Tesla (TSLA) Q2 2022 Earnings Conference Call Transcript | the misc fool (2023)

Tesla(TSLA-5,03%)
Earnings Call Q22022
July 20, 2022,17:30. AND

Contents:

• Prepared Comments
• questions and answers
• call participants

Prepared Comments:

Martin Vicha

Good afternoon everyone and welcome to Tesla's Q2 2022 Q&A webcast. My name is Martin Viecha, VP of Investor Relations; and today I'm joined by Elon Musk, Zachary Kirkhorn and other leaders. Our second quarter results were released around 3:00 p.m. Central time on the update platform that we publish at the same link as this webcast.

During this conference call, we will discuss our business prospects and make forward-looking statements. These comments are based on our predictions and expectations today. Actual events or results could differ materially due to a number of risks and uncertainties, including those discussed in our recent filings with the SEC. During the Q&A portion of today's conference call, please limit yourself to one question and one follow-up.

[User Guide] But before we move on to the Q&A, Elon has some introductory remarks. Elon?

Elon Musk--Managing Director and Product Architect

Thanks Martin To summarize the second quarter, the second quarter was unique for Tesla due to an extended shutdown of our Shanghai plant. But despite all these challenges, it was one of the strongest quarters in our history. More importantly, in June we achieved production records in both Fremont and Shanghai.

And as a result, we have the potential for an unprecedented second half. I would like to stress that this is obviously subject to force majeure, things that are beyond our control. The last few years have been pretty much force majeure and a bit of supply chain hell for the past few years. Thank you to our amazing Tesla Supply Chain team for tackling the hard-to-rescue challenges.

And thank you to the team at Tesla's Shanghai plant who sacrificed so much to get the plant back up and running and record production in June. So things are going well with ramping up production in Berlin. We hit a major milestone of 1,000 cars a week in June. And we're hoping - sorry, our Giga Texas will surpass the 1,000 vehicle-a-week milestone, hopefully within the next few months.

To be clear, we are currently building the 2170 cell cars and Drew Baglino will be addressing some of the 4680 issues later in this call. But it's worth noting that we have enough 2170 cells to cover all vehicle production for the rest of the year. So we are not dependent on 4680. 4680 will be important next year, but it's not important this year.

With this in mind, we installed the second generation of 4680 cell manufacturing facilities in Texas. And even in our established factories such as Fremont and Shanghai, we continue to expand capacities. In terms of autopilot, we've now rolled out our FSD beta with the City Streets driving feature to over 100,000 owners. They are very happy with the capacity of the system and we will keep improving it every week.

We have now driven over 35 million miles on FSD Beta. That's more autonomous miles than any company we know of, I think probably more than any other company combined. Well, and this mileage is growing exponentially. In terms of manufacturing and technology, we said about five or six years ago that we want to be the best manufacturer in the world and, somewhat counterintuitively, I think that for some people that will actually be our biggest competitive advantage.

We are very manufacturing friendly here at Tesla. And in general, we want to encourage other companies to be very manufacturer-friendly. And in general I think it's a very important thing to do. We have to do things and do it efficiently, and that's manufacturing.

So we've made a lot of advancements in the manufacturing processes. As we are now showing in the shareholder presentation, thanks to our. Large castings, we make the largest castings in the world. We reduced the number of body welding robots by 70% per unit of capacity in Austin and Berlin. So this is pretty much a body shop, about three times smaller than it would normally be.

And I have to say that it's also lighter, cheaper and has superior noise and vibration toughness. So good on all levels. But this journey is not over yet. We will be introducing another level of simplicity and manufacturing improvements with Cybertruck and future products that we can't talk about right now, but I think it will be very exciting to introduce in the future.

Our safety team also introduced a feature that increases seat tension when the vision system detects an impending collision, something that has never been done before. So you can imagine that if you have a seat belt that only tightens on impact, you have very little time to tighten the seat belt. If need be, the car has to creak to activate the seat belt tensioner. But because we have vision, we can actually see with a 100% chance that a collision is imminent before it actually happens.

So we can tighten the seat belts and we can even adjust the airbag deployment because we can see, not just feel. This is a key safety advantage that Teslas can now offer. And there's also an over-the-air update, so that will be available in all cars that have at least AP3 hardware. In summary, we emerged from the second quarter with a stronger rate of production than ever before.

Our team remains focused on Cybertruck's production readiness and the design of any future platform. We're hoping, we're still hoping, to go into production with the Cybertruck by the middle of next year. And we are very, very excited about this product. I think it might actually be our best product.

We will see. FSD Beta is on track to be released to all North American customers before the end of this year. And if we get regulatory approval, hopefully we'll roll it out in Europe and other parts of the world as well. In a few months we will be celebrating our AI Day.

I think people will be surprised at what we can show on AI Day. So basically, there's a lot to look forward to in the second half of this year. And I want to thank all of our employees and suppliers for their hard work during these difficult times. I appreciate it very much.

Gracias.

Martin Vicha

Thanks very much. And Zach has a few opening remarks, too.

Zachary Kirkhorn--CFO

Yes, thank you Martin First, I would like to congratulate the Tesla team on an excellent performance in the second quarter. Although our production volume was sequentially reduced due to the COVID-related closures in Shanghai, we made significant progress in almost all business areas and particularly in our global vehicle production rate at the end of the quarter.

Our Fremont factory, supported by our Reno team, achieved new production records. The Shanghai factory has resumed full production and our new Austin and Berlin factories are making good progress on their initial ramp-ups. In addition, our power business achieved record gross profit with the highest solar volume in many years. I would like to personally thank the entire Tesla team as I know many of you are listening.

You have embodied a remarkable and tireless pursuit of excellence in support of our mission. I would also like to thank our suppliers for their support during another difficult quarter. On GAAP automotive gross margin, it declined sequentially to 27.9%. The temporary decline in production volume in Shanghai had a significant impact on margin, including idle capacity and factory restart costs, and also had an impact on the regional supply mix.

In addition, as discussed in previous calls, we are working to reduce inefficiencies in our new factories, which are progressing well but had a negative impact on margin when these factories came online. While we continue to benefit from higher prices, which have faced some headwinds from exchange rates, our cost structure continues to be impacted by cost increases from inflation, raw materials and logistics. The energy business performed well in the second quarter, thanks to the roll-out of alternative solar power and progress in unit savings. Our storage business continues to be constrained by components from both Powerwall and Megapack, which we expect to ease somewhat in the second half of the year.

We are very grateful for the patience and flexibility of our customers in overcoming these challenges. Within operating costs, start-up costs related to Boston and Berlin have been reduced as these factories have started production and their costs are now reflected in the automotive COGS. In addition, we converted the majority of our bitcoin holdings into fiat for a realized gain offset by impairments on the remainder of our holdings, offsetting a $106 million net cost of restructuring and other gains and losses. We are also incurring restructuring costs related to certain job cuts.

Elon Musk--Managing Director and Product Architect

Yes, actually it should be mentioned that the reason we sold a bunch of our bitcoin holdings was because we weren't sure when the COVID lockdowns in China would be eased. Therefore, it was important for us to maximize our cash position given the uncertainty of the COVID lockdowns in China. We are certainly open to increasing our Bitcoin holdings in the future, so this should not be taken as a Bitcoin verdict. It's just that we were concerned about the company's overall liquidity given the COVID shutdowns in China.

And we haven't sold any of our Dogecoins.

Zachary Kirkhorn--CFO

We still have it.

Elon Musk--Managing Director and Product Architect

We still have our Dogecoin.

Zachary Kirkhorn--CFO

Despite these challenges, we were still able to deliver one of our strongest operating margins of 14.6%. Our free cash flows were impacted by working capital related to the Shanghai plant closure. However, we expect this to be a benefit in the third quarter as our cash flows related to working capital are restored. Looking ahead and as Elon mentioned, we are set for an unprecedented second half of the year.

We are very happy about it. A few things to keep in mind as we move forward. The inefficiencies of the Austin and Berlin ramps will continue to impact our margins for the remainder of the year. However, the effects should wear off as we increase the ramp.

Secondly, as mentioned earlier, we expect world recognized prices to continue to increase as our order book develops. But macroeconomic cost increases will continue to be part of our story. Finally, despite losing more builds in Q3 than expected, we're still targeting 50% growth this year. This goal has become more difficult, but still possible with solid execution.

And as Elon mentioned, no more force majeure events for the rest of the year.

Elon Musk--Managing Director and Product Architect

Yes, much force majeure in recent years, that's for sure.

Zachary Kirkhorn--CFO

Gracias.

Martin Vicha

Thanks very much. And now we come to the questions from investors. And the first question is that Chinese EV makers appear to be doing a better job of software and design innovation than their Western peers, Tesla excluded. How can Tesla ensure it stays ahead of these manufacturers both inside and outside of China?

Elon Musk--Managing Director and Product Architect

Well, right now, Tesla Train is the best Chinese EV manufacturer. In fact, we are doing our best thanks to our great team in China. But I have great respect for the Chinese, our manufacturers and the EV manufacturers in particular. I think they will be a force to be reckoned with around the world.

They are very. They are intelligent and very hardworking. And I think anyone that isn't, any company that isn't as competitive as they are, is obviously going to see their shares decline. Of course we have a lot of respect for the current companies in China and then for their skills, yes.

Martin Vicha

Thank you very much. The next question is when will Tesla have a unified vector space for the lattice of moving and static objects? Will this be a V11 or newer version? If the latter, can you explain what makes it a difficult problem in layman's terms?

Elon Musk--Managing Director and Product Architect

OK. This answer, I believe, is understood by 0.01% of the audience. I think people want to know what a unified factory space would really mean. In essence, if you could assume that if you couldn't connect static and dynamic objects in C++, if they could be connected at the neural network level, then you wouldn't need to match them within the C++ heuristic.

This is an architecturally better form of - this is the most desirable result. I think it's probably not necessary to achieve full autonomous driving, but it would be a slight improvement in autonomous driving efficiency. And we definitely want to achieve that. Yes.

The Nirvana situation is you have surround video/auto labeling of all static and dynamic objects. And it also has spatial memory surround video inference. So that's... I mean, I think we'll almost certainly be there before the end of the year. Yes, I'm not sure how many would understand that.

But I should also say that we're also hoping to improve the frame rate, and because we have some of the older neural networks, we think we could reach the frame rate of single cameras, maybe up to 36 fps. , which is actually a lot of frames considering the cameras. It's certainly comfortably above 24 frames, which is basically the frame rate of movies.

Martin Vicha

Thank you very much. The next question is that Elon recently tweeted about price cuts once inflation cools. Can you elaborate on what you mean by "chilling" and how aggressively the company will cut prices? In general, how do you feel about car prices in the long term?

Elon Musk--Managing Director and Product Architect

Yes, since we have that there is quite a long wait when someone orders a car, six months in some cases; in some cases it can take up to a year. We need to anticipate the likely rate of inflation over this period. So that's what we're trying to do.

If we. If or when we see signs that the inflation rate is coming down, we wouldn't need to raise the price of our cars. There may be a slight drop in car prices, but this is primarily dependent on aggregate inflation. It's not something we control. If I had to guess, and I'd take it with a grain of salt, I think inflation will ease towards the end of this year.

We are certainly seeing a downtrend in commodity prices. Yes, but take that with a grain of salt. That's... economic forecasting is full of mistakes.

I don't know if you guys... do you want to say something about...?

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yeah, we're certainly looking at, I mean, it's kind of the full spectrum. On the battery metals side, for example, the price of lithium has skyrocketed. We used to be $11 a pound to over $80 a pound.

But not all situations are that bad, so it's kind of a spectrum.

unknown speaker

Carbon steel, aluminum, [unintelligible] carbon steel and aluminum have started trending down. We probably won't see the benefits of this until late this year or early next year.

Elon Musk--Managing Director and Product Architect

Yes, but I think like most commodities, we see a downtrend towards the end of this year or next. For some commodities, the price of lithium is crazy. I would like to once again urge entrepreneurs to get into the lithium refining business.

Mining is relatively easy. Refining is much more difficult. So lithium is actually very common, more or less, like lithium almost everywhere. But you have to refine the lithium into battery grade lithium carbonate and lithium hydroxide, which have to be of extremely high purity.

So it's basically like minting money right now. Lithium processing currently has software margins. So, once again, I want to encourage entrepreneurs to get into the lithium refining business. You can't lose.

It's a license to print money.

Martin Vicha

Thank you very much. The next question is, did you make the right economic decision when diversifying into Bitcoin, especially in terms of inflation? Since then, it hasn't proven to have great coverage in real-world testing for the past few months. How do you see it as a long-term asset? And what do you need to see to change your point of view?

Elon Musk--Managing Director and Product Architect

Well, Tesla is. Tesla's goal is to accelerate the advent of sustainable energy. Actually, we're not: cryptocurrency is a sideshow for the sideshow. We're not a cryptocurrency, we don't think much about it. We're giving a lot of thought to scaling production and accelerating the advent of sustainable energy, which is registering heat waves across the globe to emphasize the urgency of this transition.

That's what we're trying to do: make electric vehicles and solar and stationary battery packs. But the three pillars of a sustainable energy future, which like solar and wind power to generate electricity, stationary battery packs to store solar energy due to their intermittency, and then electric vehicles, are the third pillar. And when these three things work, we have a sustainable future for civilization. And Tesla's fundamental good and the reason we're doing this is certainly my main motivation here to bring the sustainable energy day here sooner.

That's our goal. We are neither here nor there in cryptocurrencies.

Martin Vicha

Thank you very much. Next question about 4680. Elon pointed out that the structure package 4680 plus is not yet optimized. Can you share the general path of 4680 in structural packages in terms of cost efficiency compared to traditional 2170 package? Are the cost improvements mostly due to scaling, or do we need to address some technical issues?

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, do you want to do architecture?

Elon Musk--Managing Director and Product Architect

Yes, so the structural package where we get dual use of the battery cells as structure and as energy storage, like an airplane gets dual use of the wing as a fuel tank and as a wing I think. clearly, from a physical point of view. , the higher architecture. It's architecture A. Well, because it's new, let's start by, I don't know, ambitiously get a C within an architecture A.

But there is potential to improve radically and then clearly better than a battery pack being carried around like a sack of potatoes.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, and we gained perspective by getting our first framework package into production that it is indeed Architecture A. And now we've built that statement and have more faith in it.

Elon Musk--Managing Director and Product Architect

Yes, exactly that, so the structural package, even the C and A architecture, outperforms the non-structural package. And so, over time, with further refinement, it will be significantly superior to a car that carries a battery pack like a load.

And that's like... it's very similar to the early days of aviation where fuel tanks were initially transported as cargo until they realized that you actually have to use a fuel tank twice, as a wing and as a fuel tank. And that makes the planes lighter and better. And that also applies to electric vehicles.

Martin Vicha

And as for the cost improvements, are they due to scaling or are they solving technical issues?

Elon Musk--Managing Director and Product Architect

Yes, yes, I mean really, the two things that drive down costs are economies of scale and technology and core technology.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, I think the technical problem is not correct.

Elon Musk--Managing Director and Product Architect

Technical questions like...

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Let's get to the optimal design, right? As always, you start with some access. Some people might call it that, but that's not really what you think at first. You just don't know how fast you can get it until you've done it a few times.

Elon Musk--Managing Director and Product Architect

Yes, I mean, there's a platonic ideal of the perfect product where the atoms... You've got exactly the right atoms and they're in exactly the right position, and you're approaching that platonic ideal asymptotically. But it takes a lot of effort over time to find out what the platonic ideal really is and then gradually move towards it.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, I mean you might have to make a new alloy. Then you have to figure out how to cast it, then you have to upgrade the casting machine with the new alloy.

Elon Musk--Managing Director and Product Architect

We made it.

Lars Moravy--Vice President, Automotive Engineering

We did it for -- We did auditions. Yes, but they take time.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Upgrading is something we're used to here, and it's kind of like what we've been doing with their vehicles and our design from the start. I mean, we're even talking from a few weeks ago, like the first version of the fascia that we did that put on early vehicles is like...

Elon Musk--Managing Director and Product Architect

I mean the stage of the Model S.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

No, I'm talking about the first Model Y. As we ordered more dies, because we introduce more dies for higher production, we saved about four or five kilos of mass just by iterating the die. And we do that fairly regularly at Tesla and will continue to do so. So we are not satisfied with a C like we are now with a C-plus because I think we have to go further to B-minus.

Elon Musk--Managing Director and Product Architect

In the back cast. But that will carry over to get better at casting. So the cast is a lot better than the rare body cast is a lot better than that. On the street it used to be done where you have 120 different parts welded together or glued together with different alloys and then you have to put sealant between all the different parts to prevent water ingress and noise. So we're a lot better off with the current casting, but there's still plenty of opportunity to lower the mastercasting and expand the casting to include more parts, as well as customize the rest of the vehicle due to the fact there's an A-cast .

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, that's what I wanted to say, wasn't it? As if we didn't just rate the package and insulation. It's the package plus the body, the integration, we have mass in the right places, we have cost in the right places and just the right amount. And I think we went through an iteration. Let's do one more thing with Cybertruck.

I mean, we take the learnings and do. The next version is expected to be a B plus architecture on A. That is certainly a goal.

Martin Vicha

Thank you very much. The next question is how do you think the progress of FSD is progressing? And does Andrej Karpathy's departure have any significant impact on the timeline or potential progress?

Elon Musk--Managing Director and Product Architect

Of course, now that Andrei wrote all the code himself, everything has come to a standstill. And such irony. So Andrej was also the one where we have transparent respect for Andrej. He's decided I think he wants to contribute more to core AI on an academic level and go back to custom programming.

But we have a team of about 120 people in our AI software group who are extremely talented. And I think we will. I am very confident that we will solve fully autonomous driving and it looks like it will be later this year. I know people are what they say they are. But it looks epic.

It seems that we are getting closer to fully autonomous driving this year.

Martin Vicha

Thank you very much. The next question is how does the ramp 4680 perform? And Giga Texas is already producing cells?

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, so we're making progress on 4680. But right now, as Elon mentioned, we're taking advantage of provider cells, which we have in sufficient numbers to grow Texas and Berlin. We hope to increase overall production from 4680 to over 1,000 per week by the end of the year, hopefully sooner, much sooner.

In the second quarter, we fully automated the power transport for the dry anode electrode tool at Kato, thereby enabling significant increases in production and improvements in earnings. Because of this, Kato's production has been growing at about 35% per month since March and throughputs across the factory are already on track in most areas and trending in that direction and in some areas. We feed the Fremont cell apprenticeships and package lines to Texas and Berlin there, a copy. Cell design has been accelerated to allow for higher performance and easier manufacturing.

Production lines were further integrated and we got additional content. For these reasons, new ramp challenges have to be mastered in Texas and Berlin. Specifically for Texas, the switchgear equipment was fully installed and commissioned in the last quarter, and we have produced our first car switchgear sets from commissioning to the end of production. Our goal for Texas is to start production this quarter and we are targeting Texas to surpass Kato's weekly production before the end of this year.

Martin Vicha

Thanks very much. The next question is also about 4680, but I think Andrew covered everything that was in the next question. So the next question concerns the production ramp-up in Austin and Berlin. What about the supply of semiconductors, battery cells and other components? What if cost inflation hurts the profitability of those other plants?

pulled backlino--Senior Vice President, Powertrain and Power Engineering

I can take that. So Tesla buys about 1,600 unique pieces of silicon from 43 semiconductor companies. So with a portfolio this size, there are always challenges. It runs more stably on the latest generation chips.

We're still seeing some tightness in older-generation semiconductors, particularly in the analog and mixed-signal space. But we have line of sight to work out the volumes that are being considered for both Austin and Berlin. And on the front of the cell, as Elon mentioned, we have a comfortable margin thanks to our partners' record production, and we have a line of sight that matches the planned production of both factories. We have significantly increased cell production on a rolling 12 month basis and have long term contracts with all our partners for key battery metals.

So of course we don't see any major issues for the components apart from unplanned shutdowns related to COVID.

Zachary Kirkhorn--CFO

Just to add the profitability part of the question. The second quarter was our biggest rise in recent quarters in inflation and increases related to commodities for our autos. It is fairly evenly distributed across factories due to common suppliers or common issues affecting the broad supply chain. So, you know, I think I mentioned before that we've seen increases over the last year.

It increased in the first quarter and then increased again in the second quarter at a higher rate of increase. So as we look towards the end of the year we see that we don't think the inflation driven increases in the third quarter will be as large as they were in the second quarter. But as Elon had mentioned, there is pricing uncertainty here. And, as [Inaudible] just mentioned, we haven't fully disclosed all the cost components because we've got some deals in place.

But there are also some spot purchases and some contracts that are being renegotiated. So we manage it with pricing and in partnership with our providers, but it's still something that affects our finances.

Martin Vicha

Thanks very much. And the last question is when will the Cybertruck be officially available?

Elon Musk--Managing Director and Product Architect

We hope to start deliveries in the middle of next year.

Martin Vicha

Excellent. Thanks very much. And now we come to the analyst's questions. The first question comes from Pierre Ferragu of New Street Research.

Pierre, please stop muting yourself.

Eisenstein--New Road Research - Analista

Hello. Thank you for taking my question. I would like to ask a question about 4680 and the structural battery pack. And I would like to understand where you are on the energy density, efficiency and technology roadmap that you outlined at Battery Day.

So what I'm trying to understand is where you stand in terms of the architecture of the battery cell itself. How much silicon does it have? How much energy improvement have you achieved so far? And the reason I'm asking this is because there are some very smart guys on Twitter who have shared their experiences of trying to fully dump a Texas Model Y out of Austin and have seen behaviors and reloading behaviors that suggest it That these cars were maybe so very high, very high mileage, very high range, and they had an artificially limited range in the software. So I'm just trying to understand how much head start you're building up now that the 4680 and battery are back in range.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, let me try to give a very direct answer. As Elon mentioned, our priority during the initial 4680 and structural battery ramp was really simplicity and scalability. So from day one we didn't put all the bells and whistles on because if we did we were in for some serious miracles to perform to get started.

But as we meet the manufacturing goals we set ourselves on the ramp we need to hit next year, we certainly plan to introduce new material tech and higher-end structure packs like we're not waiting for treats for a rainy day or so.

Elon Musk--Managing Director and Product Architect

Yes, perhaps to put it another way, our current focus is on the dozens of small issues that are holding back the 4680 from ramping up production of this revolutionary dry electrode process. But when something is revolutionary, there are many unknowns that need to be resolved.

So we hope to solve these unknowns, but it's very, very difficult. It's... yes, we're making rapid progress on this. So the first task is to get the basics right, achieve high volume and high reliability, and then iterate within that very quickly to improve the power density and lower the cost of the cell.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Totally agree, yes.

Elon Musk--Managing Director and Product Architect

I would say we are very confident of getting a good result. It is the exact counterpoint of what a debate may be, but the outcome is not.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, specifically in the dry process we made a breakthrough this last quarter in Kato which the team is really happy about and we congratulate the team on making it happen.

Elon Musk--Managing Director and Product Architect

But I must also stress that Tesla does not intend to oust our battery cell suppliers. Tesla battery cell production complements what our suppliers can do. And we want our suppliers to ramp up production of their batteries as quickly as possible, and that goes for the entire supply chain. The basic rate limiter for the sustainable energy transition is how fast you can grow with the amount of battery production per year. This is the essential speed limiter for the transition to sustainability as batteries are required for two of the sustainability pillars, stationary and vehicle storage.

So yes.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, I just want to emphasize that many of these higher energy density technologies are not necessarily scalable. I mean most of them are not scalable from what I've seen. So focusing on them is a distraction from the mission, because how can we scale as quickly as possible? And we take those risks that we discussed at Battery Day. And our plan is that when we remove them and they succeed, we want to bring them back to our partners so they can go faster too, because that's it in the mission, how can we speed up?

Elon Musk--Managing Director and Product Architect

If I'm often asked, I'm often asked if advances in battery technology are needed for the world to move towards sustainability? The answer is no. Even if there were no technological advances, literally zero where the technology is now, we could completely transition the earth to sustainable energy. Above all, the problem is the speed at which the entire supply chain unfolds from mining to refining to cell production. How fast can that grow? It is growing fast, the faster it grows, the faster we switch to a sustainable energy economy.

Eisenstein--New Road Research - Analista

This is really cool right where my follow up is. So, Elon, you keep mentioning this 50% sustainable annual growth target that they have. So my question here is, as we see the difficulties in terms of commodities, commodities and volatility in prices, I'm wondering, as you are planning that 50% annual growth if we are today in the next five to 10 years how do you think that you've secured a lot of that through your work, signing long-term contracts and things like that? And you urged entrepreneurs to get into the lithium business. So does that mean you haven't secured enough lithium to grow 50% per year for several years? And how much of that is insured today? And how quickly can this generally be improved?

Elon Musk--Managing Director and Product Architect

Well I think it's very difficult to predict anything in 10 years time. Honestly, I hope civilization continues. I don't count that as a win.

Eisenstein--New Road Research - Analista

Not so funny.

Elon Musk--Managing Director and Product Architect

Yes, exactly. Hopefully we haven't had a Third World War by then. As a result, we see limitations in refining the materials needed for lithium-ion batteries. I would like to emphasize this because it is not due to a shortage of raw materials.

In the case of lithium, lithium is one of the most common elements on earth. It's pretty much everywhere. However, refining lithium into ultra high purity battery grade lithium hydroxide, lithium carbonate, is quite difficult and requires many machines and is somewhat difficult to scale. Since it was also difficult to make the anode and cathode.

I think... I'm guessing maybe two thirds of the batteries will be iron phosphate or maybe iron phosphate with some manganese. And there's a lot, there's a ridiculous amount of iron. In fact, Earth is... a bit small stuff. says what is the earth made of more than anything else? Iron.

Iron is the number 1 ingredient on earth by mass. Number 2 is oxygen, which is wild.

Yes, basically rust. Actually, we're stuck. We're a rustball.

That's more or less... that's almost two-thirds of the earth, I think it's rust. We're like a rusty ball bearing with a little bit of other stuff. So, but a lot of lithium. In any case, there is no lack of material.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

But the other thing about the LFP is that it's not just about having more access to material that way. The actual refining process requires less capital to produce a good LFP cathode. And then there's… not only is it scalable on the resource side, it's scalable on the refining side as well.

Elon Musk--Managing Director and Product Architect

Absolutely. To clarify, there is no fundamental barrier here. It's just a matter of fee. How high can production be scaled? And I think we're seeing a very rapid increase in battery production and the entire supply chain.

If you were to say today, what are the concerns that arise in the future? I would say that one of the concerns is the machinery used to refine the critical ingredients in lithium-ion cells. The lithium itself and then the cathode which I said as I said will be mostly iron phosphate with some manganese in part. I think almost all stationary storage will be iron phosphate and then really only nickel chemistry will be needed for long haul vehicles and airplanes and such.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, I would also say that we are working with our providers to increase their capacity as soon as possible. And it's not like we're going to have a problem in the next year or two, specifically on your question. But if we look 10 years ahead, yes we need to do more to accelerate growth.

And that's why we're making our own investments, like building a facility here in Texas. The steel is rising, you can see that on the overpasses. We are also working on a lithium refining business because the best way to learn how to speed something up is to do it yourself. These are the things we do to keep everything moving.

Elon Musk--Managing Director and Product Architect

Yes, if our vendors don't fix these issues, we will.

Martin Vicha

Thank you very much. The next question comes from Emmanuel Rosner of Deutsche Bank. Emmanuel, come on, deactivate.

Emmanuel Roesner--Deutsche Bank -- Analista

Yes thank you. I have a query about the demand for your vehicle and then a quick follow up on the supply. First on the demand side.

Do you see any kind of pressure on the order book or the pace of new orders or any kind of slowdown as a result of consumer pressure? Given your assessment of the risks to the economy, which I think you've expressed, Elon, does that worry you?

Elon Musk--Managing Director and Product Architect

Well, right now our problem is mainly one of production. So we have long leads, as anyone can see, when they order our car, order the Model Y, it's coming sometime next year. So that's not a problem for us for many months. Our problem is predominantly that of production.

So yes.

Zachary Kirkhorn--CFO

OK. Perhaps there are only two things to add. Specifically to your question: do we see macroeconomic effects on our demand? I can not say that. Maybe a little bit.

Elon Musk--Managing Director and Product Architect

Some maybe.

Zachary Kirkhorn--CFO

But it's not material. Second to Elon's note on delays: we have a very long runway here with very long lead times. I mean, certainly the world is uncertain and we'll have to see where things go with commodity prices, how fast we ramp up production, what the condition of the road is sometime next year. But the lawsuit isn't something we're really talking about.

Elon Musk--Managing Director and Product Architect

Yeah, I think it's maybe just one thing worth noting that there's an interface between value for money and basic affordability, because sometimes people say, 'Well, when you have all this demand. Why not up the price on some, twice the price or something? And that's usually voiced by someone who is rich. But there is, even if infinite value is offered, if someone cares, has he doesn't have enough money to buy it, not even a product where convenience is infinite, they basically can't buy it.

Because of this, you simply raise prices to an arbitrarily high level because you are exceeding affordability, and then demand falls off a cliff. So I feel like we increased our prices or increased the price several times. They're honestly at an embarrassing level. But we also had a lot of supply chains and production trucks and we have crazy inflation.

So, I hope this isn't a promise or anything, but I hope that at some point we can lower the prices a bit.

Martin Vicha

Thank you very much. Emmanuel, do you have a follow up?

Emmanuel Roesner--Deutsche Bank -- Analista

Yes, my follow-through was indeed on the supply side. So it was very encouraging to see your current installed capacity at essentially over 1.9 million units currently installed. How fast do you think you can fill that capacity?

Elon Musk--Managing Director and Product Architect

Well, I mean, we... I think we have a good chance of coming out with 40,000 vehicles a week this year.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, I mean our internal plans are to have the capacity fully utilized by the end of the year. It takes time to drive up there. It's going to be a challenge.

There's a lot of things that need to happen to get there, but we're working on that.

Elon Musk--Managing Director and Product Architect

Yes, we've already done a lot of 30,000 car weeks, so I think a 40,000 car week is within reach by the end of this year.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Shanghai and Fremont, as we said last month for record production, are really willing to do better, really good. But Berlin is also getting stronger. In theory, they also had a record quarter, the final quarter. And if we get them up to the capacity shown on the platform by the end of this year, we'll get to that rate.

Elon Musk--Managing Director and Product Architect

There's always a lot of uncertainty as production looks like the S-curve and that middle part of the S-curve is almost certainly hard to beat. But on the last part of the S-curve you can say, I think you can have a lot more certainty. And so I'm confident that by the end of this year or early next year we'll get to 5,000 cars a week in Austin and Berlin and probably but not sure 10,000 cars a week in both places late next year next year

Martin Vicha

Thank you very much. The next question comes from Colin Rusch from Oppenheimer. Colin, go ahead, please.

Colin Rusch--Oppenheimer and Company - Analista

Thank you guys Could you talk a bit about the pricing strategy around FSD and how do you see it developing towards the end of the year and into 2023 as you get closer to implementing this full functionality and extending the cycle times? ?

Elon Musk--Managing Director and Product Architect

Yes, we will be increasing the price of FSD later this year. I think just before we go to silent beta or beta, when anyone who wants to use beta software with all the limitations that come with it can use it, it would probably make sense to increase the price of FSD. I think the value of FSD is extremely high and misunderstood by most people. Basically it's ridiculously cheap right now, assuming FSD comes about, which is fine.

Colin Rusch--Oppenheimer and Company - Analista

Excellent. And then sorry to go into the material side of the battery a bit. But on some suppliers and contaminants, can you elaborate on some of the items you are seeing in your supply chain that could be problematic for the 4680, specifically around lithium and potential contaminants? one of the oxides, the carbonates, that you end up seeing real problems with when you go into production?

Zachary Kirkhorn--CFO

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

Elon Musk--Managing Director and Product Architect

Yes, contamination from the 4680 is not a factor, which is not a problem.

Martin Vicha

OK. Thanks very much. The next question comes from Bernstein's Toni Sacconaghi. Tony, please continue.

Tony Sacconaghi--Bernstein - Analyst

Yes, thank you for accepting my question. I have two too. In response to the question about the lawsuit, I think Zach you might say a little, and Elon you might say an indication that you might see some pressure on the lawsuit.

And I'm wondering if that's really just speculation, or if there's any empirical data you've seen in the last month, if it's order cancellations or delivery times, that's made you make that comment. Anecdotally, if you squint, I think delivery times have shrunk a bit in both China and the U.S. over the past four months. That's really the only visibility investors are getting. So I'm wondering if you could maybe elaborate on whether this is really just some sort of preview of how high prices might have an impact, or is it just something anecdotal or quantitative that you could please point out.

Elon Musk--Managing Director and Product Architect

No. I mean, I think we've been saying that for many years, I know it turned out to be true. Tesla doesn't have a demand problem, we have a production problem. And almost always we've had it, it's a very rare exception, it's always been a production issue.

I think it will stay that way.

Tony Sacconaghi--Bernstein - Analyst

So there is a denominator and a numerator and do you increase production?

Elon Musk--Managing Director and Product Architect

Yes absolutely. Of course, if we increase production, more demand is needed.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

No, it's more like you can't look at the backlog and say a lot about demand because on the other hand we're doing a lot to shift production.

Elon Musk--Managing Director and Product Architect

But we're trying to close the gap, no longer.

unknown speaker

Building and building factories --

Elon Musk--Managing Director and Product Architect

We don't want a long delay. It's frustrating. It would be like going to a restaurant and ordering a hamburger and having to wait three hours and that's annoying. You want your burger right away.

The same with the car. That's why we want delivery times to be reduced.

Tony Sacconaghi--Bernstein - Analyst

OK. Well, I was just trying to follow up on the fact that you both said that demand might go down a bit, and that was the point of the question.

Elon Musk--Managing Director and Product Architect

We don't have a like ... because we see orders for our cars from all over the world every day, it's actually like a mood barometer for people's confidence in the economy. But you can't read too much because things can be very different from one day to the next. Consumer sentiment is all over the map. So it's...managing the price, frankly.

But we have a large excess demand. That's really not a problem for us. It might be a problem for some other companies, but it's not a problem for us.

Tony Sacconaghi--Bernstein - Analyst

OK. Thank you very much. Elon, I was just wondering a question for you. Obviously, Tesla has changed dramatically over the past three years, from a company on the brink of life and death to one with steady cash flow and industry-leading margins.

I wonder if you can comment on your personal role in the company and see this shift in terms of your role, your level of engagement and the time you will be with the company over the next three or four years? I think you said a few calls ago that you wouldn't call unless there was something unusual, and you've been there for every call since. I wonder.

Elon Musk--Managing Director and Product Architect

I do a lot of unusual things, let's face it. If there is only good news, I will not make any calls as a matter of principle. But when you have a tough situation like the COVID lockdowns in China, then I think I'm relatively aware when there's bad news. And we have this good news, so I won't be on the phone.

But I'm committed to the long term... I mean, I'll work at Tesla for as long as I can meaningfully advance the cause of sustainability and autonomy.

Martin Vicha

Fantastic. Thanks very much. The next question comes from William Stein. Go ahead, deactivate.

Guillermo Stein--Truist Securities – Analista

Excellent. Thank you for taking my question. Elon has historically assessed the likelihood that he can be successful in some of the more interesting AI-focused ventures, not just FSD, but Dojo and Optimus as well. Maybe I can give you an update.

Elon Musk--Managing Director and Product Architect

Well, I don't want to steal the spotlight from AI Day. So I think we're going to have some exciting news on AI Day, which I think will come later than most people probably realise. But I do not want to. I'd love to get back to you, but I think we'll save that fuss for AI Day.

Guillermo Stein--Truist Securities – Analista

OK. And maybe a follow up if I can. We've heard a lot from others, and certainly some from you, about the semiconductor shortage in particular. We've seen some big, important customers of these types of products decide to take advantage of the ecosystems that exist to develop their own products in these categories.

I wonder to what extent you do that. That's out of the dojo in terms of -- I think on the conclusion side you're certainly doing it in the car, but what about the more mundane areas like microcontrollers and such? Are there internal efforts to improve the supply chain and potentially improve other aspects of performance?

Elon Musk--Managing Director and Product Architect

Well, there's something we've done, we've collaborated with our vendors' side. We currently do not intend to manufacture chips ourselves. We don't think it's necessary to make chips, but we've worked closely with a number of vendors. In fact, just prior to this call, I met with one of the CEOs of our key provider.

We had a great meeting. They will invest heavily in some of the critical chips and components we need in the car. And I'd like to take a moment to thank our key suppliers once again for supporting us through difficult times. And they really did everything to support us.

So, to all our suppliers, thank you.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, and I guess we might not talk about it very often, but we already have a lot of custom silicon in the vehicle. Microcontrollers, yes, some battery management, yes, some power electronics, yes, some. So we're trying to figure out where there really is a technical advantage.

And in the future I think we will see where there is a provider ...

Elon Musk--Managing Director and Product Architect

[Unintelligible] Also now that the supply chain is having issues with our Tier 1 and Tier 2, please join us on the technical side as we come up with solutions, whether it's alternative chips or changing the whole structure of this one package to make it work. And I think that's an advantage we have that a lot of other environmental settings just don't have. I think Tesla is both a software company and a hardware company. One of the ways we've been able to address supply chain issues on the chip front has been by rewriting the software to use different chips, or in some cases dual use of a single chip, which is even better.

And frankly, the chip shortage has helped us reduce the number of chips in the car. Yes, it turned out we had more chips than we needed. But this is proof to our software team that we can put a new chip in the car, write a whole new software patch on that chip and still not stop production.

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes, and our goal is that as platforms mature and scale, we'll pack more features onto fewer chips, just like we've done with laptops and phones. That's how it works with cars. And we try to do that as quickly as possible wherever it makes sense.

Elon Musk--Managing Director and Product Architect

What do you think of chips and all that from a supply chain perspective?

pulled backlino--Senior Vice President, Powertrain and Power Engineering

Yes I think I mean from a high level, instead of designing and building our own microcontrollers, we work with key partners who understand the architectural requirements and take the specs and design something for us. We've done that, up to your point, the battery detection room. We have some application specific ICs.

But yes, the integration, the reduction in the number of components, it's a supply chain combination, but it also improves the reliability of the end product because there are fewer points of failure. So that has always been the mantra.

Lars Moravy--Vice President, Automotive Engineering

And sometimes we also have the wafer level and try to consume less to achieve the same functionality. We've also looked at that in some of the constrained modules we've been looking at over the past six months.

Guillermo Stein--Truist Securities – Analista

Thanks, people.

Martin Vicha

Fantastic. Well, thank you. I appreciate all your questions. Unfortunately we only have so much time left this quarter and we will be speaking to you again in three months.

[Operator's Signature]

Duration: 0 minutes

call participants:

Martin Vicha

Elon Musk--Managing Director and Product Architect

Zachary Kirkhorn--CFO

pulled backlino--Senior Vice President, Powertrain and Power Engineering

unknown speaker

Lars Moravy--Vice President, Automotive Engineering

Eisenstein--New Road Research - Analista

Emmanuel Roesner--Deutsche Bank -- Analista

Colin Rusch--Oppenheimer and Company - Analista

Tony Sacconaghi--Bernstein - Analyst

Guillermo Stein--Truist Securities – Analista

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