Tesla - Earnings Call - Q1 2012

Transcript

Speaker 6

Good day, ladies and gentlemen, and welcome to the Tesla Motors first quarter 2012 financial results. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Evanson. Please go ahead.

Speaker 1

Thank you, Patrick, and good afternoon, everyone. Welcome to the Tesla Motors first quarter 2012 financial results question and answer conference call. I'm joined today by Elon Musk, Tesla's Chairman, CEO, and Chief Product Architect, as well as Deepak Ahuja, Tesla's Chief Financial Officer. We announced our financial results for the first quarter shortly after 1:00 P.M. Pacific Time today. The shareholder letter, financial results, and webcast of this Q&A session are all available at the company's investor relations website at ir.teslamotors.com. Today's call will consist of questions and answers, and we will conduct the Q&A session live. If you've not already done so, please press star one now if you wish to ask a question. During the course of this call, we may discuss our business outlook and make forward-looking statements. Such statements are only predictions based on management's current expectations.

Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent Form 10-K filed with the SEC. Such forward-looking statements represent our views only as of today and should not be relied upon after today. We also disclaim any obligation to update these forward-looking statements. Now, let me pass the call to Elon.

Speaker 6

All right, I think we can go right into the questions. Let's just go ahead and start addressing the questions.

Speaker 1

Thank you. If you have a question at this time, please press star one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you have a question, please press star one. Our first question comes from Amir Rozwadowski from Barclays. Your line is open.

Speaker 9

Thank you very much, and good afternoon to you all, Deepak and Jeff.

Speaker 6

Hi.

Speaker 4

Hi.

Speaker 9

Yes, I was wondering if we could talk a bit about the ramping of your facility at the moment. It seems as though, based on your release, you know, you do expect to now deliver the vehicles in the June timeframe. I was wondering if you could provide us an update in terms of getting the factory up and running to the run rate at which you expect to be delivering vehicles and where you stand today.

Speaker 4

The initial ramp will, of course, be sort of slow, and then it'll spool up rapidly. We're keeping the exact ramp sort of confidential, in part because we want to, as we increase the production, stabilize at various plateaus and evaluate the quality. If it looks good, then ramp up. Our goal is to be at a run rate, an annualized run rate of greater than 20,000 units here at the end of the year. It's a little difficult to predict that ramp exactly in advance. It's going to depend on how rapidly we can make cars at exceptional quality.

Speaker 9

Are there any major pieces that need to be shipped in or installed, Elon? Is there any sort of color you can give us as to where you stand today versus perhaps your last earnings call?

Speaker 4

Yeah. We have all of the factory machinery in place. We have the vast majority of the tooling in place. There are a few stamping dies that are sort of stragglers due to late changes, and those are coming in next month. Really, the machinery's in place, and it's just a question of ironing out any bugs with the overall manufacturing system. If you can think of the manufacturing of the factory as sort of like a big machine with many subcomponents, effectively, it's getting that machine to work effectively at the subsystem level and then in the transition from one subsystem to the next, and then being able to kind of spool it up and go at a greater and greater speed. We really want to be super sensitive to the quality of the product, and our aspiration is to deliver cars that have zero defects.

It'll take some time to be able to have the whole system move with equal cadence to achieve that goal.

Speaker 9

Do you feel comfortable that you can hit the 20,000 or greater by the end of the year?

Speaker 4

I am highly confident of that, yeah.

Speaker 9

Great. Thank you very much for the incremental color.

Speaker 4

You're welcome.

Speaker 1

Our next question comes from Chris Kovach from Robert W. Baird. Your line is open.

Speaker 8

Hi, guys. Thanks for taking my question. Can you give us a sense of, you know, it's looking like another record quarter with reservations. You're at over 10,000 now. Can you give us a sense of what % of those you started to lock in as you take specs for cars? Can you maybe comment on how the new stores have affected your reservation momentum and how you expect that momentum to increase or change as you can allow customers to test drive cars in the summer?

Speaker 4

Sure. We've begun to lock in the cars that are, you know, as we queue the parts for production. We've got the first 100 cars locked in. We're really not seeing any significant falloff, at least in the beginning, from people. As soon as people said, "Oh, I've put down a deposit now. I'm not sure I want the car," it's really been an extremely high rate of people wanting to put down the remainder of the money and complete their purchase of the vehicle. Regarding the new stores and how that's going, George, would you?

Speaker 9

Sure.

Speaker 4

I have George Blankenship here, and George probably would be the best person to provide some color and detail regarding these stores.

Speaker 9

Yeah, I'll do that. I'm with Clark. We had very, very good traffic in Q1. As the shareholder letter said, we had over 410,000 people go through the six new design stores that we have. We are now getting ready to start opening our new stores for this year. We plan to open about 10 more new stores of the new design stores in traffic locations similar to those that the six exist in. The traffic has been very positive and has a positive effect on the reservation flow, both for Model S and Model X. It's been very, very positive, and we're looking to open at least 10 stores this year of the new design.

Speaker 4

I should say, we're particularly focused in the greater New York area, where we think there's a substantial untapped market.

Speaker 1

You combine that with the additional marketing cars that will be there in these stores and the customer rides and drives, definitely there'll be a significantly higher level of marketing effort and presence that the customers will see starting in this quarter.

Speaker 4

Yeah, it's worth noting that the signups that we've, I mean, the 10,000 people who put down a reservation payment, they've not test-driven the cars. I think we're achieving these numbers with no advertising, with no test drives, and in many cases with stores that only have cars part of the time. By the end of this month, I think we'll have Model S cars in all the stores. To date, since cars have been reserved for testing, much of the time, there's been no Model S in the store, which obviously adds to the sales challenge.

I think we should see some acceleration of reservations as a function of having cars that people can actually drive and having more stores open and increased word of mouth from people seeing cars on the road and eliminating any question marks as to whether the cars, any of the consumers, is the car going into production.

Speaker 8

Okay. Thank you guys for that color. Just one follow-up. I think there was some news that came out with Toyota on the RAV4 that made an announcement this week. I think they mentioned 2,600 cars over the next three years or so. Can you talk about, I mean, is there more to that contract contemplated than that number in terms of the $100 million deal you guys have with them besides the 2,600 cars? What's your indication from Toyota, or what's the triggers for them to expand that number in future years beyond the next three?

Speaker 4

We've had and continue to have extensive discussions with Toyota about scaling up the quantity significantly. I think Toyota wants to wait until the first phase of the RAV4 EV program gets on the road before potentially signing anything that's at a larger scale. I think there's certainly good grounds to conclude that the scale-up, you know, the odds of scaling up, I think, are good. That's for sure. I can't characterize it with any greater certainty than that. I think the reaction to the electric RAV4 is going to be quite positive. This car has amazing acceleration and handling, and it's got one thing that wasn't clear in the announcement earlier this week. It's got 60% more range than a Leaf in highway, city, or any scenario, really. It should be quite a compelling vehicle from the standpoint of its capabilities compared to, say, a Leaf.

The price is a bit on the high side, but the volume numbers initially are low. Hopefully, that's not an issue.

Speaker 8

Great. Thank you very much.

Speaker 1

Our next question comes from Patrick Archambault from Goldman Sachs. Your line is open.

Speaker 5

Great. Thank you very much. I guess two questions from my end. Can you tell, you know, obviously, you have a pretty big, you know, event and well-anticipated event in front of you. Can you tell us a little bit about what your strategy is to, you know, get some cars in the hands of the press? Clearly, word of mouth, as you say, is important, and that's going to be a key channel for, you know, getting the thing reviewed and, you know, hopefully helping the reservation numbers. How are you thinking about that in terms of your marketing strategy over the coming month or two?

Speaker 4

Sure. We've had limited test drives for journalists going back as far as September, but the more sort of exhaustive reviews, I think we want to wait until the car is as close to perfect as possible before we do that. Certainly past the start of production. I mean, if we give a car that maybe has some bugs in it and a journalist just writes whatever they write, then they would presumably write about a few issues. There's no point in doing that if those are expected to be cleared up within, you know, four or five weeks. I think we'll wait until probably the end of June before doing any journalist reviews.

Speaker 8

Gotcha.

Speaker 4

Six weeks.

Speaker 5

Certainly. I don't know, maybe one for Deepak just on the modeling side. It sounds like, with some of the tooling coming in late and, I guess just, the characteristics of low-volume production when you're ramping up, you're going to probably be using components manufactured with pre-production tooling. If you do it right, obviously, it doesn't impact the quality, but it impacts the cost. Can you tell us a little bit about how you expect your material costs to trend as you ramp up and when you think they can sort of come down, once you have the volume behind you to help you hit that 25% gross margin target?

Speaker 1

Sure. As we have said, the 25% target is when we achieved our annualized 20,000 units production since they deliver an overhead component as well to it. That would be sometime late this year and on a full quarter basis. We'll get closer to that in Q1 of next year. Initially, at this point, primarily in Q2, as you said, there could be a variety of reasons why initial pricing from suppliers could be high. Just the mere fact that they have low volumes in some cases can result in higher prices. That's been factored in our financial assumptions, and most of Q2 expenses will be in R&D for those issues, and that's why we have also provided the guidance of our increased R&D expense in Q2.

Speaker 4

Yeah, to be clear, we remain, and perhaps arguably at this point, increasingly confident of achieving 25% gross margin for 2013.

Speaker 5

Okay. Terrific. Very helpful. Thank you.

Speaker 1

Our next question comes from Colin Rush from ThinkEquity. Your line is open.

Speaker 0

Thanks so much. Can you talk about the cycle time right now in terms of car production and how many more iterations of the manufacturing process you expect to go through before you start shipping cars? I should say the Model S in specific.

Speaker 4

Right. Yeah, I'm not sure what you mean by cycle time. I mean, we are producing cars at a very slow pace at this point. Perhaps you can clarify that. You mean production.

Speaker 0

I'm just asking how long is it taking to, are you, you know, you're running, you know, test cars through there, I'm assuming now. Is it taking two weeks? Is it taking a full month? How many iterations on those process refinements do you think you'll go through before you really lock them in?

Speaker 4

I think we're going to keep iterating for the next four or five weeks. Even after we start production, I think there's going to be room for improvement on the car as there is with any product. I don't think we'll ever stop iterating on improving the vehicle. I mean, we're really down to very sort of small refinements at this point. These are kind of nuanced issues of fit and finish, rattle, squeak, the final fine-tuning of the stereo system, and that kind of thing. It's not major stuff, really. I want to be really attentive to the details, and I want Model S to be right all the way down to the smallest detail. That's kind of what we're dealing with right now, things at the very tiny detail level.

Speaker 0

Right. Can you talk a little bit about the cost trajectory for the battery packs? How much do you think you can improve pack performance through further controls as opposed to improvements on the battery cells? What's the timeline for making those sorts of improvements?

Speaker 4

Increasing the dollars per kilowatt hour or the range? If we wanted to right now, we could build a pack, theoretically, build a pack with 500 miles of range. It just doesn't seem to us that people would necessarily, or that most people wouldn't really have a need or want for that. It's better to use that space for cargo capacity or other things. Maybe the bigger focus over time will be improving the cost per kilowatt hour of the battery pack and improving both the non-sale costs and the sale costs. We're pretty comfortable with where we are in terms of achieving the 25% gross margin next year. I think we've got a pretty good idea of how to get there. Over time, we'll continue to see both the sale and non-sale pack costs decrease. Historically, it's been at roughly the 8% to 10% per year rate.

It's not necessarily a smooth thing, but it's been that average over time. It looks like things will continue to improve at around that rate in the future.

Speaker 0

All right, thank you so much.

Speaker 1

Our next question comes from Adam Jonas from Morgan Stanley. Your line is open.

Speaker 9

A couple of questions. First, I appreciate that you won't disclose more reservations kind of ongoing on the Model X, and I think that's a wise decision to focus the attention on the Model S. Will you continue to publish the balance sheet item of reservation payment? If you do, will that balance still include Model X reservation payments as well? That's the first question.

Speaker 1

Hi, Adam. Yes, it will. We do have to report that on our academic balance sheet, so yep.

Speaker 9

All right.

Speaker 4

I mean, yeah, obviously, if we show Model S reservations, show the total balance sheet number, it's not super hard to figure out what the Model X reservation number is. We don't want to call attention to something when our focus is very much on the S.

Speaker 9

Understood.

Speaker 4

Yeah.

Speaker 9

It may raise some questions, like my next one, which is, you know, if you look at the ratio of the cumulative reservation balance over the reservation number to get like a ratio, that ratio did decline kind of materially from Q4, from the end of December to the end of March, from around $11,500 to about $10,500, implying an incremental reservation amount on incremental reservation number decline a bit sharper than that. Is there anything to read into that? Is that because the Model X reservation amounts are just much lower per unit, or are we seeing like the incremental now at first, your VIPs and super high net worth folks that maybe were higher up on the reservation list getting the performance packages? Is it reflecting kind of just more the mass market buyer now, if you could call it that, for the Model S incremental reservation?

Speaker 1

That's a good question, Adam. The driver is that we received far fewer, or we received more general reservations, not signature reservations. As you may recall, we basically completed or sold out all of our Signature Series cars in early January. The deposit or the reservation amount for Signature Series cars was $40,000 versus $5,000 for general production. Clearly, in Q4, that's when a big chunk of the last of signature reservations came in, and that resulted in that higher average reservations amount.

Speaker 9

Great. Next question is on your Model S delivery target, moving it up into June, but yet you're still providing the revenue guidance of roughly stable at $30 million at the group level. That would imply, am I correct? This is a very small number of deliveries that you're going to be making in 2Q. I mention that because presumably most people on the call who have Tesla models have probably zero deliveries in the second quarter right now. Are we talking about a handful, kind of 10, 20, 30, that order of magnitude? It doesn't seem like it could be much more than that if you're going to be near the $30 million revenue mark.

Speaker 4

Yeah, I mean, it's on that order, yeah. It's not like it's not 1 and it's not 100.

Speaker 9

Okay.

Speaker 4

It's sort of in the 10.

Speaker 9

Okay. Just want to confirm that. Thanks, Elon. Finally, given the pull forward or the good timeframe of the launch timing, the very positive reception of the Model X, your ability to kind of show and accelerate perhaps key developments for the Gen 3 a few years out, have you given any further thought to potentially, you know, using an opportunity to raise a bit more capital to help fund these projects that really deserve probably more resources or, you know, could deserve more resources given the great interest in your early execution on them? That's my last question. Thank you.

Speaker 1

Thank you. Our next question comes from Carter Driscoll from Capstone Investments. Your line is open.

Speaker 8

Good afternoon, gentlemen. I guess I just want to follow up on the reservation question a little differently. I've talked to some of the stores and some of the salespeople, and I've talked about maybe multiple orders from individuals and, you know, maybe some that have actually exceeded multiple orders and, you know, maybe that effect, positive or negative, in terms of, you know, your positioning the car. Also, maybe some people have been rumored to be potentially reselling the car or flipping the car and whether that might have, you know, a minor impact or none at all. Maybe you could address that for me first.

Speaker 1

Participants, please hold on for a moment. We're having technical difficulties. Ladies and gentlemen, thank you for holding. Please stand by. Ladies and gentlemen, thank you for holding. Please stand by. Thank you. Please go ahead.

Speaker 7

Sorry about that, everyone. Why don't we pick it up again with Adam Jonas' last question, please? Adam, if you're on the line, do you want to repeat that, please?

Speaker 1

Pardon me, Adam Jonas. Can you please queue back up? We currently have Carter Driscoll's line open from Capstone Investments.

Speaker 7

All right. Why don't we take Carter's question, and then we'll come back to Adam Jonas.

Speaker 8

Thanks for taking my question. I just want to follow up on the Model S reservation question. Talking to some of the stores, I heard certain comments that maybe certain individuals had ordered multiple or put down multiple reservations and the chance of potentially flipping the car. Is that at all a concern? Have you heard similar things from some of your feedback from some of your salespeople?

Speaker 9

There's been a few mentions of that. The quantity is so minimal that it's not an issue. There's been a couple of issues on the, there's been a couple of inputs on our web forum as well on the subject, but it is so few and far between that it's not an issue.

Speaker 8

Okay. Just moving over quickly, a question on the Daimler agreement. In your prepared marks, you alluded to that potentially outpacing all the other development contracts you've had before. Has the automobile moved from the prototype into early-stage production? Maybe you could shed some color on where that's progressing right now.

Speaker 4

I guess it's effectively early-phase production, although it's, you know, in terms of cars that we'd be prepared to deliver to customers, those will occur kind of next month.

Speaker 8

Okay, thank you for that. That's all I have.

Speaker 4

Sorry. No, I stopped breathing. Okay. With respect to Daimler, no. My apologies for misinterpreting context there. We certainly delivered many electric smart battery action chargers and Mercedes A-Class, but we have not yet delivered anything for the new program beyond the initial prototype level.

Speaker 8

Is therefore then the prepared comment about it potentially exceeding your other development contracts, is that based on their market position globally? Is it based on discussions you've had before? I guess having seen the RAV4 essentially be pushed this week, and we're getting a picture of that, what makes you comfortable that it's going to exceed all your other development contracts if the vehicle is not out of prototype stage?

Speaker 4

The nature of the agreement is in excess of everything combined to date. That's the plan, essentially. That's what we're gearing up to do with Daimler.

Speaker 8

Okay. Just to last, not to push it too hard, but do you expect something in the back half of this year, or is it really just all focused on the Model S today?

Speaker 4

Our primary focus really is on the Model S, but we certainly expect to make material progress on the new electric Mercedes-Benz later this year. I mean, production deliveries in terms of what customers would see, let me make sure, is essentially in the early 2014 timeframe.

Speaker 8

Okay. Appreciate the color. Thank you.

Speaker 1

Thank you. We do have a question from Adam Jonas. Your line is open.

Speaker 9

Thanks for taking the follow-up here. You mentioned that the Model S has now been fully certified by the U.S. Environmental Protection Agency and the state of California, but unless I missed it in the release, I didn't see the disclosure of what the mileage was going to be. Presumably, when this goes on sale in the initial deliveries in June, or unless I'm mistaken, won't it have to have a sticker with the combined fuel economy?

Speaker 4

Yeah, you're talking about the MPGe rating?

Speaker 9

Exactly.

Speaker 7

The range, I think, is what.

Speaker 9

Yeah, exactly.

Speaker 7

Cycle derived.

Speaker 4

Right, right, right. I'm not sure if you had a chance to see the range blog we published earlier today, but as far as the EPA fuel economy rating, we're expecting it to be at least, in fact, initially, it will be 89 MPGe, although we think we might be able to improve that with some efficiency improvements at the charger level because it's measuring the AC watt-hours in. We think there's, we don't want to promise anything, but we think there's a little room for improvement there. The current sort of official rating is 89 MPGe. On the two-cycle test, we got 320 miles, and on the five-cycle test, 265.

Speaker 9

Sorry, can you repeat those, please?

Speaker 4

On the two-cycle test, 320 miles. It's actually 20 miles above our target. On the five-cycle test, which is a much more intense test where the car sometimes goes up to 80 miles an hour type of thing, that's 265 miles of range.

Speaker 9

Excellent. Thanks for, and you only release it for the largest battery size?

Speaker 4

Correct. All initial deliveries are the largest battery size.

Speaker 9

Okay.

Speaker 7

Everyone should go check out our website blog. You'll see a very thorough letter from Elon Musk and J.B. Straubel, our Chief Technology Officer, that explains a lot of the details and some of the numbers behind that. It's quite interesting reading.

Speaker 4

Thank you. I think we're going to have an exciting thing to announce later this year regarding long-distance travel of the Model S. I think sometime probably in the July-ish timeframe. It's going to be pretty cool.

Speaker 9

Great. Thanks, Elon.

Speaker 4

All right.

Speaker 1

Our next question comes from Dan Levy from Deutsche Bank. Your line is open.

Speaker 8

Hey, good afternoon. You guys mentioned that there were still some stamping dies to be delivered next month. Are you comfortable with all your suppliers in terms of them being able to supply production parts in time for the launch?

Speaker 4

Yeah, we're highly confident of that.

Speaker 8

Okay. Got it. In terms of the Tesla stores and service centers, can you give us an update on how many you feel like you need to support global sales of the Model S and the Model X? Clearly, by owning your own stores, you guys are capturing a lot of the margin that's usually taken by the franchise dealers. Do you have an estimate for what % of sales the Tesla store and service center costs will represent as a % of your revenue over time?

Speaker 1

Dan, to answer your earlier question, we expect to have close to 30 stores by the end of this year. As we look at next year and growth of Model X in 2014, we'll be somewhere north of 50 stores at that time. When we think globally, that gives us enough capacity and throughput in these stores to sell our projected volumes of Model S and X as we have shared externally so far. We certainly have a sense of our % of revenue for these stores. It's part of our SG&A expenses. We don't necessarily split that out, but I can tell you that we find we are very efficient in our selling as compared to the typical dealership model. That's something we absolutely track.

Speaker 4

It is also a learning. We don't have a national advertising spend. It's zero. At some point, I think we'll want to do that, but probably not for the first few years at least. Right now, demand outstrips supply. We need to improve supply. That's our focus.

Speaker 8

Okay. Thanks very much for that. Can you give us an update on when you expect to begin sales in Europe of the Model S? If there's a, I'm not sure if you've announced pricing for the European vehicle, when would that be if you haven't already?

Speaker 4

Sure. We expect to start delivering in Europe early next year, and we have not yet announced final pricing for Europe. It is going to be sort of sensible pricing compared to what is in the U.S. It will be a little higher to account for exchange rate variations and the logistics costs of bringing things to Europe, and there are some import duties and whatnot. It will be otherwise quite similar to our U.S. pricing.

Speaker 8

Gotcha. There are certain countries in Europe where the tax regimes are very favorable to EVs. Is there any opportunity to take advantage of that a bit by selling the car higher, or do you think that the pricing will be consistent across Europe?

Speaker 4

I think it's important to kind of do the right thing for customers. If they think we're sort of really taking advantage of them to lower tax rates, I think that would be bad. We are going to have really great sales in a lot of those countries. I mean, we are huge in Norway. I'm going to visit Norway at some point. We actually have just a phenomenal customer base in Norway and in places like Switzerland.

Speaker 9

Netherlands.

Speaker 4

Netherlands, yeah.

Speaker 9

Denmark.

Speaker 4

Denmark, yeah.

Speaker 9

Those are the Scandinavian countries that are really strong on the incentives, and the customers have responded very positively, both for Roadster and for Model S.

Speaker 4

Right.

Speaker 9

Model X.

Speaker 4

There are things like, I think London's going to be a very strong market as well because there's no congestion. You don't pay the congestion fee if you have an electric car. The city's taking a lot of steps to install access to electricity for electric vehicles for charging. Anyway, from a pricing standpoint, we'll probably see a slight premium in Europe, but we don't want to try to push to get a large premium in Europe. I think that would send the wrong message to customers. Yeah, it'll be unfair.

Speaker 8

Makes sense. Thanks very much.

Speaker 1

Our next question comes from Ben Schumann from Pacific Crest. Your line is open.

Speaker 3

Hi guys, thanks for taking my call. Maybe Elon, can you discuss how you divide your time these days between Tesla, SpaceX, and SolarCity with all three companies approaching such critical events and milestones?

Speaker 4

Yeah, it is kind of intense right now, I have to admit. I'm not getting a lot of sleep. My time is generally, on average, split roughly 50/50 between Tesla and SpaceX. SolarCity is less than a day a month, so that doesn't take much time at all. Credit for SolarCity really goes to Lyndon and Peter Rive, who are doing an awesome job running that company. I don't think it's going to have just an outstanding IPO later this year. In fact, I don't think most people realize how good it's going to be. It'll be really good. I basically, I'm on email a lot. I think I'm primarily an email processing device. That's really helpful to be able to run both companies simultaneously. When I'm with my kids, when they don't need my direct attention, then I'm on email as well. That's kind of how it works.

Speaker 3

All right, great. Thanks. With the Toyota announcement, given the size of the production contract, we get to about $38,000 Tesla content per vehicle. You mentioned in the shareholder letter that the Mercedes-Benz powertrain costs can be sort of low enough on higher volumes to fit a higher volume vehicle. Can you sort of walk through the steps there? Is it all just pure economies of scale, or are there some additional cost reductions that you can point to?

Speaker 1

Ben, I just want to clarify a certain point. I think it's very tempting to take the approximations that you just did of our $100 million deal versus the volumes announced to come up with $38,000. It's a simple math, but I have to say it's very imprecise and not very useful. There are many elements to our transaction with Toyota in addition to volume. We have a partnership with them on ongoing training and support and service and warranty, and there are a few other things. The analysis of cost that you mentioned is not that straightforward on a per-unit basis. Furthermore, for confidentiality reasons, as you can imagine, we can't share with you the price itself of the powertrain and the underlying cost to us.

I want to just clarify that and also keep in mind that the volumes we are talking here on the Toyota program are far lower. There's an inherent design inefficiency when you're trying to develop a powertrain and make it fit in an internal combustion engine vehicle. It doesn't give us those cost savings that we get inherently from the Model S platform. When we look at the higher volumes for the Daimler program, there are huge economies of scale and other design factors that help us out.

Speaker 4

Yeah, just to be clear, the economies of scale are the single biggest driver of cost reduction. I think, first of all, approximation, if you scale up production by a factor of 10, your costs will generally drop by half. I mean, that's a good generalization, I think. That's where most of the cost savings is coming from. There will obviously be continued design improvements as we figure out how to achieve the same end goal in a smarter way. Those are the two drivers of mass market, of technology getting to mass market, which is continued iteration on the design and economies of scale. That's generally true for any technology.

Speaker 9

Great. Thanks for the help on the math there. That's very helpful.

Speaker 1

Our next question comes from Jesse Pichol from Jefferies. Your line is open.

Speaker 8

Yes. Good evening, gentlemen. I'd like to ask about the Daimler drivetrains. In your letter, you allude to tremendous volumes. Can these volumes be large enough to change the cost structure of the S drivetrains? Was a contract of this magnitude factored into your 25% margin guide?

Speaker 4

With respect to the margin, that's not really, we're not talking about the 25% gross margin. We're talking about the Model S, just by itself, so no, that's not been factored in. I think economies of scale are helpful. There does need to be some commonality to achieve those economies of scale, and there will be some amount of commonality. I guess it would probably be of some help to the Model S costs to add the Daimler volume in there. It's not directly additive, but I think it's at least partially additive to the economies of scale.

Speaker 8

There's been a lot of chatter in the media about the Tesla battery pack showing up in solar projects. Do you think that, you know, solar could be a driver of your, a significant driver of your battery cells in the future?

Speaker 4

You know, I don't think we want to show all of our cards right now, but I think there's some interesting potential in that direction, maybe in partnership with a certain solar company.

Speaker 8

When investors are thinking about what it takes for EVs to really penetrate the market, we always come back to the charging infrastructure buildout. Do you think you can give us some color on how you see this buildout occurring, you know, along key corridors? Where are we in the buildout? What are you doing to accelerate the buildout? What business models do you see emerging?

Speaker 4

I think we're going to have a very exciting announcement on the charging front, you know, in the sort of July timeframe, which I alluded to earlier. I don't want to release details of that quite yet, but I think it's really going to, the light bulb's going to turn on when people see that. It's pretty awesome. I think it's really going to fill in the missing piece of the puzzle. It's not quite the right time to talk about it.

Speaker 8

That's what I was hoping to get. Let me ask one more question. You know, you talk about Norway, but you missed the big, perhaps the biggest market for EVs, which is China. What kind of interest are you getting from China, either for a store or for a drivetrain?

Speaker 4

We certainly see China as a very important market, and we're hoping to begin sales in China towards the end of next year. There are a lot of variables in there as regards to approvals from the Chinese authorities and whatnot. Our aspiration would be to begin sales there in the latter half of next year. It's an important market. We're not currently in discussion for any powertrain supply deals to companies within China, but that's, I suppose, a possibility in the long term. In the short term, we're very focused on partnerships with Daimler and Toyota.

Speaker 8

Thank you, gentlemen.

Speaker 1

Our next question comes from Andrea James from Dougherty & Company. Your line is open.

Speaker 10

Hi. Thanks for taking my question. China gave the opportunity in the Daimler partnership. If we look at all the powertrain agreements signed in Tesla history, it's about $140 million in agreements. Is that about right? Are we talking about a Mercedes-Benz contract value that's an order of magnitude greater than that or just simply greater?

Speaker 1

Yeah, the $140 million is probably what's partially in our financial statements, Andrea. There's a little bit more to it, as well as our existing Toyota agreement, which is not in our financials. It's going to happen over the next few years. The number is north of that, you know, roughly in the $280 million or so range. In terms of the Daimler contract, it's north of that. How much? I think probably best to just wait till we mature, get to that level, and talk beyond. We just wanted to still give you some sense of scale by providing that guidance.

Speaker 10

Thank you.

Speaker 4

I mean, there's the possibility for it to lead to something that's an order of magnitude greater. We need to get things, you know, we need to reach one level after another. It's a question of proving ourselves at each successive level, which we've been able to do thus far. We need to keep doing that in order to progress to essentially the next level.

Speaker 10

Okay. R&D in Q3, do we look at that as roughly about half of Q2 because some of it shifts up into COGS?

Speaker 1

A lot will shift into COGS. I think half is probably a bit on the high side in terms of half reduction. It all depends on, and there's some accounting implications here that we need to sort out as to what costs get plunged into COGS at what time versus in R&D. We'll provide you better guidance as we do the Q2 call in terms of Q3 specifically.

Speaker 10

Okay. Raising the lower end of your guidance by the $10 million there on the earlier deliveries, what exactly, can you just go over what exactly is in the guidance range again, and what about the early delivery helps you to feel more confident on the lower end?

Speaker 1

I think it's a measure of the slightly higher confidence that we have in achieving our numbers that enabled us to narrow the range.

Speaker 10

Okay, thank you.

Speaker 1

If you have a question, please press star one. If you have a question, please press star one. Our next question comes from Michael Liu from Needham & Company. Your line is open.

Speaker 7

Thanks, and good afternoon. On the last call, you'd mentioned that you were thinking about a mainstream offering for Gen 3 instead of an updated Roadster. Do you have any update on your thought process there? What types of market signs are you looking for?

Speaker 4

I mean, it's very aspirational at this point because our attention is focused on the Model S and on our key powertrain partners, Toyota and Daimler. I'd say late 2015 would be the earliest.

Speaker 7

Okay.

Speaker 4

2016 is probably most likely, but you know, something like that.

Speaker 7

Got it. Okay. Also, on the RAV4 EV, are you providing multiple versions of the battery pack? As Toyota had stated, a 100-mile range, and you've highlighted in the shareholder's letter that you're providing a range of 170 miles.

Speaker 4

I think there was, unfortunately, the way that the information got communicated was a little confusing because there is actually only, there's one battery pack, and the range is actually, if you were to compare it, say, to what the Leaf 100-mile range is, which is the city driving, that compares to the 170-mile number for the RAV4, or sort of 165, somewhere between 165 and 170 miles. If you look at the Leaf, say, five-cycle test, that range is around the 70 to 75-mile number, I believe. It's about around maybe 71 or something. 73, I think. Okay. I think maybe 73. We think it's probably 73. When comparing to the five-cycle range, the RAV4 range is around 105 miles. In both cases, it's in any given range scenario, the RAV4 is about 60% more range than a Leaf.

I think where people got confused was comparing the Leaf's city range to the RAV4's five-cycle range, which is not apples to apples, obviously.

Speaker 7

Okay. I was just trying to reconcile the 100 from Toyota and your 170. I was a little bit confused. That's a big 70-mile delta unless Toyota is talking about 100 miles strictly highway driving. Still, that's a nice 70-mile increment on the city side.

Speaker 4

Sorry, could you repeat the question?

Speaker 7

No, no. Toyota had stated 100 miles, and you're at 170 for the RAV4 EV. There's a big 70, there's a 70-mile delta there. I guess Toyota is mentioning highway driving versus, let's say, city driving.

Speaker 4

What Toyota is referring to there is what's called the five-cycle. It's an extremely arduous range, and it's at least 100 miles. It's actually, depending on configuration, at least 105 miles, and it may be as high as 120 miles.

Speaker 7

All right.

Speaker 4

If you were to compare that to the Leaf, you would compare it to the Leaf's five-cycle range, which is 73 miles.

Speaker 7

Right. No, no. Okay, I understand. I get that.

Speaker 4

Yeah.

Speaker 7

Okay, one more.

Speaker 4

What happened in the media was people were looking at the Leaf's city range of 100 and comparing that to the RAV4 EV's five-cycle range, and those are not comparable numbers. It made more sense to compare it to the sort of almost 170-mile range for the RAV4 EV.

Speaker 7

Okay. I agree. Great.

Speaker 9

Also, one last question. You mentioned earlier a high conversion rate for the Model S signups to reservations. Have you seen any signs of, let's say, cannibalization from the Model X since those that are on the waitlist for the S may just choose to switch over? I think you had earlier on the Model X a little bit earlier.

Speaker 4

The Model X deliveries will be really, I mean, if you put down a deposit on Model X, you're going to get the car in almost two years, maybe 20, 22 months, that kind of thing. If you put down a deposit for the Model X, you're getting a car in Q2 of 2014, whereas you're getting a car in Q2 of next year if you put down a deposit on the Model S. There's about a year advantage there. We'll see how deposits track, but I think it'll remain true that you'll be able to get a Model S a lot sooner than a Model X for quite some time.

Speaker 7

Okay. I misunderstood. I thought they would be rolling out late in 2013, but got it. Thank you.

Speaker 4

I mean, in very tiny numbers, that's possible. If you put down a deposit now, you're really going to get your car in about 22 months-ish. I mean, actually, that's overly precise. I think at approximately two years.

Speaker 7

Hi, appreciate it.

Speaker 1

Patrick, we probably only have time for one more question.

Speaker 9

Our last question comes from Ben Rose from Battle Road Research. Your line is open.

Speaker 2

Good afternoon, gentlemen. Just a question. From the shareholder letter, you say, "Selected cars are independently purchased and crash tested by the NHTSA." Do you know whether the Model S will be one of those cars? If so, when?

Speaker 4

Yeah, it'll definitely be one of those cars. I'm not sure. In fact, I'm not sure that they actually tell us exactly when they do it because I think that, I don't know, I think they just buy the cars, I think, secretly. We don't actually know where they are in the queue.

Speaker 2

Would you be surprised if they didn't issue a crash safety test rating by, say, August or September?

Speaker 4

I honestly don't know. We do feel that we are very confident that when they do test the car, it'll be at the five-star safety rating level. In fact, I think the Model S is, in my opinion, will be the safest car on the road. We have certain architectural advantages that other cars don't have, like a much longer crumple zone in the front because we don't have a big engine block that we've got to deal with. Our side pole intrusion is, we think, will probably be the lowest of any sedan. Our rear crash performance is definitely going to be better than any sedan because we're protecting for the third-row occupants.

In fact, for the rear impact, the car is designed to not just take a highway speed impact in the rear, but be able to take that highway speed impact on half the car, which I think is an important threshold for safety for the third-row seats. It has really good rollover protection. I really think this is going to be the safest car on the road.

Speaker 2

Okay, thanks very much. Appreciate it.

Speaker 4

All right, you're welcome.

Speaker 9

All right. Thank you, everyone, for joining us today on the call. We look forward to talking with you next quarter. We'll also be attending a couple of conferences in the month of May, including the Deutsche Bank Cleantech Conference next week. Thank you, everyone. Have a great day.

Speaker 6

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.