Tesla Second Quarter 2018 Update
- Q2 Automotive gross margin increased to 20.6% GAAP and 21.0% non-GAAP
- Model 3 gross margin turned slightly positive in Q2, expecting roughly 15% in Q3
- Expecting to produce 50-55k Model 3s in Q3; deliveries should exceed that
- Major cost restructuring executed in Q2
- $2.2B of cash and cash equivalents at Q2-end, expected to grow in Q3 and Q4
- Capex projection in 2018 adjusted to <$2.5B
It’s fair to say that no production ramp of any other product has been as closely watched and debated as that of Model 3. We are proud of our team for producing roughly 7,000 Model 3, Model S and Model X vehicles during the last week of June. We also want to thank all of our reservation holders who have waited patiently and who have been supportive of our mission. While we faced multiple obstacles during this ramp, our team worked hard to find solutions, and in the end, it was all worth it: A total vehicle output of 7,000 vehicles per week, or 350,000 per year, should enable Tesla to become sustainably profitable for the first time in our history - and we expect to grow our production rate further in Q3.
In July 2018, Model 3 not only had the #1 market share position in its segment in the US, it outsold all other mid-sized premium sedans
combined, accounting for 52% of the segment overall. The popularity of Model 3 is a true testament to the product. Based on trade-ins that we’ve received so far, we can see that the total addressable market for Model 3 is much larger than mid-sized premium sedans. We are drawing customers from many other segments, including non-premiums sedans and hatchbacks.
AUTOMOTIVE PRODUCTS
During the month of July, we have repeated weekly production of approximately 5,000 Model 3 cars multiple times while also producing 2,000 Model S and X per week. Having achieved our 5,000 per week milestone, we will now continue to increase that further, with our aim being to produce 6,000 Model 3 vehicles per week by late August. We then expect to increase production over the next few quarters beyond 6,000 per week, while keeping additional capex limited. We believe that increasing capacity by improving utilization of our existing lines and making selective improvements to address bottlenecks rather than creating entirely new duplicated lines will be the most capital efficient approach.
We aim to increase production to 10,000 Model 3s per week as fast as we can. We believe that the majority of Tesla’s production lines will be ready to produce at this rate by end of this year, but we will still have to increase capacity in certain places and we will need our suppliers to meet this as well. As a result, we expect to hit this rate sometime next year.
Over the past 12 months, we have overcome bottlenecks across various stages of the Model 3 manufacturing process. Last quarter, it became clear that GA3, our main general assembly line, would likely become a production constraint if certain issues were not addressed. This assembly line, which is where we add all the components to a painted metal body, was designed to work with hundreds of robotic lifters that bring components to the line. Due to the density of the line and the relatively high downtime of the lifters, ramping GA3 became substantially more complicated than we had anticipated. That said, significant progress has been made in the last few months, and GA3 is now expected to reach a production rate of 5,000 per week very soon.
To address the short-term issues with GA3, we built GA4 to help us reach our 5,000 units per week target earlier and ultimately to push us past that point. We were able to build GA4 quickly due to the designed simplicity of the Model 3 architecture. The layout and processes of GA4 are similar to those of the Model S and X assembly line, while quality and cost of production are roughly equal to those of GA3. General assembly, excluding the cost of components, accounts for approximately 3% of Model 3 cost. The rest of our manufacturing processes remain highly automated, including stamping, body-welding, paint shop, powertrain assembly and battery pack assembly.
No production target is more important than sustained quality, which is why every vehicle we produce goes through a thorough set of measurements and tests before it reaches the customer. Model 3 quality continues to improve every month and is already on par with Model S and X.
At the end of Q2, we started to produce the performance version of Model 3 Dual Motor All-Wheel Drive. The Wall Street Journal called it a “thrilling, modern marvel” and a vehicle that is “magnificent, a spaceship, so obviously representative of the next step in the history of automobiles. The Model 3 is more than futuristic. It’s optimistic. This is what ordinary cars should be, which is to say, better than they are.” Motor Trend said: “In maybe 120 wheel revolutions, a high-performance hierarchy has been rattled. The European marques perennially atop the sport sedan podium are about to have trapdoors release beneath them….[T]he dual motor and all-wheel drive give the compact Tesla a tensed, hair-trigger potency for leaping ahead or around whatever's in the way. It's pure jungle cat.” The performance version accelerates from 0 to 60 mph in just 3.5 seconds, which puts it into supercar territory, and with a starting price of $64,000, it is no more expensive than other high-spec premium sedans on the market today. Traction control software of Model 3 Performance has been substantially modified and it now allows drivers to powerslide, something that true track enthusiasts have been craving.
At the end of July, Gigafactory 1 battery production reached an annualized run rate of roughly 20 GWh, making it the highest-volume battery plant in the world by a significant margin. Consequently, Tesla currently produces more batteries in terms of kWh than all other carmakers combined.
In July, we announced our plan to build a wholly Tesla-owned Gigafactory 3 in Shanghai – our first Gigafactory outside the US. We are excited about this opportunity, as China is by far the largest EV market in the world and Chinese support for electric vehicles has been exceptionally strong. Initial capacity is expected to be roughly 250,000 vehicles and battery packs per year, and will grow to 500,000, with the first cars expected to roll off the production line in about three years. Vehicles produced at Gigafactory 3 will augment our existing capacity in order to meet growing local needs, which means our US manufacturing operations will not be affected. Construction is expected to start within the next few quarters, though our initial investment will not start in any significant way until 2019, with much of it expected to be funded through local debt. We will share more information about Gigafactory 3 in upcoming quarters. Demand for Model S and Model X vehicles remains high, with Q2 2018 being our highest ever Q2 for Model S and Model X orders. In July 2018, we delivered our 200,000th vehicle in the US, which means that our US customers will have access to the full $7,500 federal tax credit until the end of 2018, at which point it will phase out over the course of 2019. We produced 53,339 vehicles in Q2 and delivered 22,319 Model S and Model X vehicles and 18,449 Model 3 vehicles, totaling 40,768 deliveries.
Given that we are in full production mode for Model 3, we recently stopped taking Model 3 reservations in the US and Canada and moved to a direct order system, similar to our process for Model S and Model X. We continue to generate strong Model 3 demand despite having done almost nothing to try to sell it, and even though Model 3s have only been available to cash/loan purchasers of the long-range battery version with the premium interior package in North America. Demand will accelerate even further once we offer leases, less expensive variants, and orders outside of North America. Additionally, we recently started taking requests for Model 3 test drives in July and have already received more than 60,000 Model 3 test drive requests in the US alone. Most stores in North America were just getting Model 3s for test drives in July 2018. Early results indicate that the Model 3 test drive-to-order conversion rate is higher than for Model S, so weekly orders should grow significantly in upcoming months. In recent weeks, orders from non-reservation holders have already become a significant portion of our total new Model 3 orders, suggesting that we have barely tapped the full potential of Model 3 demand. While tariffs on vehicle imports to China have recently decreased to 15%, imports specifically from the US have increased to 40%. As a result, we had to adjust pricing in China in order to partially offset this increased cost. This will likely have some negative impact on our volumes in China in the near term. However, we do not expect our global vehicle deliveries to be heavily impacted since we will partially divert deliveries to North America and Europe if necessary.
Consistent with our mindset of continuous improvement for our products, we continued to add functionality to our vehicles in Q2. Thanks to the feedback we received, we significantly reduced braking distance of Model 3 through an over-the-air update. Summon and Wi-Fi functionality have also been added to Model 3 vehicles as well as an optional max speed limiter for all Tesla owners. We continue to analyze feedback from our customers on a regular basis and update functionality of our cars accordingly.
During Q2, we opened eight new store and service locations, resulting in 347 locations worldwide at the end of the quarter. Our electrified Mobile Service fleet continued to grow further to more than 340 service vehicles on the road today. While the majority of our mobile service network is based in the US, we are gradually rolling it out to other parts of the world. Our customers have shown a clear preference for getting their vehicles repaired at home or at work, which is why Mobile Service will continue to be a big lever for our service capacity expansion.
In Q2, we opened 103 new Supercharger locations for a total of 1,308 Supercharger stations and in late June celebrated our 10,000th Supercharger stall opening. To date, we have over 10,800 Superchargers and 19,200 Destination Charging connectors globally. We also continue to work with large employers to install chargers at their office locations so that customers lacking easy charging solutions at home can still switch to an electric vehicle.
