Good day and thank you for standing by. Welcome to the Tesla Second Quarter 2021 Financial Results and Q&A webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Martin Viecha, Senior Director of Investor Relations. Please go ahead.

Thank you. And good afternoon, everyone. And welcome to Tesla's Second Quarter 2021 Q&A Webcast. I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q2 results were announced at about 1 PM Pacific Time, in the update deck we published 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 and 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?

Sure. To recap, Q2 2021 was a record quarter on many levels. We achieved record production, deliveries and surpassed over $1 billion in GAAP net income for the first time in Tesla history. I'd really like to congratulate everyone at Tesla for the amazing job. This is really an incredible milestone. It also seems that public sentiment towards EVs is at an inflection point. And at this point, I think almost everyone agrees that electric vehicles are the only way forward. Regarding supply chain, while we're making cars at full speed, the global chip shortage situation remains quite serious. For the rest of this year, our growth rate will be determined by the slowest part in our supply chain which is a — there's a wide range of chips that are at various times the slowest part in the supply chain. I mean, it's worth noting that if we had everything else, if we had vast numbers of vehicles themselves, we would not yet be able to make them — everything except the chips, we wouldn't be able to make them. The chip supply is fundamentally becoming a factor on our output. It is difficult for us to say how long this will last because we don't have — this is out of our control, essentially. It does seem like it's getting better, but it's hard to predict. In fact, even achieving the output that we did achieve was only due to an immense effort from people within Tesla. We were able to substitute alternative chips and then write the firmware in a matter of weeks. It's not just a matter of swapping out a chip. You also have to rewrite the software. It was an incredibly intense effort of finding new chips, writing new firmware, integrating with the vehicle and testing in order to maintain production. And I'd also like to thank our suppliers, who work with us. And there have been many calls, midnight, 1:00 AM, just to deal with suppliers in resolving a lot of the shortages, so thanks very much to our suppliers. Let's see. In terms of FSD subscription, we were able to launch a Full Self-Driving subscription last month. And we expect it to build slowly, but then gather a lot of momentum over time. Obviously, we need to have the Full Self-Driving feature widely available for it really to take off at high rates, and we're making a lot of progress there. So yes, I think FSD subscription will be a significant factor probably next year. Regarding Giga Texas and Giga Berlin, we're actually doing this earnings call from Giga Texas. We're in the factory right now, doing this earnings call. And the team has made incredible progress here. You can see the pictures online, and see that there was basically nothing a year ago and this is a mostly complete large factory a year later. So really great work by the Giga Texas team. And then also great work in Berlin, out in Brandenburg, with the team there. We expect to be producing the new design of the Model Y in both factories in limited production later this year. It's hard to explain to people who have not been through the agony of a manufacturing ramp why you can't just turn it on and make 5,000 a week. This is — it is so hard to do manufacturing, it is so hard to do production. To the best approximation, there are 10,000 unique parts and processes that have to work. And the greater growth of production goes as fast as the least lucky and dumbest of those 10,000 things. And a bunch of them are not even in our control, so it's insanely difficult. I'm fond of saying that prototypes are easy and production is hard. And arguably, the really remarkable thing that Tesla has done is not to make an electric car or to be a car startup because there have been hundreds of car startups in the U.S. and outside the U.S. so the thing that's remarkable is that Tesla didn't go bankrupt in reaching volume production. That's the amazing part, because everyone else did. Because they all thought the prototype or the idea was the hard part and it is not; it is trivial by comparison with actual production. It's always worth noting that of all the American car companies, there are only two that have not gone bankrupt, and that is Ford and Tesla. The seeds of defeat are sown on the day of victory. And we must be careful that we do not do that. If you look at history, so often the Caesars beat us on the day of victory. We will endeavor not to make that the case at Tesla. The Model Ys made in Texas and Berlin will look very much like the Model Ys we currently make, but there are substantial improvements in the difficulty of manufacturing. For example, the Model Y made here and in Berlin will have a cast front body and a cast rear body, whereas the one in California has a cast rear body but not a cast front body. We're also aiming to do a structural pack with 4680 cells, which is a mass reduction and a cost reduction. But we're not counting on that as the only way to make things work. We have some backup plan with a non-structural pack and 2170s, essentially. So at scale production, we obviously want to be using 4680s and a structural pack. From a physics standpoint, this is the best architecture, and from an economic standpoint, it is the lowest cost way to go, so the lightest, lowest cost. But there's a lot of new technology there so it's difficult to predict with precision when it will work and when you reach scale production. And Drew is going to talk a bit more about the 4680 production. We are making great progress on the 4680 cells, but there is a tremendous amount of innovation that we're packing into that 4680 cell. And so it's not simply a minor improvement on state-of-the-art. There are, and we went through this on the battery cell day, really half a dozen major improvements and dozens of small improvements. So I think it will be great. But it's difficult to say when the last of the technical challenges will be solved. In conclusion, our team continues to make huge efforts to make our factories run at full speed, which is very difficult. We have had some factory shutdowns due to parts shortages. And we hope those will be relieved in the coming weeks and months. We're making great progress on Full Self-Driving. Some of the progress is not easy to see because it's at the foundational software level. And so it's been sort of two steps forward, one step back. But over time, doing two steps forward, one step back, and keep going, you do move forward. I'm highly confident that the cars will be capable of Full Self-Driving. If they have a Full Self-Driving computer and the cameras, I'm confident that they will be able to drive themselves with safety levels substantially greater than that of the average person. Once again, thanks to all of our employees, for making this a breakthrough year for Tesla and an incredible quarter. Thanks, guys.

Thank you very much. And we have some follow-up remarks from Zachary Kirkhorn.

Yeah, thanks Martin. And thanks, Elon. Just to reiterate, Q2 was a great quarter for the Tesla team, with a strong improvement across the business. In particular, auto gross profit and margin, excluding credits, increased substantially. This was primarily driven by better cost optimization across our factories, good execution against our cost reduction plans, as well as increases in production and delivery volumes. There was some benefit from pricing actions, mostly in North America, however, it was small in the context of the other contributors. Note that the Model S and X program was at a slight loss for the quarter due to the relatively low volume. And supply chain challenges, including expedites, continue to provide cost headwinds. Additionally, it's encouraging to see the progress made on profitability within our energy and services and other businesses. While there's some benefit to looking at our progress quarter-over-quarter, I find it more helpful to look at progress over a slightly long-term horizon. Over the last two years, our vehicle delivery volumes have more than doubled. This volume increase was made possible by a steady decrease in ASPs of more than 10%, driven by a roadmap to increase affordability and shifting mix towards our more affordable vehicles. Yet over that same period of time, our auto gross margin, excluding credit, has increased nearly 10 percentage points to our highest yet since the introduction of Model 3. This is only possible because our average cost per vehicle has reduced by more than the reduction in average price. This is a remarkable achievement in the context of the volume growth and ASP reduction as mentioned and a testament to the hard work by the Tesla team. Additionally, OpEx as a percentage of revenue has declined, and in particular SG&A, representing the work we've done to become more efficient as we scale the Company while still making the required R&D investments to support our future. As a result, our GAAP Operating margins have risen from negative to double-digit in line with what we have guided. By managing our overhead costs and driving higher volumes, our P&L is benefiting from the marginal profitability of each incremental unit, or said differently, we are recognizing the benefits of scale and improved fixed cost absorption. With strong operating cash flows and cash balance, we are putting that cash to use. Capex continues to tick up, primarily driven by capacity investments in Austin, Berlin, and Shanghai. Additionally, each quarter we are using our cash to retire legacy debt, which was taken on at a time when interest rates and Company growth expectations were much higher than in today's environment. As I've mentioned before, our 2021 volumes will skew towards the second half of the year as we push for continued sequential increases in volume. Despite the great work so far, managing the instability of the supply chain, these challenges remain and unfortunately increase in pain with the higher volume. As we work through the uncertainty, we want to ensure we do our best to manage customer wait time, as well as the impact these interruptions have on our employees and costs. And as Elon mentioned, volume growth will be determined by part availability as we have the factory capacity ready, and now we're in a strong demand position. I'm excited to see the progress made by the Tesla team, as we continue building the business and strengthening our financials. Thank you very much.

Great. Thank you very much, Zach. Now let's go through the retail investor questions on say.com. The first question from Robert M. is: Tesla's website still says Cybertruck production is expected to begin in late 2021. Can Tesla share more details on the current status of the Cybertruck and confirm if production is still on track?

That's okay.

Lars, do you want to?

Sorry, we cut out there for a second. Yeah, the Cybertruck is currently in its alpha stages. We finished basic engineering the architecture of the vehicle. With the Cybertruck, we're redefining how a vehicle is to be made. As Elon said, it carries much of the structural pack and large casting designs of the Model Y being built in Berlin and Austin. Obviously those take priority over the Cybertruck, but we are moving into the beta phases of Cybertruck later this year, and we will be looking to ramp that in production, and take it to Texas after Model Y is up and going.

Yeah, it's just worth reemphasizing the extraordinary difficulty of ramping production of large manufactured items. At the risk of being repetitive, it is essentially easy to make prototypes or even small volume production. But anything produced at high volume, which is really what's relevant here, is going to move as fast as the slowest of the roughly 10,000 unique parts and processes. You can have 9,999 working, but when just one is missing — we were missing, for example, like a big struggle this quarter was the module that controls the airbags and the seatbelts. And obviously you cannot ship a car without those. That limited our production severely worldwide, in Shanghai and at Fremont. It wouldn't have mattered if we had 17 different car models because they all need the airbag module so it's just irrelevant. In order for Cybertruck and Semi to scale to volumes meaningful for customer deliveries, we've got to solve the chip shortage working with our suppliers. People just want to say, why don't you just build a chip fab? Well, okay that would take us — even moving like lightning, 12 to 18 months. So it's not like you can just whip out a chip fab. This is like, 'yeah let's make the chip fab.' So some of these things are — anyway, it is quite a trial feeling with all of the constraints of scaling a large manufactured object. I think it may be the case that Tesla is scaling — I think we might be the fastest in history ever for scaling a large manufactured object. Maybe the Model T would have been comparable back in the day, of the Ford Model T. Probably the internet knows the answer, but I think we may be scaling a large-manufactured object at the fastest rate in history, or I would like to know who did it faster so we can learn from them. It's worth just noting that in the grand scheme of things, it's not bad. So, yeah. The Cybertruck — and Semi actually both are heavy uses of cell capacity so we've got to make sure we have the cell capacity for those two vehicles or it's kind of pointless. We can make a small number of vehicles, but the effect on cost if you make a small number of vehicles is the same. They would literally cost $1,000,000 a piece or more. There's a reason why you do things in volume production, which is to get the economies of scale and get the cost down. So we are looking at a pretty massive increase in cell availability next year. But it's not like on January 1 it comes through — it ramps up through the course of next year. But even without Tesla cell production, with our suppliers, we'll be able to deliver about twice as much cell output next year as this year. Drew, do you want to talk more about that?

Yeah given concerns over cells bottlenecking growth, our target is to grow cell supply ahead of the 50% year-on-year growth targets of the vehicle business, and also enable increased energy storage deployments.

Yeah.

So yeah, our cell suppliers are tracking to double their production in 2022.

It's worth noting that if you have a target of a certain number, that doesn't mean it happens as surely as night follows day. It's a target. So if there is some calamity in the world that interrupts the supply chain, then it will be less. But these contracts that we have with cell suppliers call for roughly a doubling of cell supply to Tesla in 2022. And we have to juggle these exponential — it's a whole bunch of exponential graphs overlaying on top of each other. And small changes in where you are on the x-axis of time can quite substantially change the area under the curve. So what we're thinking of doing, depending on circumstances, is basically overshooting on cell supply for vehicles, and then as we have say excess cell supply in one month or another, routing that output to the Megapack and Powerwall. By the same token, if we're prioritizing vehicle production and there's a shortage of cells for some reason, then we will throttle down Megapack and Powerwall production. So something's got to give, basically.

Or if there is a disruption in the vehicle production and we have an outlet for cell capacity.

Yes. Exactly. There is a tremendous amount of inertia in the supply chain. So if we said to the supplier, we want you to double cell output — well, even doing that in a year is very difficult. And that system has a tremendous amount of momentum. It is like a fleet of supertankers. It's insane.

Speaking of which, from a raw materials perspective, we offer long-term contracts to secure our supply chain to also enable this growth. We're not just looking at the suppliers, but upstream from there, which is more important.

Yes. As mentioned, things will move as fast as the slowest part in the entire supply chain, which goes all the way back to raw materials — lithium and nickel and that kind of thing. And there's somehow a misconception that Tesla uses a lot of cobalt, but we actually don't. Apple uses I think almost 100% cobalt in their batteries in cellphones and laptops. But Tesla uses no cobalt in our iron phosphate packs, and almost none in the nickel-based chemistries. On a weighted average basis, we might use 2% cobalt compared to say Apple's 100% cobalt. Anyway, it's really just not a pack that we expect to basically have zero cobalt in the future. I do think probably there is a long-term shift more in the direction of iron-based lithium-ion cells over nickel. I think probably we'll see a shift to maybe two-thirds iron, one-third nickel on that order. This is actually good because there's plenty of iron in the world. There's an insane amount of iron, but nickel is much less, and there's way less cobalt. So it is good for relieving the long-term scaling to move to iron-based cells, mostly. And I think long-term, possibly all stationary storage — Powerwall and Megapack — move to iron. This is most likely the case, since you do not need to transport it, and there's lesser volume constraints with stationary storage. So then nickel would be really for long-range road transports, ships, and aircraft, and that kind of thing.

Thank you. Let's go to the second question from retail, which is, Elon has said that Tesla will be opening up the Supercharger network to other EVs later this year. Can you share some more details on how this will be structured, will this be at select brands, or will they contribute to the growth of this network?

Yes. We're currently thinking it's a real simple thing where you just download the Tesla app and you go to Supercharger. And you just indicate which stall you're in. You plug in your car, even if it's not Tesla. And then you just access the app and say, turn on this stall that I'm in for how much electricity. And this should basically work with almost any manufacturer's cars. There will be time constraints. If the charge rate is super slow, then somebody will be charged more because the biggest constraint at the Supercharger is time — how occupied is the stall. And we'll also be smarter with how we charge for electricity at the Supercharger, so rush hour charging will be more expensive than when the site is underutilized because there are times when the Superchargers are empty and times when they're jam-packed. And so it makes sense to have some time-based discrimination.

Yeah. We've been doing that and it's been working and people are responding. It helps with utilization.

Yeah, exactly. In Europe and China and most parts of the world, it's the same connector for everyone, so this is a fairly easy thing to do. We developed our own connector, which, in my opinion is actually the best connector — it's small and light and looks good; up to our standard. So an adapter is needed to work for EVs in North America. But people could buy this adapter. And we anticipate having it available at the Superchargers as well if people don't sort of steal them or something.

We have a good solution to that.

Okay. So that's a historical constraint. But I think we do want to emphasize that it is our goal to support the advent of sustainable energy; it is not to create a walled garden and use that to bludgeon our competitors, which is sometimes done by some companies.

I think it's also important to comment that increasing the utilization of the network actually reduces our costs, which allows us to lower charging prices for our customers and make the network more profitable, allowing us to grow the network faster. That's the good thing there. And no matter what, we're going to continue to aggressively expand the network capacity, increase charging speeds, improve the trip planning tools to protect against site congestion using dynamic pricing, as Elon mentioned.

Yeah. Obviously, in order for this to be useful to other car companies' cars, we need to grow the network faster than we're growing vehicle output, which is not easy. We're growing vehicle output at a very high rate. So Superchargers need to grow faster than vehicle output. This is a lot of work for the Superchargers team, but it is only useful to the public if we're able to grow faster than Tesla vehicle output. That is our goal.

Thank you very much. And the third question is, Elon said 4680 cells aren't reliable enough for vehicles. Is this referring to cycle life degradation, or something else? Please update us on progress of 4680s and what still needs to be done to make them reliable enough for vehicles.

Really — this is not — we'll definitely make the 4680 reliable enough for vehicles, and I think we are at the point where, in limited volume, it is reliable enough for vehicles.

Yeah. It's not like a science problem, it's an engineering problem. It's not a question of if, it's a question of when. The team is 100% focused on resolving these limiting processes as quickly as possible.

Again, going back to limited production is easier — prototype production is easy but high-volume production is hard. There are a number of challenges in transitioning from small scale production to large volume production. Right now, we have a challenge with basically what's called calendaring, or squashing the cathode material to a particular thickness. It goes through these rollers and gets compressed. It's causing — it's denting the calendar rolls. This is not something that happened when the calendar rolls were smaller, but it is happening when the calendar rolls are bigger. So it's just like — we weren't expecting that.

On the reliability side, as Elon mentioned, we have successfully validated performance and the lifetime durability of the 4680 cells produced in Kato, and we're continuing ongoing verification of that reliability. We're actually accruing over 1 million equivalent miles on our cells that we produce every month. In our testing activities, the focus is very clear; we want high-quality cells for all of our customers. And we're just focused on the unlucky limiting steps in the facility. With the engineers focused on those few steps remaining, we're going to break through as fast as possible.

Meantime, we have a massive amount of equipment on order and arriving for the high-volume cell production in Austin and Berlin. But obviously, given what we've learned with the pilot plant in Fremont, which is really quite a big plant by most standards, we will have to modify some of that equipment, so it won't be able to start immediately. But it seems like, correct me if I'm wrong, we think most likely we will hit an annualized rate of 100 GWh a year sometime next year.

We'll have all the equipment installed to accomplish 100 gigawatt hours, and it's possible that by the end of the year we will be at an annualized rate of 100 gigawatt hours by the end of the year.

My guess is more likely than not we'll be above 50% of reaching 100 gigawatt hours a year by the end of next year on the annualized rate. It could shift by a little bit, but as Drew mentioned, nothing fundamental — just a lot of work.

And on the large roller question — on the anode side, the large rollers work great, no concerns. We're just learning as we go. The nice thing about having that facility on a fast-track was really de-risking the big factories. We've learned a lot. With each successive iteration, the ramp up and the equipment installation will be faster and more robust.

Alright, thank you very much. And the last question from retail is from Emmett. Can Elon do an interview with one of our YouTube channels once or twice a year? I would nominate David Lee on Investing or Rob Maurer's Tesla Daily channels as first possible candidates.

Yeah, I guess I'll do an interview. I mean, obviously if I'm doing interviews it takes time away from other work. Only so much time in the day. But I'll do it once. I won't do it annually, but I'll do it once. I think also that this will be the last time I'll do earnings calls by default; going forward I will most likely not be on earnings calls unless there's something really important that I need to say.

Okay. Thank you. And let's go to institutional questions. The first one, and we covered a lot of these already. Can you please update us on timelines for the startup production of Berlin and Austin Model Y, Cybertruck and the Semi. Do you expect the ramp of Cybertruck to be as difficult, as it is a new process?

I think Cybertruck ramp will be difficult because it's such new architecture. It's going to be a great product. It might, I think, be our best product ever. But there's a lot of fundamentally new design ideas in the Cybertruck. Nobody's ever really made a vehicle like this before. So there will probably be challenges because there's so much unexplored territory.

Thank you. I think question 2 and question 3 we can skip given we have already addressed them. I'll get to question 4. In 5 years time, how much faster or better could you be at manufacturing capacity expansion using your current pace? And what are the biggest issues you need to solve to get to that rate?

Well, like I said I think we might be the fastest growing Company in history for any launched manufactured item. Those who have not actually been involved in manufacturing ramp up just have no idea how painful and difficult it is. It's like you got to eat a lot of glass. For our manufacturing ramp, it's hard.

Yeah, I mean, I think if you look at the expansion we've done in Shanghai, that factory was built in less than a year and ramped in 5 to 6 months to full volume.

It took longer than that. It was about a year.

And when you consider cut-and-paste, we've repeated that in Fremont and elsewhere. But now with Berlin and Austin, we have new factories and new designs, and there's always challenges as you said, Elon, with new designs and ramping. But I think having teams in three locations — three continents — will definitely expand our ability and our capacity to grow more lines, rather than just having the one factory in Fremont that we had a year and a half ago.

For Shanghai, it's an incredible team built the factory in nine months but it took longer to actually reach high volume production — about a year. And when you put a factory in a new geography, in order for that factory to be efficient you have to localize the supply chain. So there's no such thing as cut and paste — it does not exist. It would be insane to produce in Europe and send vast numbers of parts from North America. You have to localize your supply chain and you're moving as fast as your least lucky, least good supplier. We go three or four layers deep in the supply chain. Frankly, I feel at times that we are inheriting all force majeure of Earth. So if anything goes wrong anywhere on Earth, something happens to mess up the supply chain.

I think the human capital growth though, having factories in Fremont, Shanghai, Berlin, and Austin, does a lot to hopefully maintain exponential growth.

Yeah. It also takes a while to hire and train people to operate a factory. A factory is like a giant cybernetic collective. And you can't just hire 10,000 people and have them work instantly. It's not possible. I really encourage more people to get involved in manufacturing. I think in the U.S. this has not been an area where many smart people have gone into. The U.S. has an over-allocation of talent in finance and law. It's both a criticism and a compliment. I'm not saying we shouldn't have people in finance and law, I'm just saying maybe we have too many smart people in those arenas. Manufacturing is fun. Manufacturing is great. It's very tangible, and obviously, you can't have stock unless someone makes it. That's how you get stock.

Okay. Thank you very much. And let's go to the last investor question. Does Tesla plan to offer more services beyond FSD or high-speed connectivity as part of its subscription bundle going forward? What areas in particular present an opportunity?

Yeah, we don't have a lot of ideas on this to be frank. Really, Full Self-Driving is the main thing. Things are obviously headed towards fully autonomous electric vehicles in the future. And I think Tesla is well-positioned and in fact is the leader objectively in both of those arenas — electrification and autonomy. The value of a fully electric autonomous fleet is generally gigantic; it boggles the mind. So that will be one of the most valuable things that is ever done in the history of civilization.

Thank you very much. And now let's go back to Analyst Q&A, please.

In the interest of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Colin Rusch with Oppenheimer. Your line is open.

Thanks so much, guys. Can you speak to the attach rates for FSD so far and where you're targeting in terms of the subscription levels?

Yeah, it's not worth commenting on right now, it's not meaningful. We really need Full Self-Driving, at least the Beta, to be widely available so anyone who wants it can get it. Otherwise, it'll be pointless to read anything into where things are right now.

And then just the follow-up there is about the regulatory environment keeping up with the technology. Are you seeing meaningful evolution in terms of the regulators really understanding the technology and beginning to set some standards here sometime in the near term?

At least in the U.S. we don't see regulation as the fundamental limiter. We've obviously got to make it work and then demonstrate that the reliability is significantly in excess of the average human driver for it to be allowed to be used without paying attention to the road. But I think we have a massive fleet. It will be straightforward to make the arguments on statistical grounds, just based on the number of interventions, especially in events that would result in a crash. At scale, it will have billions of miles of travel to be able to show that the safety of the car with Autopilot on is 100% or 200% or more safer than the average human driver. At that point, it would be unconscionable to not allow Autopilot because the car just becomes way less safe. It would be like the elevator analogy. Back in the day, we used to have elevator operators with a big switch to operate the elevator and move between floors. They get tired or maybe drunk or distracted and every now and again somebody would be injured between floors. That's kind of the situation we have with cars. Autonomy will become so safe that it will be unsafe to manually operate the car relatively speaking. Today you just get in an elevator, press the button for the floor you want and it takes you there safely. It would be alarming if those elevators were operated by a person with a giant switch. That's how it would be with cars.

Next question comes from Rod Lache with Wolfe Research. Your line is open.

Hi everybody. Your cost of goods sold per vehicle is already down to the mid $37,000 range in the quarter, down $5,000 year-over-year, despite some of the inefficiencies that you talked about. And I know that a lot is going to change from here given how mix is going to evolve. But if you're successful on the structural pack and front and rear castings and the launch of the 4680 cell, can you give us a sense of what a successful outcome would look like maybe a year from now? Obviously a lot has to go right. But any kind of broad framework for us to think about would be helpful.

Yes, it's really difficult for us to make specific predictions; it is very difficult. I think we feel confident of at least a few percent growth year-over-year next year. And maybe it's a lot more, but it's hard to predict exactly. It is literally impossible to make a specific prediction, but at least some growth and potentially much more depending on how things go.

Okay. And maybe just separately from this, can you just clarify what the status is of some of the advances in battery manufacturing, things like dry cathode mixing that you talked about on Battery Day? What's the timeline? How are those evolving?

We commented on it today already, but in the facility at Kato, over 90% of the processes have demonstrated rate there, but we are limited by the unlucky few that have not. That's what we're working on. One of them that Elon mentioned was running the full-scale calendar. We're working through some improvements that we need to make to that equipment and to the actual raw material itself to not have those limitations. But again, it's an engineering problem. It's not a question of if, it's a question of when. On the mixing side, we haven't actually had any challenges specific to your question. Fundamentally, we're still happy with the dry process direction in terms of factory footprint, complexity, energy consumption, space, and overall implications.

Yeah. We're going to have programs using dry cathode. It's not the Messiah; dry versus wet reduces cost, maybe around ten percent less cost than wet. So it's not insignificant, especially if you're making hundreds of GWh a year, but it's not a miraculous single solution.

Thank you very much. We can go to the next question, please.

Next question comes from Pierre Ferragu with New Street Research. Your line is open.

Thanks very much for taking my question. I have another question on batteries but from a slightly different angle. I was wondering how you're looking at your sourcing strategy for the 4680. You've talked a lot about all the work you're doing to develop your in-house production. But what about asking other battery manufacturers to do 4680 cells with their own technology? Maybe less innovation than what you guys are lining up internally. I was wondering if the first 4680 cells that we see on the road will definitely come from Tesla's own manufacturing lines, or whether they could come from outside suppliers as well. And I have a quick follow-up.

Yeah. We are in fact working with our existing suppliers to produce 4680 format cells. And this is just a guess right now, but I see us consolidating around a 4680 nickel-based structural pack for long-range vehicles, and then not necessarily a 4680 format but some other format for iron-based cells. Right now, we kind of have a Baskin-Robbins of batteries situation, where there's so many formats and so many chemistries that it's like we've got many variants. This results in an engineering drag where each variant of cell chemistry and format requires an amount of engineering to maintain and troubleshoot and this inhibits our forward progress. So it is going to be important to consolidate to maybe two or three formats, ideally two, and then just one nickel chemistry and one iron chemistry so we don't have to troubleshoot so many different variants.

Yeah, and there is an end where we are engaging with the suppliers that we've had good partnerships with on 4680 designs to enable that duplication; so far so good. They are working on it and are bringing their core competencies to bear on that. We're not mandating what's going on inside, but it's been a good collaboration.

Yeah. We do expect to see significant increases in supply from our existing suppliers in addition to the cells that Tesla's making. So it's both. Sometimes I get questions from our cell suppliers asking if we're going to make all the cells ourselves. We're like, no, please make as many as you possibly can and supply them to us. We have significant unmet demand in stationary storage. Megapack is basically sold out through the end of next year, I believe.

Yes.

We have a massive backlog in Powerwall demand; the mismatch between demand and production is huge. Part of that problem is also the semiconductor issue because we use a lot of the same chips in Powerwall as you do in a car, so it's like, which one do you want to make? Cars or Powerwalls? So we need to make cars, and that has reduced Powerwall production. But as the semiconductor shortage is alleviated, then we can massively ramp up Powerwall production. I think we have a chance of hitting an annualized rate of a million units of Powerwall next year, maybe on the order of 20,000 a week. But again, dependent on cell supply and semiconductors. In terms of demand, I think there's probably demand in excess of 1 million Powerwalls per year. And actually a vast amount of Megapacks for utilities as well as transitions to sustainable energy production. Solar and wind are intermittent and by their nature really need battery packs in order to provide a steady flow of electricity. When you look at all the utilities in the world, this is a vast amount of batteries that are needed. That's why in the long term we think combined Tesla and suppliers need to produce at least 1,000 GWh a year, and maybe 2,000 GWh a year.

Okay. Great. Thank you. And a quick follow-up. I know, Elon, you don't think it's meaningful today, but I'd be curious to know when you announced the new pricing on the FSD subscription at $199, how did that affect take rates? Did you see a very significant spike in the take rate among people who previously would have had to pay $10,000 up front?

Okay. What you're asking is whether the FSD take rate was too expensive and that's why we're doing subscription? I'm not sure if I understand your question correctly.

This is Zach. I think we're still early in understanding how FSD subscription will unfold. But a couple of data points: we looked at our backlog to see if customers who had ordered FSD canceled to instead go to subscription after they take delivery. The level of cancellations there was low; we're not seeing cannibalization there. It's possible that could change, but that was part of our pricing strategy at $99 and $199.

Any given price is going to be imperfect, so we'll just adjust it over time as we see what makes sense. We need to make Full Self-Driving work in order for it to be a compelling value proposition. Otherwise, people are betting on the future. Once we have Full Self-Driving widely deployed, the value proposition will be clear and I think basically everyone will use it — it could be rare for someone not to.

Okay. Thank you very much for your help. And I think that's all the time we have for today. Thanks for all your questions and we'll speak to you again in three months' time. Have a good day, everyone.

All right. Thank you.

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