Earlier this week, Tesla held its quarterly investor webcast after announcing earlier in the month 2021 second-quarter production and delivery of a record 200,000 vehicles. Model 3 and Y accounted for 199,360 of the deliveries, with the Model S/X at just 1890 as production ramps up for the new versions, starting with the Model S.
In the second quarter, the company exceeded $1 billion of GAAP (Generally Accepted Accounting Principles) net income for the first time in its history. Specifically, it had $1.3 billion GAAP operating income, $1.1 billion GAAP net income, 11.0% operating margin, and a 28.4% GAAP Automotive gross margin.
“Q2 was a great quarter for the Tesla team, with strong improvement across the business,” said Zach Kirkhorn, CFO. “In particular, auto gross profit and margin, excluding credits, increased substantially. This was primarily driven by better cost optimization across our factories, good execution against our cost reduction plans, as well as increases in production and delivery volume.”
Semiconductor supply issues
These numbers come despite the challenges of supply-chain constraints on production due in some part to port congestion but mostly the global semiconductor shortage.
The chip supply was the governing factor on Tesla’s output, said Elon Musk, CEO. “The output that we did achieve was only due to an immense effort from people within Tesla. It was an incredibly intense effort of finding new chips, writing new firmware, integrating with the vehicle, and testing in order to maintain production.”
The company’s vehicle software team had to react quickly and mitigate disruptions to manufacturing caused by semiconductor shortages. Electrical and firmware engineers have had to design, develop, and validate 19 new variants of controllers in response.
For example, a big struggle in the quarter was getting chips for the module that controls the airbags and seat belts, said Musk: “Obviously you cannot ship a car without those, and that limited our production severely worldwide in Shanghai and Fremont.”
Despite the chip issue, the quarter also saw launches of the updated Model S, the FSD (Full Self Driving) subscription, and Tesla Vision, which relies mostly on cameras and ditches radar.
Production capacities
Tesla says that global demand continues to be robust, and it is producing at the limits of available parts supply.
In the U.S., it expects the production ramp of Model S will continue to increase throughout the rest of the year. Given the strong U.S. demand, a majority of Model 3/Y production was delivered in North America. Buildout of Gigafactory Texas in Austin continued to progress in Q2, with commissioning having begun in some areas of the factory.
While the company experienced minor interruptions due to the supply-chain challenges and factory upgrades, production in Shanghai remained strong. Due to strong U.S. demand and global average cost optimization, the company completed the transition of Gigafactory Shanghai as the primary vehicle export hub.
Tesla’s European demand remains well above supply, resulting in growing wait times for delivery. The company continues installing equipment, has begun testing tools, and is working as quickly as possible toward starting production in Gigafactory Berlin, while growing import volumes in the interim.
In California, installed annual capacity for Model S and Model X is 100,000, for Model 3 and Model Y 500,000. In Shanghai, capacity for Model 3 and Model Y is now at over 450,000 units.
Berlin and Texas
More Model Y production awaits final facility construction at both Berlin and Texas Gigafactories.
“We expect to be producing [a] new design of the Model Y in both factories in limited production later this year,” said Musk.
While the new Model Y will look much like the existing model, there will be substantial improvements under the skin, aiding manufacturability. The front will adopt the cast body structure similar in concept to the rear body’s.
Tesla is also aiming to include a structural pack with 4680 battery cells for mass and cost reductions. However, if the new pack and cells are not ready, it has backup plans with a non-structural pack and 2170 batteries.
“We obviously want to be using 4680s and the structural pack,” said Musk. “From a physical standpoint, this is the best architecture, and from an economic standpoint it is the lowest cost way to go. But, there’s a lot of new technology there, so it is difficult to predict with precision when it does work and reach scale production.”
Cybertruck production will follow the Model Y in Texas. Tesla has finished the basic engineering architecture of the truck, and it is currently in its alpha stages, according to Lars Moravy, Vice President, Vehicle Engineering.
“With Cybertruck, we’re redefining how the vehicle is being made,” said Moravy. “It carries much of the structural pack and large casting designs of the Model Y being built in Berlin and Austin. Obviously, those take priority over the Cybertruck, but we are moving into the beta phases of Cybertruck later this year, and we’ll be looking to ramp that in production in Giga Texas after Model Y is up and going.”
Vision and FSD
After selling over a million vehicles equipped with radar for its Autopilot and FSD systems, Tesla says it has collected enough data to start removing the sensor in some regions. The removal of radar, enabled by the collection of a vast dataset of corner cases, allows developers to focus on vision and increase the pace of its improvement.
Tesla Vision was enabled by the company’s ability to use data from over a million Tesla vehicles to source a large, diverse, and accurate dataset.
Building on Tesla Vision, achieving full autonomy is a difficult engineering challenge, but the company continues to believe it can be solved through the collection of large, real-world datasets and cutting-edge AI. Its first customers downloaded FSD V9 Beta in July, and the company says it has prompted strong positive feedback from current users.
Tesla expects FSD subscriptions to build slowly but then gather a lot of momentum over time.
“Obviously, we need to have the full self-driving build widely available for it really to take off at a high rate,” said Musk. “I think the FSD subscription will be a significant factor probably next year.”
4680 cell progress
At the company’s Kato facility in California, battery and powertrain developers have successfully validated the performance and lifetime of the new 4680 battery cells, and they are nearing the end of reliability and manufacturing validation.
“We’re continuing ongoing verification of reliability,” said Drew Baglino, SVP, Powertrain and Energy Engineering. “We’re actually accruing over 1 million equivalent miles on our cells that we produce every month in our testing activities. The focus on that is very clear; we want high-quality cells for all of our customers.”
In addition, internal crash testing of the structural pack architecture with a single-piece front casting is said to have been successful.
“There is a tremendous amount of innovation that we’re packing into the 4680 cells,” said Musk. The technology represents “half a dozen major improvements and dozens of small improvements, but it’s difficult to say when the last of the technical challenges will be solved.”
While substantial progress has been made, there is still some work ahead before the team can achieve volume production. The focus is now on improving the 10% of manufacturing processes that currently bottleneck production output.
One of those challenges is with cathode calendaring, “basically squashing the cathode material to a particular height,” said Musk. The cathode material “goes through these rollers and gets squashed like pizza dough, but very hard pizza dough, and it’s denting the calendar rolls. This is not something that happened when the calendar rolls were smaller, but it is happening when the calendar rolls were bigger. We weren’t expecting that.”
However, Tesla battery developers are confident they can quickly overcome the challenge.
“It’s not a science problem, it’s an engineering problem,” added Baglino. “It’s not a question of if, it’s a question of when” this problem will be solved. “The team is 100% focused on resolving the limiting processes as quickly as possible.”
Ramping cell capacity
Meanwhile, Tesla has a massive amount of equipment on order and arriving for high-volume 4680 cell-production in Austin and Berlin. With what engineers have learned at the pilot plant in Fremont, they will have to modify that production equipment. The end goal is an annualized production rate of 100 GWh a year.
“We’ll have all the equipment installed to accomplish 100 GWh, and it’s possible by the end of the year we will be at that annualized rate,” said Baglino.
Concerns over bottlenecks to sales and growth are what’s driving the need for more battery manufacturing. This demand will come not only from more Model Y production, but also demand from Cybertruck and Semi, both heavy users of cell capacity.
“Our target is to grow cell supply ahead of the 50% year-on-year growth targets of the vehicle business and also enable increased energy storage deployments,” said Baglino.
Even without Tesla cell production, the company says its suppliers will be able to deliver about twice as much cell output next year as this year.
“The contracts that we have with cell suppliers call for roughly a doubling or so of cell supply to Tesla in 2022,” said Musk.
The company expects to overshoot on cell supply for vehicles then juggle that capacity between vehicle and stationary applications. When it has excess cell supply for vehicles, it will rout output to Megapack and Powerwall stationary applications.
“By the same token, if we’re prioritizing vehicle production [and] there’s a shortage of cell output for some reason, then we will throttle down Megapack and Powerwall production.”
Outlook
Tesla believes it has sufficient liquidity to fund its ambitious product roadmap and long-term capacity expansion. It expects operating margin will continue to grow over time, continuing to reach industry-leading levels even with the capacity expansion and localization plans underway.
The top priority of the company is building the first Model Y vehicles in Berlin and Austin in 2021. To better focus on these factories, and due to the limited availability of battery cells and global supply-chain challenges, the company has shifted the launch of the Semi heavy-truck program to 2022. Cybertruck is also expected to slip into 2022.
Timing for production of the Roadster and a “Future Product” were not disclosed.
