Tesla (TSLA) Q2 2023 Earnings Call Transcript

Tesla (TSLA -1.11%)
Q2 2023 Earnings Call
Jul 19, 2023, 5:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Martin Viecha

Good afternoon, everyone, and welcome to Tesla's second-quarter 2023 Q&A webcast. My name is Martin Viecha, VP of investor relations, and I'm joined today by Elon Musk, Zachary Kirkhorn, and a number of other executives. Our Q2 results were announced at about 3 p.m. Central Time in the update deck we published at the same link as this webcast.

During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of reasons and uncertainties, including those mentioned in our most recent filings with the SEC. During the question-and-answer portion of today's call, please limit yourself to one question and one follow-up.

Please use the raise hand button to join the question queue. But before we jump into the Q&A, Elon has some opening remarks. Elon.

Elon Musk -- Chief Executive Officer and Product Architect

Thank you, Martin. So, just a Q2 recap. In Q2, we achieved record vehicle production and deliveries and record revenue of about $25 billion in a single quarter. And Model Y became the best-selling vehicle of any kind globally in Q1, surpassing the likes of Corolla and Golf.

So, it was the No. 1 vehicle of any kind, including vehicles that are selling at far lower price. This is, I think, an incredible achievement by the Tesla team. And just a huge thank you to our customers for their support.

So, this came in spite of high interest rates and a lot of macro uncertainty. And nonetheless, we managed to achieve operating margin of about 10%. We continue to target 1.8 million vehicle deliveries this year, although we expect that Q3 production will be a little bit down because we've got some shutdowns to for -- a lot of factory upgrades. So, just probably a slight decrease in production in Q3 for sort of global factory upgrades.

In the long term, Autonomy, we think, is going to just drive volume through the ceiling next level and -- and our sort of future robotaxi products -- dedicated robotaxi products, we think, have like quasi-infinite demand. So, we're -- the way we're going to manufacture the robotaxi is also itself a revolution. So, it's a revolutionary design made in a revolutionary way. It'll be, by far, the highest units per hour of any vehicle production ever.

So, we're very excited about that. With respect to Autopilot and Dojo, in order to build Autonomy, we obviously need to train our neural net with data from millions of vehicles. The more -- I mean, this has been proven over and over again, the more training data you have, the better the results. And I mean, there are times where we see basically -- in a neural net, basically, it's sort of at a million training examples.

It barely works at 2 million. It's -- it's slightly worse at 3 million. It's like, wow, OK, we're seeing something. But then, you get to, like, 10 million training examples, it's, like, it becomes incredible.

So, you just -- it's just -- there's just no substitute for massive amount of data. And obviously, Tesla has more vehicles on the road. Then, collecting this data, then all of the companies combined. I think maybe even an order of magnitude.

So, I think we might -- we might have 90% of all or a very big number. So, you know, the success in AI endeavors is a function of talent, you -- sort of unique data and computing resources. And we have outstanding capabilities in all three arenas. And really, just don't know how anyone could do what we're doing, even if they had our software and had our computer, if they did not have the the training data.

So, speaking of which, our Dojo training computer is designed to significantly reduce the cost of neural net training. It is designed to -- it's somewhat optimized for the kind of training that we need, which is a video training. So, you know, we just see that the need for neural net training, talking about quasi-infinite things is -- is just enormous. So, I think having -- having -- we expect to use both Nvidia and Dojo to be clear.

But this -- there's -- we just see a demand for really vast training resources. And we think we may reach in-house neural net -- neural net training capability of 100 exo FLOPs by the end of next year. So, to date, over 300 million miles have been driven using FSD Beta. That 300-million-mile number is going to seem very small, very quickly.

Will very -- it'll soon be billions of miles and tens of billions of miles. And FSD will go from being -- from being as good as a human to then being vastly better than a human. We see a clear path to full self-driving being 10 times safer than the average human driver. So -- and between Autopilot, Dojo computer, our inference hardware in the car, which we call sort of hardware 3, 4, you know, but it's really dedicated.

It's a -- it's a high-efficiency inference computer that's in the car. And our Optimus robot, Tesla is clearly at the cutting edge of AI with that robot. With regard to self-drive, we continue to build release candidates of the Cybertruck on our final production line in Austin. I'm actually here in Austin at the Gigafactory.

This is the first truck that we're aware of that will have four doors over a six-foot bed and fit into a 20-foot garage. So, it's a -- it's sort of biggish on the outside, but it's even bigger on the inside. So, it's a -- that's a -- one of the elements of good design is it should feel bigger on the inside than it looks on the outside. And this is -- this is no small car.

But we -- we've -- we really cared about the exterior dimensions of the Cybertruck down to the last millimeter. So, it's just what you're trying to get right in the middle of the Goldilocks zone, not too big, not too small, and then really maximize the -- the utility of the volume. And we can't wait to start delivering it later this year. Some -- some other highlights.

Our global supercharging network now stands at over 50,000 -- roughly 50,000 connectors and over 5,000 locations. As I think a lot of people are aware, the Tesla starting -- the Tesla charging standard, which we made open source, and it's now called the North American Charging Standard. We're -- we're deeply honored that Ford, GM, Mercedes, and many other OEMs have signed up to use our connector and gain access to our charging network. We strongly believe in helping other car companies to accelerate the EV revolution and just trying to do the right thing in general.

So, that's a goal there. Then something I think I want to emphasize, like, very strongly, this is a very important point, is that Tesla, just as with the North American Charging Standard, although we're not licensed in that case -- not licensing it, we're just making it available, but -- but we are very open to licensing our full self-driving software and hardware to other car companies. And we are already in discussions with -- early discussions with a major OEM about using the Tesla FSD. So, we're not trying to keep this to ourselves.

We're more than happy to -- to license it to others. And lastly, the -- our new lithium refinery and cathode facility are progressing well. Then in conclusion, we continue to focus on making as many cars as we can while maintaining healthy financials. Our artificial intelligence development is obviously entering a new era, and we're incredibly excited about what's to come.

Our other businesses such as Megapack, supercharging service, and whatnot, all started to become a meaningful contributor to overall profitability this quarter. And then, lastly, I'd just like to profusely thank all of our employees who are making a lot of extra effort during uncertain times. Thank you very much for your hard work and the impact you're making.

Martin Viecha

Thank you very much, Elon. And I think Zach has some opening remarks as well.

Zachary Kirkhorn -- Chief Financial Officer

Yeah, thanks, Martin. As Elon mentioned, Q2 was another record quarter of production and deliveries, as well as records and profit for energy and services and other businesses. Congratulations again to the Tesla team on the continued progress as we navigate through a period of economic uncertainty, rising interest rates, volatility in consumer confidence, and regulatory change. And I want to comment on our financial approach.

First, the single most important priority is to ensure we are continuing to invest heavily in the core technologies that will drive the long-term value of the business. This include increasing spending on AI-related technologies such as full self-driving Optimus and Dojo, as well as new products such as Cybertruck, our next-generation platform in the semi, as evidenced by the continued growth in our R&D spend. This also includes continuing our investments in capacity expansion, not only in our vehicle factories but also our supercharging network service, internal applications, and battery processes as we continue with meaningful capital expenditures to lay this foundation for the future. Second, we continue to work toward our goals of maximizing volumes on both our vehicle and energy business, but most importantly, doing so in a way that generates the capital to continue our pace of R&D and capital investments.

This requires a strong focus on per-unit COGS reductions in each of our key businesses, as well as working capital improvements on raw materials, work-in-process inventory, and customer AR, all of which progressed appropriately in Q2. If we look specifically at our automotive business, our gross margin showed a modest reduction and remain healthy despite action taken to further improve vehicle affordability early in the quarter. We recognized -- we realized per unit cost improvements in nearly every category, including material cost and commodities, manufacturing costs, and logistics, while also continuing to rapidly increase the build rate in our Austin and Berlin factories. For our energy business, we improved margins and gross profit driven by cost reductions in deal economics, particularly with Megapack.

As a reminder, storage volumes are typically volatile sequentially based on the types of projects and their specific revenue recognition milestones. As we look forward to the rest of the year, I want to reiterate Elon's comments on Q3 volumes driven by planned downtimes for factory upgrades. These upgrades will also carry some amount of factory idle cost. However, we are working to minimize as much as possible.

It's also important to keep in mind the uncertainty in the macro environment, which can impact our execution positively or negatively in the near term. Regardless, we continue to remain dynamic with a focus on fundamental efficiency and a long-term outlook. Congratulations again to everybody on a great quarter.

Martin Viecha

Thank you very much, Zach. And let's go to the investor questions. The first -- the first question on licensing we've already answered. So, let's go through the second one.

The second question is, "What is the status of 4680 cells? How far are you from the specs you laid out on Battery Day? When do you expect to achieve what you laid out on Battery Day?"

Unknown speaker

Yeah. First, I'll just start with a little bit of a production update. So, in Texas, 4680 cell production increased 80% Q2 over Q1, and the team surpassed 10 million production cells produced here in Texas. So, congrats to the team for that.

Their focus on yield reduced our scrap bill by 40% quarter over quarter, and that resulted in a 25% reduction in cell COGS. Here in Texas, we're preparing to launch our Cybertruck cell, which is 10% higher energy density than current production. That was accomplished through process and mechanical design optimization. As we scale cyber cell production through the end of the year and early next, we should be in a comfortable place on cost per cell.

Against our battery energy density targets, the cyber cell is at our expectations on a like-for-like electrochemistry basis, where we're yet to integrate silicon or in-house cathode production, both reviewed on Battery Day, which do bring significant further energy density and cost improvements. But that is a topic for another day. Lastly, it is important to remember that most of what we focused on at Battery Day was the Tesla-engineered 4680 production system and the improvements we strove to achieve on equipment, factory density, capital cost, and utility cost reduction, all of which we are realizing in our Texas scale up to date.

Martin Viecha

Thank you very much. The next question is, "Can you talk more to the upcoming Tesla energy products and how your thinking has evolved on the revenue model? Given Tesla's AI capabilities, how do you see the long-term mix between hardware margin and recurring software margin from Autobidder as the segment accelerates?"

Unknown speaker

OK, we can't comment on future product road map, but I can provide a quick energy Q2 update. Megapack continues to show strong demand globally, with Lathrop ramping successfully to meet our contracted projects in 2023. As stated last quarter, Megapack margins are in a reasonable place in line with our target market -- vehicle target margins. The second final assembly line at Lathrop is progressing on schedule, eventually doubling Lathrop capacity ahead of our full factory ramp in 2024.

We have several exciting large projects and construction are nearing completion, including the KES project in Hawaii, the Riverina project in Australia, several projects in California, and one here at Gigafactory, Texas that I toured today, actually. We want to thank our customers, utilities, and grid operators for trusting us with these projects. On the Autobidder question, we continue to grow Autobidder contracts in wholesale markets like Australia, Texas, U.K., and California with over six gigawatt hours under Tesla's dispatch next year. In the U.K., our projects perform best in the industry in Q2.

Autobidder does have software margins and is an enabler for hardware sales, but it's a relatively small contributor to revenues. Given how much deployment growth on the Megapack hardware side is occurring, it's important to remember that these large project -- these large capital projects have lifetimes of 20 years of recurring revenues on an annualized basis, relative to upfront capex are small. On the residential side, we have some fun things happening. We recently surpassed a half million Powerwalls installed.

Just this week, we are launching Charge on Solar, which allows Tesla Powerwall and vehicle customers to charge their vehicles using their excess solar and drive only on the sunshine that hits their roof. Yesterday, we began paying customers in Texas for participating in our Virtual Power Plant to provide grid support to ERCOT. We expect these credits to lower our median customer's annual bill by a third and to increase these credits over time as ERCOT expands market access. And today, we are expanding Tesla electric enrollment to new Model 3 owners in Texas, followed by all Texas vehicle customers over the rest of the quarter.

Unfortunately, and somewhat similar to Tesla Insurance, bringing Tesla electric and BPP capabilities to our customers requires working through a fractured regulatory environment on a jurisdiction-by-jurisdiction basis. In the long run, the value of residential energy, software, and hardware will be driven by the level of market access that utilities, market operators, and regulators permit. Our Powerwall is eligible to provide the full stack of energy services like peak -- peaker capacity and system offerings. Such as in Australia, we can more than double the value of ownership relative to a typical system today.

Martin Viecha

Thank you very much. The next question is, "Could you quantify the benefits to COGS per unit from the IRA battery manufacturing incentives, and secondly, battery raw material declines year to date?"

Zachary Kirkhorn -- Chief Financial Officer

All right. I can take that. On the first part of the question for IRA manufacturing incentives, we provided previous guidance that we expect these to be, for the course of this year, in the range of 150 million to 250 million per quarter. We are staying within that boundary as we guided previously.

So, that was the case in Q2 as well. I will note, I think we've mentioned this before, that this includes a 50-50 sharing of credits for qualified cells from our long-term battery partner, Panasonic. On the commodities side, we are continuing to see improvements there, as we've discussed previously. Lithium is the most notable improvement so far, I think commented on this on the last call, because typically, we see this coming about a quarter before it actually is realized in our financials.

And also, just as a reminder, we're not fully exposed to the price of lithium. Our supply chain team has done a terrific job in partnership with another a bunch of other companies to put in place some long-term agreements here. But we do have some exposure that moves up and down. We're also seeing benefits in aluminum and steel, which I think is great, not as large as the lithium impacts, but they contribute nonetheless.

So, if we add up the total impact of this in Q2 relative to prior quarter, it's about the same size and magnitude as the IRA benefits that we also received. You know, just to put this in context, as you look at COGS per unit sequentially from Q1 to Q2, I think there's two things to keep in mind there. The first is that our S/X mix in -- for deliveries increased quite a bit from Q1 to Q2. So, as you think about fundamental cost reductions, it's important to adjust for that.

And then. secondly, you know, as we continue to work on reducing our Austin and Berlin costs, which we did quite a bit of that from Q1 to Q2, you know, these factories are still a slightly above model production costs elsewhere. And in the quarter, our mix of Austin and Berlin-related builds increased. And so, that's something to consider as you model out the impact from Q1 to Q2 in terms of COGS per unit.

I do want to ask Karan if there's anything else on the commodity side or just more generally you want to add here.

Unknown speaker

Yeah. As you mentioned, Zach, we've naturally been a little bit hedged from the lithium position because of the long-term contracts we have in place, but we have seen reduction in pricing across the board for all commodities that specifically go into batteries such as nickel, cobalt, and graphite. And the reductions in pricing translate into thousands of dollars when you look at it from a per vehicle impact. We're taking advantage to extend some of those fixed price contracts through the end of the decade.

So, it's a playbook that we'll continue to kind of go back to as we look to the future.

Martin Viecha

Thank you. The next question on FSD, "Have you considered allowing FSD transferability as a lever to allow existing customers to upgrade to a new Tesla instead of being locked into an existing car due to the price of FSD?"

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, this is a question we get asked a lot. So, we're excited to announce that, for Q3, we will be allowing transfer of FSD. This is a one-time amnesty, so it needs to be -- you need to take advantage of it in Q3, but -- or at least place the order in Q3 within -- within reasonable delivery time frames. So, yeah, yeah, yeah, hope this makes people happy.

But want to -- I mean, this is a one-time thing, OK?

Martin Viecha

All right. The next question, "When will you -- when will you give more information about the Cybertruck orders, estimated delivery schedules, pricing, and specifications?"

Elon Musk -- Chief Executive Officer and Product Architect

Demand is so -- so far, off the hook, you can't even see the hook. So, that's really not an issue. I do want to emphasize that the Cybertruck has a lot of new technology in it. Like a lot.

It doesn't look like -- it doesn't look like, you know, any other vehicle because it is not like any other vehicle. So -- and the production ramp will move as fast as the slowest and least likely elements of the -- of the entire supply chain and -- and internal production. So, you know, I wouldn't expect, you know -- I hope it's smooth. You know, we're certainly better at production ramps than we -- you know, we've got a lot of experience with the production ramps.

But, you know, our first -- our first order approximation is there's like 10,000 unique parts and processes in -- in a -- you know, in the Cybertruck. And if any one of it'll go as fast as the least lucky, you know, at least well-executed element of the 10,000. So, always very difficult to predict the -- the ramp initially, but I think we'll be making them in high volume next year, and we will be delivering the car this year.

Martin Viecha

Thank you. The next question is, "Critics of giga casting contended that process makes vehicles harder and more costly to repair, essentially pushing costs onto the customer. Could you share some details about the initial repair experience with giga-cast vehicles?"

Elon Musk -- Chief Executive Officer and Product Architect

That must be why everyone's copying us. Yeah.

Lars Moravy -- Vice President, Vehicle Engineering

Thanks, Elon. This is Lars. That's, like, simply not true. There's a misconception that traditional bodies are easy to repair, but they are made of multiple materials and multiple joining methods.

Spot wheels and rivets have to be drilled out. Panels and structural adhesive have to be chiseled out. Dried adhesive has to be removed. Stampings cut, blah blah blah.

Elon Musk -- Chief Executive Officer and Product Architect

It's a crazy patchwork quilt.

Lars Moravy -- Vice President, Vehicle Engineering

Yeah. And so, putting that back together means time and money. Using an example of replacing a rear cast rail on a Model Y, to do that versus like what we replaced it with from the Model 3, it's 10 -- 10 times cheaper and three times faster to do it with the cast rail. My design team works with our collision repair team since we're closed loop on this with insurance.

And we design specific parts that make it easier and faster to repair. We have an incentive to do that because we have our own insurance and our own body shops. We expect that we'll continue to do this and collision repair will continue to become cheaper and faster over time. And we already make this available to all body shops through our Tesla-approved body shop training.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, closing the loop on collision repair and factoring that into design is a big deal. It's crucial.

Lars Moravy -- Vice President, Vehicle Engineering

I don't think anyone else can do it with the ecosystem that we have.

Elon Musk -- Chief Executive Officer and Product Architect

So -- yeah, and we are actually able to change the details of the casting with inserts, and we actually do that all the time. So, because the cast is -- actually wear out and need to be replaced anyway, so we can actually make design changes to the inserts and tweak the castings too. But the cast is basically a cast, a rear body and front body, is lighter; cheaper; better noise, vibration, harshness; much easier to manufacture. And it's better in every way.

And that's why so many other car companies are copying us because probably they don't know this well. They certainly put out a lot of press releases about it. I think it's basically going to be how all cars are made in the future.

Martin Viecha

Thank you. Next question, "How many Optimus bots have been made? And when will they be able to start performing useful tasks?"

Elon Musk -- Chief Executive Officer and Product Architect

Ten million. Yeah, I think -- I think we're around five or six bots. You know, there's -- we're 10, I guess, which ones are which, how many are working in what phase. But it's a -- it's sort of, you know -- yeah, like this there's more -- more every month.

The -- there's a lot of interesting things -- a lot of interesting things about the Optimus bot. We found that there are actually no suppliers that can produce the actuators. There's -- there are no off-the-shelf actuators that work well for a humanoid robot, at any price.

Unknown speaker

Certainly not compelling.

Elon Musk -- Chief Executive Officer and Product Architect

Yes. Not -- it's not a humanoid robot that can do stuff that -- you know, the things that a human can do. So, we've actually had to design our own actuators that integrate the motor, the power electronics, the controller, the sensors. And, really, every one of them is custom design.

So -- and then, of course, we'll be using the same inference hardware as the car. So, you know -- and we are end designing these actuators, designing them for volume production. So, they're not just lighter, tighter, and more capable than any other actuators that -- that we're aware of that exist in the world. These are also actually manufacturable, so we'll be able to make them in volume.

The first Optimus that is -- that will have all of the Tesla-designed actuators, sort of production candidate actuators, integrated and working should be around November-ish. So -- and then, we'll start ramping up after that. You know, in terms of when will it be able to do some useful things, like, we'll first be trying this out in our own factories and just proving out its utility. But I think -- I think we'll be able to have it do something useful in our factories sometime next year.

I would be -- yeah, I'm pretty pretty confident of that. So, yeah. And it's going well. I should say another cool thing about Optimus is that, you know, there's -- just in the U.S.

alone, there are 2 million amputees. And I was just talking to the Neuralink team, and by combining a Neuralink implant and a robotic arm or leg for someone that has had their arms -- like, all arms and legs amputated, we believe we can give you basically a cyborg body that is incredibly capable. Six Million Dollar Man in real life. But no, it won't cost $6 million; $60,000 Man.

This sounds impressive, but it'll actually, you know, so -- so, that actually could be a really -- I think would be incredible to, you know, potentially help millions of people around the world and -- and give them, you know, a robot arm like that is as good maybe long term, better than a biological one.

Martin Viecha

Thank you. The next question is, "How has the ordering take trended relatively to production levels during Q2, and how has it trended in the quarter-to-date period? Conceptually, how does Tesla decide when is it appropriate to reduce prices or add other sales incentives to increase demand?"

Elon Musk -- Chief Executive Officer and Product Architect

Yeah. Guess demand has roughly tracked production. So, which is what we aim for as we look at -- you know, something that we have that really I think no other carmaker has is that we have real-time demand and real-time production. Like, so, seven days a week, you know, I get an email -- auto-generated emails, shows output from all factories and orders globally.

So, it's like a real-time finger on the pulse of Earth, basically. And we, you know -- we just -- we just course according to what the mood of the of the public is, you know. Buying a new car is a -- it's a big decision for vast majority of people. So, you know, anytime there's economic uncertainty, people generally pause on new car buying, at least to see to see what happens.

And, you know -- and then, obviously, another challenge is the -- the interest rate environment. As interest rates rise, the affordability of anything bought with that decreases, so effectively increasing the price of the car. So, when interest rates rise dramatically, we actually have to reduce the price of the car because the -- the interest payments increase the price of the car. So -- and this is at least -- at least up until recently was to believe the sharpest interest rate rise in history.

So, we had to do something about that. And if someone's got a crystal ball for the global economy, I really appreciate it. If I could borrow that crystal ball.

Unknown speaker

[Inaudible]

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, exactly. DM me on Twitter. So, I mean, one day, it seems like the world economy is falling apart, and the next day, everything's fine. I don't know what the hell's going on, I'd be totally frank.

I wish I did. So, I mean, that's why -- that's why I say, like I always, you know -- you know, on Twitter, I posted like, you know, just really advising because, you know, I care a lot about the -- the sort of the small shareholders, especially ones that have stuck with us through -- through thick and thin. I love you, guys. And so, we can't control these macro shocks, you know, or the manic-depressive nature of the stock market.

So, that's why I recommend against margin loans in times that are turbulent. You know, if times are not that turbulent, actually, a margin loan can be a smart move within reason. But -- but we're in, I'll call it, turbulent times. Like, I have very high confidence -- confidence in the long-term value of Tesla.

Like, I see a really -- you know, see a path to a 10x, I mean. But I call it a 5x increase in the value of the company, maybe a 10x. And -- but the -- where things go along the way, the trials and tribulations and the mood of the -- mood of the markets, one cannot predict. And so, you know -- and so, you know, I mean, the old adage of buy and hold is.

right, you know? For investment advice, say, like, identify a company whose products you love, see if they -- you know, does it seem like they'll continue to make good products or great products, buy that stock, and hold it. That's it. You will win. The reason companies exist is to make goods and services.

Ideally, great goods and services. They don't exist for any other reason. They shouldn't. So, that's why you should buy off a company that makes great products and has a great future pipeline.

It's common sense, actually. And -- and then, generally, if you see -- if you have, provided you're confident about what that company's products or services are, when the market panics, buy; and when the market is, you know, overly exuberant, you can sell. I'm not recommending yourself to Tesla, but -- but yeah. Byblos is so high.

You know, Warren Buffett actually, I think, has a saying -- I'm paraphrasing him -- but, you know, a publicly traded company is like -- it's like, imagine you're living in your house and some crazy, manic-depressive guy comes and stands outside your house and yells property prices at you, you know. So, it's a different price every day, but the house is still the same house. So, this is a stock market, you know. Credit that to Warren Buffett.

Martin Viecha

Thank you. Let's go to the next question, "With the emphasis of price cuts to drive volume growth eating into automotive gross margin, can investors expect to see automotive gross margin stabilize or even rise due to efficiencies outpacing the cuts? And if so, when?"

Elon Musk -- Chief Executive Officer and Product Architect

Oh, man. Where's that crystal ball again? If I ma, it's like -- look, the short-term variances in gross margin and profitability really are minor relative to the long-term picture. Autonomy will make all of these numbers look silly. I'd recommend looking at ARK Invest.

I think their analysis is very good. It's the best, you know, I mean -- and generally, frontward. Or, like, if the finance -- smart finance people on Twitter follow their accounts, they're great. So, that's what -- that's -- that's, in my opinion, where you'll get the best -- best info.

So, you know, I strongly believe Tesla is epic long-term investment, and don't sweat it when, you know, things go up and down. In fact, if the market panics, buy; if the market's a little too exuberant, sell at the time. But -- but just generally, I feel confident, you know, we'll deliver over the long term but can't control short term. So -- and the -- Autonomy is really where it's at.

I mean, Zach, what are you...

Zachary Kirkhorn -- Chief Financial Officer

I fully agree with you. I mean, I think the only thing in the short term that matters is -- is what I said in my opening remarks, which is, you know, are we generating enough money to continue to invest. And, you know, the portfolio of products and technologies that the technical teams are investing in right now, this is intense. It's intense in terms of investment.

It's intense in terms of potential.

Elon Musk -- Chief Executive Officer and Product Architect

Frankly, I think it's ridiculous that we have positive free cash flow in a capital-intensive business while investing massive amounts of money in new technology. That is super hard.

Zachary Kirkhorn -- Chief Financial Officer

And vertical integration. It's not even just, like, new products, also.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, we actually make our s---. Yeah, we don't -- yeah. And so as others, but [Inaudible] always cool.

Zachary Kirkhorn -- Chief Financial Officer

And so, at least from my perspective, what matters is continuing to generate the cash to invest. You know, that means continuing to be hyper-focused on near-term cost reduction because everything we do in near-term cost reduction provides capital to reinvest; hyper-focused on working capital management, of which we've made quite a bit of progress there, on the raw materials and web side of that. We've been very focused on accounts receivables as well to ensure that we can continue to reinvest -- reinvest the cash. You know, this is what we're focused on.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah.

Zachary Kirkhorn -- Chief Financial Officer

And -- you know, so, there's, you know, a set of things that we control. You know, we have a pipeline of cost reductions. We are getting tailwinds in the commodity space right now, as Karan mentioned. That's helpful.

Variability around average selling prices, you know, goes back to Elon's point, we don't control interest rates, we don't control macro consumer sentiment, but we have an obligation to be responsive to that, to ensure that we're matching supply and demand and keeping things balanced. And so, this is how we're managing the next handful of quarters. You know, soon enough, these quarters will be behind us. They won't be part of the present value of future cash flows of the business.

And so, we want to make sure we keep that view and make sure that the long term of the business is exactly the way that we want it to be.

Elon Musk -- Chief Executive Officer and Product Architect

It was [Inaudible].

Martin Viecha

All right. Thank you very much. And now let's go to analyst questions. The first question comes from Dan Levy from Barclays.

Dan, feel free to unmute yourself.

Dan Levy -- Barclays -- Analyst

Great. Good evening. Thank you. Wanted to start first with the -- with a question about your efforts in AI and Dojo.

It's pretty clear. It sounds like you're accelerating your focus. Can you maybe provide us with a sense of what the process is of refining the product? Is it more machines? And maybe you could give us a sense of, you know, when the the payout starts to -- when you start to see the payout and what the resource outlay is, you know, what should we expect on the opex front as a result of this.

Elon Musk -- Chief Executive Officer and Product Architect

So, are you saying how much are we going to spend on Dojo or...

Dan Levy -- Barclays -- Analyst

Yeah. Yes.

Elon Musk -- Chief Executive Officer and Product Architect

Well, we're not going to be open loop on our Dojo expenditure, so. But I mean, I think we will be spending, you know, certainly north of a billion over the next year on -- through -- through the end of next year. It's well over $1 billion in Dojo. And, yeah, so, I mean we've -- we've got a truly staggering amount of -- of video data to do training on.

And this is another thing like -- like, in order to copy us, you also need to spend billions of dollars on -- on training compute. I mean, it's like -- and it's also hard to -- you know, you need the data and you need the training computers, like, think -- think, well, things needed to actually achieve this at scale toward generalized solution for Autonomy. It's this -- is -- this is one of the hottest problems ever. You know, you see a lot of AI companies doing, you know, ILMs and -- and whatnot.

And I'm saying if they're so great, why can't they make a self-driving car? Because it's harder. That's why. So -- but I do think -- I think there's some great -- great companies out there. But -- but just fundamentally, the -- the -- the staggering amount of data we've got to process has got to be processed somehow.

And custom silicon is the best way to do that. So, that's what Dojo is designed to do is -- is, you know, optimized for -- for video training. It's not optimized for ILMs. It's optimized for video training.

With the -- with -- with video training, you have a much higher ratio of compute-to-memory bandwidth. So, this, you know -- whereas ILMs tends to be memory bandwidth choked. So, that's that's it, I mean. But like I said, we're also -- we have some -- we're using a lot of Nvidia hardware.

And we continue to, you know -- we'll actually take the Nvidia hardware as fast as in video will deliver it to us. Tremendous, tremendous respect for Jensen and Nvidia. They've done an incredible job. And -- and frankly, I don't know if they could deliver us enough GPUs.

We might not need Dojo, but they can't. So, they got so many customers. They've been kind enough to, you know, nonetheless prioritize some of our GPU orders. But yeah, that the sheer magnitude of video training -- because like I said, we're not trying to just get as good as a human.

We want to get to, you know, 10 times better than humans, maybe 100 times better than human. Right now, I believe there's something on the order of a million automotive deaths per year. And -- and then if you say permanent serious injuries, I think it's probably closer to 10 million per year. And -- you know, so it matters if you -- if you're, you know -- you're twice as good as -- as human, 10 times -- you know, like, 10 times better than human would still mean 100,000 deaths and a million severe permanent injuries.

So, it's like, OK, well, we'd rather be a hundred times better. So, there's this really -- you know, it's a march of nines, and we want to achieve as perfect a safety as possible. And that's truly mind-boggling amounts of video and computer needed for that. So -- and then, you know, I do think this -- there's other applications for -- for Dojo, but we just desperately need it for video training.

Zachary Kirkhorn -- Chief Financial Officer

Great. Just -- just to add to what Elon mentioned. So, you know, the numbers that he mentioned are, you know, between R&D spend and capital spend. And, you know, this is moving quickly, you know, and so we provide a three-year outlook on our capital expense.

We are considering this -- these expenses in that outlook. And as that moves up and down, we'll continue to update our guidance in the Q.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, I want to say that the -- the fundamental rate limiter on the progress of full self-driving is training. But that's -- if we had more training compute, we would get it done faster. So, that's -- that's it.

Zachary Kirkhorn -- Chief Financial Officer

And it's just difficult to predict how quickly we can execute on it.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah.

Dan Levy -- Barclays -- Analyst

Great. Thank you. Just as -- as a follow-up, I recognize, you know, there's some incredible macro uncertainty right now, but you're sticking with your near-term, your volume target, 50% CAGR. As we just think about sort of in the -- in the year ahead, you know, Cybertruck is going to be some contribution.

You know, there's going to be some help from further EV penetration growth. But to what extent are you willing to sacrifice on pricing to keep that 50% volume CAGR intact? Or, you know, are you thinking differently about margins versus your prior commentary of willing to sacrifice on margins to get more share?

Elon Musk -- Chief Executive Officer and Product Architect

It's not about getting more share. It's just that you can think of every car that we -- that we sell or produce that -- that -- that has a full Autonomy capability as actually something that, in the future, may be worth as much as five times what it is today. Because, you know, your average passenger -- passenger vehicle is doing, like, maybe 10 hours of driving a week, you know? It's sort of if it's 1.5 hours a day on average, that's 10 hours a week-ish. If you've got an autonomous -- if that vehicle is able to operate autonomously and -- and use -- be used in either dedicated or autonomous or partially autonomous like -- like, Airbnb, like maybe sometimes you allow your car to be used by others, sometimes you want to use it exclusively, just like, you know, Airbnb, you know, doing Airbnb with a room in your house.

You know, the value is just tremendous. So, I think it's sort of it would be -- I think it -- it does make sense to sacrifice margins in favor of making more vehicles because we think, in the not too distant future, they will have a dramatic valuation increase. I think the Tesla fleet value increase to the point at which we can upload full self -- you know, full self-driving and it's approved by regulators, will be the single biggest step change in asset value maybe in history.

Martin Viecha

Thank you. Let's go to the next analyst. The question comes from Emmanuel Rosner from Deutsche Bank.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Thank you very much. Two questions for me as well. First, following up on -- on the Autonomy. So, you know, before you start launching these dedicated robotaxi vehicles on existing vehicles, you're improving FSD, you know, incrementally.

What is your latest timing to essentially release a non-beta version or an eyes-off version that would trigger much higher take rates? And would Tesla benefit from lowering the price of FSD?

Elon Musk -- Chief Executive Officer and Product Architect

Well, obviously, you know -- you know, as people have sort of made fun of me and perhaps, you know, quite fairly have made fun of me, my predictions about achieving a full self-driving have been optimistic in the past. And the reason I've been optimistic is what it tends to look like is the -- we'll make rapid progress with the new version of -- of FSD. But -- but then, it will curve over logarithmically. So -- so, at first, like, a logarithmic curve looks like, you know, just sort of fairly straight upward line, diagonally up.

And so, if you extrapolate that, then you -- you have a great thing. But then because it's actually logarithmic, it curves over. And then, there have been a series of logarithmic curves. Now, I know I'm the boy who cried FSD, but man, I think -- I think we'll be better than human by the end of this year.

That's not to say we're approved by regulators. And I'm saying -- and that would be in the U.S. because we've got to focus on one market first. I think we'll be better than human by the end of this year.

I've been wrong in the past. I may be wrong this time. And the price of FSD -- so, the weird thing is the price of FSD is actually very low. It's not high.

When you go back to what a singular -- the value of the car increases dramatically if it is actually autonomous. You know, $15,000 is actually a low price, not a high price. And now, we will offer -- you know, we think we do sort of offer as a sort of monthly subscription, although most people don't know that. So, I'd recommend, like, maybe trying it out as a monthly subscription so you don't have to go with the $15,000 thing.

But I think, yeah, yeah, the -- obviously, if the car is worth several times its original price, $15,000 is actually a low price for FSD.

Martin Viecha

Thank you. And the next question comes from William Stein from Truist. William, go ahead and unmute.

William Stein -- Truist Securities -- Analyst

Great. Thank you very much for taking my question. I'd like to ask about the -- stick on this AI topic. We've read, you know, with great interest the developments in Dojo today, and you've spoken about FSD.

But you've also -- Elon, you've started this x.ai company. And, you know, for investors that think that there might be quite a bit of value in the AI features and products of Tesla, it might be concerning to see you, you know, pursuing another endeavor where AI is the focus. So, can you talk about how x.ai might overlap, might perhaps compete with Tesla, or in other ways, perhaps it enhances the value of what Tesla does? Thanks very much.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, I think we'll actually enhance the -- the value of Tesla. There -- there really were just some -- some of the world's best AI engineers and scientists that were willing to join a start-up, but they were not willing to join a large sort of relatively established company like -- like Tesla. So, I was like, that's actually how it got started. I was interviewing a few people, and they're like, "No, we want to do a start-up." I was like -- and that's all.

I can't convince them to join Tesla. So -- so, I was like, "OK, well, you know, better to start up that -- that run than they go work somewhere else." That's kind of the genesis of xAI. And xAI is -- is focused on sort of AGI, yeah. So, it's -- but like I said, I think there will be some value that xAI brings to Tesla.

You know, also some of the best -- some of the very best people in the world. hey really want to work on interesting problems. And if you take, say, you know, our materials science group, you know, really what convinced Charlie Kuehmann to leave Apple, where he was very happy and well-compensated, and both at -- and built the -- what we think is the best materials science group in the world was that he got to work at both Tesla and SpaceX. He -- he wasn't willing to leave Apple if it was just Tesla, but he was willing to do it because it was Tesla and SpaceX.

So, sometimes, you get the best talent in the world. That's the kind of thing, you know, you need to do. And that actually has been very beneficial to Tesla, so.

William Stein -- Truist Securities -- Analyst

You know, if I can squeeze one more mundane question in, I wonder if you think you can hit the 1.8 million unit number with current pricing, or do you anticipate needing to continue to lower prices because it seems like they've stabilized. The trends have stabilized in the last maybe month and a half. Should we expect a -- a sort of continued decreases or more stabilization for the rest of the year?

Elon Musk -- Chief Executive Officer and Product Architect

Sure. You know, we have a -- sort of restarted the referral -- referral program, which I think will be quite effective. But, you know, as -- as Zach was saying earlier, we don't control the macroeconomic conditions. So, if interest rates continue to rise, that reduces the affordability of cars, you know.

And for a lot of people, they really try to balance it, just, you know, barely breaking even every month. In fact, if you look at the rise of credit card debt, they are, in fact, not breaking even every month, like credit card debt is -- is looking kind of scary. So, you know, we're like -- we're just don't control the macro conditions. If macro conditions are stable, I think prices will be stable.

And if they're not stable, then, you know, we would have to lower prices, yeah.

Martin Viecha

Thank you. Let's go to Colin Rusch from Oppenheimer.

Colin Rusch -- Oppenheimer and Company -- Analyst

Thanks so much, guys. You know, as you're building out Dojo and implementing what surely is going to be a highly complex set of software, can you speak to the maturity of the operating system and how much soft -- outsourced software you're expecting to use in that system?

Elon Musk -- Chief Executive Officer and Product Architect

This is a custom software stack, so -- but it is designed such that you can run at the -- at a high-level PyTorch and Jax. So, but then, we have to customize it to actually run on, like, custom silicon. So, the software stack is a combination of open-source software and then -- and that tells the software all the way to the bare silicon, which is the case for the inference computer in the car, so.

Colin Rusch -- Oppenheimer and Company -- Analyst

OK. Thank you so much. That's super helpful. And then, can you speak to how you're managing some of the geopolitical risks relative to your capacity expansion? You know, obviously, as you guys continue to grow at this rate, you're going to be putting some folks out of business, and there's going to be some impacts around regional economies.

So, just want to understand how you're thinking about that in terms of some of your capex plans and how you're managing some of those relationships with -- with different countries and regions.

Elon Musk -- Chief Executive Officer and Product Architect

Well, you know, this is a period of unusual geopolitical risk. So, I think we're -- the best we can do is, you know, have factories in many parts of the world such that if things get difficult in one part of the world, we -- you know, we can still keep -- keep things going in the rest of the world.

Martin Viecha

Thank you. The next question comes from Mark Delaney from Goldman Sachs.

Mark Delaney -- Goldman Sachs -- Analyst

Thank you very much for taking the question. Tesla has been making progress reducing costs and did so again last quarter. Can you give an update on when you think automotive COGS per vehicle could be under the historical $36,000 per vehicle level? And what are the key puts and takes to get there?

Zachary Kirkhorn -- Chief Financial Officer

This is -- I think I was asked this in the past. This is very difficult to forecast. You know, there's a series of costs that we manage, the series of costs in which we don't control. And so, you know, particularly, on the commodity side where labor costs go, etc., it's just hard to say.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, we saw very inflationary pressures -- like, strong inflationary pressures for a while last year. And now, we're -- which obviously makes it very difficult to reduce COGS. And, you know, now we're seeing what seemed to be deflationary pressures. Certainly, deflationary deflation is a pressure, but we're seeing, you know, commodity prices drop -- dropping as -- as was mentioned -- you know, as Karan mentioned a moment ago.

And I mean, what do you think? I mean, basically, the trends seem to be deflationary at the commodity level.

Unknown speaker

Definitely, there's that. And then, there's also the unit economics improve as volumes grow. That's the other thing we're seeing. As we're becoming a bigger and bigger part of a lot of suppliers, economies of scale come into play.

There's equipment depreciation that comes into play, equipment that was commissioned five to seven years ago that used to be a part of the piece price that's completely amortized. So, we'll see situations where piece price comes down because that equipment contribution has gone away. And then, just we continue to have this mentality of continuous improvement in terms of labor, reducing labor, improving automation, and just continue to get better at what we do. So, we have seen -- I think, every quarter, we have seen an improvement.

Of course, the commodities spiked up and down just in general.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah.

Unknown speaker

The trend is toward being more efficient.

Zachary Kirkhorn -- Chief Financial Officer

Yeah, and I totally agree.

Elon Musk -- Chief Executive Officer and Product Architect

Lithium prices went absolutely insane there for a while.

Zachary Kirkhorn -- Chief Financial Officer

Yeah, And they're recovering now.

Unknown speaker

Cobalt was a third of what it used to be.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah.

Zachary Kirkhorn -- Chief Financial Officer

And, you know, we're still early in the ramps -- and, well, not early in the ramp, but early in the cost-down curve of Austin and Berlin.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah.

Zachary Kirkhorn -- Chief Financial Officer

So, it takes time to work the cost out at first. It's a focus on ramp, ramp that brings costs up.

Elon Musk -- Chief Executive Officer and Product Architect

And then the quality -- yeah, the quality costs.

Zachary Kirkhorn -- Chief Financial Officer

And then, once that stabilizes, we can divert bandwidth to cost reduction. And so, Austin and Berlin saw quite a decent amount of cost reduction, on a fundamental basis, from Q1 to Q2. We'll continue to do that work. That will be helpful.

And so, we're just going to keep chipping away at it.

Unknown speaker

[Inaudible] pack is a big -- big element to that.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, logistics too.

Zachary Kirkhorn -- Chief Financial Officer

Logistics is normalizing, which is great.

Unknown speaker

The Q-Bot utilization is something that the team has been very focused on. So, every bit of it.

Zachary Kirkhorn -- Chief Financial Officer

Yeah, it's hard.

Elon Musk -- Chief Executive Officer and Product Architect

Logistics is underappreciated. You know, as the old saying goes like, you know, the guys who won with tactics was the one with logistics.

Unknown speaker

Yeah. And we made tremendous improvements in costs in all fronts on, you know, X Y costs. We have down -- down pre-pandemic cost X Y levels now. And our goal is to go further down.

Zachary Kirkhorn -- Chief Financial Officer

So, yeah. So, when we look at our progress from Q1 to Q2 on cost, the way that we look at internally, normalized for the impacts of mix shift with Austin and Berlin being a higher percentage of our mix, normalized for S and X being a higher percentage of our mix in Q2 versus Q1, the sequential cost reduction, it might be the largest we've had in a while. So, anything is -- it's great work on behalf of the Tesla team, and we just got to keep it up.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, it's a game of pennies. It's like Game of Thrones for pennies.

Martin Viecha

Mark, do you have a follow-up question? I think you're muted.

Mark Delaney -- Goldman Sachs -- Analyst

Yep. Yeah. Thank you very much for all the details on that. You know, maybe you could put a finer point on the downtime impact that you both -- you spoke about in your prepared comments in terms of production impact and then also to what extent there's a margin impact from those factory upgrades that you're planning this quarter.

Thank you.

Zachary Kirkhorn -- Chief Financial Officer

Yeah, the downtime -- you know, we don't know exactly the number of cars impacted because, you know, kind of the way that we go into downtime windows for upgrades is, you know, we set aside a period of time, but then the team is challenged to go as quickly as possible so that we can get the factories up and running again and minimize that. So, it's not -- it's not profound reduction, you know. Hopefully, it's quite small.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, I think we're getting too much into the weeds here. I mean, like we're asking for a level of precision that is not possible to answer. So, let's move on.

Martin Viecha

Yeah, I think this is, unfortunately, all the time we have for today.

Elon Musk -- Chief Executive Officer and Product Architect

OK.

Martin Viecha

So, we'll speak to you all in the next three months. Thank you very much.

Elon Musk -- Chief Executive Officer and Product Architect

Thank you.

Duration: 0 minutes

Call participants:

Martin Viecha

Elon Musk -- Chief Executive Officer and Product Architect

Zachary Kirkhorn -- Chief Financial Officer

Unknown speaker

Lars Moravy -- Vice President, Vehicle Engineering

Dan Levy -- Barclays -- Analyst

Emmanuel Rosner -- Deutsche Bank -- Analyst

William Stein -- Truist Securities -- Analyst

Colin Rusch -- Oppenheimer and Company -- Analyst

Mark Delaney -- Goldman Sachs -- Analyst

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