特斯拉 (TSLA) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors second quarter 2013 financial earnings results call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. I would like to turn the call over to your host, Jeff Evanson. Please go ahead.

Thank you, Patrick, and good afternoon, everyone. Welcome to our second quarter financial results Q&A webcast and conference call. I'm joined today by Elon Musk, Tesla's Chairman and CEO, and Deepak Ahuja, Tesla's Chief Financial Officer.

We announced our financial results for the second quarter shortly after the close of trading today. The shareholder letter, financial results and webcast of this Q&A session are all available at our Investor Relations website, at IR.TeslaMotors.com. Today's webcast is for your questions, and I thank you for primarily using the webcast. That helps save us some money, so thank you. We're going to conduct this Q&A session live.

(Operator Instructions)

And we do plan to end this call in 45 minutes, as always.

Now during the course of this discussion, we may talk about our business outlook and make forward-looking statements. Such statements are predictions based on management's current expectations. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10-Q filed with the SEC. Such forward-looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements.

And so now, Patrick, could we please have the first question.

Our first question comes from Patrick Archambault with Goldman Sachs. Your line is open.

Thank you very much, guys. Congratulations on a good quarter. You know, I think obviously the execution looked great. But my one question would be, can you help us walk a little bit from, I think, your margin is adjusted 10%, ex-ZEV credits. It sounds like you still have some levers to pull to get to the 25%. Can you just go through those with us?

I think, Patrick -- Deepak here -- our automotive gross margin, excluding ZEV credits, is closer to 13%, and maybe we can walk you through that later on to clarify. I know this is a confusing quarter with significant accounting numbers here, so we'll just help you with that. But we see clearly a path that gets us to 25%, excluding ZEV credits, given the actions that are underway and have been underway for a while, and these relate to on the cost reduction aspects, with our part cost reduction road map, the efficiencies we have in our manufacturing and supply chain that are happening over the second half, as well as a combination of the new options that we have put in the marketplace and the margin enhancement we get from there. I'm sure Elon has more to add.

Right. Just in summary, we're about 12 points away from getting to the 25% gross margin target, without ZEV credits. And if you look at, say, Q1 to Q2, we increased 8 points. So obviously on average, between Q3 and Q4, we need to do 6 points per quarter. So we need -- we don't need to make quite as big an improvement as we did Q1 to Q2, but obviously, significant hill to climb and huge amount of work. But we feel pretty confident about the 25% number. And it's important to note that we have visibility into these numbers, within reason, ahead of time. So the things that affect the gross margin, in order for them to affect the fourth quarter, really need to be in place or substantially in place about a month before the fourth quarter. Otherwise, the parts that go into the car will not contain the cost savings that are necessary. So essentially, things need to be in place next month. And so that's not very far away. So that's why we feel -- felt confident enough to reaffirm the 25% gross margin guidance, absent ZEV credits, for the fourth quarter. -- a force majeur event or something, some really big unexpected thing, but as long as there's nothing really unusual that happens, then that should beat that target.

Okay. Great. And then, we haven't had an update on the X and when that's likely to -- we understand that obviously, the variants of the S are what's taking a lot of engineering resources in the near term. Deepak maybe, in terms of the X timing is it still towards the end of next year when you're thinking about it, and when do those engineering resources come to bear on your capital budget? Thanks.

So I'll maybe do part of the answer, and then Deepak. But yes, we're hard at work on the Model X, refining the design. We expect to be in limited -- to deliver a small number of units at the end of next year, and then volume production would only occur in 2015. So in terms of, if you're trying to model it financially, I'd model it more in 2015 than 2014, although we're on track to deliver (Inaudible) to customers at the end of next year. And from a product standpoint, the Model X is our primary focus. Obviously at this point, it's where most of our resources are spending a lot of time personally on the Model X and try to get the details right. And I think there are some things we can do to improve the Model X over the early demonstration prototype that people have seen. I think there's room to make it better. So we're going to push pretty hard to make it better than what people have seen. I think there's some exciting features that I love. Hopefully, other people like them, too.

I think Elon's covered the key points. A lot of the resources required for Model X is in our plan, in terms of expenditures. And that's one of the contributors for the increase in R&D expense as we go forward.

Okay. Thanks a lot, guys. I'll get back in the queue.

Our next question comes from Andrea James with Dougherty & Company. Your line is open.

Hello. Thank you for taking my questions. I imagine you have several options available to you now, from investing in the Model S capacity, which you mentioned in your letter, to finishing up the Model X and then to engineering the next generation of vehicle. And I was wondering if you could just weight your priorities and tell us how you're thinking about it, both from factory investment and also from your R&D.

Okay. Well -- okay. So it depends on how you -- how one weights those things. So in terms of our expenditures, we're still more on Model S than anything else, on every front, including R&D, because bear in mind, we've got right-hand drive that's coming out in the spring, and then there's the China version. And obviously, we've got the European version that's going in, and there are a number of nuances in the various European countries that require work to ensure the car operates smoothly. There's the Japan right-hand drive version. So there's a lot of versions, and individually maybe not so huge, but you add them up and they amount to a fair bit of spending. In terms of executive time, I think we're -- the Model X is swiftly rising to become the main priority. It's not quite there yet, but it will be soon. I'm allocating an increasing portion of my time to that every week. Probably in the fourth quarter, it becomes the top one, the top item, is my guess. These are somewhat qualitative statements, but --

The capital expenditures for Model X will primarily kick in next year, as we start to get some of the tooling phase. Right now, it's more of the human resource expenditure and some of the --

It's design and engineering, but not a lot of tooling. It's a lot of lab work and design work, but not a lot of hard tooling or anything. There will be a fairly big chunk of that in second and third quarter, and fourth quarter next year.

When does the next generation of vehicles move up? Is it a timing thing? Is it a cost of the battery pack thing? Is it resources?

You mean our high volume affordable car?

That's right.

Right. So there's a couple -- as we think ahead to that vehicle, we're allocating a little bit of time to some of that advance planning. It's only maybe less than 5% a week, of our planning activity. But when you do the math, on saying okay, how many batteries do you need? What's the cell fabrication capability, the raw materials, all the elements? it's really quite a large number in order to ultimately, say, be at a factory that's producing half a million vehicles a year. And we start exceeding the entire laptop industry by a decent margin. So clearly new factories, new cell factories need to be built. And we need to be smarter about the raw materials going into the pack.

I certainly see a clear path. I don't see any -- I see not really -- not only do I not see obstacles, I see a fairly clear path to that vehicle. I have high confidence that we can create a compelling car for around $35,000. Compelling meaning a 200-mile range and, of course, a lot of the other features that people have come to expect from Model S. Although fewer things would be default features. So yes, I feel pretty good about it. There's a huge amount of work, but no miracle is required.

Are Tesla shareholders going to see any benefit from the hyper loop?

I don't know. I think it's not out of the question, but I think I kind of shot myself in the foot by ever mentioning that, I believe, because I'm too strung out. Obviously, I have to focus on core Tesla business and SpaceX business, and that's more than enough. But did I commit to publishing a design, and we're going to provide quite a detailed design, I think, on Monday. And then invite critical feedback and see if people can find ways to improve it and then it can just be out there as an open source design that maybe can keep improving. And I don't have any plans to execute it, because I must remain focused on SpaceX and Tesla. If nothing happens for a few years with that, I mean maybe it could make sense to make the hyper loop happen with Tesla involvement, but that's, I would say, is extremely speculative.

Finally, just for Deepak, what were the other regulatory credits in the quarter, and does your GM assumption include those in the long term?

Yes. Our gross margin for automotive does include the other regulatory credits, because we have good visibility of those and they're locked in for us over longer term. ZEV credits are the ones which are not predictable from, in terms of recognizing sales and revenue by quarter. And given their unpredictability, we have deliberately kept that aside in our own projections. And in this quarter, in Q2, those were roughly $18 million.

Can you just -- the visibility is better than the ZEV credits because why, exactly? And then I'll hop off. Thank you.

Because we have longer term contracts with certain car makers to sell those credits.

Thank you so much.

Our next question comes from Adam Jonas with Morgan Stanley. Your line is open.

Hello, everybody. Okay, Elon, I'm not going to ask you any questions about a cap raise this time. I don't think we need to go there. First question, on the 40,000 unit annualized sales comment you made by late 2014 as a potential, what metric were you using when you were extrapolating that for Asia? Is that something like on a sales per store or percentage of addressable market?

Actually, it's just based on what we kind of see the demand as. Right now, obviously, we're selling in North America at about 20,000 units a year. So Europe is a similar size market to North America. China is actually bigger, and then that doesn't include the rest of Asia-Pacific, South America, South America, Australia. So it seems like that's a pretty safe number to assume. I mean, I think we've probably got some potential upside from that number.

Okay. That's clear. Next one, can you elaborate a bit on the nature of the supplier bottlenecks that you mentioned? Is it related to homologation for some of the exotic either European or right-hand drive type deliveries? Is it a new issue or was it a lingering legacy issue, and any update on when this could be resolved?

Yes. This is an important point that our production is -- we have production constraint, not demand constraint. Very often, people will suggest all sorts of marketing ideas, this, that and the other thing. But obviously, our time is spent trying to figure out how to make more cars. And the things that prevent us from doing that are supplier parts, essentially. And we've got 90% of our suppliers are able to ramp up. And if 5% have some difficulty and 4% have a lot of difficulty and 1% just can't, and so we've got to replace those or insource those items. You can't supply -- give people a car that's 99% complete, unfortunately. And there's several thousand unique parts in the car. So that's really what we're really spending our time on is clearing out those production bottlenecks or supply chain bottlenecks. And I think we should have probably cleared most of them out in the next six months. I think by maybe end of Q1, Q2 we should -- certainly by Q2, I think, unlock a fair bit more production potential. And we'll see what the demand looks like at that point.

But we're striving to become demand limited, as opposed to production limited. And I feel like we're actually able to attract more the A team on suppliers, whereas previously we had some trouble attracting the A team from suppliers. They felt we wouldn't be around long term. And we had that issue where IHS had predicted that Tesla would only ever sell 3,000 cars, lifetime, of the Model S. And then we sold that in the first -- basically the first quarter of production. And so the tricky thing was that a lot of us -- many of our suppliers had taken the IHS number or taken historical electric vehicle numbers and maybe given us a little bit of credit for our projections, but not much. And so they didn't tool up for the production that we actually experienced, as they were scrambling to make up for it. And, yes, so that's really -- they just didn't believe it. You have to take some time to tool up and do it. And then some suppliers, a small number, they're just not set up for volume production. So we've got to switch them out or insource them.

That's clear, Elon. Thanks. And this is my last question. I think many of the people on this call might be interested in your views on the BMW I3. That's it. Thanks. What do you think?

Well, I'm glad to see that BMW is bringing an electric car to market. That's cool. I think there's room to improve on the I3, and I hope they do. My comments about manufacturers --

Sorry. (Laughter)

Anyway, I keep on -- I really do encourage other manufacturers to bring electric cars to market, because it's a good thing. And they need to bring it to market, and then keep innovating and improving and making better and better electric cars. And that's what's going to result in us, in humanity, achieving a sustainable transport future. I wish it was going faster than it is.

Yes. Thank you for that, Elon. Good answer.

Sure.

Our next question comes from Brian Johnson with Barclays. Your line is open.

Yes. Good afternoon. Two questions. One for Deepak, probably, and one for Elon on Gen 3. For Deepak, the first question, ask you to bridge on gross margin through the end of the year. Could you just maybe give us, on the bridge of improvement from 1Q to 2Q, the big chunks of things that contributed to that margin increase, ex-reg credits?

Sure. I would say the biggest pieces there were spot cost reduction. As we continue to get more efficient at our suppliers, as well as some of the design changes we made to make the design efficient, while not taking anything away from a consumer point of view. We also had improvements in our labor and overhead and our freight costs. And all of those, in fact, were partially offset by the mix we had. We had a poorer mix in Q2, since we sold the 40 (Inaudible) cars that had the 60 (Inaudible) battery pack and --

We essentially sold at a loss.

Right, yes. Which had, from an average gross margin perspective, a negative impact. So I think what I'm sharing with you is no different than what we have shared before. It's those same levers, and part cost is our biggest lever that helps to drive.

Yes, parts, labor, yes. That's what cars are made of. And I think -- maybe another way to characterize it is like in the fourth quarter of last year, we were extremely dumb at making cars. In the first quarter, we were maybe still pretty dumb/ And we're slightly dumb in the second quarter; and hopefully, by the fourth quarter, we will at least not be dumb, when you think about it. (Laughter)

I'll figure out how to quantify that.

This is not some super -- how did we get so super good? It's like, how do we stop being so stupid?

Second question, Gen 3, two questions underneath, the 35K price point, is that before or after regulatory -- excuse me, consumer credits and tax credits? And then second, as you think of Gen 3 and making money at it, some talk I've heard that maybe small format batteries aren't the right way to go, but large formats, just maybe reiterate, I kind of think the former, small format, where you are on those and how that gives you some comfort in getting to the price point on the Gen 3?

Sure. So yes, the 35K does not assume -- assumes that the $7,500 federal tax credit is no longer available. There may be other sort of state level tax credits, or maybe other things, but we're assuming that the 35K is without any subsidy.

Right.

It's always helpful to have some subsidy, but we're not counting on it. And so in terms of the cell format, for us, when we talk to our key cell suppliers and we ask them to give us -- say at the cell level, what is the best energy density, and what is the best price dollars per watt hour, invariably, the 18650 format is the best, usually by a pretty decent margin. That's an 18-millimeter by 65-millimeter cylinder -- yes, that's the format that seems to be the best. It has advantages. I think, you say, well, why does it cost less? You're able to kind of pack -- and why does it have that energy savings -- you're able to compress and pack in quite a bit of electrode and electrolyte in that cylinder. That's why batteries really were like -- can survey batteries, there's like cylinder, AA, AAA, and that kind of thing, but you can pack more in there. And this just happens to be a fairly efficient manufacturing process in almost every way, relative to the prismatic approach. Also as you make the cell bigger, you have to say that the reject rate for the cell is going to increase. So you think of maybe an analogy to the silicon wafer fab and say, what would be cheaper, having a whole bunch of, say, 6-inch wafers or one 12-inch wafer? And actually, it's the lower diameter wafer that is cheaper, because with the silicon, as with electrode area, you have to reject anything that's got a flaw. So the reject rate -- and to also help us think of things in the limit. So you say in the limit, where the battery -- where the whole battery is one cell, the reject rate would be virtually 100%. And then as you make the cell smaller and smaller, the reject rate will reduce. And at the 18650 format, the reject rate is very low. And you have very good statistical reliability. So I'm sort of giving long winded answers here.

Shorthand, could we call it a server rack versus a mainframe strategy?

Yes, sure.

Okay. And in terms of how you're managing the load, are there advantages to having several thousand? I've heard numbers as high as 8,000 cells, versus a smaller number, again kind of thinking about the statistics behind it?

Well, I think we're at around 7,000 cell number for the 85-kilowatt hour pack. If we were to say, what's the ideal cell number, and if we were to get a whole new cell, like the whole new cell plant -- I think we might drop the cell number in half, but probably not less than that. And the other thing that cells give you is that for long term life of the pack, if you have a large number of cells, then losing a cell actually has a very small impact on the total capacity of a pack, whereas if you have a small number of cells, then losing a cell has a big impact on the capacity of the pack. So there's some advantages for life as well, and for reliability.

Okay. Thanks.

Our next question comes from Dan Galves with Deutsche Bank. Your line is open.

Okay. Thanks. Just wanted to follow up on the 40,000 units per year by late 2014 comment in the shareholder letter, can you tell us what North American order flow is on an annualized basis right now? And what type of order rate are you seeing in Europe currently, and what's the trajectory, what's been the trajectory of that?

Yes. So I don't want to get too specific, but we're at a -- in terms of net orders, weekly net orders, so new orders net of cancellations, it's something on -- fluctuates a little bit from week to week, but it's around 20,000 right now for North America. We're not trying to push it higher than that, because it's kind of pointless to push volume when you don't have the production to meet it. So I think there's potential there for, once we are sort of -- we have service centers in more parts of the country and more stores out there and more word of mouth and more Supercharger stations, and there's an argument that the long-term demand in North America is greater than 20,000 units a year, since we lack those things today, and have that approximate demand.

And then in Europe, also in Europe, we're actually not trying to push sales very hard, because the -- if you order a car in Europe, you're going to get it in like maybe November. So we really, again, need to improve our production. We need to make sure that the entry of the car into Europe is smooth, that people have a good experience with the car, that all the service centers are there, that the people are well trained. These are the really important things. And then like I said, I think if you look at sedan demand, the EU or greater EU area is actually higher than North America in general sedan demand. So if you say, how many Prius sedans are sold? More are sold in the greater EU area than in North America. So to the degree that there's some -- that we achieve a similar percentage in Europe, and maybe it's a bit less, because our car costs a bit more because it's got to come from the US and there's increased logistics costs and import duties and that kind of thing.

So that's why we're not going to say we assume it's going to be just as good as North America, but it's probably at least half as good as North America, and maybe it is ultimately as good as North America. But a conservative estimate would say it's half as good. And then China and rest of Asia and other countries, if they can be half as good as North America, then we're at the 40,000 unit number. So that all seems pretty reasonable to me.

That makes sense. In terms of capacity to build, I think your current line is set up for maybe 40,000 to 50,000 units on two shifts. I guess, two questions. When do you think you can get to that number in terms of production rate, and what is the decision making process in terms of potentially adding more capacity if you're going to fill that up with just the Model S?

Right. And yes, as I said earlier, while we have the ability to produce at the 40,000 unit level, all of our suppliers must also have that ability. So that's the thing that's holding us back. I think we -- there's certainly room to grow beyond that. We have a big factory, but yes. So we'll have to see how demand settles out. As I mentioned, we want to get to being demand constrained as soon as possible. Hopefully, we'll get there next year. That's our goal, at least by the end of next year. And then, of course, we'll bring the Model X online in limited numbers next year and then in bigger numbers in 2015. And the potential is obviously very significant. But I won't over promise or -- I think there's a lot of potential, but we'll have to see how it turns out.

Okay. Great. One last question. You mentioned that the changes to options and pricing that went in maybe a week ago was going to be a benefit to margin in the back half. Do you have any sense of kind of how much it would have benefited margins in this quarter, or do you have a projection for how much of an increase you'll see from that action?

We're really not sure, because we only introduced them less than a week ago, like four days ago, five days ago, and we don't know what the take rate's going to be. We've got some guesses, but I think there's no need to guess, because we'll in, let's say, a few weeks time, we'll have a pretty good sense for what the option mix is in reality, as opposed to just like a guess. So what we did with the options is we actually unbundled a bunch of things. We added some additional options that weren't there before, like parking sensors and improved interior trim options, and a number of other things that people had been asking for that are -- subzero weather package. There's improved tires, which come as default on the 85 and are an option on the 60. There's a whole bunch of cool things actually, and then --

New wheels.

Oh, yes, new wheels, the aerowheels, which improve range and give us actually by far the lowest drag coefficient of any car in production. And yes, there's a whole bunch of cool stuff. And like I said, we unbundled some things like the performance package, which required you to buy a whole bunch of things in addition to just the 0 to 60 time. Now you essentially can buy just the power and then decide if you want the other options. And we slightly lowered the price of the technology package. And to be clear, the base price stayed the same, and the technology package dropped. The cold weather package, we also dropped, in deference to our customers in Norway, because I think the subzero package you kind of need if you're in Norway, and so we actually dropped the cost. We made on headlights and the Hi-Definition backup camera, we made that standard equipment on all cars. So essentially, I think the value for money is actually better. But we did increase the price on some of the optional, the extras that, so we'll actually make more margin on some of the things out there, like for example, the third row seats, and those were a fairly low margin item. So we increased the price to make it more of a better margin item for us.

Okay. Great. Thanks.

Our next question comes from Colin Rusch with Northland Capital Markets. Your line is open.

Great. Can you guys talk a little bit about the introduction of new generations of batteries into the battery pack? How much testing do they need to go through, and how much impact do you think that can be on the cost structure over the next several quarters?

We're not planning on making a significant fundamental technology change at the cell level. We' re making a number of improvements at the pack level, and in the electronics and packaging and all that stuff that surrounds the pack. So there's the cell and the non-cell portion of the cost. To get the cell cost lower, we're working with our main cell supplier, which is Panasonic, and working with them to improve the cost of the cell. And obviously, the more volume there helps. And we're quite optimistic about that relationship. It's going really well. They're a great partner to have, actually. So yes, I'm not quite fully answering your question, but we feel good about where things are and where they're headed on both the cell and non-cell portion of the battery pack cost.

Okay. Perfect. And then with the purchase of the additional land around your current facility, pie in the sky. How much capacity does that -- would that potentially give you, if you build out all that area?

Well, it's worth learning that that piece of land adjacent to the factory was originally part of the Nummi facility. So when we bought the factory, it was actually divided into the center parcel and then kind of a north parcel. It was mostly just land, and a south parcel that was mostly land. So when we bought, we bought essentially the factory and the main parcel of land, but there were these two little sort of satellite parcels. And what we did was we bought about half, I guess, of the south land parcel. And Nummi as a whole, as a factory, had about half million unit capacity. So we'd actually need to be slightly more space efficient than them to achieve the 500K number, or buy maybe some more land. So I don't think buying that land puts us above the 500K number. It just makes it easier for to us achieve the 500K number.

Okay. Excellent. Thank you so much.

Our next question comes from John Lovallo with Bank of America Merrill Lynch. Your line is open.

Hello, guys. Thanks for taking the call. First question would be on what you're expecting in terms of the ramp in R&D and SG&A in the back half of the year. Can you hear me okay?

Yes. R&D and SG&A, right?

Yes, please.

Right. I think certainly it's going to be fairly significant. I want to be careful about how much I quote in terms of percentages, but I think it's more important to understand the physicals, as we have indicated in the shareholder letter, that overall, given the continued emphasis on multiple product programs that we have, we will see an increase in R&D. And on the sales and SG&A side overall, we are strengthening our infrastructure globally on a variety of fronts. So I would say from a trend perspective, the percentage increase would be higher than what you've seen in the last couple of quarters.

Okay. That's helpful. And then if we think about cash flow for a minute, I think if you look at just free cash flow was a use of about $79 million in the quarter, and I think if you make the adjustments that you guys had talked about, I think $11 million for the DOE payments and a $67 million increase in receivables that may not occur. That looks like about a use of $1 million. Now you have CapEx ramping up in the back half of the year. So how are you thinking about just free cash flow generation through the remainder of the year and into 2014?

We said in the shareholder letter that we clearly intend to generate cash flow from operations. You're right in pointing out that some of that will be offset by our capital expenditures, and we want to be very careful about burning cash. We want to be sure we are as close as possible to a free cash flow position, but that's something that we don't want to necessarily guide to. We're going to manage it, but we are going to be judicious and spend the CapEx where we need to, in order to make sure that we are growing at the right pace.

Yes. We are aspiring to make slight improvements to our cash position quarter over quarter. I mean, that's our aspiration.

Okay. That's very helpful, again. And the final question would be, just looking at the typical ramp curve of a vehicle after launch, generally speaking, and I don't want to put you guys in a category with any other vehicle, but generally speaking, volumes tend to peak, call it seven, eight quarters out. Now you guys -- sorry.

I don't think that's going to be the case for the Model S.

Okay. That was the question. So in North America, you would say that you have not seen any signs of slowdown in new orders?

No.

Yes. The traditional model doesn't apply for Tesla, because that assumes that you have a network which is already present, not only in the US, but globally.

Correct, exactly.

So we just don't have that presence. We are starting here essentially from scratch and slowly increasing our presence, and making consumers feel comfortable about what EVs are.

Exactly. I think there's a pretty long way to go.

Go ahead. Sorry.

It's sort of like an S curve of technology adoption. You've got the really early adopters. But for the mainstream audience, they need to really see a lot of cars on the road for a long time to really feel like -- to feel comfortable buying it, particularly when it's a new technology, like an electric car, as Deepak was saying.

Okay. Thanks very much, guys.

Our next question comes from Craig Irwin with Wedbush. Your line is open.

Evening, gentlemen. Congratulations on the solid progress.

Thanks.

Thanks.

First question I wanted to ask was about the Tilburg plant capacity. What sort of capacity have you put into that plant, and what sort of capital investment would be needed there, as far as expanding finishing capacity? Can you sort of sketch this out for us a little bit?

Yes. I really -- I don't think that that's going to be in any way a limitation on our progress. To be clear, it's a final assembly plant. So we're not dependent on parts from suppliers or anything. Generally, when we haven't been dependent on parts -- when we haven't had an external dependency, we've been able to get the job done, but once data is in the hands of others, that makes it a lot more difficult. And it is not in the hands of others in the case of the Tilburg plant.

Great. Great. Progress in China, obviously the Chinese market is a huge market. There's a lot of enthusiasm over there for electric cars. Can you share with us where you stand on your order rate out of China, what you think we're likely to see over the course of the next couple quarters, and if maybe you could update us on your store plan for China?

Sure. I wouldn't say that this is quite the quarter to talk about China. I think we might want to talk about it, probably at the next earnings call, in more depth. But as you say, China is a huge market. It's the world's biggest market for premium sedans. If you take something like, say the Mercedes S class, they sell approximately half of allof their worldwide production in China. Obviously, if we were to ratio -- have a similar ratio, that would be a pretty amazing outcome for Tesla. But we're not counting on anything remotely like that, quite the opposite. But it could be a positive upside surprise there, you just never know.

But we have one store in Beijing that we'll probably open later this year. And I'm going to visit China obviously and really try to understand the market and make sure we're doing the right things for Chinese consumers and the buyers over there, because not every market wants exactly the same thing, so we've got to make sure that our product is properly tailored to the desires of consumers in every market, in Europe, North America or China or Japan, or anywhere else. So we're doing a few things especially for the China market, for example, improving the comfort level of the rear seat, because it's common for people in China to be driven rather than drive themselves. And when we first designed the Model S, we designed it to be the perfect driver's car, really. It's like, how do we make the driver fall in love with the car? And obviously, we -- if people are being driven around, then we need to make sure that the back seat is optimized. We're working on an executive -- kind of an executive back seat that's more comfortable than what we have right now, which is kind of like the family back seat.

So those are some of the things. It's difficult to predict, and this is not the quarter to talk about China. Maybe at the next earnings call, and certainly at the earnings call about Q4, as we'll be talking quite a bit about it at that point, I think.

Great. And then last one, if I may, you've got a pretty interesting trajectory on battery costs over the next few years. Can you share with us philosophically whether or not you might use the reduction in battery pack costs as a way to sort of neutralize the impact of the federal tax credit rolling off for your customers or do you see this possibly extending out beyond the time frame where that would have the necessary benefit?

Well, the $7,500 federal tax credit is limited to the first 200,000 cars for any manufacturer. So that -- between model S and X, we think probably that's going to get exhausted in the next several years, and that's why we think it probably wouldn't apply to our third generation, the affordable car. At that point, if it's possible for us to maintain a high margin and neutralize the loss of the tax credit, if I think we'll probably -- I'd probably elect to do that, rather than have a higher margin car.

Thanks again for taking my questions.

Okay. We're running about five minutes over, everyone. We want to make sure that we get to all the questions in the queue. So we have a couple more left. So if we can keep the questions brief, we'll wrap this up as quickly as we can.

Our next question comes from Aditya Satghare with Lazard Capital Markets. Your line is open

Thank you. I had two questions. Firstly, as a follow-up on the 40,000 unit price, on the 40,000 unit target, how many different versions of the ModelS and how many different countries do you plan to sell into to get to that 40,000 unit target?

In terms of actually the number of countries, it would be quite a large number of countries, because of the EU, which is -- I forget, I'm not sure of the exact number of countries in the EU, but I think it's 14 or 15 or something like that. And then, of course, there's Norway and Switzerland which are not in the EU. So right there, you're approaching -- and taking Canada and the US into account, you're talking about 20 countries right there. And then the China, Japan -- Japan's a very important market for us, by the way. We're going to take the Japan market very seriously. I know that a lot of American car companies, they don't take the Japan market really seriously, but I think if we're going to do that, I know it would -- yes. The Japanese market's very discerning, and actually I would consider it a great honor if the Japanese were to actually buy our car.

Got it. Okay. Okay. And the second question was on the US market. Could you give us a little bit more color about your buyer base here, and what kind of potential brands do you think your customers are swapping out and who do you think you're grabbing share from?

We have some pretty good numbers for that. It's a really broad mix of cars. It's not -- they're not just premium sedan. In fact, I think we --

I believe we (Inaudible) that in our last earnings call, where we shared that --

At the capital rate --

Probably. That's right.

If you go back and look at our capital rates presentation --

Go ahead and just talk about some of the cars we're replacing.

Yes. it's a wide range of cars. It's not like you can say, oh, it's a BMW-5 series or something like that. In fact, we're just pulling up the pie chart right now.

This is from the -- it's an ALG overview taking data from Polk, and they're showing sort of the -- it's essentially like the famous sedans and hybrids are the big ones. But seriously, like we've got -- there's no -- the largest one here is sort of on the order of 10%, 10%, 11%. A lot of people are buying our car instead of the Prius, but that's 10%. There's obviously things like the E-class are buying our car instead of the Leaf, or coming from -- I'm sorry, these are cars they're coming from. So it's like E-class, Prius, Leaf, the Highlander, E-5 series, Odyssey, Honda Odyssey has 4%, the Honda Odyssey going to Model S. Volvo XE90 is 4%. Volkswagen Jetta is 4%.

A pretty broad mix, overall.

Honda Civic is 3%. So it's really a pretty broad range. It's not just from the premium sedan segment.

Got it. That's helpful, and congratulations on good execution this quarter.

Thank you.

Okay. We have time for one last question, please.

Our last question comes from Elaine Kwei from Jefferies. your line is open.

Hello, everyone. Thanks for squeezing me in. Now that you're beginning to ship internationally, could you talk a little bit about the thinking behind the pricing strategy for Europe and Asia? Are there any adjustments based on local incentives? Is it based on what the local market can bear, and would you expect margins to vary compared to the US? And then I'll just throw the second part in there, with the Supercharger network has really overcome the infrastructure obstacles for long distance driving, and does Tesla have any strategy for addressing the challenges for urban dwellers, especially in international markets where that might be more common? Thanks so much.

Sure. The Tesla policy is to try to make the same amount of money on a car in any given market. So this is not a policy that -- in fact, we may be unique in this. I'm not sure if there's another automaker that does this. But we don't want to make more money off someone just because they're in another country. So I don't think that's the right thing to do. So for example, in China, it's quite common for manufacturers to mark up the cars in a pretty huge way. We will not be doing that, and we'll also try to be extremely transparent about our pricing. So you can take the US price and you could factor in logistics and any import taxes, and then there's maybe a 3% allowable for exchange rate movements, and then some incremental for any extra costs of doing business in that country, that would increase our overhead. But we try to be really transparent about that and keep trying to improve those costs over time. I guess the overarching principle here is that we don't want to rip anyone off. So you should assume the same margin in every country.

That's great. And then is there any thoughts behind addressing the challenges for folks living in apartments or condos, where you might not have a personal garage? I could see this especially being an issue for the Gen 3 buyers, especially.

Yes, absolutely. It's not a huge percentage of the market that has this issue, but it is something we need to address. So for -- and the toughest one is street parking. A lot of cities and municipalities are putting in charging infrastructure on the street. So we're working with them to get more of that established. And then on the -- for apartments and condos, for their garages there, we're forming -- or we actually have sort of loosely formed a group within our sales and service operations team that is able to work with the -- whoever is running the condo or apartment building and tell them what they need to do to install sockets.

And I think it's going to be important long term is the ability to sort of load level or limit total power -- electricity power load in an apartment building. So if there's a lot of cars, you don't want to exceed the total power going to that building at any one time. So it's just kind of a peak power limiter that's able to communicate between the cars that are getting charged. And there's -- there are a few companies we're working with in that regard to deal with that peak power load in apartment buildings. You know, it really hasn't been, thus far, a constraint on our growth. So it's occupied a little bit of our attention. As that becomes -- next year, perhaps it will become a constraint on our growth, and then it's going to be more centrally in our attention.

That's great to hear on the international and the infrastructure front. Thank you so much, Elon.

Okay. Thank you, everyone, for joining us today. We look forward to seeing you over the next quarter. And in fact, we'll be at Jefferies' Industrial Growth Conference in Manhattan next Monday. And on Tuesday, also in Manhattan, we'll be at JPMorgan's Auto Conference. So hope to see you all out on the road, and happy driving.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.