Good day, ladies and gentlemen, and thank you for standing by, and welcome to the Tesla First Quarter 2021 Results and Q&A Webcast. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I will now hand the conference over to your speaker today, Martin Viecha, Senior Director of Investor Relations.

Thank you, Carmen, and good afternoon, everyone, and welcome to Tesla’s first quarter 2021 Q&A webcast. I am joined today by Elon Musk; Zachary Kirkhorn; and a number of other executives. Our Q1 results were announced at about 1 p.m. Pacific Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today’s call, please limit yourself to one question and one follow-up. But before we jump into Q&A, Elon has some opening remarks. Elon?

Great. Thank you. So Q1 2021 was a record quarter on many levels. Tesla achieved record production, deliveries and surpassed $1 billion in non-GAAP net income for the first time. We have seen a real shift in customer perception of electric vehicles and our demand is the best we have ever seen. So this is — if you talk about, we are used to seeing a reduction in demand in the first quarter and we saw an increase in demand that exceeded the normal seasonal reduction in demand in Q1. So Model 3 became the best-selling mid-sized premier sedan in the world. In fact, I should say, the best-selling luxury sedan of any kind in the world. The BMW 3 Series was for the longest time best-selling premium sedan. It’s been exceeded by the Tesla Model 3, and this is only three-and-a-half years into production and with just two factories. For Model 3 to be outselling its combustion engine competitors, I think, this is quite remarkable. In the past couple of quarters, we delivered roughly 250,000 Model 3s, which translates to an annualized rate of 500,000 per year. When it comes to Model Y, we think Model Y will be the best-selling car or vehicle of any kind in the world, and probably next year. So I am not 100% certain next year, but I think it’s quite likely. I’d say more likely than not that in 2022 Model Y is the best-selling car or truck of any kind in the world. Then with regard to Full Self-Driving, Full Self-Driving beta continues to make great progress. This is definitely one of the — I think, one of the hardest technical problems that exists, that has maybe ever existed. And really, in order to solve it, we basically need to solve a pretty significant part of artificial intelligence, simply real-world artificial intelligence. And that sort of AI, the neural net needs to be compressed into a fairly small computer, a very efficient computer that was designed, but nonetheless, a small computer that’s using on the order of 70 watts or 80 watts. So this is a much harder problem than if you were to use, say, 10,000 computers in a server room or something like that. This has got to fit into a smaller space. And this — I think with the elimination of radar, we are finally getting rid of one of the last questions. Radar was really — it was making up for some of the shortfalls of vision, but this is not ideal. You actually just need vision to work. And when it works, it works better than the best human because it’s like having eight cameras. It’s like having eyes in the back of your head, beside your head and has three eyes of different focal distances looking forward. This is — yes — and processing it at a speed that is superhuman. There’s no question in my mind that with a pure vision solution, we can make a car that is dramatically safer than the average person. So, but this is a hard problem because we are actually solving something quite fundamental about artificial intelligence, where we basically have to solve real-world vision AI. And we — so — and the key to solving this is also having some massive dataset. So, just having well over a million cars on the road that are collecting data from very rare corner-case situations, data with many weird things in the world like a truck carrying a truck or a car with a kayak on the roof where the kayak has a little weight dangling from the front of the kayak in front of the car, and yet the car must ignore this and just look at the road. So it’s really quite tricky. But I am highly confident that we will get this done. So, yes, this quarter I think we will continue to see that a little bit in Q2 and Q3. So Q1 was — had some of the most difficult supply chain challenges that we have ever experienced in the life of Tesla and same difficulties with the supply chain, with parts — over the whole range of parts. Obviously, people have heard about the chip shortage. This is a huge problem. But then in addition to that, for example, we had quite a difficulty scaling, driving our production in China, because we are unable to get critical engineers there because of COVID quarantine restrictions. So — which meant that Tesla worldwide was dependent on drive units made at our factory in Nevada, Giga Nevada. So that was a very challenging situation. I think we are mostly out of that particular problem. But those were just two of many challenges. So the team has really done an incredible job of dealing with really severe supply chain shortages. So with respect to Model S and X, there were more challenges than expected in developing the Plaid Model S or what we call the Paladium program, which is the new version of Model S and X, which has a revised interior and new battery pack and new drive units and new internal electronics and has, for example, a PlayStation 5 level infotainment system. There’s just a lot of issues encountered, ensuring that the new factory was also, as we were saying, quite hard, because it was in a smaller space. So it took quite a bit of development to ensure that the battery of the new S/X is safe. Then, we are trying to get components into the cars slowly for the past few months. But we are just stacking them up in the yard and just making refinements to the cars that we have built. But we do expect to ramp Model S production and start delivering them probably next month. So — and then to be in sort of fairly high-volume production for the S in Q3 and to start delivering the Model X in Q3 as well. So I think as we ramp up, I think, probably the demand for the new S/X will be quite high. So surely, it’s going to be a question of ramping supply chain and internal production processes. So probably, we are — like we are going to aim to produce over 2,000 S/X per week, perhaps, if we get lucky, upwards of 2,400 or 2,500. This again is contingent on global supply chain issues, which involve a lot of factors outside of our control here. But I do think we — this will get solved, it’s just a matter of time, and then we will be doing well over 2,000 S/X per week. It actually costs us a little bit less to produce, but it is a superior product. So in conclusion, there’s a lot to be excited about in 2021 and 2022. We are building factories as quickly as we can. Both Texas and Berlin are progressing well and we expect to have initial limited production from those factories this year and volume production from Texas and Berlin next year. And at this time, we will continue to ramp production of Model Y in Shanghai in three months. In the background, we are continuing development work on the Semi, Cybertruck, on the Roadster and other products. Thanks to everyone at Tesla who have made this year a huge success. Now on to questions.

Thank you very much. We have some remarks from Zachary Kirkhorn as well.

Okay.

Yeah. Thanks, Martin. Thanks, Elon. So congratulations to the Tesla team on breaking multiple records in the first quarter of 2021, as Elon had mentioned, which is typically the most difficult of the year for many reasons. To summarize the quarter, I think, it’s best understood by three key items. First, we successfully launched and began the ramp of Model Y in Shanghai, achieving positive gross margin in the first quarter of production and receiving a great reception from the market. Second, as Elon mentioned, although we began the production process for the Model S during the quarter, we had not yet begun customer deliveries. The reduction in Model S and X deliveries from Q4 to Q1 were a meaningful headwind to free cash flows and profit generation. For example, we incurred an estimated $200 million of direct P&L impact relating to this program in Q1, the majority of which is reflected in COGS and that’s before even considering the impact of lost revenue and profits as a result of the transition. And as Elon mentioned, we expect the first deliveries to begin shortly. Third, as we continue to work through the instability of the global supply chain, particularly around semiconductors and port capacities, while the Tesla team in partnership with our suppliers did tremendous work keeping our factories running, we did experience high expedite costs in the quarter and they were also higher than they were in Q4, with some minor interruptions to production over the course of the quarter. We believe that this landscape is improving, but it does remain difficult and it’s an evolving situation. If we double click within net income, auto gross margin excluding credits improved sequentially and year-over-year. This is in spite of the costs mentioned for S/X and expedites and a reduction in global ASPs as our cost structure as a company is reducing at an even faster pace. So as we look out over the course of the year, we feel optimistic about our gross margin strength, particularly as some of these headwinds we are experiencing start to be resolved. On Services and other margins, these have recovered and are trending towards profitability, aided by strength in the used car business, operational improvements in service and additional service revenue opportunities that help absorb fixed overheads. On energy gross margins, these remained negative for a second quarter. This was driven by Solar Roof-related ramp costs and winter seasonality in the lease and Power Purchase Agreement business. We continue to manage through a multi-quarter backlog on Powerwall. We are working as fast as we can to increase production and this will aid in profitability of this business as those volumes increase. On operating expenses, these increased for Q1, which was driven by our investments in technology and growth. In particular for R&D, this includes the structural battery pack and 4680 cells, investments in the new S/X, and our neural net and silicon investments. On the SG&A side, we are setting up infrastructure and support for both China and EMEA in anticipation of volume to come there. And as I have said before, our plans show that we remain on track for sustained industry-leading operating margins. Double clicking on cash flows, we continue to generate positive free cash flows and this was despite the significant working capital headwinds from S/X. Additionally, we are making progress reducing various forms of debt. We also invested $1.5 billion in Bitcoin during the quarter, then trimmed our position by 10%, which contributed to a small gain in our Q1 financials. Taking a step back, we have generated $8 billion in operating cash flows and $4 billion in free cash flows over the past four quarters. As we look forward, our plans remain unchanged for long-term growth of 50% annually and we believe we are on track to exceed that this year as we guided to last quarter. Global demand remains meaningfully higher than production levels, and so we are driving as fast as we can to increase our production rates. As we think about Q2 and Q3, these quarters should largely be driven by execution on S/X, as we have discussed, continued ramp of Model Y in Shanghai and the associated cost reductions of these programs, and we expect profitability and cash generation to evolve over the course of the year in line with those improvements. And then as we get towards the end of the year, our story will pivot towards the launch and ramp of our newest factories in Austin and Berlin. So there’s certainly no shortage of exciting things for us to work on and look forward to. Thank you and we will open it up for questions.

Thank you very much. And we will first take retail questions from our website. The first question is, how is Dojo coming along? Could Dojo unlock an AWS-like business line for Tesla over the next few years?

I will jump in here. So with respect to…

Sorry about that. My apologies. I was on mute.

Go ahead, Elon.

So, yeah, so it’s basically saying that right now a lot of people think of Tesla as a car company or perhaps an energy company. I think long-term people will think of Tesla as much an AI robotics company as we are a car company or an energy company. I think we are developing one of the strongest hardware and software AI teams in the world and so we appear to be able to do things with Self-Driving that others cannot. And if you look at the evolution of what technologies we have developed, we developed them in order to solve the problem of Self-Driving. So we couldn’t find a powerful enough neural net computer, so we designed and built our own. The software out there was really quite primitive for this task and so we built a team from scratch and have been developing what we think is probably the most advanced real-world AI in the world. And then it sort of makes sense that this is kind of what needs to happen because the road system is designed for a neural net computer — our brain. Our brain is a neural net computer. And the entire system is designed for vision with a neural net computer, which is because it’s designed for eyes and a brain. And so if you have a system which has very good eyes, you can see in all directions at once and see three focal points forward, it never gets tired. It’s never texting, it has redundancy and its reaction time is super-human. Then it seems pretty obvious that such a system would achieve an extremely high level of safety, far in excess of the average person. So that’s what we are doing. Then Dojo is kind of the training part of that. So because we have over a million cars and perhaps next year we will have 2 million cars in active use providing vast amounts of video training data that then needs to be digested by a very powerful training system. And currently, we use Tesla training software. We developed a lot of training software, a lot of labeling software to be able to do surround video labeling, which is quite tricky. This means all eight cameras simultaneously at 36 frames per second per camera labeling video over time. It wasn’t any tool that existed for this. So we developed our own labeling tool. Then taking it a step further, obviously, the Holy Grail is auto-labeling. So now we are getting quite good at auto-labeling where the trainers train the training system and then the system auto-labels the data and the human labelers just need to look at the labeling to confirm that it is correct and perhaps make edits. And then every time an edit is made, that further trains the system. So that’s kind of like a flywheel that’s just sort of spinning up and really the only way to do this is with vast amounts of video data. So then we need to train this efficiently. So Dojo is really — it is a supercomputer optimized for neural net training. We think Dojo will be probably an order of magnitude more efficient on, say, the exact right metric, but per frame of video, we think it will be an order of magnitude more cost efficient in hardware and in energy usage per frame of video compared to a GPU- or DPU-based solution or compared to the next best solution that we are aware of. So then possibly that could be used by others. It does seem as though over time, I mean, just an observation, I think, I will basically step back that neural net-based computing or AI-based computing is more and more of the compute stack. We are — conventional computing is called perhaps algorithmic-based computing. It’s still going to be important, it’s still going to be very important, but neural net will become a bigger and bigger portion of compute. So anyway, long story, but I think probably others will want to use it too and we will make it available.

Thank you very much. Let’s go to the second question from retail investors. The recent price changes on Solar Roof have been a bit discouraging for customers and investors. Could Tesla share more about Solar Roof challenges and if the outlook has changed at all, i.e., 1,000 roofs per week?

Yeah. First of all, I should say, the demand for the Solar Roof remains strong. So despite raising the price, the demand is still significantly in excess of our ability to meet the demand to install the Solar Roofs. So production has gone fine, but we are choked at the installation point. We did find that we basically made some significant mistakes in assessment of difficulty of certain roofs, but the complexity of roofs varies dramatically. Some roofs are literally two times or three times easier than other roofs. So you just can’t have a one size fits all situation. If a roof has a lot of protuberances or if the core structure of the roof is rotted out or is not strong enough to hold the Solar Roof, then the cost can be double, sometimes three times what our initial quotes were. So in those cases, what we obviously have to do is to refund customers their deposit. What we cannot do is go and just lose a massive amount of money. We have just got to provide a refund of the deposit. But what is I think most important about the Solar Roof situation, which I tweeted about this past week, is that we are shifting the whole solar situation, the solar factory situation to one product configuration for every house, but we will not sell a house solar without a Powerwall. That solar could either be a conventional panel retrofit with panels put on the roof or it can be the Tesla Solar Glass Roof. But in all cases, it will have the Powerwall to buffer this — and this is essentially the Powerwall Plus if you will, the Plus refers to a higher peak power capability. So basically, all Powerwalls made since roughly November of last year have a lot more peak power capability than the specification on the website. They are about twice the power capability, roughly. It depends on how you count power, but about twice the peak power and about roughly twice the steady-state power of the specification on the website. The energy is the same but the power is roughly double. And all installations will have a Powerwall and the difficulty of the installation will dramatically decrease, it will be much easier, because the power from the Solar Roof, the Solar Glass Roof, or the solar panels, will only ever go directly into the Powerwall. And the Powerwall will only ever go between the utility mains and the main power panel of the house, which means you never need to touch the main circuit breakers of the house. You never need to touch the house circuit breakers. Effectively almost every house, therefore, looks the same electrically instead of being a unique work of art and requiring exceptional ability to rewire the main panel. So this is extremely important for scalability. It’s the only way to do it, really. And this also means that every solar Powerwall installation at the house or apartment or whatever the case may be will be its own utility. And so even if all the lights go out in the neighborhood, you will still have power. So that gives people energy security. And we can also, in working with the utilities, use the Powerwalls to stabilize the overall grid. So let’s say like what happened in Texas: if there was a peak power demand and that peak power demand, because the grid lacked the ability to buffer the power, they had to shut down power. There is no significant distributed power storage. However, with a whole bunch of Powerwalls at houses, we can actually buffer the power. So if the grid needs more power, we can actually then with the consent, obviously, of the homeowner and the partnership with the utility, we can then actually release power on to the grid to take care of peak power demand. So, effectively, the Powerwalls can operate as a giant distributed utility. This is profound. I am not sure how many people will actually understand this, but this is extremely profound and necessary, because we are headed towards a world where, as we just talked about earlier, people are leaning toward electric vehicles. This will mean that the power needs in homes and businesses will increase significantly. In fact, if you go full renewable electricity, we need about three times as much electricity as we currently have. These are rough numbers, but you roughly need twice as much electricity if all transport goes electric and then you need three times as much electricity if all heating goes electric. So basically, this is a prosperous future, I think, both for Tesla and for the utilities, because — and in fact — and this will be very important — if this is not done, utilities will fail to serve their customers. They won’t be able to do it. They won’t be able to react fast enough. And we are going to see more and more of what we see in California and Texas of people seeing brown-outs and black-outs, and the utilities not being able to respond, because there’s a massive change going on with the transition to electric transport and we are seeing more extreme weather events. This is a recipe for disaster. So it is very important to have solar and batteries at the local level at the house. In addition, it is important to have large battery storage at the utility level so that solar and wind, which are the main forms of renewable electricity, can be stored because sometimes the wind doesn’t blow. Sometimes it blows a lot. Sometimes it blows too much and at times it doesn’t blow enough. But if you have a battery, you can store the energy and provide the energy to the grid as needed. The same goes for solar because, obviously, the sun does not shine at night and sometimes it is very cloudy. And so by having battery storage paired with solar and wind, this gives the long-term solution to a stable energy future, and as I said, especially both at the local level and at the utility level. If it doesn’t occur at the local level, what will actually be required is a massive increase in power lines, in power plants, as they would have to put long distance and local power lines all over the place. They will have to increase the size of substations. It’s a nightmare. This must occur. There must be solar plus battery. It’s the only way. So, yeah.

Thank you very much. And the next retail question is, "Master of Coin, can you tell us anything about Tesla’s future plans in the digital currency space? Or when any such major developments might be revealed?"

Sure. Thanks, Martin. So as I noted in our opening remarks and we have announced previously, Tesla did invest $1.5 billion into Bitcoin in Q1 and then we subsequently sold a 10% stake in that. We also allow customers to make vehicle deposits and final vehicle purchases using Bitcoin. Where our Bitcoin story began, maybe just to share a little bit of context here: Elon and I were looking for a place to store cash that wasn’t being immediately used, trying to get some level of return on this but also preserve liquidity. Particularly as we look forward to the launch of Austin and Berlin, and uncertainty that’s happening with semiconductors and port capacity, being able to access that cash very quickly is super important to us right now. And there aren’t many traditional opportunities to do this, at least that we found, particularly with yields being so low and without taking on additional risk or sacrificing liquidity. Bitcoin seemed, at the time, and so far has proven to be a good decision — a good place to place some of our cash that’s not immediately being used for daily operations or maybe not needed until the end of the year and be able to get some return on that. And I think one of the key points that I want to make about our experiences in the digital currency space is that there’s a lot of reasons to be optimistic here. We are certainly watching it very closely at Tesla, watching how the market develops, listening to what our customers are saying. But thinking about it from a corporate treasury perspective, we have been quite pleased with how much liquidity there is in the Bitcoin market. So our ability to build our first position happened very quickly. When we did the sale later in March, we also were able to execute on that very quickly. And so as we think about global liquidity for the business and risk management, being able to get cash in and out of the markets is something that I think is exceptionally important for us. So we do believe long-term in the value of Bitcoin. It is our intent to hold what we have long-term and continue to accumulate Bitcoin from transactions from our customers as they purchase vehicles. Specifically, with respect to things we may do, there are things that we are constantly discussing. We are not planning to make any announcements here. We are watching this space closely. So when we are ready to make an announcement on this front, if there’s one to come, we will certainly let you all know.

Thank you. And the fourth question from retail investors is, does Tesla have any proactive plans to tackle mainstream media’s imminent massive and deceptive click-bait headline campaigns on safety of Autopilot or FSD, perhaps a specialty PR job of some sort?

Well, I will take this one. From the safety side, I continue to say safety is driving too.

Yeah.

Go ahead, Elon.

No. Please go ahead. I think, just with — just going through the facts of what I mean, specifically, there was an article regarding a tragedy where there was a high speed accident in Texas and it was really just extremely deceptive media practices where it was claimed to be Autopilot, which is completely false and those journalists should be ashamed of themselves. Please go ahead, Zach.

Yeah. Thanks, Elon. So I was just saying, we are committed to safety in all our designs and that’s number one in what we do here. Regarding the crash in Houston specifically, we worked directly with the local authorities and the NTSB, so wherever applicable and whenever they reach out to us for help directly on the engineering level and whatever else we can support. In that vein, we did a study with them over the past week to understand what happened in that particular crash and what we have learned from that effort was that Autosteer did not and could not engage on the road condition as it was designed to. Our adaptive cruise control only engaged when the driver was buckled and above 5 miles per hour, and it only accelerated to 30 miles per hour with the distance before the car crashed. As well, adaptive cruise control disengaged the car fully to a complete stop when the driver’s seat belt was unbuckled. Through further investigation of the vehicle and the accident remains, we inspected the car with NTSB and local police and were able to find that the steering wheel was indeed deformed, which suggests a likelihood that someone was in the driver’s seat at the time of the crash and all seat belts post-crash were found to be unbuckled. We were unable to recover the data from the SD card at the time of impact, but the local authorities are working on doing that and we await their report. As I said, we continue to hold safety in high regard and look to improve our products in the future through this kind of data and other information from the field.

Okay. Thank you very much. Let’s go to the next question from institutional investors. The first question is, proponents of alternative grid storage technologies claim that lithium ion is unsuited to long-term storage at scale due to vampire drain. Could 4680 cells address this limitation? Is the limitation even relevant for changing the energy equation?

Yeah. Just let me jump in on the vampire drain. That’s definitely not the issue. Good lithium-ion cell self-discharges less than 0.001% of its energy per day, so the vampire drain is maybe a myth.

Yeah. Myth. We have got a long way to go before we are dealing with seasonal storage issues. But certainly a way to deal with seasonal storage would be to have wind and solar already on the site or at more southerly latitudes and distributed across a variety of longitudes. So essentially, let’s say in the U.S., for example, you can actually power the entire United States with roughly a 100-mile by 100-mile grid of solar. Sometimes people don’t quite understand how much solar is needed to power the United States. It’s not that much. The solar incidence is about a gigawatt per square kilometer under clear conditions. If you took the clear area for a typical power plant, you would find that solar could generate more power than a nuclear plant for many footprints. If you have 25% efficient solar panels and then they are 80% efficient in how they are laid out, you do about 200 megawatts per square kilometer. Therefore, 5 square kilometers is a gigawatt, which might be a typical power plant. It’s really not much area at all and a lot of places can have wind and solar put in place. So anyway, it’s entirely possible to power the world with a small percentage of the earth’s area and then to transfer that power through high voltage DC lines. No new technology like room temperature superconductors is necessary. Low-cost, long-distance power lines using copper or aluminum are important. Heating loss is I squared R, so as you increase voltage, you can drop current dramatically and drop heating dramatically to a point where losses are minor. Maybe you lose 5% to 7% with a high voltage DC power line. So I want to be clear. No new materials are necessary. We just need to scale it up. The technology exists today to solve renewable energy. Some people ask why don’t we do it — that’s because the energy basis of the earth is gigantic. You can’t build terawatts overnight. You have to build production capacity for the cells, for battery cells, for solar cells. You have to put that into vehicles, into stationary storage packs, into solar panels and Solar Glass Roofs and you have to deploy all of this stuff. But it’s certainly the case that we can accelerate this and we should try to accelerate it. The right thing to do from an economic standpoint is to have a carbon tax, similar to taxes on cigarettes and alcohol, to align incentives. Sustainable energy will be sold. It is being sold, but it matters how fast we sell this and if we sell it faster, that’s better for the world. There’s no question in my mind whatsoever that the energy storage problem can be solved with lithium-ion batteries. Zero. I want to be clear, zero. I think the bias will tend to be towards iron-based lithium-ion cells for stationary storage. Lithium in cells is actually a small fraction by mass — maybe 1% to 2% of the cell. The main part of the cell is the cathode. For high energy cells we use nickel-based lithium-ion cells, which have higher energy density, longer range than iron-based cells. However, for stationary storage, energy density is not as important because it’s just staying on the ground and so I think the vast majority of stationary storage will be iron-based lithium-ion cells — iron phosphate cathode. There is an enormous amount of iron and lithium in the world relative to expected demand for iron phosphate lithium-ion cells.

Thank you very much. Let’s go to the next question from institutional investors which is, you have suggested that between a 5x to 10x improvement is achievable in automotive production versus the first Model 3 line on a first-principles physics analysis. Where does Berlin sit relative to that limit?

I think we are still quite far away from it. I mean, the thing to bear in mind with production is for those who have never done production, they just don’t understand how insanely hard production is. I want to really be very, very emphatic here. Prototypes are trivial. They are child’s play. Production is hard. It is very hard. Now you say production at large scale with high reliability and low cost is insanely difficult. But what Tesla achieved on the automotive side was not to create an electric car. The truly profound thing on the car side is that Tesla was the first American car company to achieve volume production of a car in 100 years and not go bankrupt. So this was extremely difficult. The thing about making a large complex manufactured object is let’s say that you have a close to 10,000 unique items. If even one of those items is slow, that sets your rate — just one. We have had production stops because of carpet in the trunk. We had a production stop because of a USB cable. At one point for the Model S, we literally raided every electronics store in the Bay Area for a few days. Nobody could buy a USB cable in the Bay Area because we went and bought them all to put them in the car, literally. And there are hundreds of stories like that. So solving those constraints and a logistics problem that makes World War II look trivial — I am not kidding. The scale is insane. We are talking millions of cars, massive global supply chain, 50 countries, dozens of regulatory regimes. It’s insane, so yeah.

Thank you. And the last question from institutional investor is, Master Plan Part Deux talks about an urban transport vehicle that is smaller than a traditional bus with greater areal density achieved by removing the central aisle. Do you have any update to share on that goal?

Not at this time.

Okay. Thank you very much. So let’s move to analyst Q&A.

Thank you. First question is from Pierre Ferragu with New Street Research. Your line is open.

Hi, guys. Thanks so much for taking my question. I’d love to get, based on what you presented at Battery Day in the last six, seven months, how much progress you have made on that front, first in terms of process development. How are things coming together on your pilot line? Are you getting to the kind of production throughput you are aiming for? And second, on production ramp: in which size are you ramping production capacity for the 4680 cell and where do you stand on ramping up that capacity as well? And I have a quick follow-up on energy as well if that’s possible.

Well, so we have the — and Andrew can add to this — but we have a small pilot plant, which is still big by normal standards. We expect to have about a 10 gigawatt-hour per year capability in Fremont, California. And we made quite a few cells. We are not quite yet at the point where we think the cells are reliable enough to be shipped in cars, but we are getting close to that point. And then we have already ordered most of the equipment for battery production in Berlin and much of it for Austin as well. So we really don’t fix the nitty-gritty elements publicly. But overall, I think we still feel quite optimistic about achieving volume production of the 4680 next year. What do you think?

Yes. I think, Pierre, just one thing I’d add is, there’s been a lot of questions about yield. The yield progress isn’t really strong every day and we were still in commissioning phases. We were still in commissioning phases with most of the tools to the point where we were confident that the yield trajectory aligns with our internal cost projections. We did talk about yield also at Battery Day, which is one of the reasons why it’s useful to check in on that. It takes a while, as Elon just mentioned, to go from prototype to production and it’s not just parts, it’s processes, it’s equipment. But as we have matured the process equipment, we have gotten to where we need to be on the yield side.

Yes. And basically, this is just a guess because we don’t know for sure, but it appears as though we are about 12, probably not more than 18 months away from volume production of the 4680. Now at the same time, we are actually trying to have our cell supply partners ramp up their supply as much as possible. So this is not something that is to the exclusion of suppliers. It is in conjunction with suppliers. We want to be super clear about that. This is not about replacing suppliers. It is about supplementing suppliers. We have a very strong partnership with Panasonic and LG and other cell suppliers. Our request to our strategic partners for cell supply is: please supply us with as much as you possibly can. Provided the price is affordable, we will buy everything that they can make.

Yes. And specific to that, we are on track to more than double supplier capacity over the next 12 months.

Okay. And I had a quick follow-up on energy as well. I understand the negative gross margin with Solar Roof ramp, but what do gross margins look like in Storage and where is your ambition for gross margin in that business? It’s going to grow in the mix in coming years, so important for long-term modeling.

Yes. We are seeing a lot of progress. We are aiming for comparable margins in storage as in vehicles. But it is important to bear in mind that vehicles are more mature than storage, so we are already at good margins with the Powerwall, but some additional work is needed for the Megapack to achieve our targets.

Yes. Sorry, just jumping in. Elon is right. Powerwall is mature. We have been producing Powerwall 2 for three years now and we are at good margins there, but Megapack has more room to go to achieve our targets. We have a clear runway for improving the cost per megawatt-hour for the Megapack.

Thank you. Let’s go to the next question, please.

From Rod Lache with Wolfe Research. Please go ahead.

Hi, everybody. I was hoping maybe you could talk a little bit about how you are thinking about the rollout of version 9 of FSD and the transition to subscription models. It sounds like some of this is about to roll out next month. I am not sure if that’s just the subscription model. Could you spend a little time talking about how impactful you expect that to be?

So go ahead, Zach.

Yes. We are working on getting FSD subscription out. There are a couple of internal technical dependencies, but from a business model perspective that’s aligned and we are hoping to roll that out soon. The key thing I would say is there’s a lot of potential for recurring revenue based on an FSD subscription. If you look at the size of our fleet and you look at the number of customers who did not purchase FSD upfront or on a lease and maybe want to experiment with FSD, this is a great option for them. One of the things we will need to keep an eye on is a potential transition from cash purchases of FSD over to FSD subscription, and so there could be a period of time in which cash reduces in the near-term and then as the portfolio of subscription customers builds up, then that becomes a pretty strong business for us over time. But we are hoping to get this launched pretty soon and see what the response is to it.

Okay, great. And I was hoping, Zach, maybe you could talk a little bit about OpEx. It was a noticeable increase, even excluding SBC. A lot going on this quarter. Can you talk about how we should be thinking about that going forward?

Sure. On the R&D side, as I mentioned in my opening remarks, there’s a convergence of a series of programs and our R&D OpEx spend correlates to where we are in the product lifecycle in different programs. We are at the tail end of investments in what we call internally Paladium, which is the new Model S and Model X, so we expect that to decrease over time, but it was high in Q1 for a lot of the reasons Elon mentioned. We are also getting very heavy into 4680 development that Drew and team are working on and the associated structural battery pack. These are new technologies, not only new to Tesla but new to the industry, and so we are investing heavily on the R&D side to work out those kinks. Spend in those areas should continue as we work through development. Then I also mentioned Dojo and the potential there — neural net investments and custom silicon investments continue to be areas where we spend. On the SG&A side, the business is pivoting very quickly to be global and China is ramping quite quickly, and we are trying to stay ahead of volume so we have the right sales capacity, store capacity, local investments and IT to manage the growth. Overall, as we look at OpEx as a percentage of revenue over the course of the year, we expect to see a substantial drop from 2020 to 2021 as volumes in the latter part of the year pick up.

Thank you. Let’s go to the next question, please.

We have Dan Levy with Credit Suisse. Your line is open.

Hi. Good evening. Thanks. Two questions. One is on COGS: from Battery Day we got a feel about potential for COGS reduction related to Powertrain. But what is the path to reducing COGS ex-Powertrain? What levers do you have to reduce COGS ex-Powertrain? Is it more scale, better supply pricing, ongoing cost reductions?

I think all of the above.

Yes. On the vehicle side, there’s plenty of opportunity as well. Building a car like a Model S is quite complex and has various moving parts. Model 3 and Model Y were steps of improvement in that. But when you look at some of the other advancements that we are including in the Model Y factories into Austin and Berlin, we have reduced the body pound by as much as 60%. Part count matters and part cost matters. We continue to find optimizations there as well as we get economies of scale. When we start to talk about volumes, we are considering worldwide production with four factories building the same vehicle. So both design improvements and scale will improve our COGS and the Powertrain continues to be integrated into that.

Great. And then as Berlin and Austin ramp, how should we think about the comparison of Fremont versus the new capacity? Fremont is non-optimized because you bought the old NUMMI facility and had to retrofit. Can you give a sense of how the new capacity will differ versus Fremont and how much that adds up to improved COGS over time to help achieve that $25,000 vehicle?

Yes. We always talk too much about future product development. Earnings calls are not the right place for us to make a major product announcement, so we will get there and provide more detail later.

All right. Thank you very much. Unfortunately, this is all the time we have for today. Thank you very much for dialing in and for listening, and we will speak to you again in about three months. Thank you.

Thanks. Thanks, everyone.

This concludes today’s conference call. Thank you for participating. You may now disconnect.