Author | Zhu Shiyun
Editor | Qiu Kaijun
“If it’s all good news, I probably won’t participate in the conference call.” Musk said in the Q2 earnings conference call on July 21.
On July 21, Tesla released its strong Q2 2022 financial report. Despite the huge challenge of the one-month shutdown of its Shanghai plant, Tesla still achieved an operating profit margin (EBIT) of 14.6% in the second quarter, leading global automakers.
Sales were also strong: delivering 255,000 vehicles, a 17.85% decrease from the previous quarter, but sales revenue only decreased by 11.89% to $14.258 billion. Free cash flow was as high as $621 million, and the Fremont and Shanghai factories hit peak capacity in June, producing 650,000 and over 750,000 vehicles per year, respectively.
On this basis, Tesla still insists on its 50% growth target this year: “a total production and sales of 1.5 million vehicles this year, but taking into account the impact of force majeure.” Tesla CFO Zachary Kirkhorn said in the earnings conference call that day.
“Yes, a lot of force majeure events have happened in the past few years.” Musk emphasized. “When global new car manufacturing forces, and even some traditional manufacturers, are trying to catch up with Tesla, Tesla is entering into many transformative ‘deep waters’ caused by force majeure.”
For new energy and autopilot!
“As long as I can contribute to the ‘acceleration of the world towards sustainable energy transition’ and ‘autopilot,’ I will still work at Tesla.” Musk said during the conference call.
Tesla’s vision of “accelerating the world towards sustainable energy transition” has very specific core goals: achieving global annual sales of 20 million vehicles by 2030.
When Musk set this FLAG at the 2021 Shareholder Meeting, not many people believed it, but with Tesla’s Berlin and Texas factories opening this year, this goal has become more tangible.
According to the current capacity planning, the Berlin and Texas factories have annual production capacities of 250,000 vehicles each, plus the Fremont and Shanghai factories, Tesla’s global production capacity in the second quarter has reached 1.9 million vehicles.
Musk said in the conference call that Tesla has now achieved a capacity of 30,000 vehicles per week and a global production capacity of 1.56 million vehicles. By the end of this year, it is expected to reach a capacity of 40,000 vehicles per week, or 2.08 million vehicles per year.
“But there are still many uncertainties. The Berlin and Texas factories are expected to reach 5,000 vehicles per week by the end of this year or early next year, climbing to 10,000 vehicles per week next year. Demand is not a problem for us.”Tesla’s global production capacity will reach 23.96 million vehicles by 2028, based on achieving an annual production capacity of 2.08 million vehicles in 2022, with a 50% annual growth rate thereafter. If demand remains robust during this period, the goal of selling 20 million vehicles per year worldwide will be achieved two years ahead of schedule.
Musk predicts that deliveries of the Cybertruck electric pickup will begin in mid-2023. In May, Cybertruck stopped accepting orders from China and Europe, allowing only North America to pre-order. It is reported that the number of orders has reached nearly 1.5 million.
Autonomous driving seems to be imminent. Musk stated that FSD Beta is expected to be released to all North American customers by the end of this year. “If we get regulatory approval, we can also release it in Europe and some other parts of the world.”
Inflation + Black Swan “Hurt” Profit
While Tesla is still a “money-making machine” in the auto industry, gray rhinos and black swans are lurking on the company’s path to self-surpassing.
“We have a long-term plan. (But it is worth noting that) there are many uncertainties in the world, such as changes in commodity prices, the ramp-up speed of mass production, and the overall situation next year. However, demand is not a problem we are concerned about,” said Zachary Kirkhorn.
Although Tesla is still profitable in the auto industry, its profits have been affected by unforeseen circumstances over the past year.
In Q2, Tesla’s automotive gross margin was 27.9%, down 5 percentage points from the previous quarter, while operating profit margin was 14.6%, down 4.6 percentage points from the previous quarter. “Temporary production declines at the Shanghai plant have significantly impacted margins, including idle capacity and factory restart costs, as well as regional delivery mix,” explained Zachary Kirkhorn.
The shutdown at the Shanghai factory is not the only obstacle that Tesla has faced. The skyrocketing prices of upstream raw materials are also squeezing its profit margins.
In March of this year, Tesla raised prices by 10,000-30,000 yuan for multiple models of Model 3 and Model Y in the Chinese market. Tesla also raised prices several times in the US market, with the maximum increase reaching $6,000.
In terms of model composition, the Model S/X, which costs $100,000-$120,000, accounted for 6.3% of Tesla’s Q2 deliveries, compared to between 3.8% and 4.7% in the past.
However, price increases, higher priced product configurations, and larger sales scales, are difficult to completely offset the impact of inflation and supply chain pressures.# Q2, Tesla’s gross profit per vehicle is $16,000. However, the gross profits per vehicle in the previous three quarters (2022Q1, 2021Q4, Q3) are $17,900, $15,800, and $15,200 respectively. Moreover, to cope with supply pressure, Tesla is refining lithium in Texas, USA.
“It has been a supply chain hell these years.” “If there are signs of inflation decreasing, we don’t need to raise prices, and we may even lower them. But it depends on microeconomic inflation, which we cannot control,” Musk said on a conference call. “I’m guessing that inflation may decline by the end of the year, and the price trend of some commodities may decrease, but the price of lithium, for example, is still very high.“
Tesla also has its own “localized” black swans.
Tesla sold 75% of its Bitcoin holdings, cashing out $936 million. At the beginning of 2021, the company announced that it had purchased $1.5 billion worth of Bitcoin. Investors commented, “Buying high and selling low is really speechless, it’s better to go back to buying government bonds.“
Musk stated that the sale of Bitcoin was to maximize the cash position in uncertainty and maintain liquidity needed for possible crises. However, Tesla still holds Dogecoin.
Challenging period of production capacity climb
While macro environment uncertainty continues to increase, Tesla, which has gone from nothing to something, is now facing a key moment of going from good to great. However, “going one step further” has always been difficult.
“There are two most important ways to reduce costs, one is economies of scale, and the other is core technology.” Musk said: “In terms of technology, it’s secondary. The so-called optimal design scheme is difficult to know the best plan at the beginning. It takes a lot of practice to gradually figure out how to optimize and improve. A lot of effort is required in this process.”
The difficulty of grinding the optimal design scheme is reflected in the previous integrated casting and the current 4680 battery.
“You may need to create a new alloy, figure out how to cast this material, and improve the production capacity climb of casting machines.” Musk said, with mold optimization iteration, the front trunk of the integrated Model Y casting is now 4-5 kilograms lighter than the previous generation. The floor is also much better than the traditional stamping sheet metal. “But it is still at level B, and it will be further reduced in the future, including more parts and components.“
How to better produce the 4680 battery is currently Tesla’s tough problem to crack.“For 4680 and structural battery packs, simplification and scaling are currently the most important aspects. It is impossible to consider all aspects from the beginning. Unless a miracle happens, it is difficult to begin production. ” Drew Baglino, Senior Vice President of Powertrain and Energy Engineering at Tesla said.
Currently, Tesla is focusing on solving many “small issues” that were previously unknown. “We are working hard to solve them, but it is also difficult.” said Drew Baglino. The first step is to achieve scale and reliability for the 4680 battery, followed by solving energy density and cost issues.
“We have made a lot of progress on 4680, but the production capacity is still not enough to meet the production needs of Giga Texas and Berlin.” Musk expects the weekly production capacity of 4680 battery packs to exceed 1000 by the end of this year.
In Q2, the dry electrode coating for 4680 batteries has been fully automated on the trial production line in Fremont’s Gigafactory, with a month-on-month increase of 35% in production capacity since March.
Musk stated that the Giga Texas and Berlin factories will further optimize and improve the production process of 4680 based on the experience of the trial production line. The 4680 production line in the Texas factory has been installed and is expected to start production in Q3, with annual production capacity exceeding the trial production line by the end of this year.
“Essentially, the speed of battery production determines everything, that is, the speed of ‘accelerating the world’s transition to sustainable energy’.” Zachary Kirkhorn said, “The growth rate will depend on our equipment capacity, factory normal operating time, operating efficiency, and supply chain capacity and stability.”
Will Fully Autonomous Driving be Rolled Out in North America by the End of the Year?
Musk also updated the timeline for the large-scale deployment of fully autonomous driving during the conference call. This may happen by the end of this year.
On July 14th, Andrej Karpathy, Tesla’s AI Senior Director and responsible for the Autopilot Vision team that created the BEV Vision Perception Architecture, announced his departure from Tesla. There have been various speculations in the market whether AK’s departure was due to finishing the work or because FSD did not work. Musk responded during the conference call: “We have a very talented team of 120 people in the software AI team. We are very confident in solving FSD and it is very likely to be achieved this year.“
Musk also provided some technical support. By the end of this year, Tesla’s FSD will be able to automatically mark all static and dynamic objects in the vehicle’s panoramic video, achieving prediction based on panoramic video and time memory. It will also achieve a recognition frame rate of 36FPS, which is currently 24FPS.Predictive ability determines the level of rules and control capability of the autonomous driving system. The more complete vector space perception provides more accurate predictions, thus serving the planning and control phases later on.
Also on July 14th, Tesla released FSD Beta 10.13. The release notes for version 10.13 showcased significant improvements in unprotected left turns and other areas such as false reporting and false deceleration around pedestrian crossings.
For instance, the decision making for unprotected left turns has been improved by better evaluating the interaction between the vehicle and other objects. The speed error for pedestrians and cyclists has been improved by 17% by improving the vehicle trajectory estimation used as input for the neural network, especially during turns. In addition, lane position error has been improved by 5%, lane recall rate improved by 12%, and the lane position error for cross and merge lanes improved by 22%.
From September last year to Q2 this year, FSD Beta has accumulated 35 million testing miles. Musk stated that he will increase the price of FSD this year. “The value of FSD is extremely high, but not many people understand it. Based on the reality of FSD, the current price is actually ridiculous low.”
This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.