Musk expands on Tesla’s Q2 financial report

Last evening, Tesla Motors announced its Q2 2013 financial results, and afterward, Chairman & CEO Elon Musk and CFO Deepak Ahuja took questions from journalists and analysts for about an hour. As expected, Musk did most of the talking, and covered a lot of ground concerning Tesla’s future production plans and international expansion.

 

On Model S Sales & Production

The company’s current weekly net orders of the Model S are annualizing to about 20,000 units a year for N. America. “We’re not trying to push any higher than that,” Musk said. “We have a production constraint, not a demand constraint. Our time is spent trying to make more cars. The thing that prevents us from doing that is primarily supplier parts.”

Musk said about 90 percent of its suppliers are ready to ramp up production, but a small percentage cannot. He mentioned that when they were preparing to produce the Model S, there were predictions out there that, for example, the Model S would only sell 3,000 units in its lifetime. “We sold that in the first quarter of production,” Musk said.

Nonetheless, some of Tesla’s suppliers took those predictions to heart, and never tooled up for volume production of their parts. “So we’ve got to switch them out or in-source them,” Musk said. He expects those production bottlenecks to clear out by Q2 2014.

“We’ll see what the demand looks like at that point,” Musk said. “We’re striving to become demand limited, rather than production limited.”

To get much higher than 20,000 cars a year in N. America, Musk mentioned they’ll need a bigger infrastructure of service centers, stores, and Supercharger stations. “”You have an S-curve of technology adoption,” he said. “You have the really early adopters, but the mainstream consumers need to really see a lot of cars on the road before they really consider it, especially a new technology. I think we’ve got a long way to go still.” 

Ahuja added that before they worry too much about increasing demand, there are cost efficiencies they can look for to increase their gross margins in the big expenditure areas of parts and labor.

And then Elon broke it down in his signature blunt style: “In the fourth quarter of last year, we were extremely dumb at making cars,” he said. “In the first quarter we were still pretty dumb. We were slightly dumb in the second quarter, and hopefully by the fourth quarter we’ll not be dumb. This is not: ‘how did we get so super good?’ This is: ‘how do we stop being so stupid?'” 

 

On Model S International Expansion

Tesla estimates global annual sales of 40,000 cars (including 20,000 in N. America) once it expands to Europe, Asia, and Australia. Currently, its not pushing for international sales too hard, because a car ordered in Europe now would be delivered around November. But Musk thinks the demand for premier sedans in Europe is higher than N. America, and with high demand in Asia as well, he thinks 40,000 worldwide units a year is a conservative estimate. 

“There’s certainly room to grow beyond that,” he said. “We’re a big factory. There’s a lot of potential, but we’ll have to see how it turns out.” 

Tesla will open a store in Beijing later this year. “This isn’t quite the quarter to talk about China, but I will say it’s a huge market for premium sedans,” Musk said. He’s also excited about Japanese expansion. “Japan’s a very important market for us. We’re going to take it very seriously. The Japanese market’s very discerning, and I would consider it a great honor if they actually bought our car.” 

When asked about international pricing, Musk said the Tesla policy is to try to make the same amount of money on a car in any given market. “We don’t want to make more money off a person just because they live in a different country. I don’t think that’s the right thing to do.” Even though it’s common for OEMs to mark up cars quite a bit in China, Tesla won’t do that and wants to be transparent about making the same margin regardless of the country. “The overarching principle here is we don’t want to rip anyone off,” Musk said.

 

On the Model X SUV

The Tesla Model X SUV will be based on the Model S platform. “We’re hard at work on the Model X, refining the design,” Musk said. “We expect a small number of units by the end of the next year.”

Although the Model S is still the company’s biggest priority in all areas at the moment, more and more resources and Musk’s time are moving toward getting the Model X’s details right. “In terms of executive time, the Model X is becoming more of a priority,” Musk said. “Probably in the 4th quarter it becomes the top item.”

Currently, the Model X work is lab work on the design and engineering, with capital expenditures for hard tooling coming in Q2 and Q3 of 2014. By Q4 2014, some initial deliveries of the Model X should begin, with volume production beginning in 2015.

“We’re going to push pretty hard to make it better than the first prototype that most people have seen,” Musk said. “There’s some exciting features that I love and hopefully other people love too.”

 

On the Third-Generation Tesla

Sometime after the Model X, the third-generation Tesla should cost around $35,000 before any incentives come into play. In fact, Musk does not expect the third-gen Tesla to sell with the $7,500 federal tax credit. That credit is limited to the first 200,000 vehicles sold from one manufacturer, so Model S and Model X could likely exceed that number by the time the third-gen vehicle come out.

“It’s always helpful to have some subsidy, but we’re not counting on it,” Musk said.

Still, Musk believes the third-gen vehicle will offer a 200-mile range for the $35,000 price. He mentioned that a new battery cell factory needs to be built to accommodate all the eventual capacity, and that Tesla’s battery partnership with Panasonic is going very well.  

 

On the New BMW i3

“I’m glad BMW is bringing an electric car to market. I think that there’s room to improve on the i3, and I hope they do,” Musk said, then pausing to laugh in spite of himself along with the reporter. But he encourages big automakers to bring electric cars to market and hopes they keep iterating and improving them.

“That’s what’s going to result in humanity building a sustainable transport future,” he said. “I wish it was going faster than it is.”

 

On the Hyperloop

A reporter asked Musk if Tesla shareholders would ever see any benefit from his Hyperloop idea, a supposed new mode of high-speed transit that Musk said could shuttle people from San Francisco to Los Angeles in 30 minutes.

“I think I kind of shot myself in the foot by ever mentioning the Hyperloop, because I’m too strung out,” Musk said. “I have to focus on the core Tesla business and Space X, and that’s more than enough. But I did commit to publishing a design.”

Some kind of alpha Hyperloop design is due from Musk this Monday, August 12.

“I don’t have any plans to execute it, because I have to focus on Space X and Tesla,” he said, adding that perhaps the design will become an open-source project for people to run with, if there’s interest. And if nothing happens with it after a few years, maybe Tesla would get involved. “But obviously that’s extremely speculative,” he said.

 

Image: Jurvetson (flickr)