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Good day, ladies and gentlemen, and welcome to
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the Tesla Second Quarter 2017 Financial Results Q&A Conference Call.
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At this time, all participants are in a listen-only mode.
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Later, we will conduct a question-and-answer session, and instructions will follow at that time.
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As a reminder, this conference is being recorded.
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I would now like to introduce your host for today's conference, Mr. Jeff Evanson.
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Mr. Evanson, you may now begin.
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Thank you, Shree, and good afternoon, everyone.
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Welcome to Tesla's Second Quarter 2017 Q&A Webcast.
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I'm joined today by Elon Musk; JB Straubel; Deepak Ahuja; and Jon McNeill.
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Our Q2 results were announced 80 minutes ago in the update letter we published at the same link
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as this webcast.
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During this call, we will discuss our business outlook and make forward-looking statements.
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These comments are based on our predictions and expectations as of today.
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Actual events or results could differ materially due to a number of risks and uncertainties
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including those mentioned in our most recent filings with the SEC.
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During the question-and-answer portion of today's call, please limit yourselves to one
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question and one follow-up.
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But before we jump into the Q&A, Elon has some opening remarks. Elon?
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[AV issues, skip to 11:15.]
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All right. Thank you. All right, we apologize, everyone.
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Elon, over to you.
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All right, thank you. My apologies, we actually tried a new audio system
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with a bunch of individual mics that seems to have malfunctioned,
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so we went back to our standard conference call object.
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Anyway, I just want to confirm people can hear what I'm saying? Okay, great.
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So first of all, I want to say that Friday night was an amazing time for Tesla.
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It was one of the most important days in the history of the company.
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It's something we've been striving for, for 14 years.
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Having with us steady production of Model 3s was just an incredible milestone in the company's history.
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We wanted to make a great, affordable electric car which is a fundamental thing that is missing.
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We wanted to make that from day one, and if we could only have done it sooner, we would have.
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And I'm glad that this day has come.
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What we have ahead of us, of course, is an incredibly difficult production ramp.
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Nonetheless, I think we've got a great team, and I'm very confident that we will be able
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to reach a production rate of 10,000 vehicles per week towards the end of next year.
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And we remain – we believe on track to achieve a 5,000 unit week by the end of this year.
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So, I would simply urge people to not get too caught up in what exactly falls within
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the exact calendar boundaries of a quarter, one quarter or the next, because when you
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have an exponentially growing production ramp, slight changes of a few weeks here or there
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can appear to have dramatic changes, but that is simply because of the arbitrary nature
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of when a quarter ends.
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But what people should absolutely have zero concern about is that Tesla will achieve a
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10,000 unit production week by the end of next year.
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So, if you can sort of see where we came from, the Roadster – we were making only 600 units
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a week where the non-powertrain portion of the car was made by Lotus.
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And we did the powertrain and final assembly of the car, and then we went from that to
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20,000 units a year of the Model S, a far more complex car, where we did the whole thing.
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And then with Model 3, we are more vertically integrated.
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I think people should really not have any concerns that we will reach that outcome from
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a production rate.
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We're also very confident about costs.
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We feel we gained a lot of experience.
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We certainly aspire to learn from the mistakes of the past, and I think we largely have.
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Deepak will go into some of our margin expectations there.
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And unlike, say, for example, the Model X, where the mistake that we made, and I obviously
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take the prime responsibility here, was having far too much advanced technology in version
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one of our product.
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Model X is an incredible car, but it was overreaching for the first-generation of the product.
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In the case of Model 3, we're strived hard to simplify and make sure that it has everything
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essentially to be a fantastic car.
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If you see the reviews, the reviews are – one could not ask for better reviews.
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And I just thought I'd give you one little anecdote, which was – which I found quite
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surprising is that when we were giving test drives to – or the journalists were driving
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the car and doing test drives.
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About 80% of the journalists said that they would buy the car themselves.
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Most of the remaining 20% said probably.
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This is crazy.
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I've never seen anything like it.
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So this is a very good sign.
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It should also be noted that one of our big concerns was that Model S, particularly, and
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Model X demand would suffer with the introduction of the Model 3.
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In fact, this has turned out to be the opposite situation.
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Model S and Model X demand increased with the release of Model 3.
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Jon, would you like to just elaborate on that?
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We did express this as a concern.
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Yes.
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And it was a big concern, but it has turned out to be a pleasant surprise.
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Yes.
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I think that's right.
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Not only as Elon said, we expressed it is a concern.
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We had positive comps, both year-over-year and quarter-over-quarter in orders in the
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second quarter.
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But since then, orders have accelerated in July as we noted in our shareholder letter.
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And they've accelerated further since the hand-over event on Friday for the Model 3.
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So, it clearly shows that S and X as our flagship products have a strong position in the market
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and strong demand.
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And that's super encouraging that we've got a strong product lineup with three cars that
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are proving to be very popular in their individual segments.
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Yes.
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In fact, I don't know – I think we mentioned some of this in the earnings letter, but just
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some of the key stats on, say, July orders for S and X were...
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Yes.
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July orders were 15% higher than our Q2 average weekly order rate, so we accelerated off of
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Q2 into July.
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Yes.
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And as we noted in the shareholder letter, deliveries grew by 53% compared to the Q2
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2016 in a flat luxury vehicle market, so we're gaining share...
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Yes.
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In a flat-to-down market, and the order has accelerated.
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So July was one of our best months ever.
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Yes.
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Again, contrary to our expectations, I want to emphasize.
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Of course, who knows if this will continue, but all indications are that it will.
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So that's very exciting.
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Yes.
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A side note, we're making great progress on our internal Autopilot software.
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It's getting better and better.
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I'm really, really excited.
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I test drive the latest development release as soon as it comes out, and I'm like this
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is really getting to be something special.
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Yes, it's really, and I think it's going to accelerate from here.
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And the talent that we're seeing join on the technical side for Autopilot is really world-class.
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I don't think there's – it's unmatched anywhere, I would say.
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So, let's see, Model 3 net orders are – there's not that many cancellations – about 1,800
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a day.
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I want to emphasize you can't see the car, unless you want to look at pictures online.
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You can't test drive a car.
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You have to put down a $1,000 deposit.
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We're not promoting the car.
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We're not promoting the car.
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If you go to our stores, we don't even want to talk about it, really, because we want
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to talk about the thing that we can supply.
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If somebody orders a Model 3 now, it's probably late next-year before they get it.
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We want to give people a car where it's, in fact, maybe a one- or two-month wait for an
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S or an X.
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I think the point that we're trying to make is that the S is still a superior sedan.
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It seems to have come through, and that's true.
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Things got a little confusing because of the nomenclature of being Model 3 versus Model
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S and X, which was, I guess, sort of my fault, being too clever for my own good there, because
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especially the Model E, as you can tell, I have a wonderful sense of humor.
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But then people mistook that for generation three, but in fact, if you look at, say, what
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we're really on right now?
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I would say is approximately generation four.
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We're on generation four of S, X and 3.
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At the risk of really confusing matters.
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Model 3 is generation four, but so are S and X.
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We evolve the technology all at the same time.
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So overall, looking really good.
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And then Solar Roof – we have installed and working the Solar Roof tiles.
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I have it on my house.
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JB has it on his house.
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I think we included some of the pictures in the earnings letter.
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I want to emphasize that there's no Photoshopping on the roof.
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That is actually how it looks, and it wasn't taken by some – it was take some pics with
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your phone and send them over.
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That's what we're talking about here, not some special lighting conditions, pro-photographer
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situation.
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And this is version one, and I think this roof's going look really knockout as we just
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keep iterating.
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Now it is a very challenging technical task to get this right, get the costs good, streamline
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the installation process, ramp up the production.
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Again, this is sort of follows a similar S-curve to vehicles where it starts up very slow,
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but then it grows exponentially.
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Also, our conventional solar is doing quite well and generating significant positive cash
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flow – just standard flat panel stuff, which, I think, is still the right solution for any
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kind of flat roof situation, which is most commercial installations in a lot of houses,
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or some part of the roof where it's really not visible and therefore, doesn't really
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matter from an aesthetic standpoint.
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And then, batteries – also making great progress on the battery front.
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I'm hoping to do something around the International Astronautical Congress, which is in Adelaide
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this year.
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Not promising anything, but we're aspirationally going to have a very substantial portion of
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the battery pack, already done in about eight weeks, which is hard because we have all the
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shipping and logistics challenges of getting things across the Pacific.
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Not promising anything.
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It's an aspirational goal.
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Team's working super hard to make it happen.
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But I'm excited about the prospect, and I feel, of course, optimistic that that will
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take place.
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So, yes, I think and we're really proud of the Tesla team for getting to this point.
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And I really want to thank the whole Tesla team, and we already have 33,000 people at
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this point, for working hard to achieve some very difficult things.
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And I can be prouder to work with such a great team.
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So, let me go to – anything else you want to add, guys?
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All right.
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Let's go to questions.
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All right.
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Shree, let's open it up to Q&A.
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And everybody in Q&A, we have a lot of people in queue, so Shree's going to be real hard
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core on the one question, one follow-up.
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Yes.
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Not the, one question with eight nested questions.
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Correct.
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No nesting.
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Yes.
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But as one question part A through H.
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Thank you.
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Our first question comes from James Albertine with Consumer Edge Research.
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Very good.
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Thank you for taking my question.
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Good afternoon, and congratulations on the first 30 deliveries last week.
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It was a great event.
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Thank you.
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I wanted to ask if I may, my one question on capital expenditures.
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Wanted to get an idea, what comes next with respect to some of your spending on the Model
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3?
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And I guess, if I can nest one in, related to (25:23).
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Oh, God.
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You know what?
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Fine.
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Do it.
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You know.
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Fine.
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It's one question on CapEx.
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But really want to understand what the big next steps are in 3Q and 4Q as we start to
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kind of build-out our models and figure out from there?
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Thanks.
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Certainly.
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I mean, I do want to emphasize like but a lot of us is actually very hard for us to
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know.
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When we make mistakes is because we're stupid, not because we're trying to mislead anyone.
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I just want to emphasize – I – we aspire to be less dumb over time.
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So if I knew it, I would tell you.
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It's sort of like I've got this, like secret hand of cards that I'm holding close to my
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vest and I'm not telling you.
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It's just fundamentally impossible to predict the exponential part of the manufacturing
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S-curve.
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It's crazy hard.
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And S-curve is a simplification because it's really running through a series of constraints
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that, if you – it's like a really jagged sort of upward growth and it'll plateau and
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then it'll grow rapidly, and it'll plateau again.
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And then sometimes it'll go backwards because something broke.
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Yes.
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When I said manufacturing hell and supply-chain hell on Friday.
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I meant it.
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I mean, we know this.
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Signed up for it.
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Not blaming hell because when we bought the ticket.
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So but I think at a high level, I don't think we should expect any significant negative
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surprises.
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There will be – as usual be the case, there tends to be some cost growth in CapEx for
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unexpected things.
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So we've got to expedite this, you've got to fix that, or this supplier doesn't work
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out, or this machine we bought doesn't work out.
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And you've got to be all hands on deck 24/7 to fix it or replace it.
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But I don't expect any significant – I think that is relatively contained.
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Deepak, do you want to...
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Yes, I think maybe the other way, James, to answer your question is.
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You need to talk to close with this.
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Yes.
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I think you're asking where we are spending the money.
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I think it's in the completion of the Model 3.
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We are bidding-off on the equipment.