Tesla Inc ($TSLA) Q2 2022 Earnings Call

Thank you, Martin. So just as a Q2 recap, Q2 was a unique quarter for Tesla due to a prolonged shutdown of our Shanghai factory. But in spite of all these challenges, it was one of the strongest quarters in our history. Most importantly, in June, we achieved production records in both Fremont and Shanghai. And as a result, we have the potential for a record-breaking second half of the year. I do want to emphasize this is obviously subject to force majeure, things outside of our control. The past few years have been quite a few force majeures. And it's been kind of supply chain hell for several years. Credit to our awesome Tesla supply chain team for overcoming insanely difficult challenges. And huge thanks to the Tesla Shanghai factory team who sacrificed a lot to get the factory back up and running in June and achieve a record output. Also making good progress with production ramp with Berlin. We achieved important milestone of a thousand cars a week in June and we're expecting our Giga Texas to exceed the thousand vehicle per week milestone in hopefully the next few months. To be clear, we're currently making the cars with the 2170 cells and Drew Baglino will address some of the 4680 questions later in this call. But it is worth emphasizing that we have enough 2170 cells to satisfy all vehicle production for the remainder of the year. So, we're not dependent on 4680. 4680 will be important next year but it is not important this year. That said, we haven't sold the second generation of manufacturing equipment for 4680 cells in Texas. And even at our established factories like Fremont and Shanghai, we continue to expand capacity. Regarding autopilot, we have now deployed FSD beta with city streets driving capability to over a hundred thousand owners. They're very happy with the capability of the system and we'll continue to improve it every week. We've now driven over 35 million miles with FSD beta. That's more autonomous miles than any company we're aware of. I think it might be more than all other companies combined. And that mileage is growing exponentially. With regard to manufacturing and technology, about five or six years ago, we said we wanted to become the best manufacturer in the world. And that is somewhat counterintuitively to some people what will actually be I think our strongest competitive advantage. We're super pro-manufacturing here at Tesla and in general, we want to encourage other companies to be super pro-manufacturing. And in general, I think it is a very important thing to do. We need to make stuff. And make it efficiently, and that's manufacturing. So we made a lot of advancements in manufacturing processes. As we now show in the shareholder deck, thanks to the large castings, we make the world's largest castings. We reduced body welding robot count by 70% per unit of capacity in Austin and Berlin. So that's a body shop that is roughly three times smaller than what would normally be the case. And I should say it's also lighter, cheaper, and has superior noise, vibration, and harshness. So, it's good on every level. But the journey is not over. We'll bring a whole another level of simplicity and manufacturing improvements with Cybertruck. And future products that we're not quite ready to talk about now, but I think will be very exciting to unveil in the future. Our safety team also introduced a feature that tensions seatbelts if the vision system detects imminent collision, which has never been done before. So, you can imagine that if you have a seatbelt that only tensions upon impact, you have very little time to tension the seat belt. If the car is literally going to be crunching to trigger the seat belt tensioner. But, because we have vision, we can actually see that a collision is about to occur with 100% probability before it actually happens. And so, we can tension the seat belts and we can even adjust the airbag deployment because we can see, not just feel. This is a fundamental safety advantage that Teslas are now able to offer. And this is also an over-the-air update. So, this is something that will be in place in all cars that have at least AP3 hardware. In conclusion, we exited Q2 with a stronger production rate than ever before. Our team continues to focus on Cybertruck production readiness and some future platform design. We are still expecting to be in production with the Cybertruck in the middle of next year. And we're very excited about that product. I think it might actually be our best product ever. And FSD beta is on track to be released for all of North American customers before the end of this year. And hopefully if we get regulatory approval, we'll also be releasing it in Europe and some other parts of the world. We're hosting our AI Day in a few months. I think people will be amazed at what we're able to show off in AI Day. So, basically there's a tremendous amount to look forward to in the second half of this year. And I want to thank all of our employees and suppliers for their super hard work during these challenging times. Super appreciate it. Thank you. And Zach has some opening remarks as well.

Yeah, actually it should be mentioned that the reason we sold a bunch of our Bitcoin holdings was that we were uncertain as to when the COVID lockdowns in China would alleviate. So it was important for us to maximize our cash position given the uncertainty of the COVID lockdowns in China. We are certainly open to increasing our Bitcoin holdings in future. So this should not be taken as some verdict on Bitcoin. It's just that we were concerned about overall liquidity for the company given COVID shutdowns in China and we have not sold any of our Dogecoin. But we still have it. We still have our Dogecoin.

A lot of force majeure in last several years. I think that's for sure.

Well, right now the best Chinese EV manufacturer is Tesla China. We're actually doing the best thanks to our incredible team in China. But I have a lot of respect for the Chinese car manufacturers and EV manufacturers in particular. I think they will be a force to be reckoned with worldwide. They're very smart and they're hard working and I think any company that's not as competitive as them will obviously suffer a market decline. So I would say we have a lot of respect for the car companies in China and their capabilities.

Okay. This answer will be understood by 0.01% of the audience, I think. Most people don't know what a unified vector space would actually mean. It essentially would be if instead of knitting together static and dynamic objects in C++, if they can be knit together at the neural net level, then you don't need to reconcile them within C++ heuristics. That is an architecturally better way. That's the most desirable outcome. It's probably not necessary to achieve full self-driving, but it would be a slight improvement in the efficiency of the self-driving. And that's certainly something we want to get to. Yeah, this sort of Nirvana situation is you have surround video auto labeling of all static and dynamic objects, and you have then surround video inference with spatial memory as well. And that's I mean, I think we're almost certainly there before the end of the year. Yeah. Not sure how many people would have understood that, but sounds good. I should say also we are also confident of improving the frame rate. As we delete some of the legacy neural nets, we think we might be able to get the frame rate of all eight cameras maybe up to 36 FPS, which is actually a lot of frames considering eight cameras. Certainly comfortably above 24 frames, which is basically the movie frame rate of movies.

Yeah, so since we have there's quite a long wait when somebody orders a car, for some cases like six months, in some cases it could be up to a year. We have to anticipate what the probable inflation rate is over that period of time. So that's what we're trying to do. When we see indications that the inflation rate is declining, then we would not need to increase our car prices. It's possible that there could be a slight decrease in car prices, but this is fundamentally dependent on macroeconomic inflation. It's not something we control. If I were to guess, and take this with a grain of salt, I think inflation will decline towards the end of this year. We're certainly seeing prices of commodities trending lower. But take it with a grain of salt. Making economic prognostication is fraught with error. I don't know if you guys want to say anything about that.

Yeah, but I think that's just like for most commodities, we're seeing a downward trend towards the end of this year or next year. Some commodities, the pricing of lithium is insane. I'd like to once again urge entrepreneurs to enter the lithium refining business. The mining is relatively easy. The refining is much harder. So, lithium is actually a very common... There's lithium pretty much everywhere. But, you have to refine the lithium into battery grade lithium carbonate and lithium hydroxide, which has to be extremely high purity. So, it is basically like printing money right now. There's software margins in lithium processing right now. So, I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can't lose. It's a license to print money.

Well, you know, Tesla's goal is to accelerate the advent of sustainable energy. We're not really... cryptocurrency is a sideshow to the sideshow. So we're not a... cryptocurrency is also something we think about a lot. We think a lot about scaling production and accelerating the advent of sustainable energy which the record heat waves around Earth serve to emphasize the urgency of that transition. So that is what we're trying to do is make electric vehicles and solar and stationary storage battery packs the three pillars of a sustainable energy future which is like solar and wind for energy generation, stationary battery packs for storage of the solar and wind energy because of its intermittency and then electric vehicles the third pillar. And if those three things are solved, we have a sustainable future for civilization and the fundamental good of Tesla and the reason we're doing this or what's really my primary motivation here is to have the day of sustainable energy come sooner. That's our goal. We're neither here nor there on cryptocurrency.

Which one do you want to try starting off with, Drew? Yeah, do you want to do the architecture? Yeah. So structural pack where we get dual use of the battery cells as structure and as energy storage in the same way that an aircraft gets dual use of the wing as a fuel tank and as a wing is I think unequivocally from a physics standpoint the superior architecture. So it's the A architecture. Now, because it is new, we'll start off getting I don't know, up to aspirationally a C within an A architecture. But the potential is there to get radically better and then unequivocally better than a battery pack which is carried like a sack of potatoes.

Yeah, exactly. So the structural pack even the C in the A architecture is beating the non-structural pack. And so over time it will with further refinement be substantially superior to a car that is carrying a battery pack as though it is cargo. And this is like I said, it's very much very analogous to the early days of aviation where fuel tanks were initially carried like cargo until they realized actually you should get dual use of the fuel tank as a wing and as fuel tank. And that makes the planes lighter and better. And that's the same as true of electric vehicles.

Both. Yeah, it's always both. Yeah. I mean but really the two things that improve cost are economies of scale and core technology. So technical issues may not be right. Technical issues like technology advances.

Yeah, I mean there's some platonic ideal of the perfect product where the atoms are you have exactly the right atoms in there in exactly the right position. And you asymptotically approach this platonic ideal. And but it takes a lot of effort over time to figure out actually what is the platonic ideal and then you actually gradually approach that.

Yeah, I was going to say the same thing. Like we're not just evaluating the pack in isolation either. It's the pack plus the body, the integration. You know, do we have mass in the right places? Do we have the cost in the right places and only just the right amount? And I think we've gone through one iteration with we're going to we're doing another one with Cybertruck. We're taking the learnings and doing the next version hopefully is a B B+.

Well, since Andrej was writing all the code by himself, you know, naturally things have come to a grinding halt. And so the irony. So Andrej's also a man we have tremendous respect for Andrej. You know, he's decided to I think he wants to contribute more to I think core AI at an academic level. And get back to coding individually. So but we've got a team of about 120 people in our software AI group that are extremely talented. And I think we will have I'm highly confident we will solve full self-driving and it still seems to be this year. I know people they're like, you know, he always says that, but it does seem as though we are converging on solving full self-driving this year.

We're hoping to start delivering them in the middle of next year.

Yeah, maybe another way of putting it is that our focus right now is on the dozens of little issues that inhibit the production ramp of the 4680. Some of the more challenging ones have been feeding the anode and cathode material because we were using this revolutionary dry electrode process. When something's revolutionary, there's a lot of unknowns that have to be resolved. So we're confident of resolving those unknowns, but it's very, very difficult. But we're making rapid progress on that front. So the first order of business is really get the basics right, get to high volume and high reliability, and then very rapidly iterate within that to enhance the energy density and reduce the cost of the cell.

But I should also emphasize that it is not as though Tesla intends to displace our suppliers of battery cells. The Tesla battery cell production is in addition to what our suppliers can do and we want our suppliers to grow their battery output as fast as they possibly can, and that goes for the entire supply chain. The fundamental rate limiter for Earth transitioning to sustainable energy is how fast can you grow lithium-ion battery output per year. This is the fundamental rate limiter for both transition to sustainability, because you need the batteries for two of the pillars of sustainability, the stationary storage and for vehicles.

People often ask me if some breakthrough is needed in battery technology for the world to transition to sustainability. The answer is no. Even if there were zero technology breakthroughs, literally zero, from where the technology is right now, we could fully transition Earth to sustainable energy. The issue is very much the rate at which the entire supply chain, from mining to refining to cell production, how fast can that grow? It's growing fast, but the faster it grows, the faster we transition to a sustainable energy economy.

Well, I think it's very difficult to predict anything 10 years from now. I hope civilization is still around, frankly. I'll count that as a win. Hopefully we haven't had World War III by then. Or the earth doesn't burn up. So, we do see constraints in refining of the materials necessary for lithium-ion batteries. I do want to emphasize this is not due to a scarcity of the raw material. In the case of lithium, the lithium is one of the most common elements on earth. It's pretty much everywhere. But refining of the lithium into ultra-high purity battery grade lithium hydroxide and lithium carbonate is quite difficult and requires a massive amount of machinery and it's a hard, hard thing to scale.

As well it is also difficult to create the anode and cathode. I think maybe two-thirds of batteries will be iron phosphate or maybe iron with some manganese. And there's plenty of, there's a ridiculous amount of iron on Earth. In fact, Earth is, well, bit of trivia everyone says, 'What is Earth made of more than anything else?' Iron. Iron is the number one ingredient of Earth by mass. Number two is oxygen, which is wild. But, yeah, oxygen's basically rust. You stuck them together. We're a rust ball. That's almost two-thirds of Earth, I think, is rust. We're all right, like a rusty ball bearing with a little bit of other stuff. So, but plenty of lithium, so anyway, there's not like a shortage of materials.

To be clear, there's no fundamental barrier here. It's simply a rate question. Like, what rate can you scale production? And I think we're seeing a very rapid increase in battery production and in the whole supply chain. If you were to say today, what are concerns a few years down the road, I would say one of the concerns is the machinery to refine the critical ingredients of lithium-ion cells. So, the lithium itself and then the cathode, which like I said, we mostly iron phosphate and also some manganese. I think almost all stationary storage will be iron phosphate and then you'd really just need nickel chemistry for long-range vehicles and like aircraft and that kind of thing.

Yeah, I mean, if our suppliers don't solve these problems, then we will.

Well, right now our problem is very much production. So, we've long leads on as anyone can tell if they order a car. If you order a Model Y, it will arrive sometime next year. So, this is clearly not an issue for many months for us. Our problem is overwhelmingly that of production.

Yeah, and I think it's very, very just worth mentioning that there's a difference between value for money and fundamental affordability, because sometimes people say, 'Well, if you got all this demand, why don't you just raise the price to some, you know, double the price or something?' And this is usually expressed by somebody who's rich. But even if you rate a value for money to infinity, if consumers do not have enough money to buy it, even a product where the desirability is rated to infinity, they simply cannot buy it. So this is why you cannot just raise prices to some arbitrarily high level because you pass the affordability boundary and then you fall off a cliff.

So I do feel like we've raised our prices quite a few times. They're frankly at embarrassing levels. But we've also had a lot of supply chain and production shocks. And there's crazy inflation. So I'm hopeful this is not a promise or anything, but I'm hopeful that at some point we can reduce the prices a little bit.

Well, I mean, I think we've got a good chance of exiting this year at 40,000 vehicles a week.

Yeah, we've had many 30,000 car weeks already. So, I think a 40,000 car week is within reach by the end of this year. So, seeing how in Fremont, as we said last month, were record production and they're really firing, if that's a term, doing really well. So, yeah. But then Austin and Berlin are coming on strong. Theoretically, they also had record quarters last calendar. And if we ramp them to the capacity shown in the impact, by the end of this year, we'll be at that rate.

But there's always a lot of uncertainty and the production output looks like an S-curve. And that intermediate part of the S-curve is very difficult to project that with high certainty. But the end part of the S-curve, you can say, I think you can have a lot more certainty. And so, that's why I'm confident we'll get to 5,000 cars a week in Austin and Berlin by the end of this year or early next year. And probably, but not certainly, 10,000 cars a week at both locations by the end of next year.

Yeah, we will increase the price of FSD sometime later this year. Probably just before we go to wide beta. The wide beta is anyone who wants to use the beta software with all the caveats associated with that can use it. Then it would make sense to increase the price of FSD. The value of FSD is extremely high and not well understood by most people. It basically currently ridiculously cheap, assuming FSD materializes, which it will.

Yeah, I don't really think we have anything to comment on the purity specs of lithium on this call right now.

You know, I mean, I think we've said this now for many years and it has proven true. Tesla does not have a demand problem, we have a production problem. And we've almost always had it with very rare exception. It's always been a production problem. I think that will remain the case.

We don't want a long backlog. That's annoying. It'd be like go to a restaurant and you order a burger and you have to wait 3 hours. I'm like, that's annoying. You want to get your burger right away. Same with the car. So we want the lead times to reduce.

Maybe I say like we don't have like because we see daily orders from around the world for our cars, it's actually a mood barometer of people's confidence in the economy. But one can't read too much into it because things can vary a great deal from one day to the next. Consumer sentiment is all over the map. So it's very impressive frankly. But we have so much excess demand that it's really just not an issue for us. So it might be an issue for some other companies, but it is not an issue for us.

A lot of unusual things. Let's face it. You know, I mean basically if there's only good news, I won't be on the call. But if you have a tough situation like COVID shutdowns in China. Then I think I'll be on the call if it relatively speaking is bad news and if all we have is good news, then I won't be on the call. So, but I'm committed to the launch, I mean, I'll work at Tesla as long as I can usefully advance the cause of sustainability and autonomy.

Well, I don't want to steal thunder from AI Day. Though I think we'll have some exciting news on AI Day. I think we'll be further ahead than probably most people think. But I don't want to, I'd love to answer you, but I think we'll leave that excitement for AI Day.

Well, this we've done, we've been working with our suppliers, but we don't currently intend to make chips ourselves. We don't think there will be a need to make chips, but we have been working closely with a number of suppliers. I actually just met with one of our key supplier CEOs right before this call. And we had a great meeting. They're going to make major investments in some of the critical chips and components that we need in the car. And I've actually like take a moment to thank our key suppliers once again for supporting us through difficult times and they really went above and beyond to support us. So, to all our suppliers out there, thanks very much.

Yeah, I think Tesla is as much a software company as it is a hardware company and so one of the ways that we've been able to address supply chain issues on the chip front is by rewriting our software to be able to use different chips or in some cases achieve dual use of a single chip which is even better. And actually quite frankly the chip shortage has served as a forcing function for us to reduce the number of chips in the car. A simple fact. Yeah, it turns out we had more chips than we needed. So but it's a testament to our software team that we're able to roll a new chip into the car and write a whole new batch of software for that chip and without interrupting production.