Tesla Q3 2023 Financial Results and Q&A Webcast

Good afternoon, everyone, and welcome to Tesla's third quarter 2023 Q&A webcast. My name is Martin Vieka, VP of Investor Relations, and I'm joined today by Elon Musk, Abe Aftaneja, and a number of other executives. Our Q3 results were announced at about 3 p.m. Central Time in the update that we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements.

These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our mostly recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. But before we jump into the Q&A, Elon has some opening remarks. Elon?

Thank you, Martin. So just a Q3 recap. Our last quarter was impacted by downtime for global factory upgrades that will help us reduce cost per vehicle as well as increase production. We remain focused on three main objectives, which is the cost reduction of our products, investments in artificial intelligence, another growth project like Optimus, and continued pre-cash flow generation.

Regarding vehicle cost, our team was able to reduce the cost per vehicle further in Q3, despite headwinds from factory idle cost and ramp up of new factories. And we believe there's still meaningful room for improvement there.

Regarding autopilot and AI, our vehicle's now driven over half a billion miles with FSD beta, full self-driving beta, and that number is growing rapidly. We recently completed... a 10,000 GPU cluster of H100s, we think probably bring it into operation faster than anyone's ever brought that much compute per unit time into production. since training is the fundamental limiting factor on progress with full self-driving and vehicle autonomy. We're also seeing significant promise with

FSD version 12. This is the end-to-end AI where its photon count in controls out. Really, you can think of it as just a large bitstream coming in. and a tiny bit stream going out, compressing reality into a very small set of outputs, which is actually kind of how humans work. human data input is optics from our eyes and so we are like the car photons in controls out with neural nets just neural nets in the middle

It's very interesting to think about that. We will continue to invest significantly in AI development as this is really the massive game changer. And I mean, success in this regard in the long term, I think has the potential to make Tesla the most valuable company in the world by far. If you have fully autonomous cars at scale and fully autonomous humanoid robots that are truly useful, it's not clear what the limit is.

Regarding energy storage, we deployed four gigawatt hours of energy of storage products in Q3. And as this business grows, the energy vision is... becoming our highest margin business. Energy and service now contribute over half a billion dollars to quarterly profit. The Cybertruck, and a lot of people are excited about the Cybertruck. I am too.

I've driven the car. It's an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck and then in making a Cybertruck. catch-flow positive. This is simply normal for when you've got a product with a lot of new technology or any brand new vehicle program, but especially one that is as different and advanced as the Cybertruck, you will have problems proportionate to how many new things you're trying to solve at scale.

So I just want to emphasize that while I think this is potentially our best product ever, and I think it is our best product ever, it is going to require immense work. reach volume production, and be capital positive at a price that people can afford. Often people do not understand what is truly hard. That's why I say prototypes are easy, production is hard.

People think it's the idea or you make a prototype, you design a car. And as soon as they're designing a car is such as anyone can do it, it does require taste. it does require effort to design a prototype. But the difficulty of going from a prototype to volume production is like 10,000 percent harder to get to volume production than to make the prototype in the first place.

even harder than that, to reach positive cash flow. That is why there have not been new car startups that have been successful for 100 years, apart from Tesla. So I just want to temper expectations for Cybertruck. It's a great product, but financially it will take... I don't know, a year to 18 months before it is a significant positive cash flow contributor. I wish there was some way for that to be different, but...

That's my best guess. The demand is off the charts. We have over a million people. or reserve the car so it's not it's not a demand issue but we have to make it um and we need to make it at a price that people can afford insanely difficult things uh in conclusion We continue to focus on ramping production while maintaining a positive cash flow. And we continue to target and expect to have...

around 1.8 million vehicle deliveries, as stated earlier this year. The Tesla AI team is, I think, one of the world's best, and I think it is actually by far the world's best when it comes to real-world AI. I'll say that again. Tesla has the best real-world AI team on Earth, period. And it's getting better.

And lastly, I wanted to thank all of our employees who are making a lot of extra effort during uncertain times. Thank you very much for your hard work and the impact that you're making. Thank you very much, Ilan.

And our CFO, Wybuff, had some opening remarks as well. Thanks, Martin. Vehicle deliveries in Q3 outpaced production, and we had yet another record quarter of profitability in our energy business. Congratulations to the Tesla team for the continued focus on operational excellence as we navigate through a period of economic uncertainty, higher interest rates, and shifting consumer sentiment. As Elon mentioned, our Q3 operational...

and financial performance was impacted by planned downturns for our factory upgrades. This was necessary to allow for further factory improvements and production rate increases. Despite such factory shutdowns, Our cost per vehicle decreased to approximately $37,500. We saw sequential decreases in material cost and freight. Reducing the cost of our vehicles is our top priority.

On the operating expenses front, R&D expenses continue to rise due to Cybertruck prototype builds and pilot production testing combined with spend on AI technologies like full-size driving, Optimus, and Dojo. We have and will continue to make investments in these areas and hence our capital expenditure and R&D will continue to grow in the near term.

Our focus is to continue making investments through positive cash flow from operations. This year itself, we have generated operating cash flows of approximately $8.9 billion and free cash flows of approximately $2.3 billion. Our other businesses are becoming more prominent on a standalone basis, with energy business leading the charge primarily from the growth in megabyte deployments. Our services and other businesses on a year-on-year basis also continue to show power.

positive momentum as we benefit from our growing fleet. As regards our pricing strategy, in addition to what we have shared before, I want to elaborate that most car buying happens with one or other form of financing. And hence, We also view pricing in terms of monthly costs for the customer. And therefore, as interest costs in the U.S. have risen substantially, it has required us to adjust the price of our vehicles to keep the monthly cost in parity.

We've tried to offset such adjustments via focus on reducing costs. However, there is an inherent lag in cost reductions, which in turn impacts margins. To that extent, We recently announced a partner vehicle leasing program in the US, whereby you can get a standard in Model Y for as low as $399 a month. challenging economic environment will focus on reducing costs, maximizing delivery volumes, and continuing making investments in the future, in particular AI and other Next Generation platform.

This strategy positions us well for the long term. Once again, I would like to thank the Tesla team for their efforts in the last four. Thank you very much. And now let's go to investor questions. The first investor question comes from Craig. How many Cybertruck deliveries do you anticipate for 2024? It's difficult to make an accurate guess at this point.

Going back to what I said earlier, that the ramp is going to be extremely difficult. And like I said, there's no way around that. If you try to make, if we just try to. do some copycat vehicle design of which there are literally 200 models that are slight variations on a theme in the combustion engine world. distinctions without a difference, then it's really not that hard. But if you want to do something radical and innovative and something really special like the Cybertruck.

it is extremely difficult because there's nothing to copy. You have to invent not just the car, but the way to make the car. So the more uncharted the territory, the less predictable. Now, I can say that if you say, well, where will things end up? I think we'll end up with roughly a quarter million Cybertrucks a year. I don't think we're going to reach that output rate next year. I think we'll probably reach it sometime in 2025. That's my best guess. Thank you.

The second question is, can you provide a progress update on the 4680 cell, particularly progress towards performance improvements and cost savings outlined on Battery Day? Thank you. Sure thing, Martin. 4680 cell production in Texas increased 40% quarter over quarter. Congrats to the Texas team for producing their 20 millionth cell off of line one. Texas is now our primary 4680 facility.

We're heavily focused on quality. Scrap is down 40% quarter over quarter. With the increased volume and yield improvements, sell costs consistently improved month over month within the quarter, although we have a lot more work to do to achieve our steady state goals.

That is our priority. The Cybertruck cell with 10% higher energy than our Model Y cell started production on line two in Texas. This quarter, we convert to building 100% Cybertruck cells to simplify and focus the factory as we ramp all four lines.

in phase one over the next three quarters. Phase two of the Texas 4680 facility is currently under construction. The additional four lines incorporate further capital efficiencies over phase one and our target is for them to start producing in late 2024. Lastly, in Cato, we're retooling to enable large-scale pallet runs of our next-generation cell designs. Cato's long-term goal is to be the launch pad for new cells.

one generation ahead of our mass production facilities, enabling faster iteration and smoother ramp-ups of new designs. Thank you. The next question from institutional investors, could you please provide an update on capacity expansion plans for companies factories in berlin and austin and the opening schedule of gigafactory mexico berlin and austin factory the current priority

is actually maximize the output from our existing lines by laser focus on efficiency improvement. As always, maintaining a high quality and reducing per unit cost will be as critical as growing production volume. For Mexico, we're working on infrastructure and factory design in parallel with the engineering development of the new production that will be manufactured there. That's all I can share for that.

In Mexico, we're laying the groundwork to begin construction and doing all the long lead items. But I think we want to just get a sense for... what the global economy is like before we go full tilt on the Mexico factory. I'm worried about the high interest rate environment that we're in. I just can't emphasize enough that

for the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.

that's if interest rates remain high or if they go even higher it's that much harder to for people to buy the car they simply can't afford it um so um and and we are tracking i believe at this point for model y to be the selling car on earth but not just in revenue but in unit volume if you compare that to the other vehicles that are you know number two and number three and whatnot

They cost much less than our car. So we're just hitting low of large numbers situations here. I know people want us to advertise and we are advertising. I think there is some. There is something to be gained on the advertising front. I don't think it's nothing. But informing people of a car that is great that they cannot afford doesn't really help. So that is really the thing that must be solved is to make the car portable or the average person cannot buy it for any amount of money.

They can't afford it. They can't afford it. So this is a big deal. Okay. Thank you very much. The next question is... when do you expect model 3 highland to be available in the us i just wanted to address that unfortunately we don't answer product related questions and timings on earnings calls so let's go to the next one

Current sell-side consensus assumes that Tesla will deliver 2.3 million vehicles in 2024, representing 28% growth versus 2023 guidance. Is this growth rate achievable without any mass market launches in 2024? And when does Tesla expect to return to its 50% long-term CAGR? Thanks for the question. When you look at 2024, there are a lot of moving pieces. Elon just talked about what is happening in the microeconomic environment. We're focused on growing our volumes in a very cost-efficient manner.

and are carefully reviewing all our options, and we'll be able to provide a much more meaningful update at our next earnings call. The risk of stating the obvious, it's not possible to have it. compound growth rate of 50% forever, or you will exceed the mass of the known universe. But I think we will grow very rapidly, much faster than any other car company on earth by far.

Thank you. Next question is, do you have an approximate timeline in mind for the Robotaxi, driven or non-driven? What excites you most about how this project is progressing? Well, Robotaxi is... like necessarily non-driven. I guess I'm very excited about our progress with autonomy. The end-to-end, nothing but nets, self-driving software is amazing.

drives me all around austin with no interventions so you know this is clearly the right move um you know so it's really really pretty amazing um and obviously that same software and approach will enable optimists to do useful things and enable optimists to learn how to do things simply by looking.

extremely exciting in the long term. As I mentioned before, given that economic output is number of people times productivity, if you no longer have a constraint on people, effectively you've got a humanoid robot that can do as much as you'd like, your economy is quasi-infinite. or infinite for all intents and purposes. So I don't think anyone is going to do it better than Tesla, not by a long shot.

Yeah, boss dynamics is impressive, but their robot lacks a brain. Sort of like the Wizard of Oz or whatever. Yeah, lacks a brain. And then you also need to be able to design the humanoid robot in such a way that it can be mass manufactured. And then at some point, the robots will manufacture the robots.

make sure that there's a good place for humans in that future and we do not create some variance of the terminator outcome um so we're going to put a lot of effort into localized control of the humanoid robot so you you know, basically anyone will be able to shut it off locally. And you can't change that. Even if you put like a software update, you can't change that. It has to be hard coded.

Thank you. The next question is, why was the price dropped on FSD if it is getting better and Robotaxi is expected so soon? Well, we just wanted to make it more affordable as some more people could try it. I think over time, the price of FSD will increase proportionate to its value.

So I would regard the current price as a kind of a temporary low. Thank you. The next question is again on FSD. Mercedes is accepting legal liability for when its Level 3 autonomous driving system, DrivePilot, is active. Is Tesla planning to accept legal liability for FSD? And if so, when? Well, there's a lot of people that assume we have legal liability, judging by the lawsuits. We're certainly not being left that off the hook on that front, whether we would like to or wouldn't like to.

I mean, I think it's important to remember for everyone that Mercedes' system is limited to a few roads in Nevada and some certain cities in California. It doesn't work in the snow or the fog. It must have a weed car marked lanes only 40 miles per hour. Our system is meant to be holistic and drive in any conditions, so we obviously have a much more capable approach, but with those kind of limitations, it's really not very useful.

Some people understand the profundity of a Tesla AI system, but it's very, very few. It's basically baby AGI. It has to understand reality in order to drive. Maybe AGI. Thank you.

the next question on optimus will optimus be working on gigafactory lines next year if so how many uh would you guess uh will be deployed i think at this point we are not ready to discuss details of the optimus program but we will make provide periodic updates online so as you can see where Optimus, a year ago, could barely walk, and now it can do yoga. So a few years from now.

can probably do ballet sounds good um and the last question from investors is neural net path planning represent a significant advance in capability and safety for fsd What steps is Tesla taking to make this technology available outside the US? Yeah, our approach has been to try to get it, like the more places we try to make it work, the harder the problem is.

So the reason we don't do it in all countries simultaneously is that it would take much longer to make it work anywhere at all. So that's why it's currently just North America. Also, for most parts of the world, you have to get approval before deploying things, whereas in the US, you can deploy things at risk or at least take liability for what you deploy.

it's uh whereas most countries require some sort of extensive approval program so we all we only want to go through that extensive approval program when we think it's kind of ready for prime time in that country. I apologize, it's not in those countries, but we keep finding ways to make it better. It needs to drive such that it exceeds the, even unsupervised, significantly exceeds the

probability of injury of a human, significantly better, a lower probability of injury than a human by far. I think we're tracking to that point very quickly. Obviously in the past, I've been overly optimistic about this. The reason I've been overly optimistic is that the progress tends to sort of look like a log curve, which is that you have kind of rapid initial improve improvements that if you were to extrapolate that rapid fairly linear rate of improvement you you you get to self-driving

quite quickly, but then the rate of improvement curves over logarithmically and saw us to asymptote. That's not happened several times. I would characterize our progress. in real-world AI as a series of stacked log curves. I think that is also true in other parts of AI, like LLMs and whatnot, a series of stacked log curves. Each log curve gets higher than the last one. If you keep stacking logs, eventually you get to echo state. Thank you. Let's now go to Analy's questions.

The first question comes from Will Stein from Truist. Will, please go ahead and unmute yourself. Great. Thanks so much for taking my question and thanks for all the updates today.

We learned earlier on the call, it sounds like you don't think the truck will ramp to... significant volume until its third year of production should we have a similar anticipation for the ramp of the next gen platform or is there any reason that we should be maybe more optimistic or pessimistic about the ramp profile there thank you yeah i mean

To be clear, it's not really the third year of production. It's kind of like the 18th month of production is roughly my guess. So it's just that it'll happen. It starts this year, spans next year, and gets to 2025. Technically, there are three calendar years in there, but there's actually only 18 months, not three years. I would be very disappointed if it took us.

It's shocking if it took us three years. But 18 months from initial deliveries to reach volume and reach prosperity with an immense, I can't tell you how much. The blood, sweat, and tears level required to achieve that is just staggering. I've been through it many times. And then here we go again.

similar path for the next-gen platform? I mean, there's, like, unique complexity to Cybertruck. Yeah. I mean, Cybertruck is, you know. Yeah, I mean, we dug our own grave with Cybertruck, you know. Nobody, and generally, I probably, you know. every big digs are great better than themselves. And so, you know, it is, it is, you know, Cybertruck is one of those, one of those special products.

that comes along only once in a long while and special products that come along once in a long while are just incredibly difficult to Bring to market to reach volume to be prosperous It's it's fundamental to the nature of the newness So now the sort of high volume, low cost, smaller vehicle is actually much more conventional. Yeah, in terms of like the technologies we're putting into it, we didn't have to invent.

how to bend full hard stainless steel or have mega 9 000 ton castings or the largest hot stamping in the world or new yeah high voltage low voltage architectures it's it's it's learning from everything we've done so We hope it will ram faster than the, you know, the technology. We also went through a ruthless simplification exercise. Yeah, we did. There's significantly less parts. Yeah. You're only as fast as the slowest part.

If you have less of those, that means you could probably be faster. Yes, exactly. I mean, that said, it's still pretty revolutionary in how we're going to build it. It is. Yes, it's a manufacturing approach for the high volume of small vehicle is revolutionary.

but not revolutionary quite in the same way as the Cybertruck. I think it will be quite a fast ramp. So as I was saying, we're doing everything possible to simplify that vehicle in order to... achieve a units per minute level that is unheard of in the auto industry. Yeah, I mean, the simplification makes it easier to automate. It also makes it lower cost. It's intrinsically lower cost. Yeah. Let's be clear. It'll be cool, but it's utilitarian.

It's not meant to be, you know, fill you with, you know, bow and magic. It's, it can get you from here to be, it'll be still beautiful, but. it's a it's utilitarian it's a utility doesn't have 14 inches of travel on the suspension yeah as an example yes so I mean, the Cybertruck has a lot of bells and whistles. All right. Thank you very much. Let's go to Pierre Ferragou from New Street Research. Hey. um can you hear me fine yes yes um hey um i have a first like a follow-up question on uh fsd

and pricing and adoption. So I agree with you that as FSD improves, we should see its value increasing, but I guess like the ultimate. values of FSD which is to be able to handle like a robotaxi is not going to necessarily interest everybody and you have a bit of a degraded version that would be like a chauffeur service where the car drives by itself but you still have to be in the car and around and then there is like the hands-on eyes-on version of the service um and and i guess you know

There should be like much lower cost, lower feature kind of variance of the service that could have a very large penetration on your install base and more expensive one that would remain. at the lower penetration level. So I'm just wondering if you're taking that. And last but not least. like the simplest version of FSD are available and are going to work from a technical perspective probably before like the ultimate robotaxi version can work if ever.

And so I'm wondering how you take that into account in how you're thinking like the financial contribution of FSD over time and whether you could evolve your pricing along that kind of tiers too. increase adoption. For the autonomous vehicle, I think the economics of a fully autonomous vehicle are truly astounding in a positive way. When you look at passenger vehicles today, they only get about...

10 to 12 hours of usage per week. If you drive an hour and a half a day on average, that's roughly 10 hours a week out of 168 hours. And then there's also you're going to have parking and insurance. You got to take care of the car. It's like there's a lot of overhead. So. I mean, yeah. It's. The economics of the system are just insanely positive, given that all of the cars we're making and have made for a while, we believe a cable of full autonomy.

um so then if you if you're able to say increase the utility of that car by a factor of five which slowly means that you're being used for maybe 50 hours a week out of 168. So you still notice you're still assuming that still seems less than a third of the hours of the week or it is doing something useful. You've increased the value of that by by five, but it still costs the same. Like you have something, then we're a hardware company with software margins.

Pierre, do you have a follow-up? Yes. I have a follow-up on a different topic for you, if that's okay. It's about your gross margin in the quarter. Could you give us a sense of... like in in how the gross margin evolved sequentially how much was the impact of idle costs how much was like the sequential benefit i imagine of production ramping at berlin and austin

And then I saw this massive jump in energy storage, a very strong positive surprise. So if you can give us the background on that and tell us how we should think about that gross margin going forward. Thanks for that question. So in terms of you have a few different aspects of your question. So if I just look at from Q3 perspective, you know. Obviously, factory idle time had an impact. It did impact by, I mean, I won't give you the exact percentage, but it had decent impact for the quarter.

When you look at the other pieces which we're trying to do, we did see certain of our other factories ramping up pretty well. And they actually contributed. pretty well to the margin for this quarter. In fact, one of the factories came pretty close to in terms of per unit cost to where we are for one of our... other established factor which is fremont so that that was a positive in the quarter when it comes to energy margins you know mega pack deployment was the key driver there and

that product has done well. On the cost curve also we've been able to do a lot there. But I do want to caution that Megapack deployments are a bit lumpy. Yes, we had a great quarter this period, but depending upon where we are trying to deploy that product in different markets, you would see periods where there would be.

downward pressure on deployment because of us trying to get the product to the exact place where it is. Yeah, product in transit. Yes. Okay, thank you very much. Let's go to Rod Lash from Wolf Research.

Rod, feel free to unmute yourself. Thanks. Really nice to see the rate of vehicle cost improvement despite the downtime that you took. You've taken now about $2,000 out of the average vehicle cost over the past year. Can you give us maybe a sense of the rate of improvement that you see from the changes that you alluded to, the factory changes you alluded to? Is there a way maybe to convey

the speed of improvement on your existing product from here. And then related to that, can you share the timing of your next gen that the lower priced product that you talked about earlier this year? Yeah, so just in terms of product margins, there are lots of puts and takes when you look at this. There are certain things which we control, and there are certain things which we don't control.

We expect that we'll get some benefits from our cost reduction efforts, which are all underway. On the other hand, we just finished our factory updates late in Q3. Some of these factors are still in the early RAM phase in Q4. We're still not up to where we want those factors to be, so they'll impact in the near term.

Elon mentioned, we're going to be ramping Cybertruck, which is going to be another headwind which we will be dealing with. On top of all that, there's overall uncertainty in the macroeconomic environment, which even makes it. harder to predict precisely as to where we land. But yes, this is something which, you know, it's an evolving thing which we're observing every day and reacting to it on a daily basis.

I would just say that on the cost reduction efforts, we are unflagging in our pursuit of additional cost downs for 2024. We do have a good pipeline of them and work. on both the engineering side and the factory operation side. And our intention is to maintain or exceed the trend that you saw. We're trying as hard as we possibly can. The timing of the next-gen product?

Can you share that? Not at this time. Okay. And just as a follow-up, obviously price is also a driver of demand, but that's obviously not happening in a vacuum. And you mentioned that, I think you mentioned at some point during this call that you're also maybe hitting the law of large numbers on some of your products. Can you just share how you're thinking about price elasticity?

just at this point and in this macro environment um and any thoughts along those lines i think that there's very significant price elasticity um i mean to totally frank if i car

cost the same as a RAV4, nobody would buy a RAV4. Or at least they're very unlikely to. It's worth noting that a lot of these incentives like the tax credit and whatnot, but they're actually very difficult for the average person to access because most people do not have 10 grand or even $7,500 burning a hole in their bank account. Large number of people are living paycheck to paycheck and with a lot of debt. They've got credit card debt, mortgage debt. So, yeah, that's reality for most people.

It's sometimes difficult for people who are high-income owners, and I'd say high, it'd be like someone who's earning over $200,000 a year. to understand what life is like for someone who is earning 50 or 60 or 70 000 a year which is most people um so um so that like for a lot of people like these these tax credits just They can't front $7,500 for 18 months or even six months for the tax credit. And they actually don't, in some cases, even have that $7,500 in taxes.

So, you know, so it's really just the best regard of people is how much money do they have to pay immediately and how much per month? That's it. It can stop right there. And a car is still much more expensive than a wrap pole when you look at it that way. Now, one other thing which I'll add, you know, when you look at... car buying in general, we're trying to get to the next set of EV adapters. Not an EV adapter, just who wants a great car? Exactly.

You know, sometimes you get these like, you know, honestly, I would say it's like somewhat correlates with the why doesn't everyone work from home crowd. I'm like, I mean, this is like some real Marie Antoinette vibes. from people that say, why does everyone work from home? Like, what about all the people that have to come to the factory and fill up the cars? What about all the people that have to go to the restaurant and make your food and deliver your food?

what are you talking about you i mean how detached from reality does it work from home crowd have to be um while they take advantage of all those who do you cannot work from home so I mean, you have to say, why did I sleep in the factory so many times? Because it mattered. So. So I just can't emphasize how important cost is. It's not an optional thing for most people. It is a necessary thing. We have to make our cars more affordable.

so people can buy it. And I keep harping on this interest thing, but I mean, it just raises the cost of the car. I mean, we're looking at an internal analysis, which kind of we... like we think is is more or less on track that when you look at the cost or the price reductions we've made in uh say the model y um and you compare that to how much people's

monthly payment has risen due to interest rates. The price of the Model Y is almost unchanged. If you factor in the change in interest rates. Yes. Which is the thing I'm trying to say, the thing that matters is the monthly, it's how much money do they have to put down and do they literally have that in their bank account or will the check bounce? And then what is the monthly payment? And it doesn't matter if that monthly payment is.

principal interest or whatever, it's just a number, and that number has to not cause their bank account to go negative. That's it. You know going from near zero interest rates to the current very high interest rates The actual monthly payment is basically the same It's just a bunch more of it is going to interest. And there are some incremental challenges beyond that, which is the difficulty of getting credit at all has increased. And so the number of people who simply cannot get credit, period.

Even if they've got a job and everything's solid, the banks are a little gun-shy on handing out credit, given that a bunch of them kicked the bucket earlier this year. Yeah, there's also just fewer options, even if they hand out credit, there's fewer banks to go to. Does your bank still exist? Well, if your bank does not exist, you have to establish a relationship with a new bank.

You know, so a lot of regional banks are, you know, died and I mean, even Credit Suisse. I mean, geez, that's that was a shocker, you know, 160 year old-ish. Swiss institution that doesn't exist anymore. That's mind blowing. And I think there's still quite a few shoes to drop on the bad credit situation. Commercial real estate obviously is in terrible shape.

You know, credit card debt has been rising significantly. The credit card interest rates are usurious. It's over 20% interest rates, meaning like which over time is just. becomes extremely punishing. Because if somebody's paying 20% interest on their credit card, it means they cannot pay them off. And if you cannot pay them off, and you're still accruing interest at 20%,

That's headed to a bad place. Thank you. Let's go to the next question from George from Canaccord. Thank you for taking my question. Just to focus on the cost per vehicle coming down in future quarters, as you discussed in your written remarks, I'm curious as to what the levers of that could be.

Is it more scale, more factory utilization? Is it material cost reductions? Are there things like gigacasting? I mean, can you just kind of give us some data points to give us confidence that that's going to come down over time? And if I can sneak one in, please, there are press reports. And I know how perilous it is to believe some of these. But they say that you've included radar as an option in some model wise in China. And I'm just here to ask if that's true. And if so, why?

thank you uh we've not included radar uh we we have radar as a tesla designed radar as an experiment in the model s and x uh that's it We'll see whether that experiment is worth it. But there are no plans to integrate radar into 3NY. Just as humans drive... Well, in fact, an excellent human driver can drive with amazing safety simply with their eyes. The car will far exceed the average human safety just with vision. Far, far, far.

Because, I mean, the car is looking at all directions at once, and we don't have eyes in the back of our head. And the computer never gets tired and never gets distracted, get drunk, hopefully. So radar is, you know, what really matters is how much does it affect the probability of an accident? In order for the radar to be effective, you have to be able to do radar-only braking. You have to do actions that are radar-only. Otherwise, you get this disambiguation problem between vision and radar.

That's why we actually turned off the radar in cars historically that we had. All 3NY used to have radar, but we turned it off because the radar actually generated more noise than signal. Now, the Tesla-designed radar is... a high resolution radar that has some potential to be useful, but the jury is still very much out on whether that is in fact the case.

On the cost question, I guess from the vehicle side, as Drew mentioned earlier, we are always trying to engineer our products to be cheaper to make and more efficient to make. That comes obviously on the engineering side as we come up with.

new innovations but as well on the supply chain side with our partners we work with them to automate some of their lines remove their um you know bottlenecks and their high costs as well on the logistics side getting parts to the factory it's not it's not equal it's not like a one thing that you have to you have to attack cost everywhere and and we do it ruthlessly at all times

All of the above. Yeah, I mean, I would say there's a whole laundry list of things which we are chasing. We internally call it the cost attack, where we're literally going line by line and saying, how can we make it better?

And it's a grind. It's a grind. It's a game of pennies. It's like Game of Thrones, but pennies. I mean, first approximation, if you've got a $40,000 car and... roughly 10 000 items in that car that means each thing on average cost four bucks so in order to get the cost down say by 10 percent you have to get 40 cents out of each part on average It is a game of pennies. We play it. Willingly. Yeah, we've done it many, many times. And, you know, even something as simple as like a sticker.

There's too many stickers internally in the car that nobody ever sees. There's something as simple as a QR code. You might think, well, putting a QR code on part one, why not just put them on there? It's like, well, are we actually going to use that QR code? Cross a penny. Yeah, exactly. And then inevitably, sometimes the QR code doesn't go on properly, or you can't read it properly, and then it stops the line.

It's more than a penny. Yeah, absolutely. It's chipping away. I mean, it does feel like digging a tunnel with a spoon at times. Very much escaping prison. On top of it, like we said, we did some factory upgrades, so we expect volume to go up. that would also bring some savings from higher production but then on the flip side we're going to be ramping a new product like cybertruck which we talked about so yeah so those are the real puts and takes what we

are working for. Yeah, but there's not like some accidentally, you know, some brick of gold that we've shot in Lekkoa, unfortunately. And it's, you know, we're trying to be... very rigorous about improving the quality and capability of the car because it's like any fool can reduce the cost of a car by making it worse. And just, you know, leading.

functionality and capability and that's that's how cool this sort of the any any fool it it's like if you want to like lose weight and you said well i need to lose whatever 15 pounds right away well you could chop your almost um But then you're sitting there with one arm and you're still fat. So it's sort of like, yeah, you actually have to.

eat it eat less food and work work out that's the actual way and doctor's effects yeah so you know super fun because food is delicious and mostly i'm not a huge that i don't love working out i know some people do i wish i did but i don't Unless moving the mouse consists of working out, in which case I love moving the mouse. All right, let's go to Colin Langham from Wells Fargo.

calling uh can you unmute yourself oh sorry about that do you hear me now yeah okay thanks for my question um You said in the commentary that you're not going full tilt on the plant in Mexico until there's signs that the economy is strong. Can you continue at a 50% CAGR without that plant?

And where would that come from? And any color on what you mean, sort of not going full tilt, could that plant get delayed indefinitely? Or what are we kind of talking about? No, we're definitely making the factory in Mexico. We feel very good about that. We put a lot of effort into looking at different locations and feel very good about that location. And we are going to build a factory there. It's going to be great.

The question is really just one of timing. And, you know, there's going to be a broken record on the interest front. It's just the interest rates have to come down. Like if interest rates keep rising. You just fundamentally reduce affordability. It is just the same as increasing the price of the car. So I just don't have visibility. If you can tell me what the interest rates are, I can tell you.

when we should build the factory. We're going to build it. And I mean, I think we'll start the initial phases of construction next year. But I am still somewhat scarred by 2009 when General Motors and Chrysler went bankrupt. So, well, that's now 14 years ago. That has seared into my mind with a branding iron. Because Tesla was just hanging on by a thread during that entire time.

and we closed off a financing round in 2008 on at 6 p.m december 24th christmas eve and if we had not closed that financing round we would have bounced payroll two days after christmas So we actually closed that round on the last hour of the last day that it was possible. Stressful, to say the least. And then barely made it through 2009. So I'm like... I don't want to be going at top speed into uncertainty. A lot of wars going on in the world, obviously, as well.

And we have room here, like in Cape Cod, Texas. You said we still have room in this building. It's not full with Cybertruck and Model Y. you know there's plenty of growth opportunities still to have inside the building where our team already is we also have 2 000 acres here there's also a lunch we're actually only occupying a tiny corner of the land that we have um but you know we could

we could technically do all the scaling industry just here. So, I mean, personnel is our biggest challenge in that the greater Austin area only has generously, the greater Orson area only has two million people. So people are moving here and they're willing to move here, but there is somewhat of a housing crisis. They got to live somewhere. So, yeah. So I don't know. I mean, I'm just curious. I'm not saying things will be bad. I'm just saying they might be.

Tesla is an incredibly capable ship, but we need to make sure if the macroeconomic conditions are stormy. even if the best ship is still going to have tough times, the weaker ships will sink. We're not going to sink, but even a great ship in a storm has challenges. The best one will apply to everyone, not just us, and not just the auto industry. It applies to everyone, I think. Apart from necessary staples.

about food and stuff. I don't know. If interest rates start coming down, we will accelerate. All right. If anyone's got any guesses on this, I'd love to be less wrong. And I apologize if I'm perhaps more paranoid than I should be, because that might also be the case, because I have PTSD from 2009, big time. 2017 through 19 were not picnic either. That was very tough going. So, you know, the auto industry is also so much cyclic because people

tend to hesitate to buy a new car if there's uncertainty in the economy. So, you know, car companies do very well in good economic times, and they... don't do as well in tough economic times. So it's just, you know, whereas if somebody is selling bread, then I think, you know, that people still need to have bread.

Yeah, you need for all the time. But new car, you don't have to have brightsmith. Especially if there are wars going on, and then that impacts your sentiment. Yeah. I mean, people are reading about it. wars all over the world. Playing in your car tends to not be front of mind. All right. Unfortunately, that's all the time we have today. Thank you very much for all of your good questions, and we'll see you again in three months. Thank you very much.