Good afternoon, everyone, and welcome to Tesla's First Quarter 2023 Q&A Webcast. My name is Martin Viecha, and I'm joined today by Elon Musk, Zachary Kirkhorn, and several other executives. Our Q1 results were announced at about 3:00 P.M. Central 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. Please use the raise hand button to join the question queue. But before we jump into Q&A, Elon has some opening remarks. Elon?

Thank you, Martin. So just a Q1 recap. Model Y became the best-selling vehicle of any kind in Europe and the best-selling non-pickup vehicle in the United States. This is in spite of a lot of challenges in production and delivery. It's a huge credit to the Tesla team for achieving these great results. It is worth pointing out that the current macro environment remains uncertain. I don’t think I’m telling anyone anything new; people already know this, especially with large purchases such as cars. While we reduced prices considerably in early Q1, our operating margin remains among the best in the industry. We've taken the view that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin. However, we expect our vehicles, over time, will be able to generate significant profit through autonomy. We believe we are laying the groundwork here. It’s better to ship a large number of cars at a lower margin, then subsequently harvest that margin in the future as we perfect autonomy. This is an extremely important point. Regarding the Cybertruck, we continue to build Alpha versions of the Cybertruck on our pilot line for testing purposes. It's a great product, and we're completing the installation of the volume production line at Giga Texas, anticipating a great delivery event probably in Q3. As with all new products, it will follow an S curve, so production starts out slow and then accelerates. So the Cybertruck is no different. There is an enormous amount of demand for the product, obviously. I believe it is a fantastic product, a hall of famer. But as with all new products, it takes time to get the manufacturing line going. It is a very radical product. It's not made in the way that other cars are made. With regard to Megapack, we're making great progress. Our energy storage deployment reached nearly 4 gigawatt hours in Q1, by far the strongest quarter ever. This growth was achieved thanks to the ongoing ramp at our Megafactory in Lathrop, California. We still have some way to reach our target rate of 40 gigawatt hours per year. We additionally announced the start of a new Megafactory in Shanghai. As we've expected, the stationary storage growth will significantly exceed the vehicle growth. Regarding Autopilot and Full Self-Driving, we have now crossed over 150 million miles driven by Full Self-Driving beta, and this number is growing exponentially. This is a data advantage that really no one else has. Those who understand AI will understand the importance of data — of training data — and how fundamental that is to achieving an incredible outcome. We are also very focused on improving our neural net training capabilities as this is one of the main limiting factors in achieving full autonomy. We're continuing to make significant purchases of NVIDIA GPUs and also putting effort into Dojo, which we believe has the potential for an order of magnitude improvement in the cost of training. Dojo also has the potential to become a sellable service that we would offer to other companies in the same way that Amazon Web Services offers web services, even though it started as a bookstore. I really think that the Dojo potential is very significant. In conclusion, we're taking the view that we want to keep making and selling as many cars as we can. Despite this uncertain macro environment, this is a good time to increase our lead further, and we'll continue to invest in growth as fast as possible. Once again, I want to give a huge thanks to all Tesla employees worldwide who are doing an incredible job again. Yes, super appreciated.

Thank you very much. And Zach has some remarks as well.

Thanks, Martin. I want to start by congratulating the Tesla team for record vehicle production and deliveries. I also want to congratulate our energy storage team for record volumes as well. There are three main points I want to make. First, automotive gross margin and operating margin reduced sequentially. But as Elon mentioned, these remain at healthy levels. In particular, automotive gross margin was impacted by a few factors since our discussion on the last earnings call, including additional actions taken in the second half of the quarter to improve vehicle pricing and one-time items, most notably warranty adjustments on older S and X vehicles, as well as increased deferred revenue for certain Autopilot features as we transition technologies. Progress on vehicle cost reduction continued in Q1 with meaningful improvements on logistics and the beginnings of some commodity cost reductions starting to be realized. Per unit cost for Austin and Berlin improved as well, driven by record volumes. However, these factories still provide a margin headwind and will likely continue to do so until after we reach and stabilize at our intended volumes. Note that Q1 was our third quarter in a multi-quarter plan to move to a more regionally balanced mix of builds and deliveries. As I've mentioned previously, this results in lower deliveries and production within a quarter due to a higher volume of cars in transit at the end of the quarter and has an associated impact on quarter-ending free cash flows. This was particularly prevalent in Q1 for S and X as we began exporting cars for international deliveries. Second, our storage business is starting to take shape, and this is exciting to see after many years of investment and focus. This business is growing as a percentage of the company's revenue and reached its highest level yet in Q1, driven by an increasing rate of deliveries for our Megapack products. We are also making progress on storage profitability, generating our highest gross profit yet in the quarter. Third, I want to reiterate the philosophy by which we're operating the business this year. Our approach is to grow volumes as quickly as possible in both our vehicle and energy businesses. We plan to continue to invest heavily into our future plans, which include the Cybertruck next-generation platform, in-house cell production, energy storage business, and our autonomy and AI-enabled products. We plan to do this while keeping the business financially healthy and industry-leading. To accomplish this, we need to remain focused on cost efficiency and working capital, and in particular, unwinding the strategic inventory buildup leftover from the pandemic. I want to conclude by thanking the Tesla team again, as well as our suppliers and customers.

Thank you very much. And let's go to investor questions on say.com. The first one is what is the process to make auto pricing adjustments? What variables do you consider? How frequently do you review pricing?

Do you want to take that, Elon, or do you want me to take that?

My apologies. Sorry, I was on mute. Yeah, I think this is not something we can really talk about. We do our best to evaluate production output, macroeconomic conditions, and make a decision. But unless there's something you'd like to add, Zach.

I think that's right. I mean, as a team, we review where we stand globally on a weekly basis, and certainly, I can't get into the details of the reasons why certain decisions are made. But it is something that's very actively managed by a subset of the leadership team.

Thank you. The second question is, do you still believe Tesla Energy will be bigger than auto? And when will you provide more formal guidance on Megapack and overall Tesla Energy?

Yes, I should just clarify — like bigger than auto from the standpoint of like total gigawatt hours deployed. So it's possible automotive revenue may be higher, but gigawatt hours, I think will probably be higher with stationary storage. If you look at what's needed to transition the world to a sustainable energy economy, there is more stationary energy storage needed than there is mobile energy storage. We are seeing growth in our stationary storage well in excess of automotive, so that is in line with expectations.

And on the guidance part of the question, and maybe, Martin, we can combine this with the next question, which is on guidance for margins. I think we will get to the point where as a company, we provide guidance on the storage business. I say storage is a combination of both the Megapack and Powerwall business. Relative to total revenues of the company, it's still fairly small. The business has a lot of volatility currently, both in terms of volumes and financials, given the small volumes and diversification of the customer pool there. But as this business grows and smooths out, I don’t think we're that far away from it. I think including these volumes on our day two production and deliveries release is something we'll start doing, and then we can talk more formally as a business about our expectations over the coming year. I think it will be a few more quarters before we get there.

Thank you. The next question, as you said, was already answered, so let's go to the battery question.

Sorry. Just one other thing I wanted to mention on margin. While we're not providing specific guidance there, just to set expectations of where we think this business will go in terms of margins, probably generally in the ballpark of what we've seen historically on the vehicle business. We generally look to mid-20% gross margins for any program that we launch. We're not there yet on this business, but that's what we're working towards.

We're hopeful to get there later this year, but that's not a promise; that's an aspiration.

Thank you. The next question is, how well are 4680 cells meeting the expectations described on Battery Day? How long will it be until the cells meet those goals? Drew?

Yeah. So on Battery Day, we established a cost-down roadmap through 2026 across five areas of effort. There was the cell design we discussed, anode and cathode materials, the structural pack concept, and the cell factory itself. We've been making progress across all these aspects since then. For the cell factory, the Texas 4680 factory is partway through building and commissioning, and selling and operating will be 70% lower CapEx per gigawatt hour than typical cell factories when fully ramped, in line with what we described on Battery Day. We're continuing to further pursue densification and investment reduction opportunities in future factory build-outs like in Nevada. On the cell design, we're in production with not only the first generation tablet cell we unveiled on Battery Day, but also a second more manufacturable version in Texas today. On the cathode materials side, we have several activities underway per the Battery Day roadmap. For lithium, our Corpus Christi Lithium refinery breaks ground this May. Our goal is to start commissioning portions of the facility before the end of the year. The refinery uses the sulfate-free spodumene refining process with reduced process costs, no acid or caustic reagents, and lower embodied energy. It actually produces a beneficial byproduct that can be repurposed in construction materials. We discussed all these concepts on Battery Day. Same with cathode precursor; we've successfully demonstrated lower process cost, zero wastewater precursor process that we described on Battery Day at both lab and pilot scale and are in the detailed design phase for incorporating this technology into the front end of our Austin cathode facility. On cathode production, we are 50% equipment and 75% utilities installed at our new cathode building in Austin, with our goal to begin dry and wet commissioning this quarter and next quarter, targeting to produce first material before the end of the year. Structural pack, we saw big improvements with pack manufacturing with the 4680 cell and the structural pack concept, resulting in a 50% lower CapEx and a 66% smaller factory for the same output in gigawatt hours per year. We believe the structural concept is a good one; it’s simpler. We'll continue to structurally load the cells and use the pack as the floor of the vehicle while iterating the design to closer to B-level execution of this A-level architecture in future programs. Zooming out for the 4680 team, Q1 was all about cost and quality. We made significant improvements in both areas. Texas production increased 50% quarter-over-quarter, through yields increased 12%, and peak rate increased by 20%. Altogether, the team accomplished a 25% reduction in COGS over the quarter, and we are on track to achieve steady-state cost targets over the next 12 months. Going forward for the rest of the year, the priority, one, is yielding cost for the 4680 program as we steadily ramp production ahead of Cybertruck next year.

Thank you very much. The next question is, what do you anticipate 2023 automotive gross margins excluding credits will be at the company's current pricing levels?

Yes, I can start off on this one. This is a difficult environment to make a projection like this. There's a lot of macro uncertainty, with both headwinds and tailwinds at play. This question involves viewpoint on where costs will go. Within costs, there's a set of costs we control and a set of costs we are subject to, based on what the macro world is doing. Within the bucket of things we control, most of the cost-down work is around ramping our Austin factory, stabilizing that, and then doing cost optimization work once we reach our intended volumes there. A part of the cost journey in Austin, as Drew mentioned, is the 4680 cell, which is an input into our Austin COGS. As the 4680 program improves over the course of the year on cost, as Drew mentioned, and then the non-cell portion of the factory improves, we see a pretty good trajectory in the Austin facility. A similar story exists in the Berlin factory. It does not have 4680 as an input, but for that factory, the journey to complete localization is still ongoing. Throughout this year, as volume increases and more localization occurs, we see a good path to cost reduction in the Berlin factory as well. For existing factories, we talk about this on every call, so I don't need to rehash it, but the expectation is that every existing factory improves on all key metrics, and we continue to see progress there. There's also a handful of other costs we have influence over, but the philosophy is that we're aggressively addressing every cost bucket we can. Within the world we don’t control, the two major costs are logistics and commodity prices. Fortunately, logistics is moving in our favor, and I think our supply chain team has done a great job in logistics optimization and taking advantage of reduced spot rates where they can.

Lithium has dropped a lot. It's worth mentioning that the price of lithium has dropped significantly.

Yes, and that's the piece we expect to see more impact on in Q2. Generally, as a company, we expect commodity prices to come down and have a more meaningful impact in the second half of the year.

Yes.

So this is our approach. How that nets out is a lot of risk, and we'll have to see how the year progresses.

Thank you. The next question is, how has global order intake tracked since the most recent round of price cuts?

I think the overall thing we can say is that orders are in excess of production.

Thank you. And maybe the last question from investors, can you give updated specs and pricing for Cybertruck and any new features that will make it to production?

Well, I think we'll save that for the Cybertruck handover, which will hopefully be around the end of Q3 this year. One thing I am confident in saying is that it’s an incredible product, it's a hall of famer, I think. A product like this only comes once in a long while, so it will not be disappointing at all. It's amazing.

Great. Thank you very much. And let's go to analyst questions. We'll start with Alex Potter from Piper Sandler. Alex, go ahead and unmute.

Can you hear me?

Yes.

Yes.

Okay. Perfect. So, first question was on Lathrop. Obviously, that's great to see the growth there. Just wondering when you think that facility might be closer to full utilization? Are you just sort of deliberately working your way up the S curve there? Demand, obviously, isn't the limitation. What are the steps, I guess, to unlocking full utilization there?

Sure. There are some classic factory ramp aspects of what's going on in Lathrop. We actually had two phases of CapEx there. We phased some of the general assembly parts of the facility. Additionally, we have ramps with our suppliers that we are following, both on the sell side and on the power electronics side. We will see that unlock in the latter half of this year with both those inputs. The overall facility was phased with the second phase of CapEx coming online towards the end of this year.

Okay. Great. And then I guess my second question is on your ability to serve other markets out of Shanghai. Obviously, the facility in Berlin should be opening up your ability to allocate more vehicles to Southeast Asia, Australia, and other areas. I'm just wondering what other regions do you think you're maybe not yet serving effectively? What are your timelines for addressing some of those gaps in your regional exposure? Thanks.

Yes. That's a good question because there are still many parts of the world that we do not yet serve with respect to vehicles, especially. We do expect to open up new markets around the world. While those markets are not necessarily individually gigantic, they do add up collectively into something significant. It's high time that Tesla operates its cars in the rest of the world, and that is something we intend to do.

Okay. Thank you very much. Let's go to the next analyst, George from Canaccord. Go ahead and unmute.

Hi. Thanks for taking my question. I was wondering, first, if you could discuss your FSD take rates and whether you've seen any significant positive or negative change there? Given that you've reduced the prices for your vehicles, do you think you need to do that for FSD as well? Thanks.

Well, I can address the details on the FSD take rate, but it’s a tricky pricing question because the value of an autonomous car is enormous. The price right now is an option value on an autonomous vehicle, and that value will ultimately be very significant. For those using the FSD beta, the improvements are really quite dramatic. There’ll be a little bit of two steps forward, one step back between releases for those trying the beta, but the trend is very clearly toward full self-driving and full autonomy. I hesitate to say this, but I think we’ll achieve it this year.

Thank you. Maybe on the dramatic change we’ve seen in EV-related commodity prices. Do you think it's a reflection of any recent overcapacity in mining and refining, or is that a coincident indicator on global EV demand? How do you expect those prices to track over the next several quarters? Thank you.

Man, I wish I had a crystal ball to answer your question. I don't know if we can provide a valuable answer. I think we're in uncertain times. If somebody has a crystal ball they can lend me, I'd really like to borrow it. My guess is we're in an economic situation for about a year or so. If we hold roughly for 12 months, then — provided there are no major geopolitical wildcards that show up — things will start getting sunny around spring next year.

The only thing I would say on the EV materials markets is that they're not all super liquid, and for some of them, like less than single-digit percentage of the market has actually traded on the spot market. Not only are they not super liquid, storage isn't particularly fast for all materials, which means small mismatches in supply and demand can drive large price swings, although they're not real price swings, just temporarily large price swings. So, it's hard to read into those price swings.

Yes. This is Karn, by the way. We are seeing, as Elon mentioned, quite a bit of softening in the lithium carbonate market. Six months ago, we were trading at about $85,000 a ton, and today's spot price is about 26%. There's been a dramatic decrease in that. We were able to take advantage of low lithium pricing earlier on with fixed-price contracts. This is going to be another opportune moment to extend that into the later half of the decade. Due to the quantities we're procuring, we're not as impacted by the spot market since we have those contracts in place, and we plan to continue doing more of that. Additionally, because of the price spike, many companies within this business are becoming more ambitious about finding upstream resources and exploring locations in Africa as well as South America. This is also helping the macro situation with pricing.

Just to emphasize, the choke point is much more on refining capacity than it is on mining. The theme is very common throughout the world, including the US; lithium is a very common element on earth, so it’s much more a question of where the refining capacity is and whether it can keep up. That’s what matters more than where the lithium ore is. I think that same question extends to refining of the cathode and to some degree, refining of the anode. This is why we, at Tesla, are building our lithium refinery capability at Corpus Christi and our cathode refinery outside Austin. It's worth noting that we will have, by far, the most lithium refining capability and most cathode refining capability in North America, probably more than all others combined by a lot. Hopefully, other companies will do the same. We truly wish others would step up in this regard instead of focusing on picture-sharing apps.

It’s fun. It’s actually fun.

Exactly. For real.

That's why we are here, ready to buy.

Tesla is not famous because we want to do this. We have a lot of fish to fry, obviously, but we are doing it because others aren’t doing it, and we wish others would do it.

Awesome. Thank you very much. Let's go to Emmanuel Rosner from Deutsche Bank.

Can you hear me?

Yes, we can.

Perfect. Thank you for taking my questions. A first question for Elon, on your pricing strategy. If I understand your message, you’re saying Tesla feels it's worth maximizing the volume, increasing the size of the fleet as fast as you can because you'll be able to monetize this over the vehicle's lifecycle. Could you be a little more specific about ways you would be able to monetize this existing fleet in the future? Autonomous seems to be a big piece of it, but my understanding was that robotaxi would probably be for the next-generation vehicle, not the existing ones. In which ways would you monetize it?

Sorry, the robotaxi terminology can be a bit confusing because that's a generic term for our next-generation vehicle. We are working on a next-generation vehicle that will be very compelling. It's just not the time to talk about it in detail. We internally call it robotaxi, but all of the vehicles with Hardware 3, which is the vast majority of our fleet, will achieve full autonomy. So there will be a Model 3 or Model Y that would serve as a robotaxi, a robotic taxi. To the best of my knowledge, we believe the current hardware can achieve full autonomy.

Understood. Then maybe a question for Zach. Back on automotive gross margins. A few months ago, even after major price cuts, you felt strongly that 20% automotive gross margin was probably a reasonable floor. Obviously, the macro has deteriorated and additional price cuts have happened. Is there anything else that has changed in terms of the outlook? Is it just the macro deterioration or the competitive landscape? Anything else that has made you think differently around the full year? Is there a way, therefore, to frame a floor?

About half of the miss against that previous conversation last quarter is attributed to adjustments we made in pricing in the second half of the quarter. You could argue that that lowers the floor. We also made pricing adjustments so far this quarter. So that brings it down further. About the other half of the miss in Q1 was attributed to nonrecurring factors I mentioned in my opening remarks, notably a warranty adjustment for cars previously produced but not part of the pedigree of cars we're building now, along with some autopilot-related deferrals as we make some technology changes. These two factors are not repeating, so hopefully, that helps answer your question.

There are really two macro factors that are tricky. The biggest one being the interest rate. When the Fed raises interest rates, that is essentially equivalent to increasing the price of a car. It makes cars less affordable because people are limited by what they can afford on a monthly basis. This basically means every time the Fed raises the rates, it's almost directly equivalent to a price increase. Additionally, whenever there is economic uncertainty, people tend to postpone large capital purchases like a new car. This is a natural human reaction. If people are reading about layoffs and difficulties in the economy, they may feel they could be laid off, making them hesitant to buy a new car. This is just the nature of the auto industry. There will also be a transient amount of pent-up demand for new cars, which goes through cycles.

Thank you. Let's go to Ben Kallo from Baird. Ben, go ahead and unmute.

Hey guys. When you talk about manifest supply, you mentioned Dojo being a product you could sell outside of Tesla. How do we rank all the things you have going on in the economic environment? I mean, like heat pumps and everything else versus investing in the vehicle business, or is that not the right way to look at it?

I'm not sure I fully understand your question, but I'd categorize Dojo as a long-shot bet. If it pays off, it will do so in a very big way — potentially in the multi-hundred billion dollar range. It's a long shot with a multi-hundred billion potential outcome. So it's a bet worth making, but not one you can firmly rely on. Regarding heat pumps, we have a really good technology for homes and commercial offices, but it remains a back-burner item. Our focus is on vehicles, autonomy, and stationary storage; basically solving sustainable energy. If we can have a fleet of several million vehicles that, with a software update, can be potentially worth several times their original value, that would be, if it happens, the most significant asset value increase in history, I believe.

Thank you. Moving to pricing, many pundits talk about gaining or losing share. How do you look at pricing in relation to EVs or priced vehicles? Does that factor into your equation? Sorry to ask another question on pricing.

It's really just like — every day, we get a daily real-time update of how many cars were ordered yesterday and how many cars were produced yesterday. If there’s a company that has better real-time data than Tesla, I’m not sure there is one. We don’t rely on the typical process where other companies make cars, send them to dealers, and then wait to see how many cars were sold. We know precisely how many cars were ordered on a daily basis across the globe. Our fingers are on the pulse in real-time without latency, while others have a lot of latency in their data. We look to achieve a clearing price for our vehicle production, make pricing changes, and instantly see the effects on production. We adjust course as needed, and on balance, I believe our decisions are quite good. Sometimes they'll be down, but overall, I think they're better than the rest of the industry.

Just to add on the question about EV market share or ICE, this comes up a lot. Most of the public debate revolves around EV market share, but we don’t see it this way. We view it as the global car market, stressing that the mission of the company requires internal combustion engine cars to be switched over to electric vehicles. That’s what we pay attention to.

Yes, I’ve said that before. We should stop viewing this as the EV market; it should be about how many cars we’re selling. All cars will transition to EVs. Looking back, assuming civilization is still around in 20 years, we will reflect on internal combustion engine vehicles differently — like steam engines, a collector's item in a way. That's how gasoline cars will be perceived in the future.

Thank you. Let's go to Colin Rusch from Oppenheimer. Colin, go ahead and unmute, please.

Thanks, everyone. Can you talk a little about how much of the actual cost structure is variable on these vehicles? If you could give us a range on plus or minus in terms of the lithium cost within those contracted volumes that you're seeing?

I think we would love to have a crystal ball here, but we don’t. Depending on the time scale in question, most of the costs are variable. I think we will see improved costs from suppliers, yes, that is our expectation.

We're already starting to see that; Elon you mentioned before that we anticipated a decline in lithium prices, and some of that has flowed through to battery costs. The same will happen with lithium hydroxide. Supply chain length matters here as we’re talking about issues upstream, so by the time it impacts the battery that goes in the car, it can take several months. Beyond that, we focus on making production very efficient. For example, detention and demurrage air expedites have significantly decreased; our air expedites are down 90%, and detention and demurrage are down 93% from peaks. That can amount to hundreds of thousands of dollars per vehicle, so we're addressing all avenues to improve efficiency.

Okay. My follow-up is really around stationary storage demand on a utility scale. There's a gigantic queue for interconnection in the U.S. Can you talk about the volume of quotations you're seeing for stationary storage for the renewables queue on a global basis? And how much of that is converting into actual sales?

Drew, do you want to take that?

Yes, that’s not exactly how we look at it, really. We're not engaged in the interconnection queue; we're focused on ramping Megapack as quickly and efficiently as we can. We have visibility into the pipelines of various renewable energy and pure stationary storage developers, and we also develop our own projects. We're mostly being selective in picking the projects that fit our mission and objectives best.

This is not a product discussion call, but we are making improvements across many fronts, including Megapacks. Some of these enhancements will improve the speed at which you can connect the Megapacks to the grid.

Thank you. The next question is from Mark Delaney from Goldman Sachs.

Yes. Good afternoon. Thank you for taking the question. Do you still see 2 million units as a potential upside case for volume this year? Is the gating factor for reaching 1.8 million or 2 million units in 2023 still supply chain, as mentioned in your last conference call, or is it more about demand at this point?

Well, if you have a crystal ball, you can lend me that! These are volatile times. From a production standpoint, if things go well, we've got a shot at 2 million vehicles this year, but that’s an upside case. We feel comfortable with 1.8 million, and we’ll see how this year unfolds.

That’s helpful. Thanks. The company had discussed at Investor Day and in previous calls about opening its vehicle charging network. Can you speak to the feedback you’ve received from Tesla owners and non-Tesla owners? How might the ramp of the charging network progress from here?

Drew, do you want to take that?

Yes. As you may have seen, we opened our first V4 post in Europe and our Magic Dock post in North America in Q1. This indicates the direction we're heading with universal compatibility for all vehicles, regardless of charge port, across all major markets. We will continue to roll out similar improved offerings as we build new stations. We are balancing our ability to serve our customers with our ability to serve new customers, and we've been able to maintain that balance rather well. In Europe, 50% of our supercharging stations are open to all EVs, and we've done this without increasing wait times for anyone. We will continue this approach in North America and China over the coming quarters.

Okay. Thank you very much. Let's go to Rod Lache from Wolfe Research.

Hi, everybody. I just wanted to follow up on your comments in your letter about leveraging your cost position as others struggle with unit economics, factoring in lifetime revenue, and your service network and supercharging among other attributes. Can you give us a sense of how far you'd be willing to take this? Are there brackets around the range of initial margin you're comfortable with? Any color on the updated range of margins you'd expect in the auto business?

I think we may have answered this question a few times. It's difficult to say what the margin will be. It depends on the macroeconomic environment. For example, if the Fed were to lower interest rates, that would be super helpful for demand. If they raise them, that increases the interest costs for buyers and reduces demand. We could face a macro shock so severe that people stop buying cars entirely, but in the absence of that, we will continue to grow output at a rapid pace.

To add to Elon's comments, two other points are pertinent. It's important for us this year, in addition to daily business management, to invest in what 2024 and 2025 will look like. Using the cash we generate from current sales to reinvest is crucial. The state of margins in the next couple of quarters will matter within the context of our 2024 and 2025 investment plans. Even with margin fluctuations, we have sufficient space before revisiting those investment strategies. Our aim is to keep the business healthy, but we caution against reading too much into short-term outcomes as we focus on positioning ourselves best for when we exit this macroeconomic situation.

Yes, exactly.

Just to elaborate on that point though, the revenue and lifetime opportunities you're targeting from each vehicle is massive. If you took that to the extreme, it seems that you’d be comfortable with relatively low initial margins. Am I misinterpreting that, or is that right?

Correct. That’s exactly right.

Okay. In a recession, when consumers feel less financially secure, price elasticity typically deteriorates. Just based on your observations of consumers, do you have a view on the elasticity of demand?

I can't emphasize enough the entire fundamental question of affordability. For most people, their ability to buy a car is based on whether they can manage the monthly payment. If interest rates are really high like they are now, some people can't even obtain loans. I suspect banks are cautious about extending loans nowadays. This powerful narrative goes back to what I mentioned about Tesla being in a uniquely strong strategic position. We are the only ones making cars for which we could theoretically sell at zero profit for now and yield tremendous economics in the future through autonomy. No one else can do that; I don’t think many people realize the significance of this.

Thank you. Let's go to Adam Jonas from Morgan Stanley.

Hi there! First, Elon, good luck with tomorrow's launch of Boca Chica. Break a leg.

Thanks! You can't have too much luck in the rocket business, that's for sure.

Incredible. Now that you've gotten to know another architecture quite well over the past six months, what can you tell Tesla stakeholders about how an X.com or Super App could potentially accelerate Tesla's business model?

Well, I'm sure it could potentially make it easier to buy cars. We've strayed somewhat off topic here. I think there's a benefit, perhaps.

I understand, Elon. Just as a follow-up on manufacturing, historically, back in 1913, Henry Ford introduced the moving assembly line, and the price of the Model T plummeted. I'm wondering if history is repeating itself, with cuts that are far ahead of the cost curve compared to competition. Is this a calculated strategy not just in reaction to competition or changing supply-demand dynamics, but could we spark some Darwinian forces in the EV market?

We’re not deliberately adjusting pricing to undermine competitors or anything. We don’t think about competitors much. We merely focus on whether people like our cars, how we can make our product better, and whether consumers can afford them. We prioritize service improvements and that sort of thing. We do have a unique strategic advantage in that we’re producing a car that, if autonomy develops as anticipated — which we believe it will — that asset will significantly increase in value in the future. Hence, it’s possible to sell it at zero profit now but still yield a significantly high net present value from future cash flows associated with that asset.

We also have revenue streams from service, charging, and insurance, unlike other companies.

Indeed. Tesla's not known because we want to handle everything. We have a lot of challenges to address, but we do it because others are not doing it, and we desire for others to step up.

Thank you. Let's go to Dan Levy from Barclays.

Hi. Good evening. Thank you. First question, you're ramping supply at Austin and Berlin. I wanted to understand how crucial it is to further increase volume at those plants just to gain the vertical integration benefits in light of market demand questions. Should we expect that you'll continue to produce at your maximum capacity within supply constraints, regardless of the economic environment, just to get that volume out?

Yes, there could be a macro shock severe enough that people completely stop buying cars. But in the absence of that, we will continue to grow output rapidly.

Great. Thank you. Regarding the margins associated with Austin and Berlin, you mentioned Austin won't have its margin until you reach intended volumes. I don't know if you can disclose what those volumes are, but could you remind us of what the margin profile for Austin and Berlin will look like compared to Shanghai once vertical integration benefits are in place?

Austin and Berlin will probably not be quite as good as Shanghai. Shanghai boasts the most efficient cost structure and the lowest costs globally. However, we anticipate making significant improvements in Austin and Berlin, as well as in Fremont.

This is Roshan, by the way. We've increased our strategic localization efforts in North America and Berlin, which will reduce days on-hand requirements to cut tied-up working capital. We observed a 10% quarter-over-quarter improvement in days on-hand. We will continue to enhance the cost structure as supplier localization improves.

Thank you very much. Our final question comes from Philippe Houchois from Jefferies.

Yes, good evening, and thanks for taking the question. It's slightly longer term. I completely agree with your comments that we should look at Tesla in terms of auto market share, not just EV market share. But as you build global market share, is there a limit to the direct selling business model as you practice it? Should we think about potential agency models or using importers to further develop market share globally? In other words, is there a sell-by date for the direct business model as you apply it today?

It seems to be working well so far, based on customer feedback. Some customers miss human interaction or are unhappy with service, but you're not seeing that?

There will always be challenges during rapid growth. These challenges can differ depending on the region; at times, service may lag behind sales, and other times it may be ahead. This is typical for a company experiencing such rapid expansion like Tesla, which is growing faster than any other manufacturer of large, complex products in history, making it difficult to keep pace with that growth. However, the feedback we receive is useful as it encourages us to create designs that minimize the need for service. The ideal service is no service at all – when the car doesn’t need repairs. When a dealer network depends on service revenue, it creates a conflict of interest since they profit from service, while we aim to reduce maintenance requirements.

Have you analyzed the deficit compared to your peers? A significant amount of profits come from selling spare parts and servicing for many traditional competitors, but you don’t have that in your profit structure.

Yes. The best short-selling argument against Tesla for years was that we didn’t have an existing fleet. The reason incumbents succeed while newcomers fail is that incumbents have a large fleet allowing them to sell new cars at nearly zero margin, while making high-margin profits from spare parts. A newcomer can only succeed with a product so compelling that consumers see it as worthy of paying a premium over the incumbent. In the absence of electrification and autonomy, I don’t think a newcomer can succeed.

Thank you very much, everyone. Unfortunately, that's all the time we have for this quarter. We'll see you again in three months from now. Thank you.