特斯拉 (TSLA) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Tesla Motors First Quarter 2014 Financial Results Q&A 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 now like to turn the call over to your host, Jeff Evanson, with Investor Relations. Please go ahead.

Thank you, Patrick, and good afternoon, everyone. Welcome to Tesla's First-Quarter Financial Results Question and Answer Webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO; and Deepak Ahuja, Tesla's Chief Financial Officer; as well as J.B. Straubal, our Chief Technology Officer. We announced first-quarter results today in our quarterly shareholder letter. This letter is available at the same link as this webcast. Also a replay of this webcast will be available later today at the same link.

Please note that certain financial measures used on this call, such as revenue and income, are expressed on a non-GAAP basis, and have been adjusted to exclude the effect of lease accounting used on Model S sales, with the residual value guarantee and charges related to stock-based compensation. Our GAAP results and reconciliations to non-GAAP measures can be found in the shareholder letter.

During the course of this call, we may discuss our business outlook and make other forward-looking statements. Such statements are predictions based on Management's 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 Form 10-K filed with the SEC.

We are ready to take questions, so please press star one to ask a question. We are going to try to limit the call to about 45 minutes, so please be respectful of other callers by limiting your questions. Patrick, let's have the first question, please.

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

Yes, good afternoon. I know Elon you're back from China. Just want to get a sense of what the order book in China is looking for, how much of a contribution that's going to make to your especially second-half implied delivery targets? Then do you have to get beyond Beijing or Shanghai this year in order to grow in China -- grow further in China?

Well, I really don't think we've got any kind of demand challenge in China. In fact, I was blown away by my visit to China at the level of interest and enthusiasm for Tesla and the amount of goodwill that I encountered from people at all levels, from the government, from people in industry, and consumers in general. I'm really optimistic for how things will go there.

We are trying to expand our service centers and Supercharger coverage as fast as possible in China. It's not to generate sales. It's in order to be able to deal with the cars that we deliver in market. We're really doing very few stores in China, just our focus is 90%-plus on service centers and Superchargers. Then I think we'll actually have to limit the amount of cars we send to China, otherwise it would starve the rest of the world production. That's really how we view things there.

I did mention that we are likely to do local vehicle production in China in three or four years, although I should mention that goodwill existed before I said that -- goodwill wasn't a function of that. But that will be for vehicles delivered to the local market in China, and not to some surrounding countries. Actually, just to be clear, that wouldn't mean shifting any production from California. That would be assuming that California's starting to reach its max production.

It makes sense for us to start looking at local-country factories. I think we'd be looking at one in Europe as well, just to -- these really ended minimizing a logistics cost, because shipping two tons of metal over long distances is not very efficient. It's just a sensible thing to do is to try to satisfy local demand with local production over time.

Any sense of quantification in either the orders or the deposits or the wait times in China?

We're actually really trying to get the wait times down in China. That's -- it's really quite a long wait time. In fact, the only source of unhappiness I encountered in China was that some customers who are in some of the mid-sized cities are unhappy that we're delaying their deliveries, because it will take us a bit longer to get the service and Supercharger access.

But service is a necessary (inaudible) for a client. We can't have a service center be like 500 miles away from where somebody lives. That's -- our biggest issue in China is like customer unhappiness that they're not getting their cars soon enough. I think the wait time is quite long in some cases, like four months or five months or something like that.

Thanks.

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

Thanks for taking my questions. Your R&D expense is ramping pretty significantly sequentially in Q2, and I was wondering if you could talk about what components make up the R&D increase. Also, in line with that, how are the costs to bring the Model X to market kind of tracking against your earlier expectations?

Hi A.J. Our R&D expenses went up exactly as planned in Q1. It's primarily driven by all the engineering design and testing work that's going on, on our new product development. It's the Model X, as well as what we're doing to get the Model S ready for China and other markets.

Yes, for example, it's like right-hand drive.

Exactly.

Japan localization, China localization, UK --

Right.

Hong Kong, that kind of thing.

Right. It's more driven by those expenses rather than just head-count increases. These are the cyclical expenses that you typically see before the launch of new products.

Yes, I should say that some of that is also that we want to do ongoing improvement through to the Model S. As times go by, we've made hundreds of small improvements to the car. A lot of these people wouldn't necessarily notice, but I think collectively they add up to an improved experience with the car. We've made some improvements in seat comfort, for example, and here and there in fit and finish. We're modifying the rear door so it can open wider, so rear ingress-egress is improved. There's a whole bunch of things.

Software improvements, (inaudible - multiple speakers) --

I think there's some very exciting software updates that are going to come out in the next few months that will improve the experience for the whole fleet of customers out there. If anyone's thinking about asking me about that, I'm not going to say what they are, so just throw out information as it is. But I think customers can look forward to some really awesome functionality improvements in their existing car.

We're doing a lot more in-country testing before launching in new markets to make sure it's an outstanding customer experience.

Exactly.

In China and doing in other countries too.

Yes, exactly. It's -- I was mentioning it earlier, but there was a kind of unhappiness in China about some of the mid-sized cities delaying customers' deliveries, but what we found is that it's more important that we can service the cars really well, that charging is sorted out, and to make sure that when customers do get their car they have an excellent experience. I think we've -- we didn't do as good a job as we should have done in some of our prime market launches. We want to make sure we recognize that mistake and correct it going forward.

I want to make sure I mention Model X costs are also obviously driving the increased R&D expenses are we are working to Model X.

Model X is like the biggest driver for R&D expense, honestly. With the X, we're really trying to make an amazing car, and very importantly to have a car that -- with a production version that is better than the prototype, better than the show car. One thing that drives me crazy about the car industry is you'll see often these great show cars, and then when you actually get the production car it's some bizarre dumbed-down facsimile of the exciting prototype that was displayed. That's terrible.

The baseline expectation of Tesla is that whenever we have a prototype, the production car is better in every way. That's quite difficult to do, and requires some creative problem solving. With Model X, the one biggest challenge is the Falcon-wing door, making sure that is truly a step-change in utility for the car, and not a gimmick. It's got to work perfectly. The details have to be just right.

It's amazing how like seemingly little things become quite significant engineering challenges; such as for example getting the seals on the Falcon-wing door to work properly, and not be too prominent, so you that you've got a seal against rain, winds, and against road noise, but you've got something that's articulating across multiple hinges. You've got key junction joints and that kind of thing. It's quite a difficult ceiling problem to get it right, and be consistent and remain good over many years. We spent a lot of time on seal engineering.

Thank you for the thorough response. One more and then I'm done. Why haven't your giga-factory partner or partners, why haven't they signed on the dotted line yet?

I was actually -- I was waiting to be asked that question. We actually do have a letter of intent signed with Panasonic. We're happy to announce that, yes we have a letter of intent signed. For us, that's actually not that big of a deal, because our expectation has always been that Panasonic would be the partner with the giga-factory. I believe that's been Panasonic's intent. In fact, just to make sure we're both on the same page, J.B. spoke with Panasonic yesterday just to make sure we're on exactly the same page. J.B. do you want to elaborate on that?

Sure. As Elon said, we do have a signed letter of intent. Under that letter of intent, we've also created a joint working team between Panasonic and Tesla that's working almost daily, certainly weekly, exploring all the mutual topics, and answering questions and making progress. We're actually quite comfortable that we're heading toward final agreements in the later part of this year. It's something where, as we said, it doesn't seem like a big step change. It's something that's been progressing smoothly for the last months, and we feel confident in it.

Yes. I think we're quite confident, highly confident at this point, of achieving the 30% reduction in costs per kilowatt hour -- maybe moving towards cautiously optimistic about exceeding that number. I don't want to make any commitments, but I think we've got a decent chance of exceeding that number. As we explore the cost structure (inaudible) and the supply chain with Panasonic and with a number of other companies that make the precursor materials, we've found that there's really a lot of opportunity for innovation and for cost reduction.

In fact, we've had a number of conversations that are really interesting with mining companies, talking about some of the key constituents that go into the cell, such as the nickel and the cobalt, the lithium -- although lithium is sometimes thought of as a bigger thing than it really is for lithium-ion cell. It's used by a maybe a couple percent of the cell mass. But the biggest cost constituent is nickel. We're in conversations with some of the big nickel mines in Canada, in particular. We've been really, I'd say positively surprised, by the potential for cost reduction on producing the pre-cursor materials.

It's kind of funny, it's like the -- in talking to the mining companies, it's like nobody ever calls them. We call them up, and hey, we never get calls from companies like Tesla. They're always selling to the London metal exchange or the big stainless steel companies -- because nickel is a common alloy constituent in steel. Cutlery, for example, usually involves quite a bit of nickel. Your knife and fork is usually electro-plated nickel silver, is usually what they do.

The mining guys are super-happy to hear from us, and have quite good ideas for how to optimize the costs of the materials through minimizing logistics and processing, and just doing the fairly sensible things. A lot of it's actually quite obvious to create a supply chain that can deliver s large volume of battery packs with dramatically reduced costs.

They were also -- we're trying to do our best to ensure that in the supply of the components for the cell that our suppliers -- going all the way to the mine level, are companies that operate in a good and fair way. Do they take reasonable care from an environmental standpoint? Do they take care of people who work in the mine, that kind of thing. As much as we can, we want to make sure that our suppliers are good suppliers, yes.

Fantastic. Thank you so much.

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

First question just following up on the giga-factory. Is the formal announcement, more than a letter of intent, a prerequisite for breaking ground on the factory?

No. We actually expect to break ground on the first giga-factory location -- I want to be precise about this, because I don't want any of the states with which we're talking to, to sort of have the wrong impression. We're going to move forward with breaking ground on multiple sites, in order to minimize the risk of completion of the giga-factory. We expect to break ground on the first of those probably next month. It's really quite soon. Shortly thereafter, maybe a month or two after that, we'll break ground on the second one.

I should also say that California's potentially back in the running. But that's -- it's still in the sort of improbable -- in the category of being improbable, but it is back in the running. The governor and his staff have really tried to do everything they can to make California a significant candidate for the giga-factory. The main thing with California is -- it's got nothing to do with incentives or anything like that, it's the time to completion for the giga-factory. I don't think we did a good job of explaining why California wasn't on the list of four states to begin with, and it's just because this is a large green-field construction project. California has quite a complex and lengthy process for approval of green-field sites.

What we couldn't afford was waiting like a year or more for permits to proceed, which would -- I think often leads to no environmental impact of any significance, but it would just take a long time for the California regulatory agencies to process the information that they would need to fulfill their obligations under California law. Whereas in other states, it's a much more streamlined approach. The vehicles we build in Fremont in California, if we don't have the giga-factory on line when we have the vehicle capacity on line, we will actually be in deep trouble, because we'll have all the equipment and tooling and people for making cars, but not be able to produce the battery packs.

That was the reason why California wasn't originally on the list. The governor and legislature are going to try to do something about that, but I think the question of timing is still a big one. We also need to make sure that the ongoing operational costs of the giga-factory are not significantly worse than other states. Like I said, I think California's still in the sort of improbable but not impossible category at this point.

Okay, thanks Elon. Let me just add a follow-up. When you're thinking about the giga-factory, is the idea to have just one dedicated full-cell supplier like a Panasonic, or is it possible that it could be Panasonic and some co-opetition with another battery component or cell supplier making another part of the sub-cell, the cathode, or anode. Is there mutual or pure exclusivity for a Panasonic, for example?

Finally, on China, do you have -- or the expansion of other manufacturing in China or Europe, is that within the scope of your current capitalization and financial resources, or is that something -- or that of your expectation of your cash-flow generation, or is that another item on the list that might require new capital at some point? Thank you.

The way the giga-factory is set up right now is we -- Panasonic would be the only company producing cells in the giga-factory, and -- one way to think of the giga-factory is like an industrial park under one roof. Tesla's producing the modules. Tesla's sort of the overall landlord. We're producing the modules and the battery pack. Then the cells will be produced by Panasonic. Then we'd actually have a number of other companies producing the pre-cursors to the anode, cathode, separator, electrolyte, and so forth, that are then feeding into Panasonic.

However, referring back to our original short presentation on the giga-factory, you'll see that the cell capacity target is around 35 gigawatt hours, but the pack capacity is 50. We expect to bring in cells from other cell factories in the world to make up for others who are roughly 15 gigawatts hours. Those would be -- I would expect a lot of those would be Panasonic cells, but to the degree that Panasonic isn't able to meet that demand, there would be other suppliers, as well.

Okay. Thank you.

Thank you. Our next question comes from Patrick Archambault with Goldman Sachs. Your line is open.

Good evening. Just a couple ones here. In terms of the cadence of some of the OpEx items, maybe R&D specifically, Deepak, you described how there's a sequential increase of 30%. Can you -- I guess the first part of my question is, how do we think about it trending in the back half? Longer term, how do we see that as an expense as we sort of model out over the next couple of years? I think best-in-class vehicle producers probably have that in the mid-single digits as a percentage of sales, but just given your growth profile would probably be higher. Can you help us dimensioning -- to dimension that as we think about our forward modeling?

Yes. As time -- in future quarters as we go towards the end of the year, and potentially next year early as Model X development is behind us, I would expect some reduction in R&D spending, and then of course Gen 3 will pick up, and other products that we start working.

But to your broader point of percentage of revenue, we clearly see that as revenue is going to pick up significantly, the percentage of revenue of R&D expenses is going to be, I expect, in the single digits, with the high-single digits, clearly. I think we won't be too far away in that sense from some of the other -- I would say more growth-oriented companies, don't want to just bet it against automotive, because we will be doing more R&D in general.

Absolutely.

Okay, great.

In fact, I think our R&D is very more limited by the pace with which we can create (inaudible - background noise) integrated to the Company, rather than a budget.

Yes.

Got you. Okay, that's helpful. Just as we think about the cadence of deliveries, which is obviously very back-half loaded, but you're obviously confident in the 35,000. Can we just get a little bit more clarity as to what's driving the back-half inflection. Is it cell capacity, is it that second production line coming on? Is it just -- it seems like it's more supply-driven than demand-driven, but just wanted to get a little more clarity on what's driving that sequential progression?

Yes. The main thing in the first half of the year -- and that's something actually I mentioned, I think late last year, is that the -- for the first half of this year, we're constrained by cell supply. We expect that to -- I mean, it is in the process of alleviating, and we expect that to really -- really start alleviating in the third quarter, basically. There's obviously a bit of a delay, because the cell's coming from Japan. They've got it produced and port on the water and port over here, that kind of thing.

Thus far, from what we see everything's on track to have cells -- be able to at least meet, but probably exceed by a little bit the 35,000 targeted deliveries. Our production in [Rost] will be higher than that, because the Company's growing quite a bit, and we've got a lot of vehicles that will be en route to various countries.

Then there is that other constrainer, which is -- potentially, which is the vehicle production line. It will actually be taking the factory -- the Fremont factory down for roughly ten days or so in July to convert to the new line, which enables a substantial increase in our production capacity on the vehicle side, as well as a labor-hours reduction. It's just a fundamentally more efficient process.

It is worth highlighting the point. Very often, in the media it seems like there's confusion between Tesla production and Tesla demand. For example, we're sold out of Q2 production already. The term sales usually means demand, but in our case sales means deliveries. It's not a measure of demand, it's a measure of how many cars we're actually able to get to customers. If we'd been better at production and delivery, we would have delivered more cars.

Thank you.

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

With the Model X, previously you talked about going into production before the end of 2014. Can I just understand exactly what you're saying with the prototypes being done by the end of the year versus production, and how we should think about that relative to the previous comments? Yes, there's no question we're delayed on the Model X, although that's I wouldn't say particularly new information. Relative to our earlier forecast, we had to spend a lot more time making sure we got the Model S right, and it took longer to get to some of the international markets and what not. It just didn't make sense for us to be focusing on Model X if we didn't have our Model S house in order.

I think we're in pretty good shape on the S front, so our focus is very heavily on the X, and just making sure it's a phenomenal product. We expect to be delivering production cars roughly Q2 next year. We'll have the production design articles, I guess beta articles or production-release candidates around the end of this year, but we want to make sure we've got a decent period of validation with those release-candidate vehicles, because the production ramp for Model X will be much greater than for S, so much deeper.

With S we have quite a shallow production ramp -- start off real slow and as we encountered issues we were able to correct them without having a large number of cars in production or on the roads. With X it's going to be sharp ramp, which means we really need to make sure that we've properly validated issues and made sure in all temperatures and climates and road types that the car is really solid before ramping up production. Otherwise, we risk having a recall or a bad customer experience. Okay. Then one quick technical question. As you look at the components and the materials inside of yourselves, the quality of lithium, how much leverage do you think you can get as you start to see higher-quality lithium from the supply chain?

The quality of lithium -- I'm not sure what you mean by it.

Just in terms of higher purity, I should say.

That's really not been an issue.

That's not a big trade-off or driver of performance. It's something that we're constantly looking at with the different suppliers and trading off different processing mechanisms and different feed stocks. That can affect the pricing, but the ultimate purity doesn't really drive performance of the final cell.

Yes, there are some things that are sort of a tricky, or that matter, like for example the anode, the structure of the carbon in the anode is important. We use a very high percentage of synthetic graphite, because that gets a more precise microstructure. Yes, there is some potential trade-offs there as to how much work effort you put into creating the synthetic graphite. I think generally we want to probably aim for highly precise microstructures, which is a little trickier to do. You don't want to just have random microstructures, stuff that came out of the ground.

Next question comes from John Lovallo with Merrill Lynch. Your line is open.

Thank you very much for taking my call. First question is, we've recently had conversations with several of your customers in China and Hong Kong who have placed firm orders, pretty high trim levels, and now are actually seeking refunds because what they've discovered is that the electric wiring at the residential level is so poor that charging equipment is not being permitted in their high-rise buildings. The question is are these kind of one-off exceptions, or are you guys seeing a trend in this?

No, we're not really seeing a lot of cancellations. That's the first I've heard. One of the things we have required of customers who place the deposit is that we want to before they take delivery of their car, we want to make sure that they have a wall connector installed. Usually the wiring configuration (inaudible - background noise) what max amperage the outlet can be. Some places may be able to handle an 80-amp outlet. Some maybe only 20 amps. It's pretty unusual to see this.

Something we are doing, though, in China -- another possibility is we're putting Superchargers in cities, not just between cities. This is obviously important in places like Beijing, Shanghai, London, San Francisco, New York, where at times people may have a challenge with having a fixed parking space. The first part maybe the wiring thing it's more like some of those people don't have a definitive parking space, they might have street parking or something. London's a particularly tricky one, where there's -- a lot of high-end neighborhoods just have street parking.

If I might add, there's been a lot of questions about the supposed poor quality of the grid in China. But from what we've seen installing hard-wired charging equipment and Superchargers, it's actually been somewhat the opposite, and been quite a robust, very new equipment, new grid. We have not seen very many problems.

Yes, no exactly. In fact it's exactly as J.B. said. We've actually found -- it's been a positive surprise for us in China, not a negative one.

Okay. For my second question, I think in the release you mentioned that North American deliveries were up 10% sequentially. This would still imply they were lower for the first quarter and the second quarter of 2013, and about in line with the third quarter. Is that a fair characterization?

John, just to clarify, we said the order in North America were up 10%, not deliveries.

But how were the deliveries in the quarter in North America?

The deliveries were down. We were trying to reduce the lead time in Europe. We had a long lead time there, and we were shipping a lot of cars into Europe, so that may come to a more even lead time between North America and Europe.

Yes, I think this is getting back to what I was talking about earlier. It's easy to confuse deliveries with demand. Deliveries and demand are not the same thing for Tesla. They are for other car companies, but not for Tesla.

Okay. Thanks very much guys.

Let me speak to be clear. We are seeing a steadily increasing demand in North America.

Okay. Thanks, guys.

The next question comes from Rod Lache with Deutsche Bank. Your line is open.

Hey, everybody. It seems like you're making a lot of progress in terms of purchased material and efficiency. Just looking at the numbers, and what I'm looking at is it looks like your product's gross profit, you reported like $190 million last quarter, but there was a gain in there, so maybe it was $180 million in Q4. This quarter you did $180 million including a charge. It seems like your gross profit didn't move, even though your revenue was down.

I'm just hoping that you can maybe give us a little bit of an update on where your incremental margins stand today, just given some of the progress that you've made. In a steady-state basis, these incremental units, what kind of conversion for incremental volume do you achieve to date on the gross profit line?

John, I'm not exactly clear what your question is, but I think to your broader point, there is gross margin improvement that's happening because of cost improvements that we continue to achieve. This is the internal road map that we have on a variety of actions to achieve material cost reduction --some internally, some at our suppliers, some through design. Those actions have continued throughout the year, and that's why we feel comfortable that we will achieve 28% gross margin by Q4.

There's I think a couple of important points I'd like to make here. First of all, I have a rule that we don't do any cost-down if it makes the product worse. That doesn't really gain us anything, which it's quite tempting to do that sometimes, and it drives me crazy when companies elsewhere in the car industry or in other industries reduce costs by reducing value. That's not a good thing.

Our cost reductions are really aimed at figuring out how to get the molecules in the right shape in a smarter way, as opposed to trying to sort of strip value out. In fact, in a number of cases we've actually added costs to the car because this was something that needed to be improved. The under-body shield is an example of that. Our gross margin in Q1 will be -- we have a number of charges against -- that negatively affected gross margin, would have been a little bit higher if it hadn't been for things like, for example, the under-body shield activity. I think we feel fairly comfortable of achieving the 28% gross margin by the end of the year on the Model S front.

Okay, thanks. You indicated again in your release $650 million to $850 million of CapEx this year. Can you give us some high-level thoughts on preliminarily what next year might look like as you're starting to ramp up the giga-factory. Also, I know that you made some reference to SG&A and R&D as a percentage of sales, but I guess for your stage of development, I'm not sure that's really applicable. Can you give us an idea of how that I might look on an absolute basis?

Rod, it's a bit too early for us to give clear guidance, our thoughts on 2015 CapEx. Clearly 2015 at a high level will be dominated by spending on the giga-factory, as well as we start to prepare for Gen 3. I think much of Model S and Model X spending will be behind us. There will be some lagging Model X spending from a CapEx perspective just before launch from a tooling and an equipment perspective. There will be a small change -- there will be a change in the categorization of spending. Beyond that, clearly we will continue to expand rapidly globally with our store service centers and Superchargers, so that growth will continue. But I think we can provide you a bit more clarity on that, perhaps a couple of quarters from now.

Okay. Last one on China. When you do actually expand to domestic production, do those requirements for 50-50 JV partners, do they apply to you, or are there any exceptions for new energy vehicles, or do you actually have any thoughts on that at this point?

I think it's too early to make a prediction on that front. I think we can't say for sure what -- how things will look at that time. I can't say that we're postponing any serious partnership discussions with big companies in China, because we're still really a two-year stage. We're not trying to sort of run this to ground, because we've got really basic priorities of getting service and super-charging rolled out in China. Yes, we just don't have anything to say on that front yet.

Great. Thank you.

Our next question comes from Ben Kallo with Robert W. Baird. Your line is open.

All right. Thanks for taking my question. Back to the battery factory. Can you talk about the costs associated with running two sites in parallel, maybe three, and any optionality you have there? Then adding maybe two more on top of it. One is, how much work have you done as far as business development with stationary stores to get comfortable with that angle there? As far as additional investors, should we wait to see them after Panasonic comes to the table? I'll stop there. Thanks guys.

The reason -- your first question was fundamentally are we spending too much money by working on three sites together. I think as Elon has said a few times, for us it's really critical that we have the first giga-factory ready on time to supply the sales for Gen 3. That delay, every one-month delay at that point is far more expensive for us than the incremental costs that we may incur up front to kick off two sites at one time.

Absolutely.

Maybe I can speak to the stationary business development part of the question. We have done a huge amount of effort there, work there, and we've talked to most major utilities and energy service companies at this point. It's still early days in that effort. I think maybe the thing to focus on is our long-term optimism looking at the price versus cost of what we expect we could do. The demand for -- the long-term demand for stationary energy storage is quite extraordinary. When you look at the size of the grid and what needs to be done with renewable energy and buffering the variability of that. I think that's really where we keep our focus, is on the long-term economics that could be enabled once the giga-factory is on line.

Yes, exactly. Right now we're not trying to build demand for stationary storage because we have cell constrains, so kind of at the expense of vehicles. What we're doing right now is more on the engineering side, figuring out what would be a really cool stationary storage pack that could be produced at volume, and that could be combined so you could stack a whole bunch of them if you wanted.

I think particularly for the home solution, the sort of thing we have in mind is something that looks a bit like the battery pack from the Model S, something really flat that just maybe takes -- is coming five inches off the wall, wall-mounted, nice beautiful cover, integrated bi-directional inverter, and just plug and play. That's the sort of thing we have in mind for the stationary storage pack on the residential front, which could conceivably you could stack a bunch of them and have something that works commercially, as well. But we'll probably want to talk about that in detail end of the year or early next year, or something like that.

I think the third part of your question was about other participants in the giga-factory. We are talking to various different people in parallel. I think there's -- it's important to understand that there's a lot of aspects of this that Panasonic simply doesn't do, so it's not necessarily a competition, but it's complementary -- different pieces of the production operation. Those discussions are under way, but it's premature to talk about any specifics.

Great. Thank you guys very much.

Next question comes from Craig Irwin with Wedbush Securities. Your line is open.

Good evening. Thank you for taking my question. Elon, when you look at the Chinese market, everybody knows that this is the largest luxury automotive market in the world. It's not a market that we have as much visibility as we might like. How do you quantify the total opportunity for sales for Tesla, and what have you seen since you launched in China that surprised you, or maybe that you didn't expect? How is this shaping the plans for your store -- your store map over there, and the obvious service centers and other investments?

I don't think -- I think you probably know about as much as I do about the demand for our cars in China, as far as it's an incredible crystal ball. As you mentioned, China is the biggest market for cars in the world, and actually the biggest market for premium sedans in the world. To the degree that our sales track that of other manufacturers, presumably China would over time become the biggest market for Tesla. That's probably the best guess that anyone could make at this point.

All I know in the short-term is that we really don't have a demand issue in China -- we've got a lot of demand. Our focus then obviously is just to make sure that demand is serviced, and we're trying to roll out service centers and Superchargers as fast as we possibly can. My instruction to the China team are to spend money as fast as they can spend it without wasting it. I think that's what's happening.

Makes sense.

Let's make this the last question, please.

The last question comes from Colin Langdon with UBS. Your line is open.

Hi, this is (inaudible - accent) on behalf of Colin. Can you help us understand the difference in the variable cost structure for the Model S compared to a comparable luxury sedan like maybe a BMW 7 Series. Other than battery, which are the key areas where you'll be able to cut costs as you go ahead and achieve scale?

We don't really know what the gross margin is of individual product lines in other companies, so it's a press to make an exact comparison there. Sorry, I don't know how to answer that question exactly. As far as cost reductions, it's across the whole vehicle. It's not just in the battery pack. The battery pack is one portion of the car. But it's maybe a quarter of the value of the car. It's not like -- it's not the overwhelming portion of the car, so our cost reductions really come across the board.

Are there any specific components which you see bigger opportunity to cut costs then, or the process?

The biggest single cost reduction within Q4 this year will be related to labor and overhead, which as I mentioned earlier in the call, we have a much more efficient production line that's going to come on line in July, which has more automation, and it's just set up in a better way. Making the car with greater labor efficiency is the biggest single improvement.

But there are really hundreds of improvements across the board. What it really comes down to is can you make anywhere from like a $5 to a $100 improvement here, there, and everywhere, and it adds up to a significant number. I wish there was like one place where this was just one incredibly stupid, super-expensive thing that if we fixed would suddenly make the car cheap. That is unfortunately not the case.

Thank you. Do you have any update on the dispute with the dealer body?

I think there was something that happened just today. This stuff tends to be reported in real time, so it's not like there's something we know that is not public information. I think the appeal in Massachusetts from the dealers was denied today, so dealers -- what's that? There was a hearing. All right, so no update on the dealer front.

Okay. Thank you.

Thank you.

Patrick, I apologize. I cut off Craig Irwin there. If he's back in the queue, we could take another question for him. Anything?

We have Craig Irwin in queue, Wedbush Securities, your line is open.

I'm sorry about that.

Not a problem, not a problem. I really appreciated the comment in the shareholder letter about 10% sequential growth in orders in North America. We understand you're obviously capacity constrained and you've got great demand. But one of the points of controversy is the potential for declining shipments into North America. Can you maybe give us a commentary about your year-over-year order rates in North America, whether or not you expect to continue selling Model S vehicles similar volumes once you've started to satisfy some of the European and Asian demand?

We'd rather not make any additional predictions about deliveries. I see demand in North America, and I don't have to tell you, typically what we see is we see a steadily increasing demand in North America. That's the information that we have. We don't have something that's more predictive than that.

Okay. That's helpful. Thank you.

All right. Thank you, Patrick, for getting Craig back on the line. I appreciate that. This concludes our call. Thank you everyone for joining us this afternoon. We look forward to seeing many of you this month in New York. Next Monday we'll be at the Deutsche Bank Clean Tech Conference, and on Tuesday we'll be at the Wedbush Transformational Technologies Conference. Finally at the end of May, we are presenting at the Freidman, Billings, Ramsey Energy Technology Summit. We hope to see some of you at some of those conferences. Thank you everyone. Have a great day. Bye-bye.

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