Tesla Inc

NASDAQ:TSLA

Q2-2025 Earnings Call

[Travis Axelrod, executive]

Good afternoon, everyone, and welcome to Tesla's Second Quarter 2025 Q&A Webcast. My name is Travis Axelrod, Head of Investor Relations, and I'm joined today by Elon Musk; Vaibhav Taneja, and a number of other executives. Our Q2 results were announced at about 3:00 p.m. Central Time in the update deck be 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 risks and uncertainties, including those mentioned in our most recent filings with the SEC.

[Operator Instructions] Before we jump into Q&A, Elon has some opening remarks. Elon?

[Elon Musk, executive]

Thanks, Travis. So we've had a very exciting quarter. We're able to successfully launch robotaxi, so providing our first drives with no one in driver seats, both paying customers and Austin. And as someone have noted we've already expanded our service area in Austin. It's bigger and longer, and it's going to get even better and longer. We were expecting to really greatly increased the motion service area to well in excess of what competitors can, and that's hopefully in a week or so, 2 weeks?

[Vaibhav Taneja, executive]

Yes. A couple of weeks.

[Elon Musk, executive]

A couple of weeks or so. And then we're getting the regulatory permission to launch in the Bay Area, Nevada, Arizona and a number of -- and Florida and a number of other places. So as we get the approvals and we improve our safety, then we will be launching the autonomous ride hailing in most of the countries. And I think we'll probably have autonomous ride handling and probably half of the population of the U.S. by the end of the year, That's at least our goal, subject to regulatory approvals. I think we'll technically be able to it, so we have regulatory appeals, it's probably addressing half of the population of the U.S. by the end of the year. But we are very, very cautious. We don't want to take any chances. And so we're going to, yes, go cautiously. But the service areas and the number of vehicles in operation will increase at a hyper-exponential rate.

So add some other notable things. Model Y in June became the best-selling car in Turkey, Netherlands, Switzerland and Austria. It is, I believe, the best-selling car of any kind in the world still. And autonomy is a big factor there. So even without -- even absent -- even without supervised -- even with just supervised self-driving, it's a huge selling point. And it's worth noting that we do not actually yet have approval or supervised FSD in Europe. So our sales in Europe, we think, will improve significantly once we are able to give customers the same experience that they have in the U.S. This is, I think, a very important point to convey.

We've been working with bank country regulator, which is the Netherlands. And I think we're close to getting approval in Netherlands. Then it's got to go into the EU. It's quite [indiscernible]. In fact, KAFKA has not idea that's probably not EU [indiscernible], but KAFKA challenges with bureaucracy, but we will get the approvals. And I think we'll get -- some people in Europe will have an experience, some also have the U.S. in most of Europe, this year, hopefully, at least partially in this quarter. And then we also have some regulatory challenges in China, which we're hoping to unblock shortly where we figure we also cannot provide [indiscernible] in China currently, but we are going to unblock that [indiscernible] that's another major. It really is the single biggest demand driver.

And then within the U.S., as we get confident about safety in different geographic areas, the -- we'll loosen up on how much somebody has to be laser focused -- have their eyes laser focused on the road because that's been a common complaint. In fact, it does create odd safety issue where people will disengage autopilot than do something, change the radio, may be look at the phone, drive with their knee and then reengage on a buy, which obviously is not just less, say, than simply keeping what [indiscernible]. So we get that experience will improve in the next summer weeks.

Because of our focus on [indiscernible] with no one in the driving seat, the production release of Autopilot is actually several months behind what people experience on robotaxis in Austin. So now we have the robotaxis in Austin launched will we provide adding back those elements so that there will be a step change improvements in the what a pilot experience, what people ask [indiscernible].

This is really -- as you can tell, this is very much sort of autonomy is the story. We need the physical product without which you cannot have autonomy. But once you have a physical product, you need the autonomy is what amplifies the value to stratospheric levels.

We also launched the Tesla Dyna, which has been a huge hit. It actually got worldwide attention, which is unusual for Dyna. Dyna don't typically get the headline news out [indiscernible], but this is a pretty special dine in. And if you're in the area, it's worth visiting. It's sort of a shiny beacon of hope and we're not otherwise sort of leak over [indiscernible], frankly. So it's really quite lovely experience. A great [indiscernible] team there.

On the full stop driving front, continue to talk about that. We have -- we're continuing to make significant improvements just with the software. So the -- we're expecting to increase the parameter count. Actually at this point, we think we can probably 10x the -- almost 10x the [indiscernible] roughly 10x the [indiscernible] account. So this is actually a very tricky thing to do. Because if you -- as you increase the primary account, you get choked on memory bandwidth, but we currently think we can 10x the parameter count from what people are currently experiencing.

So not just the 4x, actually 10x increase in parameter count. And, yes. So still a lot of improvement on the existing hardware to happen.

Energy is growing really well despite headwinds from tariffs and [indiscernible] supply chain changes. The [indiscernible] bank as quickly and we have upgrades to the [indiscernible] that we may be even better. And we had record power deployment gain in Q2. So I think batteries are going to -- just going to be a massive thing. The scale of batteries, battery demand is, I think, not that many people appreciate just how gigantic the scale of battery [indiscernible] is. The way to think about it is that the U.S. sustained power output for the U.S. grid is around 1 terawatt, but average usage is less than 0.5 terawatt. If you add batteries to the mix, you can run the power plants 24/7 at full capacity, thus more than doubling the energy output per year of the United States just with batteries. That's again a big deal. It's a really big deal.

Optimus, so we're evolving the Optimus design and really getting Optimus to the point where it is a phenomenal design. [indiscernible] Optimus version to right now, sort of 2.5. Optimus 3 is an expression design, in my opinion. And will be an -- as I've said may times before, it will predictive -- it will be the biggest product ever. It's a very hard problem to solve. You have to design that every apartment from physics first principles. There's nothing that's off the shelf that actually works. So you're going doing every motor, gearbox, power electronics, control electronics, sensors, the mechanical elements. We also got to train Optimus to use its lense and it's sensors with a neural net, but we'll be applying the same techniques that we apply for a car, which is essentially a 4-wheel robot, and Optimus is a robot with arms and legs.

So the same principles that apply to optimizing AI inference on the car apply to Optimus because they're both really robots in different forms. And Tesla, it is important to note that Tesla is by far the best in the world at real-world AI. Like a clear proof point for that would be, if you compare it to Tesla to [indiscernible], [indiscernible] has got the car is best done with condos how many sensors. And it isn't Google good at AI? Yes, but they're not going to real world AI. Thus far, they have Tesla is actually much better than Google by far and any -- much than anyone at real world AI. And can I by far, Tesla has the best inference efficiency, like I think a key figure of a for AI is what is the intelligence per gigabyte? And people talk about parameters bla, bla bla, but I think start talking about parameters and talk about gigabytes because with the parameters, you can have 4-bit parameters, 8-bit parameters, 16-bit parameters. But the actual constraints in the hardware are how many gig at a run and how many gigabytes per second can you transfer from in? Therefore, it is not a frame constraint, there's a bite constraint. And Tesla has the highest intelligence density of any AI by far.

And I have a lot of insight into this with [indiscernible] AI. AI is -- [indiscernible] is the smartest overall, but it's -- [indiscernible] is the giant beast at the the terabyte levels. And -- so just kind of important to know Tesla has the best intelligence density. And intelligent density will be a very big deal in the future. It is now.

So with Optimus 3, which is really the right designs like it doesn't have -- at this point, there's no significant flaws with the Optimus 3 design, but we are going to retool a bunch of things. So it'll probably be prototypes of Optimus 3 in this year and then scale production next year. We're going to to try to scale Optimist production as fast as it's seemingly possible to do so trying to get to 1 million units a year as quickly as possible.

We think we can get there in less than 5 years, it's my sort of guess. That's a reasonable aspiration is 1 million units a year, 5 years [indiscernible].

In conclusion, so far, 2025 has been very exciting year. A lot of major milestones. We've made clear demonstrable progress in autonomy that A lot of -- as said we would not achieve. But that's worth noting, but we have done what we said we're going to do. I don't mean [indiscernible] on time, but we get it done. [indiscernible]. So great progress by the Tesla team.

Yes. I do think if Tesla continues to execute well with [indiscernible] economy and [indiscernible] autonomy, it will be the most valuable company in the world. So a lot of execution between here and there. It doesn't just happen. But provided we execute very well, I think Tesla [indiscernible] company in the world.

Obviously, I'm extremely optimistic about the future of the company. Best way to predict the future is to make it happen. And we're going to make it happen here with Tesla team. So I'd just like to say thanks to all of our quarters. And I think we're going to tell you an incredibly exciting future.

[Travis Axelrod, executive]

Great. Very much, elon, and Vaibhav does have remarks as well.

[Vaibhav Taneja, executive]

As Elon mentioned, Q2 was an interesting quarter in a few respects. We started ramping up the production of the new Model Y at all our factories. We rolled out our robotaxi service in Austin and delivered a car completely autonomously from -- directly from the factory to the customer's hall. It is a seminal point to get to this thing. I mean, it took a lot of effort, and I really want to thank everybody at Tesla to make this happen. It wasn't an easy thing to do, but we do it. It took time, but we've just begun the next phase for the company. The one big [indiscernible] has a lot of changes that would affect our business in the near term. The first among those changes is the repeal of the IRA EV credit of 7,500 by the end of this quarter. Given the abrupt change, we have limited supply of vehicles in the U.S. this quarter as we have already with the lead times to order parts with cars. We've rolled out all our planned incentives already, and we'll start gearing them back as we start to sell.

Here in the U.S. and looking to buy a car, [indiscernible] now as we may not be able to guarantee delivery for orders placed in the later part of August and beyond. We will also make changes to sort on emission standards by releasing the amount of penalty to [indiscernible]. This, in total, will have an impact on the new sales of regulatory credits to other OEMs and in turn, will lead to lower revenues.

While we never plan our business around our sales hit to nonetheless impact our total revenues quite full.

On the automotive product portfolio, the entire lineup is updated. Globally, we are seeing an increase in the number of test drives. We started the production of the lower cost model as planned in the first half of '25. However, given our focus on building and delivering as many vehicles as possible in the U.S. before the EV credict expires and the additional complexity of ramping a new product, the ramp will happen next quarter, slower than initially expected.

One thing which is grossly appreciated and Elon talked about it is that all our vehicles in the lineup are capable of autonomy. This is by far the biggest differentiator between us and the competition. Our vehicle's stop safety standard [indiscernible], but with FSD, they are and will continue to set a new standard for safety within vehicular transportation. We published our vehicle safety report earlier today. And you can see that [indiscernible] on FSD is 10x safer than the car not on FSD.

We've started seeing an uptick in FSG adoption in North America in recent months, which is a very promising trend. And just to give you a perspective, since the launch of -- since we moved to version 12 of FSD, we've seen the adoption rates really increase. We started seeing the -- on the automated revenue front, despite reduction in regulatory debt revenue and the total automotive revenue increased by 19% sequentially, given the product deliveries only improved 14%. This was primarily due to an improved ASPs because of the new Model Y. This helped in improving margin sequentially as well, along with improved mix and higher cost, fixed cost absorption despite an increase in cost from tariffs.

We started seeing the impact of tariffs in our P&L. Sequentially, the cost of tariffs increased around $300 million, with approximately 2/3 of that impact in automotive and rest in energy. However, given the latency in manufacturing and sales, the full impacts will come through in the following quarters, and so cost will increase in the near term.

While we are doing our best to manage these impacts, we are in an unpredictable environment on the tariff front.

The margins for the energy generation storage businesses improved sequentially, while deployment reduced primarily due to the ramp of power deployments at higher margins. We were able to achieve our highest gross profit for the business yet. Note that the overall deployments will continue to vary quarter-to-quarter. [indiscernible] not covered best that industrial storage will make a difference in this drive towards AI and data center growth. The energy requirements are increasing at a rapid scale as AI application applications are very energy hungry. The quickest path to scale up energy is deployer. This is something that our customers have started realizing. And destroyed this business having the largest impact of tariffs, we are seeing customers willing to accept some of the tariff impacts.

The big bill has certain and worse impacts even for the energy business, most notably on the residential storage business due to the early expiration of consumer credits by the end of this year. The challenges of the storage business, therefore, remain both from the bill and from tariffs, and we're doing our best to try and manage through this, but it will -- we will see shifts in demand and profitability.

The margins for our service and partner businesses improves sequentially, primarily due to higher profits from supercharging and improvement in insurance and service center profitability. Operating expenses also grew sequentially as we continued our investment in AI projects. including additional expenses related to employee-related costs, including higher stock-based compensation and depreciation for AI compute.

Our operating expenses, especially in R&D related spend will continue to grow. We believe even in the current environment, it is the right strategy to keep making investments in these areas to position us for the long term.

Other income grew sequentially, primarily from the mark-to-market adjustment on [indiscernible], which was $284 million gain in Q2 while being $125 million loss in Q1. Just want to remind people that this would keep creating volatility based on the bitcoin pricing.

While operating cash flow has increased sequentially, so did our CapEx, resulting in $146 million of free cash flow. We continue to make investments in various aspects of manufacturing like Cybercab, [indiscernible] and other [indiscernible] spend and the expansion of our AI initiatives. Our latest expectation for the year in terms of CapEx is in excess of $9 billion.

To summarize, we have near term challenges in our business due to the negative impacts of the bill and tariffs. However, the investments that we have made for AI, robotics and our lead in energy sets us up for a bright future. I would like to thank the whole Tesla team, our customers, by investors and supporters for their continued belief in us.

[Travis Axelrod, executive]

Great. Thank you very much, Real. So now we're going to move on to state com questions. The first question is, can you give us some insight how Robotaxis have been performing so far? And what rate you expect to expand in terms of vehicles, geofence, cities, sensor providers?

[Unknown Executive]

Yes. Robotaxi has bring great so far and as and customers really love the experience, like super small, very safe and like just a great experience overall. And we already did the first day of expansion in Austin, and we'll continue to expand in Austin to probably more than 10x our current operating region. We're also testing in a lot of other cities, as mentioned. The next thing to expand in the San Francisco BayArea. We are working with the government to get approval here -- and in the meanwhile, launch the service with the person in the driver seat just to expedite and while we wait for regulatory approvals. We are also testing a lot of other cities in the U.S., including Florida, Nevada, et cetera.

[Travis Axelrod, executive]

Great. Thank you very much, Chuck. The next question is, what are the key technical and regulatory hurdles still remaining for unsupervised FSD to be available for personal use -- can you provide a time line?

[Elon Musk, executive]

I think it's -- it will be available or in [indiscernible] personal use by the end of this year in certain geographies. We're just being very careful about it so...

[Vaibhav Taneja, executive]

This is not something which we don't want to rush. We want to make sure that everything is set before we [indiscernible] available broadly.

[Elon Musk, executive]

Yes. We're just being extremely paranoid. But I'd be -- I'm confident that by this year within a number of cities in the U.S. will be available to end users.

[Unknown Executive]

Yes. And for the same hardware in the Austin robotaxi vehicles has some customer vehicles, and we did deliver a car autonomously from the factory to a customer this quarter. And every Tesla manufacturer in the U.S. and in Europe, autonomous drives itself from the end of line to the loading docks. And so it's just a [indiscernible].

[Elon Musk, executive]

Yes. I think we'll be -- we'll end up delivering cars in the -- [indiscernible] area and the Bay Area by default from the factory by the end of this year. Like a car will deliver itself to where you are unless you say you don't want it.

[Travis Axelrod, executive]

The next question is, what specific factory tasks is Optimus currently performing? And what is the expected time line for scaling production to enable external sales? How does Tesla envision Optimus contributing to revenue in the next 2 to 3 years?

[Elon Musk, executive]

The Optimus 3 design, as I mentioned earlier, is, I think, finally the right design, the way further optimizations, but there are no fundamental changes to -- that are needed for the Optimus design. It has all the degrees of room that we really want you need. So it's -- we'll have prototypes of that in, I don't know, 3 months and it [indiscernible] production, wholesomely start production on that in the beginning of next year. The production around [indiscernible] it's always predict the S curve of your production ramp when something got an entire -- when everything is new because the rate of production will move as fast as the least lucky and least confident element of the entire supply chain as well as internal processes. So more use of [indiscernible] that in product, the slower the ramp to be because of unexpected supply chain interruptions or mistake me to internally.

It's much easier to predict sort of the end of the S curve or late in the S curve than the beginning of S curve. And the beginning of the S curve of the production and is in any case, not really material for revenue purposes. The beginning of the S curse is year usually you always negative gross margins and you're debug an amount of issues. So that's why it's -- I feel like fairly confident predicting things, at least median confident in predicting where we are in 5 years, but it's hard to predict where we are in a year or 2 years.

So that's why I think 5 years, I think we could be at the -- I'd not be surprised at the end of 5 years, 60 months from now, if we are not, roughly making 100,000 autonomous robots in month in 60 months, I would be shocked.

[Travis Axelrod, executive]

All right. Next question is, can you provide an update on the development and production time line for Tesla's more affordable models? How will these models balance cost reduction and profitability? And what impact do you expect on demand in the current economic climate?

[Lars Moravy, executive]

I think Vaibhav did a good job of answering this question is opening the lungs. As we said, we started production in June and we're rating-based things throughout the quarter. And given the -- that we started in North America and our goal is to maximize production at higher rates ending Q3, we're going to keep pushing hard on our current models with line complexity. Then fortunately, that rolls away, we'll be running with more affordable models available for everyone in Q4. And the goal of those products was not to negatively impact revenue or gross margin, but just to make a car that everyone loves and wants at a more affordable price.

[Travis Axelrod, executive]

Thank you, Lars. The next question is, can you talk about the benefits of Tesla investing in X AI?

[Vaibhav Taneja, executive]

This is not the forum to discount the topic. I mean if there is something which we need to discuss we'll discuss that separately.

[Elon Musk, executive]

I think obviously, we're a publicly traded company. Shareholders are welcome to put forward any shareholder proposals that they'd like and recently encouraged that. And then have shareholders vote and we'll act in accordance with the shareholder wishes.

[Travis Axelrod, executive]

Great. Thank you very much. The next question is, can you tell us a little bit more about what goes on in the Tesla design studio?

[Unknown Executive]

Do you want me to take that one? Can we kind of generally say that what happens in the studio stays in the studio and that earnings calls are not the place to disclose new product stuff. But we're working to make sure that we have an exciting future for Tesla and in the product lineup.

[Elon Musk, executive]

Yes, there's a lot of exciting things happening in the design studio. It's not like static. And really, what's going to happen over the next several years is a fundamental transformation of the company from a pre-autonomy world to a post autonomy. And I'm working on a new master plan to articulate that Tesla team. And there will be some teething pains as you transition from pre-autonomy to the post auto mony world, but I think the future vision for Tesla is incredibly exciting, and we will profoundly change the world in a good way. This may sound like sort of mindful ever, but I think if -- well, let's just say if we execute on that plan effectively, which is -- you have to actually do that, tesla will be the most valuable company in the world by far.

[Travis Axelrod, executive]

Great. Thank you. The next question is actually a duplicate on [indiscernible] customer vehicles, so we will skip that. After that is, are there any news for hardware 3 users getting retrofits or upgrades? Will they get Hardware 4 or some future version of Hardware 5?

[Vaibhav Taneja, executive]

I mean what we want to do is we want to get unsupervised done on Hardware 4 first. Once it's done, then we will go back and look at what we need to do with the Hardware 3 cars. I mean like I said, the focus is first to get on supervised out, and then we'll go back and see what work we need to do.

[Travis Axelrod, executive]

Great. The next question is, can you give an update on Dojo, and could AI be a customer for Dojo?

[Elon Musk, executive]

Dojo 2, we expect to have Dojo 2 operating at scale sometime next year, with scale being somewhere around 100,000 to [indiscernible] equivalents. And and then AI 5, which is really spectacular to [indiscernible] those words, likely spectating to. [indiscernible] The AR [indiscernible] be -- hopefully be in volume production by the end of next year. And that has a lot of potential.

I think thinking about Dojo 3 and the AI 6 inverse chip, it seems like intuitively, we want to try to find convergence there where it's basically the same chip that is used when we say 2 of them in a car or an Optimus and maybe a larger number on a board kind of 5, 12 on a board, something like that. If you want high bandwidth communication between the chips at of course, survey, doing [indiscernible], I think. That sort of seems like intuitively the full way to go.

[Travis Axelrod, executive]

Great. The next set of questions have all actually been covered. So we'll end with how will the EBV elimination of tax credits for solar projects affect your sales pipeline for Megapac?

[Unknown Executive]

Our sales pipeline is quite diversified across customers and market segments. So we aren't heavily weighted in Megapack projects that are paired with solar. And as we talked about in the opening remarks, we're seeing storage quickly being recognized for its ability to unlock efficiency and how quickly it can be deployed to help the grid. Additionally, although the recent bill was not favorable towards solar, we believe solar projects will still get built because the energy is necessary, that projects are well developed and they're ready for execution, and there's really no alternatives in the near term given gas turbine lead times and pricing.

We also continue to see growth in the data center segment and in stand-alone storage projects, providing capacity to the grid in several markets across the U.S. Overall, we are forecasting a very strong second half of the year as we increase deployments. And lastly, we continue to invest heavily in U.S. manufacturing to mitigate policy and tariff impacts, expecting our first cell manufacturing facility to be online by the end of the year and then launching our third mega factory near Houston in 2026.

[Travis Axelrod, executive]

Great. Thank you, Mike. We will now be moving to analyst questions. The first question comes from Emmanuel Rosner at Wolfe Research.

[Emmanuel Rosner, analyst]

Can you hear me?

[Travis Axelrod, executive]

Yes.

[Emmanuel Rosner, analyst]

So Elon, are you able to share any KPIs with us in terms of the robotaxi business? How many vehicles are you operating miles driven autonomously or the number of safety critical intervention. Just curious how the rollout it generally is going? And any sort of like targets that you could share more broadly?

[Elon Musk, executive]

[indiscernible], do you want to...

[Unknown Executive]

We have more than 7,000 miles operating in Austrian area. It's just because service is new. We have a handful of vehicles right now, but then we are trying to expand the service in terms of both the area and also the number of vehicles within Austin and other locations. So far, there's no notable [indiscernible] incidents. Sometimes we have our own restrictions as to, for example, we are in our speedy mid- to 40 miles per hours and the vehicles wants to go on higher speed or we can stop the vehicle, but there was a lot of convenience opposed to safe critical nature. So for the service has been really well received, and we continue to expand on it.

[Emmanuel Rosner, analyst]

Great. I mean -- and the longer term, from an economics point of view, longer term, you've previously talked about working to drive down the cost per mile on robotaxis maybe towards $0.30 or $0.40 per mile over time. Now that your service is live, how should we think about the main milestones to getting there?

[Elon Musk, executive]

Yes, well the Cybercab, which is really optimized for autonomy, that, I think, has got to probably sub $0.30 per mile potential over time, mid-'25. It's really -- like if you design a car from scratch to be a cost optimized robotic taxi like Cybercap, like for example, we're not trying to make it corner like incredibly well, like a Model 3 would or Model S or even Model Y, it's got model -- all of our cars that are driven by people, our superfund. They've got incredible acceleration, incredible coring capability, but we're confident that very few people in Cybertruck want to be hurdling around.

So we reduced the top end speed, which means we can use more efficient tires. We don't need as much acceleration. We don't need as much breaks to sort of -- we want stopping distance, but we're not expecting it to be heavily used. It's a gentle ride. Essentially, you design it for a gentle ride, and the you have a much more optimized design point. So that's why it seems probably that we could achieve that, especially with Optimus sort of is cleaning up the car and doing maintenance and stuff.

And you doing automatic charging. So I think it's going to -- the actual cost per mile of Cybercap will be very low. The cost from [indiscernible], our existing fleet, will be higher, but still very competitive. So yes. Maybe some over $0.50, I am just guessing. So this really tells robotaxi will go from tiny to gigantic in terms of operations in quite short period of time. Like my guess is that it has a material impact on our financials around the end of next year.

[Travis Axelrod, executive]

Great. The next question comes from Adam at Morgan Stanley.

[Adam Jonas, analyst]

So Elon, as Tesla moves into this next phase of physical AI, autonomous humanoid, robotaxis, et cetera, world-changing civilizational species changing technology with dual purpose, are you comfortable moving Tesla in this direction while only having a 13% stake in the economy -- sorry, in the company. Is that sustainable? Or does -- do you still insist that something needs to happen given your current lack of control and the types of technology you're getting into?

[Elon Musk, executive]

SP1 Yes. That is a major [indiscernible] as I've mentioned in the past, and I hope that is addressed at the upcoming shareholders' meeting. But yes, it is a big deal like I want to find that like so little control that I can easily be [indiscernible] by activist shareholders after having bolstered these - a few million robots. I think as I mentioned before, I think my control over Tesla should be enough to ensure that it goes in a good direction, but not so much control that I can't be thrown out if I go crazy.

[Adam Jonas, analyst]

Okay. You're not going to go crazy. We trust you. You can stay a little crazy. A little crazy is okay. Elon, though, we understand the Board of Directors of a major U.S. investment bank recently toward Optimus production. That's -- I don't know if you want to confirm that or not, it's just what we heard. That's cool. But when do you think others will be able to get a firsthand view of Optimus like that? And is the second half of this year too soon to have an AI day? Because it seems like everybody else in the world is doing it and this talent war is getting freaking crazy. And I know you mentioned for recruiting purposes. This is a very important thing that you've done. I think people have copied you on this. And I'm wondering if this year is too early for that?

[Elon Musk, executive]

Yes. It's a bit of a tough thing because like when we're doing AI day, we find that some computers have literally done a frame-by-frame examination of our slides and everything we say and then copy it. So I would say like what's the trade-off, which it does help with recruiting, but then competitors look very closely and copy us. I mean that said, we should probably -- I mean, I guess, we could consider the shareholder beginning to be sort of -- we can do -- we can maybe go into depth -- low amount of depth at the Annual Shareholder Meeting with respect to Optimus and AI and sort of actual chips perhaps. Yes. It has us really underrated in terms of AI chip design as well as AI software.

So like there's still not a chip that we were -- that exists that we would prefer to put in our car. That is an AI that we would prefer to win the car over our own, even though it's been now out for several years. And we're confident that the AI 5 will be a profound game changer.

In fact, it's so powerful that we'll have to [indiscernible] it for -- to some degree, for markets outside of the U.S. because it flows way past the export restrictions, so less export restrictions change we actually will have to know if our AI 5 chips -- hopefully, we keep raising the bar on export restrictions otherwise the [indiscernible]. We'll have a bunch of optimism words [indiscernible] stage at the shareholder meeting. The Optimus lab is cool to see. It looks like -- it like the [indiscernible]. It could robot in various stages. Some of them in various stages of prepare, like, I don't know, some combination of like the [indiscernible] and the West [indiscernible]. very cool. And Optimus is walking around the office here in Palo Alto, so 24/7 is just walking around like it's more, and we so Optimus the Tesla diners [indiscernible].

Yes. So it's -- we'll go from a world where robots are rare to where they're so common that you don't even look up.

[Travis Axelrod, executive]

The next question comes from Edison at Deutsche Bank yourself. All [indiscernible] that out, we will go to the next question, which is going to come from Dan Levy at Barclays.

[Dan Levy, analyst]

Elon, you've talked about the opportunity to put non-Tesla owned vehicles into the robotaxi network. Can you just talk about the gating factors to enabling that and what time line we should expect on personally owned vehicles in the robotaxi network?

[Elon Musk, executive]

We haven't really thought hard about that, but we need to make sure it works when the vehicles are fully under our control. And it's kind of 1 step at a time here. We don't want to jump again. As I said, we're being paranoid about safety. So so it's like -- but I guess -- I guess we -- like next year is, I'd say confidently next year, I'm not sure when next year, but confidently next year, people would be able to have to subtract their car to the successful fleet.

[Vaibhav Taneja, executive]

I mean 1 thing to keep in mind is that we will have some criteria because like even when you put your car in an Uber of Lyft feet, it go through a more checklist process of making sure things are working.

[Elon Musk, executive]

Air BNB or...

[Vaibhav Taneja, executive]

So we will do something like that.

[Elon Musk, executive]

[indiscernible].

[Vaibhav Taneja, executive]

Yes. We want -- like Elon said, we want to be parallel about security. And assets, long things like tread on the tire can have an impact on safety. So that's why we would want to do some proper validation before we let other cars come in.

[Travis Axelrod, executive]

Dan, do you have a follow-up?

[Dan Levy, analyst]

Yes. Could you just unpack the different costs associated with scaling the robotaxi business? And how you think about funding those costs? Are the cash flows in the auto business sufficient to fund it? And if not, what other funding sources do you think could use would you just fund it off the balance sheet?

[Elon Musk, executive]

Well, as soon as there is a clear cash flow stream associated with any product, you can debt finance it.

[Dan Levy, analyst]

And in the interim?

[Vaibhav Taneja, executive]

In the interim, we will use our balance sheet, but like once we get to a certain scale in terms of the current revenues, like Elon said, we could get into a -- easily in kind of transaction to try and get funding.

[Travis Axelrod, executive]

We will now move on to Mark from Goldman Sachs.

[Mark Delaney, analyst]

With the FSD trials that Tesla has been offering to consumers and the attention on self-driving more generally, are you able to comment more specifically on what you're seeing with FSD subscription trends and take rates, and help us better understand how large FSD revenue may be currently?

[Vaibhav Taneja, executive]

So we've definitely -- I mentioned it in my opening remarks. Since we have launched Version 12 of FSD in North America, we've definitely seen a marked improvement in the FSD adoption. And the other thing which we had also done last year is we didn't bring down the pricing and we've made subscription much more affordable. So we have seen 25% increase since that time. So -- which is an encouraging trend. But honestly, we've just started the story around explaining the benefits of FSD. Like I said before, we released our concept robot. Even if you don't believe in anything else, a car on FSD being 10x safer should be a motivator. Plus, the other thing is, people don't realize even at $99 a month, it's like you're getting a foreshow for almost $3.33 a day. And this is, by far, the biggest game changer, which I know we've been talking about it because part of it is we live and breath it, but I feel like...

[Elon Musk, executive]

[indiscernible] people still don't the vast people don't know it exists. And it's still like half of Tesla owners who could use it, haven't tried it even once. They don't actually willing. And this is something we want to educate them on. So we've got a -- when they come in for service, we'll reach out to them, send them like videos of how to make it work. And it's such a shocking thing they don't think a car is capable of this. So you have to actually show them and get them comfortable with turning it on if. It's so trivial, but it's like saying you've got a car can you sing and dance, but it just looks like an oil cut. And like until you see the cat sing and dance, and talk like you're assuming is just a [indiscernible]. That's as car is intelligent.

[Vaibhav Taneja, executive]

And so what we are going to do to Elon's point, like we've been giving the free time to try and try FSD, but we'll start giving more prompt to say, okay, this particular try FSD. So that -- I mean, because it's literally seeing is believing, like Elon said, it's -- think of it like a cat, it looks like a normal cap, but this cat can sing and dance. Same thing...

[Travis Axelrod, executive]

Great. Yes. And the 25% comment was 25% increase in the penetration since we've seen the release of V12 and B3 in North America. Great. Mark, did you have a follow-up question?

[Mark Delaney, analyst]

Tesla has historically said it would use pricing as 1 tool to help drive auto vehicle growth as long as free cash flow stay positive. Given the ability to monetize products like FSD, I'm curious how you're thinking about pricing from here as a potential tool to drive increased volumes given where you stand with FSD as well as the fact that the IRA purchase tax credits are poised to go away in the U.S. starting in the fourth quarter. So should we expect more meaningful price reductions given that monetization potential? Or do you envision price reductions be more limited compared to cost downs given where free cash flow now stands?

[Elon Musk, executive]

Well, we're in this -- we are in the transition period where we will lose a lot of incentives in the U.S. We have incentives actually in many other parts of the world, but we'll lose them in the U.S. And because [indiscernible] the relatively early stages of autonomy. On the other hand, autonomy is most advanced and most available from a regulatory standpoint in the U.S. So -- I mean does that mean like we could have a few rough quarters? Yes. We probably could have a few rough quarters. I'm not saying it will, but we could. Q4, Q1, maybe Q2, but once you get to autonomy at scale in the second half of next year, certainly by the end of next year, I think the -- I'd be really surprised if test economics are not very compelling.

[Travis Axelrod, executive]

Great. The next question is going to come from Will from Truist.

[William Stein, analyst]

First, I'd like to ask for a little bit more detail about the lower cost model that you talked about having, I think, started production in the first half, but you said will ramp later. At the last Analyst Day, as I recall, you talked about some aspects of this, like 2/3 or 3/4 reduction in silicon carbide and not using rare earths in the in the motor and perhaps other cost downs. You also had this unboxed architecture that I think you said would not be part of this sort of interim approach. Can you update us on what we should expect this thing to actually look like?

[Vaibhav Taneja, executive]

We wouldn't the looks because...

[Elon Musk, executive]

Let's [indiscernible] let the cat out of the bag here, dancing cat can talk and sing, but that's the core part. Yes. I mean, fundamentally, the biggest obstacle remains that people are just doing have some people don't the desire to buy the car is very high, just people don't have enough money in the bank out to buy it. Literally, that is the issue, not a lack of desire, but [indiscernible]. So the more affordable, we can make the car and the better. I think it's just going to be -- it will be a very big deal when people can release their car to the fleet and have it earn money for them, which like I said, I'm I feel confident in saying that will happen next year in the U.S. at least. In the U.S., we're legally allowed, appropriate disclaimers. And that will make the affordability dramatically greater. Just like if you have an Airbnb and you rent out your home when you're not there or rent out a guest room or guest house or something like that, your the affordability of your home is much greater.

[William Stein, analyst]

Okay. Trying another topic then. Can -- we see all these wonderful developments at XAI like Grock. And obviously, Tesla is trying to do quite a bit in AI. Elon, how do you manage the division of efforts and recruiting and talent and capital between these 2? That seem like there is a very high potential that they can, in fact, compete.

[Elon Musk, executive]

Well, they are doing different things here. So the XAI is doing like terabyte scale models and multiterabyte scale models, Tesla is 100x smaller models. So 1 is real-world AI and wins kind of I guess, artificial super intelligence type of thing. The -- I mean the really kind of the genesis for AAI was that there were some would not join Tesla AI engineers because they wanted to work on AI. They wouldn't join Tesla. And I was like, well, maybe we'll join a new company.

And I think the Tesla [indiscernible] is extremely important, but not everyone agrees with me on that. And so rather than have them join OpenAI up Google or whatever some other company, [indiscernible] we'll haven't created a company in that regard, which is XAI. So that's -- and [indiscernible] make a decision do they want to work on like super intelligence data center or real world AI. They're both compelling problems, but some people want to work in 1, some people want to wok on the other.

[Travis Axelrod, executive]

Great. And unfortunately, that is all the time we have today. Thank you, everyone, so much for your questions, and you'll see you next quarter.