特斯拉 (TSLA) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors' second-quarter 2014 financial results.

(Operator Instructions)

I now will like to turn the call over to your host, Jeff Evanson. Please go ahead.

Thank you, Patrick, and good afternoon, everybody. Welcome to Tesla's first -- second-quarter financial results Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO, JB Straubel, Tesla's Chief Technology Officer, and Deepak Ahuja, Tesla's Chief Financial Officer.

We announced first -- second-quarter results today in our quarterly shareholder letter. The letter is available at this time as a link to our website at www.ir.teslamotors.com. There'll also be a replay of this webcast available later today at the same link.

Please note that certain financial measures used in this call, such as revenue and income, are expressed on a non-GAAP basis and have been adjusted to exclude the effects 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 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 read differ materially due to a number of risks and uncertainties including those mentioned in our most recent filings with the SEC. If you would like to ask a question, please press star one at this time. And Patrick, why don't we turn it on over to the first question please.

The first question comes from Adam Jonas from Morgan Stanley.

Hey, everybody, first I had a question on your forward your guidance of 100,000 unit run rate by the end of 2015. Can you give us some sense of how much of that's coming from China?

We understand that demand for your products in China is off the chart strong, but we're a little concerned about your ability to deliver and service the volume well focusing 100% on the quality and building the brand authenticity. So how many China stores or service centers would you need by this time next year that might be commensurate with that volume target?

Sure, well and this is give you rough guesses on the 100,000 run rate at the end of next year, which I think is oddly one of the most interesting things in our newsletter which you picked up on. We're expecting to be roughly split between X and S, so we're talking a little over -- it's roughly 1000 units a week of each.

And when you look at the market demand for SUVs and sedans, that's about the split, it's almost exactly 50%/50%. In fact I think recently SUVs might have slightly edged ahead of sedans. So if we -- it's reasonable to expect that of one has -- I'll address the demand and then the servicing side of things.

It's reasonable to expect that if we see a comfortable 1000 unit demand on the sedans side, well probably we should expect that similar number on the SUV side. My guess is we'll actually see slightly higher on the SUV side. I think the model X is going to be a phenomenal car.

On the service front, we are spending a lot of money on service expansion. That's our primary -- in the sales and service arena, it's primarily service. The overall majority is service.

Good.

So it's not really -- our concern is not demand generation, but how do we make sure that that demand is well served. So in terms of number of stores by the end of next year, or number of service centers I should say by the end of next year, actually I don't have that offhand. But it's probably on the order of 100 in China alone I am guessing by the end of next year. And we are -- and probably worldwide it's on the order of 300, this is -- I'm speaking off the cuff here but probably north of 300 worldwide.

And actually I've been very impressed with the Tesla China team and the quality of people that we're attracting in China. I think the China team is smart and they work super hard. So the pace of progress is just amazing. So I feel pretty comfortable about being able to do good service in China, great service actually.

In fact the key metric we measure in service is the percentage of customers that are delighted which is a 10 out of 10 score, that's the primary thing we look at. And our goal is to get that worldwide to a majority of customers. And domestically I believe we're actually -- in the US we're about 70% of customers who experience service rated as perfect or -- yes 10 out of 10 essentially.

And another key metric we measure is the average time to service something. So our average is less than a day. So the car is -- so in most cases we can actually pick up your car, fix anything that's wrong with it and give it back to you without you even knowing it was gone. You just tell us my car is at my office and this is where it is and we'll pick up the car, fix it and get it back to you before you finished work.

Our goal of service is invisible up, which is you don't even -- it's like elves service (laughing) you don't even see it, it happened so fast and when it's done you love it. There is an interesting opportunity to revolutionize service as well. It's not like do the same thing as before.

There's a lot of lessons to be learned from the Formula One approach. So because we're not trying to serve customers for the most amount of money possible in a service, which is typical of the conventional auto industry. We want to get the job done super fast and then also make sure that you don't -- we want to anticipate issues so you don't have to come back again.

So we actually bring the car in and we hit it with a pit crew, like a Formula One pit crew. So instead of having one person per bay, the car gets slowly worked on over several days, it actually comes in and a team attacks it. And we're constantly improving the tools and the metrics to say how can we get the car perfect as fast as possible?

We're actually bringing in people from Formula One to help with the training on this. And I think there's real opportunity there to revolutionize the way service works.

That's great color, Elon. Can I ask a follow up?

Outside of BMW, any other parties -- can you say any other parties that have expressed interest in your patent sharing gesture? And I'm curious to think why the industry is moving towards hydrogen in this -- or so much of the industry seems to be pushing hydrogen like crazy in the past few months. Is this some (expletive) move to get carb to rewrite the rules on EVs or do they actually believe this stuff?

And then finally, can you confirm the rumor that Mr. Burns tries to kill you by running you over in an i8? Thanks.

(laughter) He does intend to kill me in The Simpsons, but not in an i8.

Maybe a Volt.

Well I don't -- as you know I'm not the biggest proponent of hydrogen. Our view, JB and my view and the rest of the team tells us that really if you take a theoretically optimal fuel cells car and compare that to a current in-production battery electric car on key metrics of mass, volume, complexity, cost, refueling infrastructure, it's a loss.

So if the best case, in our opinion, the best case fuel cell car, and obviously the current fuel cell cars are far from best case, cannot beat the current case electric car, well why even try? That makes no sense. Success is not one of the possible outcomes. JB, is there anything you want to elaborate on there?

I think that really is pretty clear. The only real benefit that get toted for fuel cell and hydrogen vehicles are potentially range and refuel time.

But both of those are not any of the benefits. When you look at where battery technology is today and certainly where it's going in a few years. So I think people make the mistake of comparing today's technology with future potential technology instead of two technologies at the same point in time.

Even if you take a theoretical optimal -- a theoretically perfect fuel-cell car, I just don't think you --

Then JB, why are they doing this? That's why ask if it is BS, is this a diversionary tactic or do they're just not on -- what's up?

We're quite confused about this.

It does not make a lot of sense. And we didn't even touch on the infrastructure challenges that hydrogen brings. But building out that infrastructure is substantially more expensive than building out any electric vehicle infrastructure and there's almost none of it today.

Yes, I don't think people understand hydrogen is an energy carrier, not an energy source. So you have to create the hydrogen which is really inefficient because you either have to crack a hydrocarbon or electrolyze water.

And if you want to do it renewably the water electrolysis route is really the only --

Which is super inefficient, yes. And then hydrogen has very low density. So if you're going to pick a chemical energy storage mechanism, the hydrogen is a terrible choice. At least do methane CH4, lock up the hydrogen with one carbon atom or something. Anyway--

You means answers the question.

It doesn't make a lot of sense.

All right, thanks a lot Adam, we should get to the next caller, please.

Our next question comes from Andrea James with Dougherty & Co.

The first one is about quality control, can you talk about the improvements you've made in quality control and where you think it needs to go, maybe with a nod toward what's going on with the drive train systems?

Sure. We definitely had some quality issues in the beginning for the early at least number of cars because we were basically figuring out how to make the model S. And I think we've addressed almost all of those for current production cars. Not all but the vast majority have been addressed in cars that are being produced today.

And we're also getting better at diagnosing what's wrong because in some cases we, particularly with respect to the drive units, we think that something's wrong with a drive unit but there's actually something wrong with another part of the car. And then we'd replace the drive unit and that wouldn't solve the problem because the drive unit was not the problem.

And we had one particular case where there was vibration and it was due to a cable detaching itself and touching the drive unit assembly and causing vibration to be transmitted to the body of the car. And it was somewhat pernicious because if the cable moved a little bit so that it didn't provide a conductive path, the vibration would go away. So you'd replace the drive unit, you'd temporarily tuck the cable back and think the problem was solved but then the cable would vibrate itself down and transmit the energy.

So that, the cable thing, takes us -- it's nothing to fix it. It's virtually like a $3 cable tie to solve it. So there's a bunch of things like that which are misdiagnosis as problems that we've obviously addressed.

There are a few items that will need -- a fair number of drive trains will need to be serviced on -- it's actually related to -- one in particular is related to the differential and we need to shim the differential. It doesn't require a drive unit replacement, it requires a technician to insert a shim. We're going to have to do that on a fair number of cars. But that's a $0.50 shim.

So it's really -- I wouldn't assume that there's going to be a vast number of drive trains that will need to be replaced. But there's several service bookings that we'll be instituting at once, many of which we have instituted, to address the issue.

And every week I have a product excellence meeting, which is to -- which is a cross functional group of engineering, service and production. And we go over all the issues that customers are reporting with the car and develop the action items that have to be addressed to get the car ultimately to the plutonic ideal of the perfect car. That's what we're aiming for. Because although I think we've got great service, the best service is no service. That's really what we want, is a car that never needs to be serviced and I think we're getting there quite rapidly.

Would you say you're satisfied or more so with the quality control function and team you have in place?

I think at this point we've got an excellent quality control team. And -- we weren't there in the beginning but I'm confident we're there now. Our aspiration is an order of magnitude better quality than any other car and we will keep at it unrelentingly until we get there.

And to flip over to the Gigafactory, it says in the shareholder letter you've broken ground in Nevada. And I guess it's out there in the blogosphere that construction has paused. So my question is why slow it down and do you have a drop dead date for when you need to make sure you're really up and going?

We've essentially completed the creating of the pad, the construction pad for the Gigafactory in Nevada. So in terms of creating a flat pad and getting the rocky foundation that is substantially complete. There's still a little bit of work ongoing.

We're going to be doing something similar in one or two other states, which something I previously said we would do. Because I think it makes sense to have multiple things going in parallel.

Before we actually go to the next stage of pouring a lot of concrete though, we want to make sure we have things sorted out at the state level. But that the incentives are there that make sense and are fair to the state and Tesla.

But I do want to emphasize, we're not -- Tesla is not going to go for a deal that is unfair to the state or unfair to Tesla. We want to make sure it's compelling for all parties. And so I think on the Nevada side -- but at this point the ball is in the court of the Governor and the State Legislature.

Is Panasonic having input into the site selection process?

We're keeping them closely informed and so that they're aware of all the details. And they haven't volunteered advice necessarily. We'd certainly listen to their advice if they provided it, but they seem to be in accordance with our theory on location.

Yes, and Tesla is managing all of the utilities and infrastructure at the Gigafactory sites so in that regard Tesla is basically aggregating the inputs and requirements from not just Panasonic but other potential partners as well. So it's primarily Tesla's role to be evaluating those sites.

I appreciate it, thank you so much.

Our next question comes from Ryan Brinkman with JPMorgan.

Earlier in the year you had discussed a potential $4 billion to $5 billion investment in Gigafactory through 2020, is that still the number that you're working with? And I think too you had planned for the CapEx to be shared by the Gigafactory partners, in your press release this morning you mentioned that Panasonic will provide equipment, you the buildings, utilities et cetera. Do you think you're on track to sign suppliers on to provide $2 billion to $3 billion of investment and over what rough timeframe might we expect you to announce those partners and their respective investment commitments?

Sure, that $4 billion to $5 billion number is we think is probably accurate. I think particularly over through 2020, I think it'll be maybe closer to $4 billion, maybe slightly less than that before we get to initial high-volume production. But then as we do continued investments to improve output and improve the technology of the pack, is probably closer to be $5 billion over the 2020 timeframe. But probably less than $4 billion to get up to serious production.

And then of that number, we see Tesla probably providing 40% to 50% of the total. Panasonic probably about 30% or 40%. The state maybe 10% and other industrial partners about 10% maybe 15% to 20% depending on how vertical we go with the factory.

And with having signed the contract with Panasonic -- I was never really -- something I was in doubt from my standpoint, but I think some of those people take things that Panasonic says which are -- they're going to be fairly conservative in there words. But I think the actions are really what matter. And Panasonic has always taken the actions of an excellent partner.

So we feel confident that there will be the amount of money needed to reach the 35 gigawatt hour level at the cell -- at the cell level, and 50 gigawatt hour at the module impact level. The module impact stuff is all Tesla internal. And then we're expecting the precursor -- suppliers of the precursor materials from the anode-cathode separator, maybe the electrolyte to be also present in the factory.

Great, that's extremely helpful and reassuring too. Switching gears, last question, is there anything you can say at all on the trend to Model X orders? I know that you don't disclose backlog, but perhaps you could speak qualitatively to it? Maybe how it compares to when you first started taking Model S orders or how are maybe returning customers, is there any difference geographically and who is preferring an SUV versus sedan, where the orders are coming from, et cetera?

Sure well first of all it's important to appreciate for the X that there are -- just to put the orders in context, there are no cars available for a test drive. There is no information about the cars in our stores because were only selling the S. In fact if somebody comes and wants to buy the X, we try to convince them to buy the S, so we anti sell it. And we don't really provide all that much information or details about the car or provide -- really dependant on when you can get it.

Despite all that, there is huge demand from all around the world for the X. Now I think that actually people are right even though they don't have enough -- they don't really have enough information to know they're right, but they are.

Great, thank you.

Our issue is not -- we will not have a demand issue, yes.

Thanks.

The next question comes from Colin Langan with UBS.

On the 100,000 exit rate on 2025, is that -- I guess that implies that the battery constraints that will be limited. And at what point should we think of the battery constraint limiting you until the Gigafactory comes online?

Sure, I think you can see -- we see a path to potentially 150,000 cars a year, maybe if you really push it 200,000 cars a year without the Gigafactory. So the Gigafactory is needed for that next -- that incremental 300,000 cars.

But we can probably -- I would guess that probably it could be pushed to a couple hundred thousand units of cars a year with the existing -- without the Gigafactory. That is probably a good guess. So yes, we'll see where that leads.

And on the Gigafactory, is the chemistry going to be the same battery chemistry that you're currently using or is that part of the discussions that are going on with Panasonic?

There are improvements to the chemistry as well as improvements to the geometry of the cell. So we would expect to see an energy density improvement and of course a significant cost improvement. JB --

Yes, that's -- the cathode and anode materials themselves are next generation. So we're seeing improvements in the maybe 10% to 15% range on the chemistry itself.

Yes and towards energy density.

Energy density. And then we're also customizing the cell shape and size to further improve the cost efficiency of the cell and packaging efficiency.

Right. We've done a lot of modeling of trying to figure out what's the optimal cell size? And it's really not much -- it's not a lot different from where we are right now, but we're in the roughly 10% more diameter, maybe 10% more height.

But then so it's a cubic function, so it effectively ends up being just from a geometry standpoint, probably a third more NG per cell. If you -- maybe 30% yes. And then the actual energy density per unit mass increases.

Fundamentally the chemistry of what's inside is what really defines the cost position though. It is often debated what shape and size, but at this point we're developing basically what we feel is the optimum shape and size for the best cost efficiency for an automotive cell.

Yes.

But the chemical formula will be the same, it's just shaped differently or --?

No, no. (multiple speakers)

Okay and one last question, it sounds like the Gigafactory might be very vertically integrated, how do you think about that for the assembly of the Model 3? Do you need to be highly vertically integrated or do you think you'll probably outsource more of that to reduce the cost of that model?

I don't think outsourcing decreases the cost, it tends to increase the cost in our experience. Just like the reason we don't -- the reason we outsource stuff is because we have too many fish to fry otherwise. But it's almost always the case that when we've in sourced something, it got cheaper.

The thing that makes it really efficient if -- or for any given technology level is to say how far did that molecule move? And if the molecule is taking several round trips around the world, that's expensive.

If it's moving from one station to the next, than that's obviously lower cost. And so the vertical integration just means that the molecule doesn't move as much, and it's not being put in a box and then put in a truck and then on a boat and then going through customs and stuff like that.

So I think it's generally true that vertical integration and doing things at large scale results in cost reductions. I feel very confident about 30% cost reduction per unit of energy, we're obviously going to target something higher than that.

Okay, all right, thank you very much.

The next question comes from Brian Johnson with Barclays.

Could you maybe help us understand how you think about the gap or how we ought to think about the gaps between production and deliveries? It looks like typically production has been running 900 to 1200 units in recent quarters ahead of deliveries. Your 4Q guide would actually imply delivery to roughly equal or actually a little bit higher than production. So can you help us think through that?

Production in Q4 we saw significantly exceed deliveries. The timeframe when a car is produced to when it is delivered, it depends on the mix of domestic versus international because when cars are sent to Europe or China, they've got to obviously get on a boat and they're going to go through customs and it's a more lengthy process.

So our average time for delivery of a car in North America is about two weeks-ish. But for international deliveries, you've got to add probably another three to four weeks on top of that. And we're trying to tighten that down a little bit, but then if you blend the two, then maybe it's an average delivery time of four or five weeks. So if a car is made in October, they would all be delivered in Q4.

(multiple speakers) Go ahead.

Yes, as we increase our overall production, there are two factors that drive that gap, what is the ramp of production increase. The other one is the mix of international markets.

And even if the mix is the same but we're increasing production, it creates a bigger gap each quarter. And then clearly as we're shipping more to right and drive markets and to China our international mix is increasing too. So each quarter it's a slightly different story but certainly there will be a gap as we continue.

Okay, so the implication of that though is your production in 4Q would not be slightly higher than 1000 a week, that's more than slightly higher than 1000 a week?

Yes it'll be sufficiently high that we'd still deliver to our expectations of slightly over 35,000 cars this year.

At 1000 cars a week, 1000 cars a week steady state implies a 50,000 roughly delivery number in steady state. So it doesn't really need to be much -- all that much beyond 1000 to achieve our goal on average for Q4.

Okay and if you think about the difference between the roughly 500 to 600 deliveries per week this quarter and the 1000 a week rate you're talking about, what -- how would you waterfall the step up in terms of the contribution of the three key geographies, Europe, China, and obviously Hong Kong is part of that, and then North America?

Long term I'd probably say -- well there's not just China and Asia of course. But I think long term we are probably looking at -- this is just a guess, but maybe 40% Asia, 40% North America, 20% Europe as a rough guess. And Asia is more than China for sure.

We think we'll do reasonably well in Japan and we're at some point going to Korea, Hong Kong. Hong Kong is being as a part of China of course, especially (inaudible). And Australia and New Zealand and that kind of thing.

So it's probably 40% Asia Pacific region. And then we tend to do very well in our home markets in North America, hence the 40% there. And then Europe, the demand is not generally as strong but Europe, but it's hard to say, Europe could be 25% or 30% of the mix, those are a rough guess.

Okay, thank you.

Our next question comes from Rod Lache with Deutsche Bank.

You brought up a few times the future case electric car and you also mentioned that you're comfortable even in the near-term with a 30% reduction in cost for batteries, for packs, most of which you said is logistics. I wanted to ask you two things on that.

One is, is that additional 10% to 15% that you talked about related to anode and cathode chemistry in geometry, is that incremental to the 30%? And if you took a step back and thought about the trajectory for this in the next 10 years rather than the next 3 years, what would you -- what do you see on the horizon? Is there a case for $100 per kilowatt hour pack in 10 years?

I would be disappointed if it took us10 years to get to $100 kilowatt hour pack.

So basically you're saying that within the next -- within that timeframe you would expect electric vehicles to reach cost parity and maybe even improve upon the cost of an internal combustion vehicle?

Yes.

That's interesting. Now another -- that's a pretty big statement.

But I correct something in your question you had, so let me correct it. So the 30% savings is not just due to logistics. Logistics is a big factor. We are --

It's not even the biggest though.

Yes, well but just if you consider the fact that it's going from one station to the next instead of going for multiple entities to multiple entities. But we're really -- when you get to the kinds of scale that we're talking about, you really get to design custom equipment that's much better at processing each step. And you really get to design the machine that makes the machine, not just do so with off-the-shelf equipment. Everything about it is going to get a whole lot better, so that's why we think the 30% number when the Gigafactory is at full production is a conservative number.

To get to those kind of targets beyond the 30%, is there some kind of breakthrough anode chemistries or things that you're looking at that you think are highly probable that are needed? Or is it just a bunch of incremental steps that you see playing out over the next years?

Well we're tracking things that I have a whole range of different horizons for implementation. But to get to -- to realize the Gigafactory and those cost targets, we don't need some fundamental breakthrough in chemistry or material science. That -- those understanding -- those things are pretty well understood and in front of us. In the long term, there are a lot of very interesting, long term being the 10 year perhaps you mentioned or more, there's many very interesting things in the horizon with reducing probabilities as you go further out.

Yes, absolutely. It's heading to a place of no contest with respect to gasoline, but we're trying to make it go there as fast as possible. Time is important here.

The sooner this can be done, the sooner we can reduce carbon output and reduce the probability of a catastrophe. So yes, in the absence of Gigafactory, this progress will be much slower.

Yes. Wanted to ask a quick near-term question. Now that it sounds like you're buttoning down a lot of things with regard to the Gigafactory and expansion of service centers and things like this. Can you share any high-level thoughts on how we should be expecting the trajectory of your CapEx, R&D and SG&A as we look beyond the year, some broad ranges into next year?

Rod, we can share more details towards the end of the year as we look further out. But clearly given the huge ramp up in our deliveries and consequently our revenue, we should see a significant improvement in our operating expenses as a percentage of revenue as we go forward. And then we can provide you a little more granular guidance as we go further out.

Yes, I should also say in the past Tesla was -- we're showing all of our cards. So you -- people have gotten used to us showing all of our cards. We're not currently showing all our cards.

Okay, all right. Well thank you.

Our next question comes from Patrick Archambault with Goldman Sachs.

A question on the cadence of sales, with the guide for deliveries of 78 for next quarter, it does appear that you are going to be in starving some demand there certainly which is going to clearly get allocated into the following quarter once the changeover is done. But I guess how do you think about the risks associated with hitting that target?

I guess if the math is right, I think you go from 78 to 13,000. It seems like an awful big ramp, maybe not in absolute units but certainly you think about it almost doubling. So how should we think about that and managing that?

Sure, we try to -- because I agree it does seem like a crazy leap. But we try to address that by pointing out that there's two weeks missing in Q3 because of the factory retooling. And those are two weeks at fairly high production. So you can add almost 2000 units to what Q3 really would be if we didn't have that two-week interruption.

So it would actually be more like 9500 units or something like that in terms of Q3 deliveries. And then it's, okay it's much more of a -- you can see how we get from 7500 to 9500 to 12,000, 13,000 whatever the case may be. The progression is much more sensible in that context I think.

Yes, it certainly helps us understand in terms of the underlying cadence of purchases, if you will. I suppose even though we're talking about deliveries, but the -- I guess the one question I would have is how about in terms of the number of service centers and the logistics of actually being able to physically deliver these cars. Is that a constraint or risk in any way I suppose?

No because we actually won't be delivering at the 1000 or 1000 plus per week rates at the end of Q3.

Okay understood. And then another related question, if you have any color on this, is if you go through what you've laid out there and hold the regional delivery rates constant with where they came in in Q2, most people have those through various sources. It does imply again that clearly you're starving one or more regions in Q3 in terms of demand that they'd want but can't get.

But for Asia, it implies something like maybe 5000 to 6000 units of deliveries, at least on our preliminary math. And I guess that's a similar number that you did initially in the US when you launched, and is that something that you've got a backlog for already? I'm imagining the answer is yes but was just curious.

Demand will not be a problem. This is an interesting little item, how many stores are we building? Wow, we're building hardly any. Building lots of service centers.

We can drive demand up at will, but if we drive it up too much then people get upset with us because they wait to long for their car. And one guy in China got so upset that when he got his car, he bashed it which seemed self-defeating. But his stated reason for bashing the car was that we took too long to deliver it to him. I'm like okay (laughing).

But -- and when I was visiting China, the only unhappiness I saw was that was because customers were upset about waiting too long for their car. So it's like, boy we better not stoke demand in that situation.

And sales per square foot on our stores, I believe Apple is normally the leader on sales per square foot, our sales per square foot are double that of Apple's.

Thank you, that's helpful perspective. If I could ask one more building on Rod's question.

As you think about OpEx, I know you're not giving guidance for next year Deepak, but clearly what you've laid out for your expansion of service and distribution obviously that's an expense that we expect to increase in a fairly steady way, how do we think about R&D in the shorter term? Obviously it's fairly elevated. I think the math implies more than $400 million this year if I'm doing it right.

Is that something that takes a little bit of a breather in terms of the growth rate? Or given the significant product ramp you've got it, it's something we should look to continue to increase in short order?

Yes, we are doing a lot of product related actions at this point and that is creating an artificial bump and especially the Model X and other activities that are going on. That will slow down, but then we're going to work on so many exciting things.

I don't want to suggest that R&D will slow down. I think if there is one place you want to spend money, it's there and do more exciting stuff. So I think we'll provide information as appropriate further on.

Our CapEx and R&D numbers are better than they appear because there are things you don't know about.

Well, okay. A lot of interesting stuff to look ahead to. Thanks for the color, guys.

Our next question comes from John Lovallo with Merrill Lynch.

First question is, there's clearly a lot of excitement and anticipation about China. It seems the Chinese government is doing just about everything in their power to favor the domestic OEs, whether it's the 10% purchase tax avoidance that won't apply to imports, the charging station standards that at this point don't seem to be compatible with Tesla's technology. And even they're allowing or thinking of allowing non-OEs to have licenses to produce autos including the owner of Fisker and A123 might be in that race.

So I guess the question is how do you see this kind of environment developing? Do you think there's going to be increasing pressure from the Chinese government to favor the domestic guys?

Actually I've been pretty impressed with the Chinese government at all levels, the city level and the national level. They're actually -- they have done some parochial actions, certainly maybe quite a bit in the past, but I don't think that's going to be the path going forward for them.

And actually for the sales tax exemption, it does actually apply to non-Chinese cars. So I think you may be misinformed there.

There are -- we have to adhere to Chinese charging standards, but we are going to do so. The challenge was that those standards weren't defined until about a month ago, so it's a little tricky to adhere to something that is not yet definitively been announced. Now that it has, we're committed to meet those standards and we expect to fit within the sales tax exemption.

It's actually a very, relatively a simple matter to meet the Chinese standards, they're very familiar and quite close to the European standard.

Right, yes exactly. And we already meet the European standard, so we currently serve the US, the European standard and then we'll be serving the China standard which is, as JB said, (inaudible).

Okay, that's very helpful. (multiple speakers) Sorry, go ahead.

Yes, in Shanghai we've got the exemption on the license plate fees which is on an imported EV. So it's not just for local EVs that those qualities are being applied. And we are having discussions in other cities where that's a possibility too. So I think so far it's been overall a positive reception that we have received, it's been good.

Yes, yes. They're generally committed to electric cars and it's not just about favoring local manufacturers.

Okay, that's helpful. I guess the second question would be recently Edmonds put out a report on I guess there first year with the Model S, and obviously everyone has their own opinion on this. But there's been a lot of talk about quality on the call.

And what the Edmonds was saying and you may have read it is that there were something like 28 to 30 service campaigns that were not part of the regular scheduled maintenance. And because of that they couldn't recommend the car. So I was curious how you guys might respond to that?

Well there's definitely some genuine issues Edmonds car, but that they had one of our early production units. And in fact, most of the problems that they've encountered there are not present in current cars.

We also -- I think this maybe ended up being counterproductive, but the service team was ultra proactive with the Edmonds car. So they would -- they were doing their best to make Edmonds happy and I think unfortunately that resulted in changing things out that just on the off chance something might go wrong.

So and -- that drive unit issue I mentioned earlier, where the drive unit was sometimes replaced even though it wasn't a drive unit problem, that happened with them twice. So it's an unfortunate case but I don't think it's broadly correct and it's definitely not correct for cars made in the past year.

Yes, if I might add one thing on the drive unit replacements as well. I think it's important to note that the drive unit is a very complicated assembly of different components. And the pieces that have needed service and have failed internal to the drive unit are relatively not very expensive. And they're being replaced in order for expedience and to get the car back on the road for the customer in the minimum time.

But going forward, we're looking at ways to repair them and give people back their same drive unit very, very quickly in about the same amount of time. If you had to replace your internal combustion engine every time something small went wrong --

Every time you need a gasket or something. Especially like the small shim that I was mentioning is equivalent to replacing a minor gasket on an internal combustion engine and normally you wouldn't give someone a new engine for that. But our optimization was customer happiness. So until we knew exactly what to do, we just wanted to give people back their car right away.

Thanks a lot, guys.

Just to add from a cost perspective since these are not significant, the overall impact on our warranty reserve has not been significant.

Right. And we're going to be at it hard core until our car is 10 x better than any other car on the road.

Our next question comes from Ben Kallo with Robert W. Baird.

As we look ahead to next year and the 100,000 unit by the end of next year, is the biggest production increase happening right now over these two weeks? Or is there some other step that has to take place next year to get you to that level?

Well there is a big step that is expected to occur in Q1 next year which is the bring up of the body line, the SX body line. So what we did the past two weeks is the assembly line where it's basically the bits get put together. But then there's the -- the body line is where the body itself is welded together, welded and bonded together. So the core skeleton of the car is created.

And so you can anticipate probably -- well I'm not sure if -- if may or may not be -- actually so I take that back, we're going to bring the body line up in parallel with the current line. So unlike this case with the assembly, we had to -- we didn't have two complete assembly lines. We had to stop and retool in the case of a new SX body line, which is a line that's designed to be capable of 2500 units a week, maybe more than that, conservatively 2500 units a week at a lower cost point. We should be able to do that in parallel.

Got it. And --

I should say -- sorry another thing that's going to be -- see a big upgrade, really big upgrade is the paint shop. So there are a few cases where advanced CapEx spending makes sense even though it's going to pay off in two or three years but it's such a big improvement that you want to do it even at a high discount rate. So our paint shop is being upgraded, it's going to be the most advanced automotive paint shop in the world. But it's expensive to do that.

And then we like watching Halle Barry every week, but can you give us any details on when we can see the Model X? And then there's slightly different language about the Alpha and Beta that I think is new, so could you tell us the difference between the Alpha model and the Beta model?

Yes, so the X that was produced, the show car or advanced prototype is pre Alpha. The Alpha itself is the production -- it's basically a production design. We're going to move very quickly from Alpha to Beta.

So in this case for the Model S the Alpha was a lot more primitive than the X will be. Because of course we didn't even -- for the X we've got all of this chassis and power train stuff that's been done for the S that we can build upon, in the S case we didn't have that.

So it's really a very advanced Alpha car that we are producing for the X. And we will move to Beta within three months. So it's a real fast Alpha to Beta and you can expect to see production cars, not in customer hands but on the road doing test and validation in Q1 next year. We'll have quite a few of those.

Great, thanks so much.

Our next question comes from --

And something I do want to emphasize with the X is because we're moving very quickly into a high production mode as opposed to where the S. The S had a -- Model S had a long production slope, starting off very slowly and then taking six months to reach the 400 unit per week level. In the case of the X, we're going to try to move to several hundred units a week within three months of production.

So it 's like half, maybe less than half the length. But because of that we really want to do serious validation on the car, test the heck out of it before going into volume production.

Our next question comes from Colin Rusch from Northland Capital Markets.

I wanted to make sure I heard these numbers right. So we're going from 1000 to 2000 cars a week in 2015. So if I take the mid range of that, about 1500 cars a week or production levels of 78,000 cars per year.

And if I heard correct on the delivery time frames, you're about two weeks in North America and something like five or six weeks overseas which you're trying to shorten up. So we'd be thinking about works in progress of roughly 10%. So are those numbers right in terms of how I'm thinking about targets for you guys for next year?

It's difficult for us to predict the slope of next year, so what is the slope, what is the exact curve of the production rise look like next year. We feel confident of [assuming] next year our 2000 units a week of production and demand, absent some macro economic shock. But it's hard to say exactly what the area under the curve looks like. But it's certainly more than 60,000 I would think, but -- yes.

Okay, that's perfect. And then can you talk about the weight reduction efforts that you've got going on right now with the vehicles? And how should we think about the cadence of pulling weight out of the vehicle and potential translation of that into extended range?

The partial on weight versus range it's not super strong. There is an improvement, but it's not a huge improvement. The Model S has gotten steadily lighter over time.

It's really like a quarter pound here or a half pound there, but the Model S in production today is at least a few hundred pounds less then the starter production. And we'll continue to see improvements over time.

So to get to a step change on -- there's so many pieces in the car, you got the battery pack, the motor, the transmission or the gearbox, the tires and wheels, the seats. I think if you had a big improvement in any one of those items, maybe with the exception of the battery pack, it only changes the weight of the car by 1%, 2% or something. These are all good things but there's not like one big block of lead that's sitting in the car that one can remove, it requires whittling away at a whole bunch of things.

And the range impact is -- the weight is one fraction of that kind of range. So even smaller than the direct percentage of weight reduction.

Yes, but it is getting slightly better over time. It's hard for people to perceive it from one month to the next, but if you look at it over the course of the year you'd notice.

Great, thank you.

The next question comes from Andrea James with Dougherty & Co.

And Patrick, I should have mentioned that we probably need to cut the call off after this question, so have this be the last question, please. Go ahead, Andrea, sorry. I guess she is no longer in queue.

So with that I guess we'll call it a day and thank everyone for joining the call and we look forward to talking with you for our third-quarter earnings release. Goodbye.

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