
Tesla Q2 2019 Letter - quico
https://ir.tesla.com/static-files/1e70a30c-20a7-48b3-a1f6-696a7c517959
======
jtchang
Being able to test your code out in the real world and dark launch a feature
gives Tesla a ridiculous advantage. No other company has the infrastructure to
be able to do that. Plus they can even tell if the decision the neural net
made was wrong because I assume even Tesla knows you got into an accident. And
this over thousands of cars. The speed at which they are collecting data is
unprecedented.

~~~
BoorishBears
I'm so tired of this unapologetic Tesla hand holding.

> No other company has the infrastructure to be able to do that.

Because they don't want it. They don't want AP regressions we've already seen
happen. They don't want engineers testing code out on real people's lives.

You really think other companies just don't know how to send OTA updates to an
ECU or other car components?

I could literally put that together with scraps in my garage, my car's ECU can
be flashed over OBD, it'd be trivial to write firmware for a microcontroller
to repeat a set of OBD commands downloaded from a webserver.

Obviously an auto manufacturer would do more than that, but there is literally
nothing but choice stopping other manufacturers from doing this.

Why is everything Tesla does always suddenly some sort of competitive
advantage. Next people will be saying the fact they have cars that spell out
"S3XY" is a competitive advantage.

~~~
snuze
As someone in the industry (with domain knowledge), I can tell you that you
are oversimplifying the problem and ignoring Tesla’s advantage and leadership
in this space. Other manufacturers have to account for legacy systems/designs,
it is not as trivial as you make it sound.

~~~
BoorishBears
I even _state_ that I'm oversimplifying the problem.

Other manufacturers do have to account for legacy systems, you don't need to
be in the industry to understand the relationships manufacturers have with
companies like Bosch and know they're not in full control of their destiny.

But their advantage is not a "let's ignore dumpster fire financials quarter of
quarter to earn them a multi billion dollar market cap" big.

Tesla is not worth 42B dollars because manufacturers can't figure out OTA
updates, and the fact other manufacturers don't have OTA updates should be a
rounding error when you list advantages that warrant that market cap. It
doesn't take any insider knowledge to know that, just common sense, and for
far too long people have been ignoring that in preference for TSLA hype.

I got out last year during the 420 nonsense so honestly I don't know why I'm
even bothering with all this, the fact anyone needs more than that to see TSLA
is not worth your time is interesting. Anything from that point onward was
just icing on the bear cake for me.

~~~
mavhc
Everyone else not doing updates is the symptom of the larger issue, everyone
else is a slow moving hardware company that outsources their software. Tesla
is a software company first. And software beats hardware whenever you're doing
something complex.

Plus lack of legacy self competition, no one else wants to cannibalise their
other sales, and no one else has really invested in batteries. Most other car
companies can't make enough EV cars to fulfill demand. They're all out of
stock until next year because they make so few of them.

~~~
BoorishBears
Treating safety critical software like a web server is not being fast moving,
it's being reckless.

We've seen regressions in AP behavior.

Situations where a route that was safe yesterday will send your Tesla into a
concrete barrier if you don't catch it

Simply. 100%. Unacceptable.

Honestly, the more I think about it, the more I do not want to be on the road
with these people. I did not sign away my life to be someone's SDC test
environment after all.

~~~
mavhc
Are you referring to
[https://www.reddit.com/r/teslamotors/comments/b36x27/its_bac...](https://www.reddit.com/r/teslamotors/comments/b36x27/its_back_after_6_months_of_working_fine_2019515/)
?

Not good, and they fixed it again.

They should probably put a warning like: Warning: Autosteer is intended for
use only on highways and limited-access roads with a fully attentive driver.
When using Autosteer, hold the steering wheel and be mindful of road
conditions and surrounding traffic. Do not use Autosteer on city streets, in
construction zones, or in areas where bicyclists or pedestrians may be
present. Never depend on Autosteer to determine an appropriate driving path.
Always be prepared to take immediate action. Failure to follow these
instructions could cause damage, serious injury or death.

------
flyGuyOnTheSly
Judging by the nosedive that the stock price is taking in after hours trading
(down over 12% from $264.88 at close an hour ago to $236 right now), the
outlook of this letter isn't great.

~~~
kenhwang
They missed market expectations. They lost 6x more money (-$2.31/share vs
expected -$0.35/share) and sold less cars ($6.3b sales vs $6.5b expected) than
the market wanted with more capex to come (China Gigafactory, Model Y).

~~~
gordon_freeman
Not sure how does the CapEx gets allocated for the projects that are already
progressing. For example: Tesla started building GF2 in China a few months ago
so any idea in which Quarter(s) Tesla account for the CapEx? Is it before the
project starts or at the end or every month gets even distribution of CapEx
allocation from Start until End of the project.

~~~
toomuchtodo
China GF is GF3. GF2 is in Buffalo, NY (old SolarCity facility, which also
manufactures Supercharger station hardware).

I can't speak to how GF3 capex is being accounted for, but competition was
fierce to provide financing to Tesla [1]. China pulled out all of the stops
not just for permitting and financing, but also construction (GF3 is already
having Model 3 production line equipment installed, after breaking ground in
January [2]). In less than a year, it will go from vacant land to producing
Model 3s.

[1] [https://www.teslarati.com/tesla-gigafactory-3-funding-
chines...](https://www.teslarati.com/tesla-gigafactory-3-funding-chinese-
banks-model-3-production-insider/)

[2]
[https://www.youtube.com/watch?v=XI6nJOic4BM](https://www.youtube.com/watch?v=XI6nJOic4BM)
(June 22 2019) Tesla Gigafactory 3 in Shanghai China Update

~~~
navigatesol
Linking to a Teslarati article, that's a laugh.

When will you realize that this company makes things up at every turn? They
are cutting capex, again. They are slashing prices on cars with "unlimited
demand". Let's see in a year how it's going,and what excuse you and they will
have.

~~~
toomuchtodo
Is that Youtube video fake? The ~90k vehicles Tesla sold this quarter? "Fake
news"? I have no excuses, just proof of hundreds of thousands of Tesla
vehicles on the road, and billions of dollars worth of manufacturing capacity
running.

Come back in a year we shall.

~~~
navigatesol
> _The ~90k vehicles Tesla sold this quarter_

And made less revenue than last quarter. Brilliant.

Is the 1 billion dollars lost this year after saying profits forever fake? The
lawsuits from whistleblowers? Months long waits for parts? The miniscule
growth after slashing prices greatly? The securities violations? Tesla Solar
selling the least it ever has?

I could care less about some factory shell in China. They told you they'd
build 10k a week in Fremont, didn't they? You have rose coloured glasses.

~~~
umeshunni
> And made less revenue than last quarter. Brilliant.

They made $5.3B this quarter and $3.7B last quarter.

Where are you getting your numbers from?

~~~
navigatesol
I meant the last delivery record quarter. Information overload on Tesla ER
day. More cars, less revenue was the point.

Anyway, like the financials matter here. It's all about the next promise.

------
nisten
In 2017 Intel acquired mobileye( the makers of the autopilot radar in the
early Teslas), for 15.3 Billion. That begs the question, if Tesla were to sell
their autopilot system tomorrow, , given it's safety record, amount of
training data, and new FPGA processor IP, how much would it be worth? 15, 20,
40?

This is why I find their delivery numbers completely and utterly irrelevant to
company value. This is a just a technology company that has produced a great
user experience and is now scaling it.

Their main bottleneck is battery production and they're very competitive at
it.

If the bottleneck was auto-manufacturing they would have no trouble raising
enough investment to just buy out a car company.

~~~
reitzensteinm
Tesla has 11bn in debt, alongside other obligations like warranties.

If they can't make the car thing work, and their autopilot tech sells for as
much as mobileye, shareholders are going to be wiped out in the event of
liquidation.

How the cars are selling and what margins they're getting matters a great
deal, even if you believe that the long term value comes from autopilot.

~~~
nisten
Looking at the competition, ford, VW, Mercedes. Their battery production
numbers look pretty mediocre. Also their cars are less and less competitive in
a rising carbon market.

~~~
reitzensteinm
You're making an argument that Tesla is going to sell cars. That's fine.

But previously you said delivery numbers don't matter because autopilot is
valuable. That's what I was responding to and could not be more wrong.

------
boldslogan
anyone care to talk about this part "This feature is currently operating in
“shadow mode” in the fleet, which compares our software algorithm to real-
world driver behavior across tens of millions of instances around the world."

that seems very juicy?

edit: it seems people put a disclaimer on their ownership of tesla stock on hn
about tesla threads. i dont own any.

~~~
leesec
This is a known feature unveiled, I believe, on Tesla's autonomy day. It just
means they're able to test Autopilot on cars even if they aren't running
autopilot.

~~~
boldslogan
neat. I would say im optomistic on this actual self driving stuff. But coming
from almost no machine learning knowledge, doesn't this make tesla way ahead
of google/waymo and others? Because they can simply check when they failed and
tweak.

I'm just curious if it does make them way ahead, and if so how much more
ahead? Is this driving a car vs horse wagon levels?

~~~
Klathmon
I think the real answer is nobody knows.

It's obviously got some benefits, and I think most people in ML would agree
that real world data from the "average person" (as in "not a Dev or paid to do
this") is worlds better than simulations.

Still, "ahead" and "behind" isn't really a thing before you reach the finish
line here. Many think Tesla will never reach full self driving or won't reach
it without additional sensors, others think it's possible but decades or more
away, still others think it's right around the corner and can be done with
what is on a Tesla right now.

Until someone reaches that finish line, we won't have anything to compare it
to, so we don't have any idea how close or far anyone really is.

~~~
jameslevy
Is there any public research or data regarding the value or predicted delta
value of long tail "average person" driving data of this kind versus the kind
of data captured by driving around the same small portions of SF or MV? I've
looked around but haven't found anything. Granted, Tesla and its competitors
don't have an incentive to publish this kind of data...but are they even in a
position to be able to calculate it currently?

~~~
Animats
Probably not. Ordinary staying-on-road is pretty much solved. There's years of
dashcam imagery available.

The last minute of video before each crash would probably be more useful.
Training on dashcam data of people doing stupid stuff from Youtube might be
useful. You don't need steering, braking, and accel data; you can run a 3D
SLAM algorithm to extract the path and get that.

~~~
xbmcuser
My 2 problems with Musk is that he has dismissed lidar in favor of just
cameras because lidar is expensive. So far most of the Tesla auto pilot
accidents would have been avoided with lidar. Even 2 very basic lidar sensors
on the front and back could make a huge difference. And he calls a driver
assistance system autopilot when it hasn't reached the level of autonomy which
the word autopilot implies.

------
danhak
Looks like the cash situation is finally under control.

They generated over $600 million in FCF in Q2. Compare this to only $200
million by Ford over the same period, also announced today:
[https://s22.q4cdn.com/857684434/files/doc_financials/2019/q2...](https://s22.q4cdn.com/857684434/files/doc_financials/2019/q2/updated/2Q19-Financial-
Release.pdf)

~~~
new_realist
They sold a lot of existing inventory (as in, cars sitting on lots) this
quarter. That generates cash.

Loss is more than $400M on record sales.

Tesla has a demand problem and is discounting cars in order to maintain the
growth story.

~~~
slg
This report is bad news for Tesla, but I think it disproves the "demand
problem" narrative. Tesla delivered more cars than they could produce this
quarter. Both delivery and production numbers were at record highs. The
average sale price of the Model 3 remained stable. Meanwhile they are nearing
production of the Model Y which is likely depressing demand of both the Model
3 and Model X. Once the Model Y is available, people expect it to have more
ongoing demand than any of their current vehicles. Tesla has a lot of
problems, but people not wanting their cars doesn't appear to be one of them.

~~~
dyarosla
Agree with most of the above except for the "Model Y likely depressing
demand"\- is there any indication that the Model Y is in demand at all?

~~~
slg
I personally don't have hard data on it, which is why I used qualifiers such
as "likely" and "people expected". Tesla has repeatedly said they expect
higher demand for the Y and that fits with what usually sells well in the
market. Plus it addresses common complaints about the 3 being "too small" and
about the X being "too expensive".

~~~
dyarosla
I’ve seen them say that and in the general it’s true, but Tesla has been hush
on revelaing any sort of demand with the Y and it doesn’t seem like the Y is
that much bigger than a 3 to entice those people who’re holding out on a low
end Tesla due to roomy interiors.

------
Animats
_" GAAP net loss of $408M"_ \- the number that matters.

Tesla isn't doing that badly. But now that they have some production volume,
they have to be evaluated as a car company, not a startup. Can they make lots
of cars at a profit? They got the production quantity up by throwing people,
money, and a big tent at the Fremont plant. That ran up the cost per car.
Although it's better than their previous state of low production with a full
staff. Can they get to a smooth running production plant with labor hours per
car comparable to Detroit? (About 30-50 labor hours per car is typical in the
industry.)

 _" Model 3 average selling price was stable at approximately $50,000."_

That's nice, but the Model 3 was supposed to be $35,000. Tesla has caught up
with their backlog, and you can now buy a Tesla Model 3 off the lot, just like
regular car dealers.[1] That's good; they're now like a normal car company.
But it also means they've saturated the market at their high price point,
which is about where BMW is.

They're also at the point where all their models need a refresh or a
replacement. Tesla is slow at new models compared to the competition.

[1] [https://www.extremetech.com/extreme/289911-what-shortage-
tes...](https://www.extremetech.com/extreme/289911-what-shortage-tesla-has-
plenty-of-model-3s-on-sale-online-today)

~~~
11thEarlOfMar
"they have to be evaluated as a car company"

Take a look at the rate of growth in _capacity_ both of their cars and their
batteries. I don't know what it is, but with Shanghai Giga coming online this
year, Model Y next year, Pickup + Semi thereafter, the growth in capacity and
the capital requirements to install it, is not matched by any other car
company, possibly in the history of car companies (Musk's posit, to be fact
checked).

All that growth is very expensive, but they may be able to fund it from
operations. That is 'super impressive'.

In terms of production volumes, they are still small relative to GM, Toyota,
VW, I'd still put them in the startup category. But not for much longer.

~~~
Animats
Building production plants is folded into GAAP numbers. Those are real assets
with real depreciation.

Actual production at Tesla's battery "gigafactory" is only around 23GWh/yr.[1]
That puts them well behind BYD and Contemporary Amperex Technology. About five
other companies have battery factories in the 10-100GWh/yr range under
construction or operating.

[1] [https://electrek.co/2019/04/14/tesla-
gigafactory-1-battery-c...](https://electrek.co/2019/04/14/tesla-
gigafactory-1-battery-cell-production-issues-elon-musk/)

~~~
rcMgD2BwE72F
>Actual production at Tesla's battery "gigafactory" is only around 23GWh/yr.

It has already increased to 28 GWh per the latest earning call, and it is
still growing. Panasonic said they already installed the equipment for 35 GWh
of production and will invest further as soon as they're able to reach that
rate.

------
jaimex2
Looking healthy to move along for Chinese factory, Model Y and pickup truck
later this year.

I like that they don't stop moving even if it scares a few investors with
heavy capex spending on their next products.

~~~
navigatesol
Heavy capex spending???

Did you even look at the financials? It doesn't even cover depreciation!

Edit: Downvoters want to explain how $250mm is "heavy capex spending" in the
automotive world, particularly in a "high growth" company?

------
Despegar
Tesla's stock has massively under-performed over the past 5 years (will be up
8% over that period if the after hours price action holds). The opportunity
cost of owning it has been huge while the rest of the market ripped up.

~~~
almost_usual
Up 8%? It's down 10%+, what made you think it would go up? Rest of the market
ripped up? The S&P is up 20% this year while Tesla has gone down 20%.

Edit: >The opportunity cost of owning it has been huge while the rest of the
market ripped up

The S&P is up over 50% in five years. TSLA could go up 20% tomorrow (and
ignore today's after hours change) and the S&P would still be outperforming
TSLA.

~~~
toopricey
He was using "ripped up" as a positive term, I assume synonymous with "Shot
up" or "went up". You're agreeing with him, both of yall are saying Tesla has
massively underperformed the market

~~~
almost_usual
That makes a lot more sense, I interpreted "ripped up" as "torn to shreds".

------
justapassenger
Most recent story of Tesla's profitability was built around Musk's
manufacturing innovations, that will make Model 3 much cheaper to produce.
Experts disagreed, got fired, and alien dreadnought continued. It was such a
huge failure, that to this day, portion of Model 3 production is happening a
tent. With forklifts, leaking roof and space-heaters.

Tesla now has new profitability story - Musk's innovations in FSD, will make
them a lot of money, and make cars appreciating assets. Experts disagreed, got
fired, and FSD continues. Wonder how will that end?

~~~
LeoPanthera
> It was such a huge failure, that to this day, portion of Model 3 production
> is happening a tent. With forklifts, leaking roof and space-heaters.

Citation needed?

~~~
justapassenger
[https://www.cnbc.com/2019/07/15/tesla-workers-in-ga4-tent-
de...](https://www.cnbc.com/2019/07/15/tesla-workers-in-ga4-tent-describe-
pressure-to-make-model-3-goals.html)

Tent was temporary, and year later - it's still there

~~~
rcMgD2BwE72F
>Tent was temporary

So what? It ended easier and cheaper to design, set up and operate than a
traditional building (the GA in the tent is already far more efficient that
the other ones). It can last for decades, too.

------
mettamage
So can someone explain to my why the Tesla stock made a nose dive to about
$170 and is now almost back to where it was 3 months ago?

I don't understand how such huge volatility could happen assuming that the
efficient market hypothesis is real.

------
eanzenberg
Sidenote: I can't stand the ipad in the middle of Tesla cars (and other
carmakers who choose this path). I got a BMW because of the sheer usefulness
of physical buttons while driving / keeping eyes on the road.

~~~
eanzenberg
Guess people like fiddling through an ipad while driving a 2 ton machine at
highway speeds? ¯\\_(ツ)_/¯. Looks like Tesla drivers are becoming the "Toyota
Camry/Prius" drivers of the past.

~~~
kinghajj
I've found that the majority of functions needed when driving are available
through the steering column's stalks, left/right buttons, or voice commands.
If I ever do need to use the touch screen, I can activate TACC & Autosteer,
and glance back and forth between the screen and road while finding the next
button to press. And for the common functions, I've developed an awareness of
the button locations, so I can press them while maintaining a view of the
road. Sort of like how I had a sense for the physical buttons of my last car;
only difference is that now the sequence of button pushes must also be
learned, not just the physical location.

~~~
eanzenberg
Maybe I'm not familiar with what the steering wheel buttons do in a Tesla.

Volume, change stations, change tracks, voice command (siri), adaptive cruise
control (including mph selection) and auto-steering are available on my
steering wheel in my BMW. In the middle of the car, climate zone and drive
modes are available as physical buttons and knobs.

~~~
kinghajj
The stalks and buttons on the Model 3 can access all of those same features,
as well as adjust the follow distance for adaptive cruise control. Climate
settings are through the screen, via a fan symbol button in the center. That
pops up a temperature selection slider with buttons to increase/decrease the
setpoint, and (de)sync the driver/passenger set points. Press the button
again, and you get a full screen with more settings (auto-flow vs manual, air
stream splitting and direction, etc.)

~~~
Fins
Sounds like _just_ the thing one should be doing in a moving vehicle! /s

~~~
intopieces
Your hypothesis is that this model (screen instead of knobs) is more
dangerous. Do you have any data to back this up?

~~~
Fins
Are you seriously suggesting that something that does require you to pay
attention to a screen entire time you're using it (and touchscreen in a moving
vehicle is not the easiest thing to operate even when you're not the one
driving) is less distracting that something that is operable entirely by
touch?

I'll stick with my experience trying to operate both. ANd I'll stick with cars
that have real controls. Not that there were much reliable data yet, what with
Tesla being pretty much the only ones who made something like that. Their
crash statistics aren't all that impressive, BTW, but it is hard to discern
which ones are pure accidents, and which ones are tied to controls, or
AutoPilot, or general stupidity.

It will be interesting to see crash statistics of e-Tron vs. regular Q series,
though, that would give some apples to apples comparison options.But then that
assumes that Audi can actually sell a meaningful number of them...

------
ianlevesque
They jumped the shark with the Model 3, and I really wanted to like it.

~~~
justina1
It's still the most popular car in it's class by a mile, how is that "jumping
the shark"?

~~~
mavhc
Someone should jump an actual shark in one as a stunt though.

~~~
stcredzero
If the cold gas thrusters on the new Roadster are powerful enough, that car
could straight out pull some Speed Racer Mach 5 antics!

------
HereBeBeasties
They've achieved a 0.5% increase in production volume in Q2, compared to Q4
2018, to 87,084 vehicles. I'd hardly call that "rapid progress". For
comparison, Toyota make around 2.2 million vehicles per quarter.

A more reasonable brand comparison might be Mercedes-Benz Cars, which made
575,639 vehicles in Q2. It's quite impressive that Tesla have got to about 15%
the volume that Merc do, but they're hardly going to take over the world with
that kind of growth rate.

IMO they should stop chasing volume sales of lower cost vehicles and
concentrate on premium vehicles with higher margins. What's the point of
killing themselves trying to lift production numbers to try to make all the
analysts who seem to be obsessed with that happy, which doesn't yet seem to be
working, if the margins aren't worth bothering? It won't end well.

~~~
kevan
They're not killing themselves with production numbers to make analysts happy,
it's literally in the mission statement...

Mission statement: Tesla's mission is to accelerate the world's transition to
sustainable energy. [1]

Strategy (paraphrasing): Start with low-volume, high margins. Over time
introduce high-volume, low-margin. [2]

[1] [https://www.tesla.com/about](https://www.tesla.com/about) [2]
[https://www.tesla.com/blog/master-plan-part-
deux](https://www.tesla.com/blog/master-plan-part-deux)

------
WheelsAtLarge
I know at least one person that's decided not to buy a Tesla simply because
their future is so murky and is not sure if they will be around for repairs.
That's a problem they need to tackle now before it spirals out of control.

Also, it seems to me that Tesla should work with one of the big three
automakers on manufacturing. Tesla has spent a lot of resources reinventing
car manufacturing and yet they can't produce a vehicle that meets their needs.
They need to focus on the high tech aspects and leave the mundane
manufacturing to experts.

At the very least, Musk should trust his manufacturing experts on how to
produce a car rather than try to make every decision by himself. He's a great
marketer and should focus on that role and leave the rest to the experts.

Too bad they can't lower the cost of batteries enough. If they did that, they
could lower the price of the car to a point where it would be a no brainer to
buy one.

~~~
mehrdada
> _I know at least one person that 's decided not to buy a Tesla simply
> because their future is so murky and is not sure if they will be around for
> repairs. That's a problem they need to tackle now before it spirals out of
> control._

I’m sure there is _one_ person that made a decision on that basis but I’ve
heard many more not-real customers speculating about this as if they were in
the market, but they very clearly wouldn’t buy a Tesla anyway and would’ve
found another excuse (hint hint: with so much negative noise and FUD and
hatred by big media it’s not hard to find one). The reality is even if Tesla
hypothetically goes bankrupt, it’ll most likely cause a change in who owns the
equity at large and will likely not materially impact the customer base.

In general, it’s much easier to expand the customer base by solving real
problems for people who are eager to buy stuff but can’t (for example, due to
real charging problems in urban areas or the car being expensive) than to try
to soothe a skeptic. This applies to VCs you pitch too. Spending time changing
people’s mind is often futile, and in this case it’s not at all clear that it
materially impacts Tesla. They are for the most part production constrained
still.

~~~
gamblor956
A company that is production constrained does not need to lower the price of
its products. It can keep the price the same or even increase prices. This is
basic economics.

Tesla has already lowered the price of its vehicles 3x this year...

~~~
mehrdada
Two points: the basic model assumes there’s a single market to sell to, but
different geos ramping up may spike your supply in one market while your other
segment is not deliverable yet, causing short term supply spike in one segment
while simultaneously being production-constrained in total.

For the Model 3 specifically, the price cuts are mostly in-line with tax
credit phaseout and they have reshuffled features (AP features moved to more
expensive FSD option for instance). of course the higher end vehicles faced
more price cuts, but that speaks little of the demand of the base vehicle.

------
techntoke
Here's to hoping that they hire some creative talent to help make letters that
don't look like they are from the 90's.

~~~
eclipxe
The drop shadows are straight out of a bad Photoshop Tutorial.

~~~
wyldfire
And here I am reading the numbers thinking, "wow, nearly doubled in sales
revenue? Great job!"

