Good afternoon, everyone, and welcome to Tesla’s Second Quarter 2023 Q&A Webcast. My name is Martin Viecha, VP of Investor Relations. And I’m joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q2 results were announced at about 3:00 pm 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. To recap Q2, we achieved record vehicle production and deliveries, along with record revenue of approximately $25 billion in a single quarter. The Model Y became the bestselling vehicle globally in Q1, surpassing vehicles like the Corolla and Golf, marking an incredible achievement by the Tesla team. We are immensely grateful to our customers for their support. This accomplishment took place despite high interest rates and significant macroeconomic uncertainty. Nevertheless, we managed to achieve an operating margin of around 10%. We are still aiming for 1.8 million vehicle deliveries this year, although we expect production in Q3 to dip slightly due to summer shutdowns for factory upgrades. In the long run, we believe that advancements in autonomy will greatly enhance our production volumes. Our future robotaxi products are expected to have enormous demand, and our innovative manufacturing process will allow for unprecedented production rates. With regard to Autopilot and Dojo, building autonomy requires training our neural net with data from millions of vehicles. Past experience has shown us that the more training data we have, the better the results. As we increase our training examples from one million to ten million, the effectiveness of our neural networks drastically improves. Tesla has more vehicles collecting this data than all other companies combined, potentially by a significant margin. The success of our AI efforts depends on talent, unique data, and computing resources, and we excel in all three. I believe that without the training data we have, no one could replicate our achievements, even with our software and computing power. Our Dojo training computer is specifically designed to lower the cost of neural net training, particularly for video data. The demand for neural net training resources is huge, and we plan to use both NVIDIA and Dojo to meet this need. We expect to have in-house neural net training capabilities reaching 100 exaflops by the end of next year. So far, over 300 million miles have been driven using FSD beta. That number will soon seem small as we move toward billions, and ultimately tens of billions of miles. We are confident that FSD will surpass human driving capabilities, with a clear path to being ten times safer than the average human driver. Through Autopilot, our Dojo computer, our efficient in-car inference hardware, and Optimus, Tesla is clearly at the forefront of AI development. Regarding the Cybertruck, we are currently producing our release candidates at our final production line in Austin. This will be the first truck with four doors over a six-foot bed that fits into a 20-foot garage. It is designed to feel spacious inside while maximizing utility. We look forward to starting deliveries later this year. Other highlights include our global Supercharging network, which now has around 50,000 connectors at over 5,000 locations. The Tesla Charging Standard, now known as the North American Charging Standard, has been embraced by companies like Ford, GM, and Mercedes, and we remain committed to supporting the EV revolution. Importantly, while we are not licensing our technology, we are open to licensing our full self-driving software and hardware to other automakers and are in preliminary discussions with major OEMs about this. Finally, our new lithium refinery and cathode facility are progressing well. In conclusion, we are focused on producing as many vehicles as possible while maintaining strong financial health. Our AI developments are entering a new phase, and we are excited about what lies ahead. Our other ventures, including Megapack and Supercharging services, are also beginning to significantly contribute to our profitability. I'd like to express my sincere gratitude to all of our employees for their hard work and dedication during these challenging times. Thank you.

Thank you very much, Elon. And I think Zach has some opening remarks as well.

Yes. Thanks, Martin. As Elon mentioned, Q2 was another record quarter of production and deliveries, as well as records in profit for our energy and services and other businesses. Congratulations again to the Tesla team on the continued progress. As we navigate through a period of economic uncertainty, rising interest rates, volatility in consumer confidence and regulatory change, I want to comment on our financial approach. First, the single most important priority is to ensure we are continuing to invest heavily in the core technologies that will drive the long-term value of the business. This includes increasing spending on AI-related technologies such as full self-driving, Optimus and Dojo, as well as new products such as Cybertruck, our next generation platform and the Semi, as evidenced by the continued growth in our R&D spend. This also includes continuing our investments in capacity expansion, not only in our vehicle factories, but also our Supercharging network, service, internal applications, and battery processes, as we continue with meaningful capital expenditures to lay this foundation for the future. Second, we continue to work towards our goals of maximizing volumes on both our vehicle and energy business, but most importantly, doing so in a way that generates the capital to continue our pace of R&D and capital investments. This requires a strong focus on per unit COGS reductions in each of our key businesses, as well as working capital improvements on raw materials, work in process inventory and customer AR, all of which progressed appropriately in Q2. If we look specifically at our automotive business, our gross margin showed a modest reduction and remained healthy, despite action taken to further improve vehicle affordability early in the quarter. We recognized - we realized per unit cost improvements in nearly every category, including material cost and commodities, manufacturing costs and logistics, while also continuing to rapidly increase the build rate in our Austin and Berlin factories. For our energy business, we improved margins and gross profit driven by cost reductions and deal economics, particularly with Megapack. As a reminder, storage volumes are typically volatile sequentially based on the types of projects and their specific revenue recognition milestones. As we look forward to the rest of the year, I want to reiterate Elon’s comments on Q3 volumes driven by planned downtimes for factory upgrades. These upgrades will also carry some amount of factory idle cost. However, we are working to minimize as much as possible. It’s also important to keep in mind the uncertainty in the macro environment, which can impact our execution positively or negatively in the near term. Regardless, we continue to remain dynamic with a focus on fundamental efficiency and a long-term outlook. Congratulations again to everybody on a great quarter.

Thank you very much, Zach. And let’s go to investor questions. The first question on licensing FSD we’ve already answered. So, let’s go to the second one. The second question is, what is the status of 4680 cells? How far are you from the specs you laid out on Battery Day? When do you expect to achieve what you laid out on Battery Day?

Yes. First, I’ll just start with a little bit of a production update. So, in Texas, 4680 cell production increased 80% Q2 over Q1, and the team surpassed 10 million production cells produced here in Texas. So, congratulations to the team for that. Their focus on yield reduced our scrap bill by 40% quarter-over-quarter, and that resulted in a 25% reduction in cell COGS. Here in Texas, we’re preparing to launch our Cybertruck cell, which is 10% higher energy density than current production. That was accomplished through process and mechanical design optimization. As we scale Cyber cell production through the end of the year and early next, we should be in a comfortable place on cost per cell. Against our battery energy density targets, the Cyber cell is at our expectations on a like-for-like electrochemistry basis. We’re yet to integrate silicon or in-house cathode production, both reviewed on Battery Day, which do bring significant further energy density and cost improvements, but that is a topic for another day. Lastly, it is important to remember that most of what we focused on a Battery Day was the Tesla-engineered 4680 production system and the improvements we strove to achieve on equipment, factory density, capital cost and utility cost reduction, all of which we are realizing in our Texas scale up to date.

Thank you very much. The next question is, can you talk more to the upcoming Tesla Energy products and how your thinking has evolved on the revenue model? Given Tesla’s AI capabilities, how do you see the long-term mix between hardware margin and recurring software margin from Autobidder as this segment accelerates?

We can’t comment on future product roadmap, but I can provide a quick energy Q2 update. Megapack continues to show strong demand globally with Lathrop ramping successfully to meet our contracted projects in 2023. As stated last quarter, Megapack margins are in a reasonable place, in line with our target – vehicle target margins. The second final assembly line at Lathrop is progressing on schedule, eventually doubling Lathrop capacity ahead of our full factory ramp in 2024. We have several exciting large projects in construction or nearing completion, including the KES project in Hawaii, the Riverina project in Australia, several products in California and one here at Gigafactory, Texas that we’ll tour today, actually. We want to thank our customers, utilities, and grid operators for trusting us with these projects. On the Autobidder question, we continue to grow Autobidder contracts in wholesale markets like Australia, Texas, UK, and California with over 6 gigawatt hours under Tesla’s dispatch next year. In the UK, our projects performed best in the industry in Q2. Autobidder does have software margins and is an enabler for hardware sales, but it’s a relatively small contributor to revenues, given how much deployment growth on the Megapack hardware side is occurring. It’s important to remember that these large capital projects have lifetimes of 20 years of recurring revenues on an annualized basis relative to upfront CapEx are small. On the residential side, we have some fun things happening. We recently surpassed 0.5 million Powerwalls installed. Just this week, we are launching Charge on Solar, which allows Tesla Powerwall and vehicle customers to charge their vehicles using their excess solar and drive only on the sunshine that hits their roof. Yesterday, we began paying customers in Texas for participating in our virtual power plant to provide grid support to ERCOT. We expect these credits to lower our median customer’s annual bill by a third and to increase these credits over time as ERCOT expands market access. And today, we are expanding Tesla electric enrollment to new Model 3 owners in Texas, followed by all Texas vehicle customers over the rest of the quarter. Unfortunately, and somewhat similar to Tesla Insurance, bringing Tesla electric and BPP capabilities to our customers requires working through a fractured regulatory environment on a jurisdiction-by-jurisdiction basis. In the long run, the value of residential energy software and hardware will be driven by the level of market access that utilities, market operators and regulators permit. For Powerwall that’s eligible to provide the full stack of energy services, like peaker capacity and system buffering, such as in Australia, we can more than double the value of ownership relative to a typical system today.

Thank you very much. The next question is, could you quantify the benefits to COGS per unit from the IRA battery manufacturing incentives; and secondly, battery raw material declines year-to-date?

All right. I can take that. On the first part of the question for IRA manufacturing incentives, we provided previous guidance that we expect these to be for the course of this year in the range of $150 million to $250 million per quarter. We are staying within that boundary as we guided previously, so that was the case in Q2 as well. I will note, and I think we’ve mentioned this before, that this includes a 50-50 sharing of credits for qualified cells from our long-term battery partner, Panasonic. On the commodity side, we are continuing to see improvements there, as we’ve discussed previously. Lithium is the most notable improvement so far. I think I commented on this on the last call, because typically, we see this coming about a quarter before it actually is realized in our financials. And also just as a reminder, we’re not fully exposed to the price of lithium. Our supply chain team has done a terrific job in partnership with a bunch of other companies to put in place some long-term agreements here, but we do have some exposure that moves up and down. We’re also seeing benefits in aluminum and steel, which I think is great. Not as large as the lithium impacts, but they contribute nonetheless. So, if we add up the total impact of this in Q2 relative to prior quarter, it’s about the same size and magnitude as the IRA benefits that we also received. Just to put this in context, as you look at COGS per unit sequentially from Q1 to Q2, I think there’s two things to keep in mind there. The first is that our SX mix for deliveries increased quite a bit from Q1 to Q2. So, as you think about fundamental cost reductions, it’s important to adjust for that. And then secondly, as we continue to work on reducing our Austin and Berlin cost, which we did quite a bit of that from Q1 to Q2, these factories are still slightly above Model Y production costs elsewhere. And in the quarter, our mix of Austin and Berlin related builds increased. And so, that’s something to consider as you model out the impact on – from Q1 to Q2 in terms of COGS per unit. I do want to ask Karn if there’s anything else on the commodity side or just more generally, you want to add here?

Yes. As you mentioned, Zach, we’ve naturally been a little bit hedged from the lithium position because of the long-term contracts we have in place. But we have seen reduction in pricing across the board for all commodities that specifically go into batteries such as nickel, cobalt and graphite. And the reductions in pricing translate into thousands of dollars when you look at it from a per-vehicle impact. We’re taking advantage of the historically low commodity pricing and certainly we’re looking to extend some of those fixed-price contracts through the end of the decade. So it’s a playbook that we’ll continue to kind of go back to as we look to the future.

Thank you. The next question on FSD. Have you considered allowing FSD transferability as a lever to allow existing customers to upgrade to a new Tesla instead of being locked into an existing car due to the price of FSD?

Yes, this is a frequently asked question. We are pleased to announce that for Q3, we will be allowing the transfer of FSD. This is a one-time opportunity, so it needs to be taken advantage of in Q3, or at least orders should be placed in Q3 within reasonable delivery time frames. I hope this brings happiness to our customers. This is a unique occasion.

Right. The next question, when will we give more information about the Cybertruck orders, estimated delivery schedules, pricing and specifications?

Demand is very high, and that's not a concern. I want to highlight that the Cybertruck incorporates a significant amount of new technology, making it unique compared to any other vehicle. The production ramp-up will be determined by the slowest components of our entire supply chain and manufacturing process. I hope this will be a smooth transition. We have considerable experience with production ramps. However, it's important to note that there are around 10,000 unique parts and processes involved in the Cybertruck. The pace will be dictated by the least efficient element among those. Predicting the initial ramp is challenging, but I believe we will be producing in large quantities next year, and deliveries will start this year.

Thank you. The next question is critics of Gigacasting contended that process makes vehicles harder and more costly to repair, essentially pushing costs on to the customer. Can you share some details about the initial repair experience with Gigacast vehicles?

That must be why everyone’s copying us.

Thanks, Elon. This is Lars. I mean, that’s like simply not true. There’s a misconception that traditional bodies are easy to repair, but they are made up of multiple materials and multiple joining methods. Spot welds and rivets have to be drilled out. Panels and structural adhesives have to be chiseled out. Dried adhesive has to be removed, stains, cut, blah, blah, blah.

It’s a crazy patchwork of a quilt.

Yes. And so putting that back together means time and money. Using an example of replacing a rear cast rail in the Model Y, to do that versus like what we replaced it with from Model 3, it’s 10 times cheaper and 3 times faster to do it with the cast rail. Design team works with our collision repair team since we’re a closed loop on this with insurance, and we design specific parts that make it easier and faster to repair. And we have an incentive to do that because we have our own insurance and our own body shops. We expect that we’ll continue to do this, and collision repair will continue to become cheaper and faster over time. And we already make this available to all body shops or our Tesla-approved body shop training.

Yes, closing the loop on collision repair and factoring that into design is a big deal.

Crucial. I don’t think anyone else can do it with that ecosystem that we have, so.

Yes. We can modify the casting details with inserts, which we do regularly because the inserts wear out and need replacement. This allows us to make design adjustments and refine the castings. The cast rear and front body components are lighter, more cost-effective, have improved noise and vibration performance, and are easier to manufacture. They are superior in every aspect, which is why many other car manufacturers are imitating us.

Probably.

Well, they certainly put out a lot of press releases about it. I think it’s basically going to be how all cars are made in the future.

Thank you. Next question, how many Optimus bots have been made? And when will they be able to start performing useful tasks?

10 million. Yes, I think we’re around 5 or 6 bots. It depends on how many are working and what phase they're in. But yes, there are more being added every month. There are a lot of interesting things about the Optimus bot. We discovered that there are actually no suppliers that can produce the actuators. There are no off-the-shelf actuators that work well for humanoid robots at any price.

Certainly not compelling.

Yes. There isn’t a humanoid robot that can perform all the tasks a human can. Therefore, we have had to create our own actuators that incorporate the motor, power electronics, controller, and sensors. Each of these components is custom designed. We will also use the same inference hardware as in our vehicles. While designing these actuators, we are ensuring they are suitable for mass production. They are not only lighter, tighter, and more capable than existing actuators, but they are also manufacturable on a large scale. The first Optimus robot equipped with the Tesla-designed actuators and capable of walking should be ready around November. We will begin scaling up production thereafter. Initially, we will test its functionality in our own factories to verify its utility, and I believe we will be able to have it perform useful tasks in our factories sometime next year. I am quite confident about that. Things are progressing well. Another interesting aspect of Optimus is that there are 2 million amputees in the U.S. I was discussing with the Neuralink team that by combining a Neuralink implant with a robotic arm or leg for individuals who have lost limbs, we believe we can create a highly advanced cybernetic body, comparable to the $6 million man, but at a significantly lower cost of around $60,000. This concept is impressive and could potentially aid many people worldwide by providing them with robotic limbs that are as good, if not better than biological ones in the long term.

Thank you. The next question is, how has the order intake trended relatively to production levels during Q2? And how has it trended in the quarter-to-date period? Conceptually, how does Tesla decide when is it appropriate to reduce prices or at other sales incentives to increase demand?

Yes. Demand has roughly followed production, which is our goal. We have an advantage that no other carmaker has: real-time demand and production data seven days a week. I receive order-generated emails that provide outputs from all factories and global orders. This gives us a real-time insight into market trends, allowing us to adjust based on public sentiment. Buying a new car is a significant decision for most people, and during times of economic uncertainty, potential buyers often pause to assess the situation. Additionally, the rising interest rate environment poses another challenge. As interest rates increase, the affordability of anything financed declines, effectively raising the overall cost of a car. Therefore, when interest rates rise sharply, we often need to lower car prices to offset the increased cost of interest payments. This recent period marked one of the steepest interest rate hikes in history, so we had to respond accordingly. If anyone has foresight into the global economy, I would really appreciate borrowing that insight.

DM us.

Yes, exactly, direct message me. It shouldn't be on Twitter. Some days, it feels like the world economy is collapsing, and the next day, everything seems fine. I don’t understand what’s happening. I wish I did. That's why I was posting on Twitter, providing guidance because I genuinely care about our small shareholders, especially those who have stayed with us through tough times. I appreciate you all. We can’t control these macroeconomic shocks or the overall negative sentiment in the stock market. Therefore, I advise against margin loans during turbulent times. If conditions are stable, using a margin loan can be a smart decision within reason. However, we are currently in turbulent times. I have strong confidence in Tesla's long-term value; I envision a path that could see the company's value increase five to ten times. But the journey, with all its challenges and market moods, is unpredictable. The traditional advice of buy and hold still holds true. For investment guidance, I suggest looking for companies whose products you love. Assess whether they seem likely to continue producing good or even great products. Buy their stock and hold onto it. That's the key to success. Companies exist to provide goods and services, ideally excellent ones. That should be their sole purpose. Consequently, you should invest in companies that produce quality products and have a promising future. It's really just common sense. If you believe in a company’s products or services, when the market panics, buy; and when the market is overly excited, consider selling. I’m not specifically recommending Tesla, but the principle is to buy low and sell high. Warren Buffett has a saying that I’m paraphrasing: imagine you live in your house while an erratic person shouts varying property prices at you every day. The house remains the same. This is akin to the stock market. Credit that to Warren Buffett.

Thank you. Let’s go to the next question. With the emphasis of price cuts to drive volume growth eating into automotive gross margin, can investors expect to see automotive gross margin stabilize or even rise due to efficiencies outpacing the cuts? And if so, when?

Where’s that crystal ball again? If I may, the short-term fluctuations in gross margin and profitability are really minor compared to the long-term outlook. Autonomy will make all these numbers seem trivial. I recommend checking out ARK Invest; their analysis is exceptional. Also, follow the finance experts on social media; they provide great insights. In my opinion, Tesla is a significant long-term investment, and there's no need to worry about short-term ups and downs. In fact, if the market panics, consider buying; if it becomes too enthusiastic, think about selling. Generally speaking, I’m confident we’ll achieve our long-term goals, even if the short term is uncertain. Autonomy is really where the focus should be. Zachary?

I fully agree with you. I mean, I think the only thing in the short term that matters is what I said in my opening remarks, which is are we generating enough money to continue to invest. And the portfolio of products and technologies that the technical teams are investing in right now, this is intense. It’s intense in terms of investment; it’s intense in terms of potential.

Frankly, I think it’s ridiculous that we have positive free cash flow in a capital-intensive business while investing massive amounts of money in new technology. That is super hard.

And vertical integration. It’s not even just like new products, but also...

Yes. We actually make our share...

From my perspective, what is crucial is generating the cash needed for investment. This involves maintaining a strong focus on reducing costs in the near term. Every effort we make in cost reduction contributes to capital for reinvestment. We are also concentrating on managing working capital, where we have made significant strides with raw materials and have been attentive to accounts receivables to facilitate cash reinvestment. This is our primary focus. There are elements we can control, and we have a pipeline for cost reductions. Currently, we are benefiting from favorable conditions in the commodity market, as Karn pointed out. The variability in average selling prices relates to what Elon mentioned; we cannot control interest rates or macro consumer sentiment, but we must respond appropriately to match supply and demand to maintain balance. This is our strategy for navigating the upcoming quarters. Before long, these quarters will become part of the past and will not affect the present value of the future cash flows of the business. Thus, we must ensure we maintain this perspective and shape the long-term vision of the business as we intend.

All right. Thank you very much. Now let’s go to analyst questions. The first question comes from Dan Levy from Barclays.

I wanted to start with a question about your efforts in AI and Dojo. It seems like you're increasing your focus in this area. Can you provide some insight into what the process of refining a product looks like? Is it primarily through more machines? Also, could you share when we might start to see the returns from this investment and what the expected operational expenditure will be as a result?

Sorry. Are you saying how much are we going to spend on Dojo or…?

Yes.

R&D on Dojo?

Yes.

We will not be transparent about our Dojo spending, but we expect to invest over $1 billion in Dojo in the coming year. We have an immense amount of video data to analyze for training, which means that to replicate our efforts, others would need to invest billions in training compute as well. Achieving autonomy at scale is one of the toughest challenges in the industry. Many AI companies focus on LLMs, but if they're so advanced, why can't they create a self-driving car? It's because it's more difficult. While there are impressive AI companies out there, the vast amount of data we need to process requires effective solutions, and custom silicon is best equipped for this task. Dojo is specifically designed for video training, not LLMs, as video tasks have a significantly better compute-to-memory bandwidth ratio, while LLMs often struggle with memory bandwidth. We're also using a substantial amount of NVIDIA hardware and will continue to do so as quickly as they can deliver it. We hold great respect for Jensen and NVIDIA for their fantastic work, but they have many customers, and while they are prioritizing some of our GPU orders, they might not be able to meet our needs completely. The goal is not just to be as good as humans, but to be 10 or even 100 times better. Currently, there are around 1 million automotive deaths annually and potentially 10 million serious injuries. Even being ten times better would still leave us with 100,000 deaths and 1 million severe injuries, so our aim is to be 100 times better. This requires an incredible amount of video and computing power. We believe there are additional uses for Dojo, but our primary focus is on video training.

Just to add to what Elon mentioned. So, the numbers that he mentioned are between R&D spend and capital spend. And this is moving quickly. And so, we provide a three-year outlook on our capital expense. We are considering these expenses in that outlook. And as that moves up and down, we’ll continue to update our guidance in the Q.

The main constraint on advancing full self-driving is the training. If we had more training computing power, we would accomplish it more quickly. That's all.

And it’s just difficult to predict how quickly we can execute on it.

Great. Thank you. Just as a follow-up, I recognize there’s incredible macro uncertainty right now, but you’re sticking with your near term, your volume target of 50% CAGR. As we just think about sort of in the year ahead, Cybertruck is going to be some contribution. There’s going to be some help from further EV penetration growth. But to what extent are you willing to sacrifice on pricing to keep that 50% volume CAGR intact, or are you thinking differently about margins versus your prior commentary of willing to sacrifice on margins to get more share?

It's not about increasing our market share. Each vehicle we sell or produce that has full autonomy capability could potentially be worth five times its current value in the future. Currently, the average vehicle drives about ten hours a week, which equates to around 1.5 hours a day. If a vehicle can operate autonomously, it opens up new possibilities, such as allowing others to use it occasionally, similar to renting a room through Airbnb. This significantly enhances the vehicle's value. Therefore, it makes sense to prioritize producing more vehicles over maintaining higher margins, as we believe that their value will dramatically increase in the near future. The enhancement in the Tesla fleet's value, particularly with the rollout of full self-driving capabilities once approved by regulators, could represent a remarkable shift in asset value, potentially unparalleled in history.

Thank you. Let’s go to the next analyst. The question comes from Emmanuel Rosner from Deutsche Bank.

Two questions from me as well. First, following up on the autonomy. So before you start launching these dedicated robotaxi vehicles, on existing vehicles, you’re improving FSD incrementally. What is your latest targeted timing to essentially release a non-beta version or an eyes-off version that would trigger much higher take rates? And would Tesla benefit from lowering the price of FSD?

Well, people have made fun of me, and perhaps justifiably, regarding my previous optimistic predictions about achieving full self-driving. My optimism stems from the observation that we tend to see rapid progress with new versions of FSD initially, but then the progress tends to level off logarithmically. At first, this logarithmic growth appears as a straight upward line, which can lead to overly optimistic projections. However, since it’s actually logarithmic, the curve eventually flattens, and we've experienced a series of these logarithmic curves. I know I sound like someone who keeps claiming FSD is just around the corner, but I genuinely believe we will surpass human capability by the end of this year. This does not imply we have regulatory approval, and I am specifically referring to the U.S. market since we need to focus on one area first. I acknowledge I’ve been wrong before, and I could be wrong again. Regarding the pricing of FSD, it is actually quite low. Reflecting on what I mentioned earlier, if a car is truly autonomous, its value increases significantly. Therefore, $15,000 is, in fact, a low price, not a high one. We will also offer FSD as a monthly subscription, which many people may not be aware of. I would suggest considering this monthly subscription to avoid committing to the $15,000 upfront. That said, if a car is capable of operating autonomously and is worth several times its original price, then $15,000 for FSD is actually a bargain.

And the next question comes from William Stein from Truist.

I’d like to ask about the AI topic. We’ve read with great interest the developments in Dojo today, and you’ve spoken about FSD, but Elon, you started this x.ai company. For investors who see value in the AI features and products of Tesla, it might be concerning to see you pursuing another endeavor focused on AI. Can you discuss how x.ai might overlap, compete with Tesla, or possibly enhance the value of what Tesla does?

Yes, I believe it will actually enhance Tesla's value. Some of the most talented AI engineers and scientists were interested in joining a startup but were not inclined to join a more established company like Tesla. That's how it all began. I was interviewing several candidates, and they expressed a preference for startups. I realized that I couldn't persuade them to come to Tesla, so I thought it would be better to create a startup that I could lead rather than have them work elsewhere. That’s how xAI originated, and it is focused on developing AGI. I think xAI will bring added value to Tesla. Additionally, the top talent often seeks to work on exciting challenges. For example, Charlie Colman decided to leave Apple, where he was satisfied and well-compensated, to join what we consider the best material science group in the world because it allowed him to work at both Tesla and SpaceX. He wouldn’t have left Apple for just Tesla, but he was open to it for both companies. At times, attracting the best talent requires such opportunities, and this has proven advantageous for Tesla.

If I could squeeze one more mundane question in. I wonder if you think you can hit the 1.8 million unit number with current pricing, or do you anticipate needing to continue to lower prices because it seems like they’ve stabilized. The trends have stabilized in the last maybe 1.5 months. Should we expect sort of continued decreases or more stabilization for the rest of the year?

Sure. We started the referral program, which I believe will be quite effective. As Zach mentioned earlier, we don’t have control over macroeconomic conditions. If interest rates keep rising, that will affect car affordability. Many people are just managing to break even each month. In fact, considering the increase in credit card debt, they are not breaking even at all. The situation with credit card debt is concerning. We simply don’t have control over market conditions. If the market is stable, prices are likely to remain stable as well. If it becomes unstable, we might see lower prices.

Thank you. Let’s go to Colin Rusch from Oppenheimer.

As you’re building out Dojo and implementing what truly is going to be a highly complex set of software, can you speak to the maturity of the operating system and how much outsourced software you’re expecting to use in that system?

This is a custom software stack, so. But it is designed such that you can run at a high level, PyTorch and JAX. But then we have to customize it to actually run on a custom silicon. So, the software stack is a combination of open source software and then Tesla software all the way to the bare silicon, which is the case for the inference computer in the car.

Okay. Thanks so much. That’s super helpful. And then can you speak to how you’re managing some of the geopolitical risks relative to your capacity expansion? Obviously, as you guys continue to grow at this rate, you’re going to be putting some folks out of business. And there are going to be some impacts around regional economy. So, I just want to understand how you’re thinking about that in terms of some of your CapEx plans and how you’re managing some of those relationships with different countries and regions.

This is a time of significant geopolitical risk. Therefore, our strategy is to establish factories in various locations worldwide so that if challenges arise in one region, we can maintain operations in others.

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

Tesla has been making progress reducing costs and did so again last quarter. Can you give an update on when you think automotive COGS per vehicle could be under the historical $36,000 per vehicle level? And what are the key puts and takes to get there?

I believe I have been asked this before. It is very challenging to predict. There are various costs that we manage and others that we do not control. Specifically, regarding commodities and labor costs, it is difficult to provide a clear answer.

Yes. We experienced significant inflationary pressures for part of last year, which made it challenging to lower our cost of goods sold. Currently, however, we seem to be observing deflationary pressures, particularly as commodity prices are decreasing, as Karn pointed out earlier. The overall trends appear to be deflationary at the commodity level.

Definitely. As volumes grow, we see an improvement in unit economics. We are becoming a larger and more efficient part of many suppliers, which allows economies of scale to take effect. There’s also equipment depreciation to consider, as equipment installed 5 to 7 years ago is now fully amortized. This will lead to lower piece prices since the contribution of that equipment has been eliminated. Additionally, we maintain a focus on continuous improvement in labor by reducing workforce needs and enhancing automation, which helps us to improve overall. We have observed improvements every quarter. While commodity prices have fluctuated, the overall trend is toward greater efficiency.

Yes, I’m totally agreeing.

Yes, lithium prices were absolutely insane there for a while.

Yes. And they’re recovering now.

Cobalt is not what it used to be.

Yes. We're at a stage in the cost reduction process for Austin and Berlin. It takes time to lower costs. Initially, the focus is on ramping up production, which will help to decrease costs.

And quality costs…

Yes. And then once that stabilizes, we can divert bandwidth to cost reduction. And so Austin and Berlin saw quite a decent amount of cost reduction on a fundamental basis from Q1 to Q2. We’ll continue to do that work that will be helpful. And so we’re just going to keep chipping away at it.

Packaging is a big element to that.

Yes, logistics…

Logistics is normalizing, which is great.

Utilization has been a key focus for the team. Every aspect of it is important.

Yes, and it’s hard...

Logistics is underappreciated. Yes, so sold saying goes like valves and logistics go hand in hand.

Yes. And we’ve made tremendous improvements in cost on all fronts on expired costs. We have done pre-pandemic expired cost levels now, and our goal is to go further down.

Yes. So when we look at our progress from Q1 to Q2 on cost, the way that we look at internally, normalized for the impacts of mix shift with Austin and Berlin being a higher percentage of our mix, normalized for S and X being a higher percentage of our mix in Q2 versus Q1, the sequential cost reduction, it might be the largest we’ve had in a while. So, I think it’s great work on behalf of the Tesla team, and we just got to keep it up.

Yes, it’s a game of pennies. It’s a Game of Thrones with pennies.

Mark, do you have a follow-up question? I think you’re muted.

Yes. Thank you very much for all the details on that. Maybe you could put a finer point on the downtime impact that you spoke about in your prepared comments in terms of production impact and then also to what extent there’s a margin impact from those factory upgrades that you’re planning this quarter?

Yes, we don’t know the exact number of cars affected by the downtime because we allocate a period for upgrades, but the team works as quickly as possible to minimize the time the factories are not operational. The reduction in production is not significant; we hope it will be minimal.

I think we’re getting too much into the weeds here. I mean, like we’re asking for a level of precision that is not possible to answer. So, let’s move on.

Yes. I think this is unfortunately all the time we have for today. So, we’ll speak to you all in the next three months. Thank you very much.

Thank you.