Tesla Call Highlights Include Model Y Production & Semi Plans
If CEO Elon Musk can launch a car he built into space, on a rocket he built, then surely anything is possible.
Today, Tesla announced the biggest quarterly loss ever in its history ($675.4 million). One might expect this financial result to precipitate some sort of day of reckoning, but it hasn’t. Not even close. Instead, confidence seems improved, reflected by a stock price which, after shadowing meandering major indices most of the day, broke free and shot higher in the afternoon, ending up +$11.03 (3.30%) at $345.00 per share, not so far off from its greatest heights.
Some of this reassurance in the company’s future may be driven by the fact that its first ever production vehicle is now beyond the reach of Earth’s gravity, softly hurtling through space in the direction of Mars — the logic being that, if CEO Elon Musk can launch a car he built into space, on a rocket which he also built, then perhaps he might be able to find his way through a hellish Model 3 production ramp up and whatever other pesky problems might arise on the way to profitability. Certainly, yesterday’s incredible technological feat and resulting spectacle didn’t hurt the Tesla’s future prospects.
As always, after the letter to investors marking the company’s progress and denoting the financials went out, Musk and other top executives held a call with financial analysts. We sharpened our pencils and took notes, the results of which you can read below. The mood was upbeat and several of the analysts congratulated Musk on the achievement as they dug into their hosts for tidbits of information they can use to give guidance to their own clients. Certainly, there was a number of interesting things mentioned that Tesla enthusiasts might want to know, especially as they pertain to Model 3 production.
- Musk prefaced the exchange by outlining the achievements reached in 2017 and thanking everyone, with a special thanks to suppliers and customers. He also expressed confidence in reaching the target of a 2,500 unit per week run rate by the end of the first quarter of 2018, and 5,000 units by the end of Q2. He echoed surprising sentiment in the letter to investors about achieving “positive quarterly operating income on a sustained basis” after reaching production of 5,000 Model 3’s per week. He is also cautiously optimistic they will be GAAP profitable as well.
- Regarding Model 3 production bottlenecks, battery module production is still the focus for near-term improvements. A new automated system for two of the four zones is nearing completion in Germany. It needs to be disassembled, shipped, then reassembled at the Gigafactory (it’s expected to arrive in March). This one line should be as productive as three to four of the lines they currently have and take up less physical space. They also have a “semi-automatic” line, which involves people working with the machines. It has been, Musk said, “remarkably effective,” and is exceeding the purely automatic lines.
- CTO JB Straubel jumps in at this point to mention that despite much being made of the manual aspect of this line, it’s not especially accurate. People are moving material between the machines, but there is still a high level of automation. Musk adds, “It’s not artisanal.” They are expanding the semi-automatic lines, bridging the gap as they redesign full automation and bring that online.
- Musk suggests they may take investors on a tour of the facilities to see what is happening there firsthand, and Straubel stressed again the efforts being made in this specific area of battery pack production. Relieving this constraint gets the team to the 2,500 unit per week run rate.
- Once the battery bottleneck is relieved, the next constraint involves the material conveyance system in Fremont. On an interesting note, part of this problem, outside of automated systems within the factory itself, involves getting things like seats from their assembly facility to the main factory floor. Musk voiced one solution under consideration to get around the problem of truck traffic congestion is to build a tunnel between the two facilities. Note, of course, that Musk is also CEO of The Boring Company which digs tunnels.
- In response to a question about successorship, Musk reiterated that he intends to remain CEO for the foreseeable future, but that once he steps down from that position he would like to work on product development.
- Musk reaffirmed that the goal of one million units a year by 2020 was still the target they’re aiming for. Later, he would go on to say that the Fremont facility alone may reach levels of 600,000 to 700,000 units per year, which is somewhat higher than the levels achieved by GM and Toyota when they operated it under the banner of the New United Motor Manufacturing, Inc. (NUMMI.)
- Tesla may begin to make investments in capital expenditure toward the Model Y program before the end of 2018. These may involve siting of a new factory, but Musk said that they will wait three to six months before announcing a production location and details associated with that.
- Musk is excited about how they are designing Model Y, taking lessons learned from Model 3 to figure out how to make it easier to manufacture.
- Annual Tesla Semi production could reach 100,000 units a year in four years. Musk added that the Semi may also exceed the specs they had previously released, though he didn’t elaborate on which specifications, in particular, might improve.
- Musk reiterated that he is confident that LIDAR is unnecessary (he called it a crutch) for achieving full autonomy, and that those who are using it now may find it a limiting factor. After some amount of technical talk involving passive optical image recognition (their system, involving multiple cameras, RADAR, and near-field ultrasonic sensors) and the need to “solve” it, he adds that once they achieve that, the need for an active system (LIDAR) goes away. He is convinced that taking the hard path of developing a neural net to achieve object recognition and using radar which can see through snow, rain, and dust is a superior method.
- Gross margins for Model S and X should return to higher levels (around 26 percent) in 2018 because of cost reductions in manufacturing that are continuing, among other things. As well, Model 3 margins, which were actually negative this past quarter, should be close to those of its stablemates by the end of the year.
- Despite Model S and X production being somewhat constrained to 100,000 units per year because of the supply of 18650 battery cells, they intend to stick with that cell for those two models. They contemplated moving to the new cell design found in the Model 3, but decided it wasn’t the right risk.
- Regarding Musk’s much-ballyhooed (and much-delayed) autonomous coast to coast trip, it is still a go, and could happen in three months, but perhaps only in six months. The good news is, that once they achieve it, this functionality would become available to Tesla owners.
- Musk says they could have significant positive cash flow by the 3rd quarter, but they will invest in Model Y and energy products instead.
- Eventual Model Y production target is one million units per year! So, twice the production of the Model 3, but using less than half of Model 3 capital expenditures to get there.
- Finally, Jon McNeil, president of global sales and service, is leaving the company and won’t be replaced. Instead, sales and service will report directly to Musk. McNeil has already been named as chief operating officer at Lyft.
That’s it for this end-of-quarter call. We look forward to doing it again in three months.