected increased endurance and cost per kWh compared to the expectations set during the battery day?
Andrew: Yeah, we're working in all the areas that we've shared on Battery Day. We have made consistent progress in all of these areas to meet our five-year cost trajectory targets for costs within our control. But we don't control all the cost of goods, which is an exception I need to point out.
Similar to Edamame 3, it will take us a few years to get the speed and yield to all the goals we have discussed. During the ramp-up of our initial 4680 and structural battery packs, our focus was on simplicity and scale. When we reach our production targets, we will add new material technologies under development, as well as a supply of structural packages with higher ranges.
ELON: In short, I think it might be fair to say that the 4680 and the structural battery pack will compete with the best alternatives later this year. Then, we think next year we will surpass the best alternatives.
Andrew: Yeah, we have some good available evidence.
For example, we have set up a factory here in Texas, for example, we know how much money we spend on the capital equipment of the factory. It is more than 5 times lower than the equipment required for the previous technology. We have saved a lot of money in terms of capital expenditures, equipment and personnel. We know how much of this overhead is and how many people are needed to run a factory that is essentially highly automated.
And we've got a lot of streamlining in both of those ways. We understand the cost model very well. It's really about speed and yield, which, as Elon said, will be gradually achieved this year and next year.
Martin: Thank you.
The next question is, how does Tesla plan to secure the raw materials needed to scale to the extreme?
ELON: Yeah, that's something we think about a lot.
This depends on the definition of extreme scale.
Of course, for example, at the level of 5 million, 10 million, 20 million vehicles per year, we must analyze the macroeconomy, how many tons of lithium, nickel, iron phosphate, graphite, diaphragm, electrolytes we need. We just have to think about how many tons are needed overall.
And when we need to think about this for the whole world, what are the limiting factors that accelerate the future of sustainable energy? Whatever the most restrictive factors, Tesla will act on them.
Now, we think mining and refining lithium seems to be a limiting factor, and it is certainly responsible for a considerable cost increase in sales. I think that's the biggest single cost growth component right now, and it's certainly based on percentages.
Although for those who don't fully understand the situation, the actual content of lithium in lithium-ion batteries can be around 2% or 3% of the battery
Andrew: 5 kg in a car.
ELON: That's right, 5 kilograms.
It's called a "lithium-ion battery," but by far the most expensive and heaviest component of a battery is the cathode, which is nickel or iron phosphate.
We are carefully studying all the raw materials and working hard to find out how we can accelerate the total amount of raw materials needed to transition the world to sustainability. I think we didn't have enough time to go into all these details on this call, but we're thinking about these things.
In the coming months, we will have some exciting news.
Andrew: One of the things I want to point out is that in all of our battery factories, we're also committed to recycling.
We are now recycling 50 tonnes a week in Reno and are in the process of being upgraded to 150 tonnes, with all the recycled materials going straight back into our cathode supply chain. We're looking at the needs of both the start and end end ends.
Lars: It's true. Because in Reno, we built a gigafactory and started producing batteries. But as we build newer factories or models, such as the Texas Gigafactory, where we are today, it recycles all of its unused or scrapped aluminum from the press shop directly to the foundry.
(Inaudible)
So we care a lot about raw materials, not just for mining and consuming them, but when we bring them into the factory gates and then use them 100 percent.
ELON: Yeah, as Lars said, that's a great point.
So we're installing an aluminum furnace, and the edamame Y that we make here at the Texas Gigafactory, has a front body die casting, and a rear body die casting, and we've almost two-thirds of the body die-cast, and it's made of high-pressure die-cast aluminum.
We take the two die castings out of the die casting machine, collect the remaining scrap, and pass them back into the aluminum furnace. Then, as Lars says, we also transfer all the aluminum scrap from stamping and other processes into the furnace.
In fact, we also found that we could use the wheels of almost any car. Yes, we also intend to recycle the aluminum cast wheels of traditional fuel vehicles and throw it into the furnace for use in our aluminum cast body of Edamame Y.
And, over time, we'll also use front and rear body die-casting for all vehicles. Well, actually, maybe not edamame S/X, just 3/Y...
Martin: Thank you.
How fast do you expect capacity climbing in Berlin and Austin, relative to Shanghai? Can you use the lessons you learned in Shanghai, or are the processes in the new factory very different?
ELON: I think we should be able to raise production faster than Shanghai because we've learned a lot. We have an experienced team that has obviously experienced the production process of edamame 3/Y, especially the production of edamame Y in many places. And we're obviously sharing what we've learned.
We don't want to be complacent or boastful, but this time production will climb faster because we've learned more. We've done a lot of work to streamline the edamame Y production process, which should lead to faster rampups in Texas and Berlin.
Lars: We also implemented a structural die casting that reduced the number of robots by about 30 percent. We expect the production capacity of the body to almost double, reduce the number of robots, and double the capacity in many links.
ELON: Yes. If you have a structural package, and castings for the front and rear bodies, the size of the body shop can be reduced by more than 60% compared to the standard way of manufacturing cars.
Edamame 3 front and rear body 171 pieces of metal vs Texas edamame Y front and rear body single die casting
Unidentified person: (inaudible)
Because, we have structural battery packs, the floor is the battery. We put the seat on the battery pack and then we put it in the car.
(Inaudible)
Think about that, think about how we've improved, and if you're waiting for the best Tesla, you're going to wait forever. If you're waiting for the best factory, you'll be waiting forever. Because every new factory is better than the previous one, because we use all the ...
Martin: Yes. The next problem was at cyberweay, where Elon mentioned that there was a future driverless taxi model on the roadmap. When can we expect more details about the product to be announced? Is this a model that people can buy to own, or is it only offered by Tesla as a service?
ELON: I think we're going to have to wait, for an exciting product, we don't want to run too soon.
I think our goal is that there will probably be a product event for driverless taxis next year and provide more details. But our goal is to have mass production in 2024.
Martin: Okay.
Probably the last question for investors, how fast is the production beat of the 4680 battery at the current Fremont and Texas Gigafactory? How fast do you expect the production cycle of the 4680 battery to be at Fremont and the Texas Gigafactory or Berlin, by the end of the year?
ELON: Well, Berlin is using 2170 non-structural battery packs, and they're not limited to 4680. They have hope of transitioning to 4680 later this year, but production in Berlin does not currently require that.
But as a means of risk mitigation, we also have the ability to produce 2170 unstructured battery packs here at the Texas Gigafactory.
However, if it goes well, we may be sometime at the end of the third quarter, and will definitely start mass production of the 4680 in the fourth quarter.
Exactly?
The 4680 battery is manufactured at the Texas plant
Andrew: Yes, the other point I would like to add is that due to the COVID-19 shutdown in China and the semiconductor bottlenecks that we experienced for part of the time from the fourth quarter until the first quarter, we currently have a sizable battery inventory and there are enough batteries to support the 2022 production target that you described.
This allows us to exercise caution in the capacity upgrade process of the 4680, and we can learn as much as we can step by step, using engineering downtime to upgrade critical equipment, modifying the structural package design to improve reliability, and achieving everything you just said.
Elon: But the production of 4680 does not pose a risk to achieving the production target of 1.5 million units this year. But if we can't address mass production in early 2023, it will be a risk next year, but we're confident we can solve it.
IV. Institutional Analyst Q&A Session
Martin: Thank you very much. Now let's move on to the analyst question session.
The first question came from Dan Levy of the CSFB. Please go ahead and unmute yourself.
Dan Levy: Hi, good evening. Thank you for taking my question.
First, maybe you can talk about some of the drivers of cost improvements this quarter, and are they just further improvements in Shanghai or Fremont? Is there an ongoing execution around the improvements you've mentioned in the past? Maybe you can talk directly about what benefited from the performance in the first quarter.
Zach: Absolutely.
Overall, cars produced in Shanghai do have a lower cost structure than cars produced in Fremont. As a result, as our automotive production portfolio tilted towards Shanghai, average costs were positively impacted.
We've also seen some progress in Fremont in terms of production efficiency, particularly Edamame S and X, which have increased production.
Expedited service has always been a big story for the company. In the fourth quarter, we had a large number of expedited services. The volume in the first quarter was still quite large, but we did make some progress in reducing the urgency.
ELON: I should mention that I'm grateful to the production team at Fremont and our colleagues there, because we're achieving record output in Fremont.
Zach: Yeah, the Fremont team is doing an amazing job.
(Inaudible)
Unidentified: It's hard to ignore the crazy logistics situation caused by the expedited service in the new crown environment.
Zach: Yes, repeat elon's point, the Fremont team, and the Shanghai team, have been extremely energetic, dealing with the unpredictability of parts arrivals.
Our supply chain teams, especially the production planning parts of the supply chain, often rarely get enough advance notice when there is a parts shortage. And a few days before the part should have arrived, it was a real mess to try to get it here.
So the effort to get results in the first quarter, or even the previous quarters, is absolutely enormous.
Elon: There's a saying in the military that when you start a war, the layman talks about tactics, and the insider talks about logistics.
Zach: Yes.
As I mentioned, there are some inherent cost improvements, but there are also offsets to the price increases in raw materials and commodities that we talked about earlier. Despite our significant efforts to improve capacity and reduce costs, outgoing logistics remains a challenge.
Dan Levy: Thank you.
The second problem, one of the initial goals of the Edamame 3, was to make electric vehicles affordable to a large part of the market. And we know that just considering the supply constraints, the price is now much higher. All other automakers are getting more expensive.
We know that you are battling inflation, and some of it needs to be passed on through the price of the vehicle. For the foreseeable future, you will all be limited by supply. This is one of the points.
But given the long-term goal of making electric cars more widely available, how do you see prices changing over time?
ELON: We definitely want to make electric cars as affordable as possible. With inflation reaching nearly four or five decades high, it is very difficult to do that. And I think the official figures actually underestimate the true scale of inflation. And it seems likely that inflation will continue for the rest of the year, as we talk to suppliers who are under severe cost pressures.
Yes, in some cases, we've seen suppliers ask for a 20 to 30 percent increase in part costs from last year to the end of this year, which is a lot of cost pressure. That's why we've raised prices, because you know, inflation is severe. While our orders will remain for a year or longer in some cases, we must anticipate these cost increases.
But I think, especially with the advent of driverless taxis and autonomous driving, I think we're finally going to give consumers the lowest cost of transportation they've ever experienced. With the advent of driverless taxis, the cost per mile could be reduced by a factor of 5 to 10, which is really quite impressive.
Andrew: So everyone can afford it.
ELON: Yes.
Looking at some of our predictions, it seems that taking a driverless taxi will cost less than a bus ticket, a subsidized bus ticket, or a subway ticket.
Martin: Thank you very much.
Let's move on to the next question, Rod Lache from Wolfe Research.
Rod Lache: Hi everyone.
I'm trying to understand your comments about inflation, and supply constraints, as well as about battery feedstocks, and the steps you've taken internally to secure those materials.
It sounds like you're optimistic about Tesla's ability to solve this problem. But do you think this is a constraint on the wider adoption of electric vehicles?
ELON: Yes, of course.
At least in the short term, the reason we keep costs low is that we have long-term contracts with our suppliers. But these long-term contracts will obviously end, and then we may start to see potentially significant cost increases.
But looking at the world at a macro level, how can we make the planet transition to sustainable energy faster? The fundamental limiting factors are the output of the battery, the capacity of the battery, and at what rate can lithium-ion batteries grow each year? This is the fundamental limiting factor.
And this speed will be determined by the slowest and least fortunate elements of the entire supply chain. For now, we think this challenge comes from lithium.
To be clear, there is no shortage of lithium in this world, lithium is almost everywhere, it is a very common element. However, you still need to dig out the ore, basically, dig out the silt or clay that contains lithium. Then you need to go through a series of refining steps. This requires a lot of industrial equipment to refine lithium ore into lithium, which can then be used as lithium hydroxide or lithium carbonate for battery cells.
We think we're going to need to help the industry in that regard, but it's growing very fast.
I certainly encourage entrepreneurs who are looking for opportunities to enter the lithium mining business. Now, the profit margin of lithium is equivalent to the profit margin of the software industry. Please correct me if I say it wrong, but I think what we are seeing is that the spot price of lithium is 10 times higher than the cost of mining. So, what we're talking about here is a 90% profit margin.
Can more people enter the lithium mining industry? Do you like printing money? Well, the lithium business is for you.
Source: Teslarati
Rod Lache: Interesting. I think we'll keep an eye on what happens.
My second question is that, given the reality that we see in terms of goods, it's impressive to see a modest increase in the cost of selling per vehicle.
You have a lot of opportunities to reduce costs, 4680 batteries and changes in the battery production process, anode chemistry, structural packages, super die casting machines. Are you suggesting that even these measures may not be enough to offset the inflation you are seeing, and that additional price increases may be needed in addition to the specific measures you mentioned?
ELON: We hope that no further price increases are needed.
The current pricing is an expectation of what we think is a possible cost increase. If the cost increase doesn't happen, we might actually lower the price slightly. We currently have no plans to make a significant price increase.
But it is clear that we cannot control the macroeconomic environment. If the government continues to print a lot of money, and if the mining and refining of lithium, as well as other raw materials, are not significantly increased, so that everyone is competing for limited raw materials, then obviously, this will push prices to a high level.
If you have a magic crystal ball that can tell us what the future will look like, we'll adjust it accordingly. However, the current price is for vehicles delivered in the future, say, within 6 to 12 months from now. That's our best guess.
Andrew: But I think if you look a little further afield, like you said, our mission is to accelerate the transition to sustainable energy. We are working with our existing suppliers and other suppliers to find out how to add all these raw materials as soon as possible to avoid a slowdown in this transition.
Whether that means we have to get involved directly in certain situations depends on the parties involved and whether they're willing to scale at a rate that we think they should be able to scale.
It's similar to what we've done in other ways, like we built a gigafactory in Reno because it was very much needed. We will therefore take every measure not to slow down this transition.
Affordability is a goal, because if it's not affordable enough, it will drag down growth, and we can't accept such an outcome.
Martin: Thank you.
The next question comes from Pierre Ferragu of New Street Research.
Pierre Ferragu: Thanks, can you hear me clearly?
Martin: Yes.
Pierre Ferragu: Good.
I want to ask you some questions about free cash flow. First of all, maybe in the long run, if you look at your performance, and your growth model, and your growth ambitions, I quickly calculate that I expect you to have $400 billion or $500 billion in cash within a decade.
I wonder, is this something you've considered?
ELON: Hahaha, the probable scenario is that if inflation continues to be high, $500 billion could be equivalent to $20 billion today. We can wait and see what we can buy for $500 billion a decade from now, but it may be a lot less than it is now.
That seems like a good amount of cash. I don't know, we'll try to do something useful with it. ... I realized that this was a problem, and that was for sure.
Zach: I think we have to take it one step at a time.
We are now making investments to get Austin and Berlin up and running. Then, as Elon mentioned, deploy production capacity for driverless taxis.
As Elon mentioned, there are also decisions to be shared in the future about what the economic model will look like and what the economic model of driverless taxis will look like.
So what Elon and I were talking about was... (Inaudible)
ELON: Pierre, I think I'll mute you if...
Zach: Our focus is on getting a solid economic model to get driverless taxis on the road and Optimus Prime to work. Then, assess the size of the cash flow at that time before deciding what to do next.
Martin: Pierre, do you have a question?
Pierre Ferragu: Yes (inaudible).
Martin: Okay. Let's move on to the next question.
The next question is Trip Chowdhry from Global Euity Research.
Trip Chowdhry: Thank you. I have two questions.
The first is the question of electric pickups. I would like to know, in terms of the number of parts, how does an electric pickup compare to a conventional pickup?
My second question is about the Gigafactory at Sparks, Nevada. Will we produce vehicles at this plant, or will all future production take place at the Austin Gigafactory? Thank you.
ELON: I'm not sure if we've actually done a comparison between electric pickup parts and regular pickup parts. Lars？
Lars: If you want to compare, it depends on what kind of parts.
(Inaudible)
If these are not taken into account, the simplicity of our structure is remarkable compared to conventional pickup trucks or any other vehicle. Like the super die casting machine we talked about, it helped save hundreds of parts.
Elon: I mean, the whole rear body, almost half of the car is a die-cast.
Lars: For example, even for electric pickups and doors, we have an exoskeleton design, the doors are great, it can withstand the impact of all sides. We have reinforced doors.
We didn't (inaudible).
Back to your question, I haven't done a calculation because I don't often judge how well I'm doing so far by reviewing old techniques, which I occasionally review and check. But in general, architectures are always moving in the direction of reducing complexity, reducing parts, or reducing the number of parts.
I would say that if the battery cells are ignored, our number of parts may be reduced by 20 to 30 percent.
Cyber Stampede, an electric pickup truck on site at a Texas plant
Martin: Okay. Thanks, let's move on to the next question...
Unidentified: Nevada.
ELON: Oh, Nevada, are we expecting an expansion?
Yes, we do expect to expand the Nevada Gigafactory. There's a lot of room for expansion, and we do expect to boost Nevada's output. But the biggest output growth so far will come from the Texas Gigafactory.
Martin: Thank you very much.
The next question comes from Pepper Sandler's Alex Potter. Alex, can you hear us?
Alex Potter: Yes, hey Martin, can you hear me?
Martin: Yes.
Alex Potter: Okay, good.
My first question is, based on the possibility of further upstream supply bottlenecks in China, to what extent will other factories outside of China be affected?
Obviously, if the COVID-19 ban gets out of control, it is clear that it will continue to affect Shanghai. But will it affect other factories to some extent and possibly?
ELON: If the ban continues, it will. Some of the parts sourced in China are supplied globally, which will affect production elsewhere.
However, all indications are that our Shanghai Gigafactory has resumed a fairly high level of production, as have our suppliers. We don't think that's going to be a big problem.
Alex Potter: Okay, thanks.
The second question, obviously, is that you've been able to feel higher margins over the last few quarters, which largely reflects some "real" improvements.
The other part is because we don't pay you, Elon, as much as we used to, pay you (pay packs). I wonder, to what extent are you and the board considering another long-term compensation package? This seems to have worked well in the past, thanks.
ELON: There's no ongoing discussion about my new pay package at the moment.
Martin: Thank you.
The next question comes from Wells Fargo's Colin Langan.
Colin Langan: Good. Can you hear me?
Martin: Yes.
Colin Langan: Good.
On asking, I'm sorry to stay on the raw material issue of batteries, but obviously, this seems to be quite important.
How can you quickly establish a supply of raw materials? Because my understanding is that it will take many years to build. When do you think we're going to see a shortage of lithium or a shortage of nickel? Is there enough time to build mining capacity? Then, correspondingly, for the nickel problem, how quickly can you switch to lithium iron phosphate batteries?
Andrew: Let me answer the question about lithium iron phosphate.
As mentioned in our earnings newsletter, half of our products last quarter used lithium iron phosphate batteries. This shows how quickly we can cope with... Well, to be honest, it's not because of raw material shortages, it's just that because it seems like the right thing to do, we can change our cathodic chemistry.
And, on the cathode side, we have more work to do. There are other cathode options on the market that can make our vehicles competitive. We are actively seeking options to give us the flexibility of alternative options in response to changes in market conditions.
I would say that, specifically with regard to the cathode, flexibility is how we achieve that goal. First, not all materials that enter the cathode are difficult to obtain by mining or refining. Second, in many cases, not all cathode materials are abundant. And if all the batteries in the world use these cathodes, the total annual production will only increase by less than 1%. This is the cathode aspect.
I think Elon has spent a lot of time talking about lithium. It does depend on the resources. Some resources need to be dug up from underground, expanding the amount of rock obtained from underground, perhaps some planning, some additional blasting and trucking operations.
The topic of refining may be too heavy to discuss online, but refining is not like refining. Extracting lithium from spodumene, or from a liquid of brine, is a much smaller operation.
What you're talking about is a 1 to 2-year time scale. And it's not that we haven't talked to all the lithium suppliers that have been around for years. They have a lot of projects in the pipeline that will be put into production this year and next year.
Some of the things that happened in the lithium mining market this year actually do not meet the truth of the fundamentals such as supply and demand, which also makes people feel a little helpless. But if we look to next year, to 2030, we need something like this 15 to 20 terawatt hours to keep our growth trajectory. We need every company in the lithium mining space to do more than we do now.
I don't know if that answers that question.
Colin Langan: Yes.
Martin: Very good, thank you very much.
So, let's move on to the last question, Mark Delaney from Goldman Sachs.
Mark Delaney: Yes. Good afternoon. Thank you very much for taking my question.
I hope you'll comment on your latest thoughts on what the U.S. charging network might be open to non-Tesla owners.
I mean, in terms of waiting times and the installation of charging packs, it's certainly very important to provide a good experience for Tesla owners. But if Tesla can have enough capacity, this could be a good way to bring other owners into tesla's network, maybe help Tesla maintain the benefits of the network, and maybe allow more people to buy Tesla cars in the future.
Andrew: Yes.
As Elon said, and as we publicly promised, yes, we do plan to open up to third-party vehicles around the world, not just in Europe, where our initial pilot was. We're looking at a solution in North America, which is a bit of a problem since our connectors are different from other manufacturers, but we're working in that direction.
What do you have to add?
ELON: I don't have much to add. Yes, we want to be able to do the right thing for the whole system.
Zach: We're speeding up the increase in charging piles. As the number of cars we produce grows, the capacity of the entire overrush network is really important. The pace of our investment in overcharge has accelerated.
ELON: Yes.
Mark Delaney: Okay. This is very helpful.
My second question, can you share more details about Tesla insurance, especially about rollouts in more states. Are there any data metrics to share and what are the conversion rates? How does the profit margin of an insurance product compare to the company's average? Thank you.
Zach: We just launched real-time Tesla insurance in Virginia, Colorado and Oregon earlier this week.
One statistic I can probably share is that Texas is our oldest real-time insurance market. But according to the information we have, Tesla is the second largest insurance company for Tesla Motors in Texas. Maybe by the end of this quarter, maybe early next quarter, we're going to be the biggest insurance company for Tesla Motors. The response from customers to this has been quite positive.
After we launched our products in these three new states, I was reading social media on Monday. A lot of people are telling their stories, saying they saved a considerable amount of money compared to their previous insurance. We are therefore quite encouraged.
We're working hard to make Tesla's insurance products available to 80 percent of customers in the U.S. as soon as possible by the end of this year. Once this goal is achieved, we will turn our attention to expanding beyond the United States.
Another thing I would say about insurance is that in these three new states, the model is different. Because we're an underwriter now, and we're taking risks now. So, in these states, we are an insurance provider that is fully vertically integrated from system to finance.
It is still too early to say anything about the financial health of the program. As this program grows, we'd love to share more information on this.
Elon: One thing I've noticed is that real-time feedback on driving habits actually allows Tesla owners to drive the car in a safer way because they can get real-time feedback, for example, this action affects my insurance rates, and that doesn't.
As a result, one can see the score in real time. They realized that if I made the following changes in my driving habits, my insurance costs would be reduced. Well, they have a real-time feedback loop to improve driving safety, which is a motivating factor.
What we're actually seeing is that it allows people to drive their cars in a safer way, and that's pure benefit.
Zach: As Elon said, we see from the data that, on average, it's safer and the premiums are lower. We see from our conversion rate data that we have extremely high customer retention rates for users who have experienced this product.
I remember talking about it in the past and it's become a really passionate project for us
These benefits far outweigh the economic benefits. On this project, we strive to do good things for our customers, save them money, and make the roads safer.
ELON: I think it improves overall macroeconomic efficiency.
It's also a feedback loop for Tesla because we'll see if there's a crash, if the plot is serious, and we're going to see the root cause of what happened. Then we think about how to change the design of the car or software to minimize the probability of such an accident. Most accidents are minor, but how can these accidents be made less frequent? And how do we make accident-related repairs super fast?
Ideally, for example, repairs after a crash could be completed on the same day. This is a world of difference from sometimes having to wait a month to resolve an insurance claim. Because Tesla itself is also operating post-collision repairs.
Zach: Yes, the feedback loop is instantaneous. Yes, I mean, we do claims management in-house. As a result, we receive notification of an accident, we carry out an assessment, and with the support of our customers, we can use our collision center for repairs. Therefore, the visibility of this service is completely end-to-end.
In summary, as Elon said, we can target areas of cost inefficiency and feed this information back to our engineering or software teams to actually improve the product. This reduces the cost of insurance and improves the reliability of the product. It's a complete closed loop.
ELON: Yeah, basically, the customer experience has improved tremendously. Because if there is an accident, there is no doubt that we will repair the vehicle immediately.
Compared to arguing with an insurance company, arguing with a claims adjuster, and then arguing with a crash repair center, it can be a nightmare. We're trying to turn nightmares into dreams with Tesla insurance.
Martin: Fantastic, thank you very much.
Unfortunately, that's all of our quarterly earnings session. Thank you so much for all your great questions and see you in three months!
ELON: Thank you!
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