Alex Cowie

ARK Invest has just published a great podcast with the one and only Elon Musk. Interviewed by Cathie Wood and Tasha Keeney, Elon set the scene by agreeing with their aggressive projections for EV sales to increase 20-fold in the next 5 years, which would represent about a third of global sales. Elon goes on to discuss Tesla’s production projections, an issue under much scrutiny, for 2021 and 2023.

However, the discussion goes way beyond market size and production stats to dig into Tesla’s positioning, and the regulatory environment, for the potentially far bigger opportunity of autonomous driving technology.

Click here or on the image to listen (or scroll down to read) this exclusive interview with Elon Musk from Tesla, a stock that ARK has likened to Amazon and believes could in time be worth more than 13 times the current share price.

 

Edited transcript

Tasha Keeney: Today, we're thrilled to be here in Fremont with Elon Musk. I have with me Cathie Wood, ARK Invest OG innovator and CEO. I'm Tasha Keeney and I'm an analyst who covers autonomous cars at ARK. Elon, thanks for joining us today.

Elon Musk: You're welcome. Good to join

Cathie Wood:  I also want to thank you, Elon. We're very excited to do this. One of the reasons I started ARK is because innovation is being completely mispriced in the public markets as the public markets go passive.

Elon Musk: Yeah. Totally agree. John Bogle, who's awesome, may he rest in peace, one of his last comments was the passive index funds are too big. He was that guy that really, obviously, came up with the low fee index fund.

Cathie Wood:  The other thing that's happening, again, a problem for innovation in the public markets is the big public asset managers. They started looking for innovation in the pre-IPO space, right? Where we operate is inefficiently priced like I've never seen in my career. Most people looking at our portfolios would not agree, because our PE ratios this year, next year, look very high, but we want companies like Tesla to be investing aggressively to capitalise on the massive opportunities we see ahead. We thank you for not going private.

Elon Musk: Yeah. You're welcome.

Cathie Wood:  We do think if you are going to achieve your goals, you need to be public to scale that quickly and to enjoy the kind of exponential growth that you will enjoy, because you're on the right side of change. We're really excited to be here. Now, what we're not going to talk about too much is electric vehicle sales, and certainly not production, right? We believe, and just want to get your high level reaction to this, based on, and this is based on battery work, cost decline, some of the amazing things you're doing with battery pack systems, new chemistries, and so forth, the cost declines, if we were relying on that analysis alone, we would see EV sales, given the price elasticity of demand, increase from 1.3 million last year to 26 million in 2023, so in five years. That's a 20-fold increase, if the battery capacity were there and production capacity. What do you think about that? That would be the high level assumption. Top down.

Elon Musk:  Sounds about right.

Cathie Wood:  Wow. So that's about a third of total global sales at that time.

Elon Musk: I mean, you might be off by a year or two, but not by much.

Cathie Wood: That's huge. Now, for our bottom up modelling, we're very conservative, so the range that we are out there in terms of our bear/bull range, 700 to 4,000. That is based on Tesla selling 1.6 million units in that year, which given our top down analysis, and given how far you are ahead of any other auto manufacturer, and any other technology company, that 1.6 million is increasingly looking way too conservative, if you can scale to take the proper amount of share, or the share you should take given how advanced you are. Maybe you could give us some of your thoughts there.

Elon Musk: Yeah, I want to emphasise that if I give estimates, there's a lot of guesswork here. Especially on an exponential curve, a year or two difference is enormous. Obviously, Tesla got a lot of criticism for the number of cars we delivered in 2017. If you say, "area under the curve of production in 2017 was quite small, because it was the beginning of an exponential ramp, but then once that got going, the area under the curve was enormous." That's why people were so shocked. I kept trying to say this, but people don't understand what exponential means.

Cathie Wood:  They don't. They're all linear thinkers.

Elon Musk: Yes, exactly. Like last year, we basically doubled our global fleet. Cumulatively, we made and delivered about as many cars as we had made in our entire history.

Cathie Wood: I know.

Elon Musk: Right, exactly. You guys know, but I'll just sort of put the audience out there.

Cathie Wood: It's crazy. Most people thought it was impossible.

Elon Musk: Yes. If you do a linear extrapolation, it certainly would be. When making estimates against an exponential, small changes in the calendar break point have enormous percentage differences. The time difference is small, but the percentage difference is enormous. I'm saying things that you guys know, but this is for the broader audience out there.

Cathy Wood:  Yes. We want people to understand this.

Elon Musk: Getting to 5,000 cars peak production per week was offset by approximately six months from my initial estimate last year. I thought we'd be there end of 2017, but it took us six months longer. In the grand scheme of things, six months late for a massive new programme is not much, but this was characterised in the press in terms of the percentage of units instead of a calendar shift, and so it was perceived as a massive shortfall, when in fact it was merely a six month delay. When I give these 'guesses for the future', if you move 6 months or 12 months, you can be 50-100% different.

If you say what's my guess for 2021? Its one and a half million cars for Tesla. 

Cathie Wood:  And in 2023, if we only knew the cost decline associated with the batteries, that could be 26 million, but really, it's actually dependent on what you do, what China does, and what you do in China.

Elon Musk:     Okay, and just guess, probably we'd do three million.

Cathie Wood: So very exciting times ahead. That's way above what anyone is thinking out there, and even above what we have assumed bottom up, just to remain conservative, because we already seem a little out there in terms of our expectations. What we wanted to do with this podcast is spend more time on your autonomous strategy. We're very happy that retail investors are asking questions about this on your call. We wish more institutional investors would understand how important this is, not only to your model, but how it's going to change your valuation from today to a software-as-a-service almost.

Elon Musk: Yeah, no. Absolutely. We can sort of think of our cars, maybe long term, as being effectively carriers for autonomy, thats autonomy software. It's like they're a vehicle, literally and figuratively, for autonomy, the software that rides on them.

Cathie Wood:  Tasha has been doing a lot of our work on autonomous taxi networks. We've been working on these models for five years, and it's extended into autonomous truck platoons, parcel drones, and passenger drones. We're very focused on this and would love to explore it a little bit more with you, in terms of what you're doing. 

Tasha Keeney: So Tesla wasn't always pursuing fully autonomous driving. If you look back in 2013, there's a couple quotes from you saying that last 10% is incredibly hard, and you needed to keep a human in the loop. What's changed your mind?

Elon Musk: I still think the last 10% of autonomy is extremely difficult, or even the last one percent of autonomy is really difficult. I think there's a couple things that would help to calibrate with the audience, and if I may go back to one thing, generally if I say we'll reach 5,000 cars a week, what I mean is that's the peak production. If you have peak production of X, then you're going to be somewhere between 80 and 85% of that for average production for the quarter when taking public holidays and equipment maintenance into account.

Then, also for defining autonomy or full self driving, I think we will be feature complete full self-driving this year. Meaning the car will be able to find you in a parking lot, pick you up, take you all the way to your destination without an intervention this year. I would say that I am certain of that.

That is not a question mark. However, people sometimes will extrapolate that to mean now it works with 100% certainty, requiring no observation, perfectly. This is not the case. Once it is feature complete, then you're kind of a march of nines. How many nines of reliability do you want it to be? Then, when do regulators agree that it is that reliable?

There's feature complete for full self driving this year, with certainty. This is something that we control, and I manage autopilot engineering directly every week in detail, so I'm certain of this. Then, when will regulators allow us even to have these features turned on with human oversight? That's a variable which we have limited control over. Then, it's when will regulators agree that these things can be done without human oversight? That is another level beyond that. These are externalities we don't quite control, and the conservatism of regulators varies a lot from one jurisdiction to another.

My guess as to when we would think it's safe for somebody to essentially fall asleep and wake up at their destination, probably towards the end of next year.

That's when I would think it's most likely it would be safe enough for that. I don't know when regulators will agree.

Cathie Wood:  Do you think they'll agree in China first? Could you imagine that happening? China really wants to leapfrog the rest of the world, and as you've said, the mayors of cities, and presumably the regulators, are tech savvy, because that's what going to get them there.

Elon Musk: We've generally found the regulators in China to be very thoughtful, quite smart. I've found them to be very good. We've also found the US, at a federal level, to be very good as well. California can be a little overzealous, but US federal, China federal, is good. Europe is a little conservative in this regard.

Tasha Keeney: Yeah, we've heard similar things about Europe, that the environment's moving a little bit slower there. This is an amazing technological feat. What gives you the confidence that this is a solvable problem? Then, why should Tesla be the one to solve this?

Elon Musk: Well, first of all, I think it's helpful to clarify.

People think sometimes that I'm like a businessperson, or a finance person, or something like that. I'm an engineer. I do engineering. Always have.

I wrote software for 15 years, 20 years, and I understand technology and software at quite a fundamental level. I know what we need to solve to make the full self driving feature complete. I think we've got an extremely good technical team. I think we really have the best people. It's an honour to work with them. I'm certain that we will get this done this year.

Tasha Keeney: Can I ask you about autopilot? To what degree is consumer use of autopilot important in terms of furthering along the process? It seems not every consumer is going to use it, and it might vary person to person. Should you incentivise people to use it? Maybe auto initiate? Is that even possible?

Cathie Wood:  I think we're talking about quality of the data. Is that what you're talking about? The data that you're getting, because you can monitor all of the data, but the quality with autopilot is superior I would imagine.

Elon Musk: The advantage there we have, that I think is very difficult to overcome, is that we have just a vast amount of data on interventions, so effectively the customers are training the system on how to drive, and there are millions of corner cases that are so obscure and you wouldn't believe it. I mean, there's different road markings, different rules in different countries, different expectations. You've got rain, snow, sleet, hail, hurricanes, floods, fires, smoke, dust. It's insane. We've got cars in almost all those environments.

Every time somebody intervenes and takes over from autopilot, it saves that information and uploads it to our system. We don't know which car it was, or what happened, there's no individual attribution for the car, we just know that that an intervention took place, and then we see what is required to fix that intervention. We're really starting to get quite good at not even requiring human labelling. Basically the person drives the intersection, and is thereby training autopilot what to do.

Cathie Wood:  One of the questions we debate a lot when we look at what is happening at Waymo and Cruise Automation, is that it seems as though the artificial intelligence, or deep learning, or deep reinforcement learning that you're using is probabilistic. They seem to be more deterministic in their approach because we're just looking at what's going wrong there. 

Elon Musk: Essentially an heuristics approach to this will result in a local maximum of capabilities, not a global maximum. I think you really have to apply a sophisticated neural net to achieve a global maximum. That's why the reliance on LIDAR is unwise, it gets you to a certain point but no further. Basically, a series of if/then/else statements on LIDAR is not going to solve it. Forget it. You're game over. You have to solve vision, perception, essentially understanding with vision and then, it's solved. You don't need anything else. No other senses at all.

I mean, we drive cars with basically two cameras that aren't very good, on a gimbal that doesn't move very fast. A professional driver will almost never have an accident.

Tasha Keeney: A lot of the time we get a lot of push back on this idea of data, and what data is more important than others. Tesla has more real world miles than anybody else, by far...

Elon Musk: I think we must have. Maybe 100 times more than everyone else combined.

Tasha Keeney: That's amazing. There must be events that are specific to Tesla in there, that no one else has. Could you sort of talk about some of that uniqueness?

Elon Musk: I think it's just really the long tale of weird events, the million weird situations. You know, all sorts of weather conditions, all kinds of road conditions, situations where the road rules aren't even followed. Like, they're not always followed. Somebody working on the road might make a mistake, and then suddenly, you've got a situation where there are no road cones, or there's a big hole in the road, or something really nutty, or a strange object on the road that's not recognised.

The reason Tesla is making rapid progress is because we have vastly more data, and this is increasing exponentially as our fleet is increasing exponentially.

Then I think we've got the best technical team. Although I've brought it up before, people don't seem to really be taking note of the fact that the Tesla autopilot AI computer is about to roll into production. Anyone who's ordered full self driving will get that for free. It's an order of magnitude improvement over the NVIDIA system that we have, maybe 2000%.

Cathie Wood:  Yeah, our analyst on AI deep learning spent nine years at NVIDIA, and concluded that you were at least three years ahead of anybody else out there. Any other auto manufacturer.

Elon Musk: Yeah, and we started the chip programme about three years ago, because it just seems that we would want to advance making things... If you want to have a complex neural network, you need a combination of software and hardware. Your software needs to be that much better in order to compensate for hardware if the hardware's weaker. Sort of like say video games, and how they progress. It's a combination of software and hardware. No amount of clever software could produce a video game on old hardware. It just doesn't matter.

The same thing with neural nets. Right now, we can process on the order of 100 frames a second, and we really need to do a lot of work in terms of cropping the frames, and bending the pixels, and not going to full resolution on all cameras, and that kind of thing with the current hardware. We're at full frames, full resolution with the Tesla hardware. All cameras at full resolution, full frames, and it still hasn't tapped out.

Tasha Keeney: Is the amount of compute processing power you need for full autonomy fixed, or would you have to upgrade this every two years? How do you think about that?

Elon Musk: Well, I mean, I do think that we can, in principle, achieve full autonomy with the NVIDIA hardware, but it's a much harder software problem. Like I said, you really have to try to budget your compute, and do all sorts of tricks to manage how you use your compute. It's a harder software problem. With hardware that's 2,000% better, you just don't have to do that constant budgeting. The software problem is much easier.

I think with the current hardware and a lot of effort we could get to full self driving with maybe being like 50-100% safer than a person, but with hardware three, I think it's probably like 1,000% safer than a person.

Cathie Wood:  Wow. Are you presenting this to the regulators? Do they understand this? Do they want to understand this?

Elon Musk: I think they'll understand data. If we show billions of miles with a given safety level, then they'll sort of appreciate that. I mean, similarly saying, "Hey, we've got this really fast computer, and everything's going to work." It's like, "Well that's just a statement." If you've got hard data, billions of miles, and you can show the accident rate, the intervention rate, and that essentially it's unsafe if you don't have autopilot on, which I think really it's unequivocal at this point. No matter how you slice the data, it is unequivocal at this point that it's safer to have autopilot on.

Cathie Wood:  The data comment you just made, we were very interested that the regulators, after they examined the data around first fatality, that they just swung in your favour. I think it was shocking. I'm surprised more people haven't really taken note of that.

Elon Musk: Yeah, there is a phenomenon that we noticed that would happen. Essentially, people just get overconfident with the system, even though we repeatedly warned them, "You must pay attention to the road." Literally, every time you use autopilot, it says, "You must pay attention to the road. You must keep your hands on the wheel." Every single time you use it, it says this. If you take your hands off the wheel for too long, it will start beeping at you, and then slow down, that kind of thing. Really, at this point, it's just flat out no question that it's safer. I would recommend it to anyone. It's just getting better, so yeah.

Tasha Keeney: Have you noticed a change in the regulatory environment? Are you feeling more confident than previously? Tesla's in a really unique position because you have the data to show them. It almost seems like you could be having more advanced conversations about proving that safety level. 

Elon Musk: Right now, with a few exceptions, we are not being held back by regulators.

Cathie Wood:  Is that a US comment, or is it global?

Elon Musk: I mean, there are a few jurisdictions in the world that are more conservative.

Right now, I would not say that we're held back by regulators.

In minor ways, like for example, we expect to, I think get the latest autopilot approval. Navigator autopilot is, I think, going to get approved in Europe next week, or something like that. These are tiny delays. In the grand scheme of things, it doesn't really matter.

Tasha Keeney: As you think about this development of autonomous driving, and the rollout strategy, Tesla's not taking this other approach that, say Waymo and others are doing going city by city. You're going to do a wider rollout. I don't know if you want to call it geofencing, but you start with highways, and then you go off highway. Are you going to go country by country? How are you thinking of this evolving in terms of the full steps to get to full autonomy? Are you then tackling intersections? Are you adding feature, feature, feature, and then country by country?

Elon Musk: Yeah, we started off with highway, because that tends to be what actually matters the most. Particularly if you're stuck in traffic, in stop and go traffic, it's very painful. It has the most benefits to have autonomy on freeways which are usually congested in almost every city in the world. In fact, even if there's a shorter way home, I still take the highway because you can use autopilot. I stopped using Waze, for example, I just take the highway because then I have autopilot on. You know, going through a bunch of windy streets, which is kind of like a lot of mental overhead, as opposed to just sitting on the highway and just cruising along is better.

Originally, I got going with, "Okay, what's going to add the most value to people?" Also, highway accidents tend to be higher velocity, and so potentially more dangerous. Fatalities are very proportionate to speed. Below a certain speed, it's very difficult to hurt yourself or die, particularly in a Tesla. Above a certain speed, it's more dangerous. It's like, "Okay, where can it be most helpful from a convenience and safety standpoint?" So we focused on highways for that reason.

Then, intersections are the next thing. You have a lot of variance in intersections. That's what we're working on right now. It's working at a development level, no problem recognising stop signs and traffic lights, but you do get ambiguity in some complex intersections with traffic lights, like which one's the right light to focus on? Even if you're a person, it's not always clear. That's what we're working on there. We'll try to make that work in the US, and then we'll extend that functionality elsewhere. Highways in Europe are different, particularly when you're dealing with the corner cases. Norway is a priority for us, because we've got a lot of customers there, and I think we're close to having that ready. Netherlands, Germany, Switzerland.

Tasha Keeney: What do you think of letting other automakers build on Tesla's platform?

Elon Musk: Haha, I mean, generally, we've found it's not easy to work with traditional automakers. First of all, they're not exactly banging on our door to work with us.

Cathie Wood: Nobody took you up on your patents? Your open patents?

Elon Musk: No, I think they have, actually.

Cathie Wood:  Oh, really?

Elon Musk:     Yeah, yeah.

Cathie Wood:  Okay, that's interesting.

Elon Musk: On the patents, they have. That's very different from, say, creating an integrated system. You know, if there was an automaker out there that wanted to implement the same hardware system as Tesla, and use our software, we would be very open to it. We're not going to change it. What tends to happen is they want to work with us, but then they'll say, "Okay, we want you to change the following six things." We're like, "No, because that's going to slow us down massively." It's like, "If you want to use exactly our thing, that's fine," but then they don't want to use exactly our thing.

We're open to other automakers using our Supercharger network. We're open to them using our autopilot system. They just need to make it work without a tonne of overhead on Tesla engineering.

Cathie Wood:  Absolutely the right thing to do. I have a little bit of a different question. It's a little bit off topic, but it's in the news, or it's becoming more in the news. It's about crypto, crypto assets, crypto, you know ...

Elon Musk:     Crypto? Seriously?

Cathie Wood:  Seriously. Seriously. Very seriously. I think you and Jack Dorsey have chatted a bit recently about this, right?

Elon Musk: Bitcoin and Ethereum scammers were so rampant on Twitter that I said I'd just join in. I said at one point, "Want to buy some Bitcoin?" Then, my account got suspended, because obviously, there's some automatic rule that if you try to sell Bitcoin or something. I was just joking.

Cathie Wood:  My question, it's a little different from cryptocurrencies. Although, given your history in the payments ecosystem, it would be very interesting to know if you agree with Jack, and there is going to be one native cryptocurrency when it comes to the internet. He thinks it's Bitcoin.

Elon Musk: It's interesting. I have some friends of mine that are really involved in crypto. I mean, I think the Bitcoin structure was quite brilliant. It seems like there's some merit to Ethereum as well, and some of the others. You know, I'm not sure that it would be a good use of Tesla resources to get involved in crypto. I mean, we're really just trying to accelerate the advance of sustainable energy. I mean, I think one of the downsides of crypto is that, computationally, it's quite energy intensive. There had to be some kind of constraints on the creation of crypto, but it's very energy intensive to create the incremental Bitcoin at this point.

Cathie Wood:  Yeah, but by the same time, there were $1.3 trillion worth of transactions in Bitcoin. We don't see it here, because it's not for pizza or Coke. It's business to business in Africa.

Elon Musk: It might be for coke.

Cathie Wood:  We think it is business to business in Africa, where it is prohibitively expensive to convert from one nation's currency to another, or you have to go through the dollar. I mean, it really is very important to ... It's money over IP for them. It's free transmission of money. That's really important to opening up the world.

Elon Musk: It bypasses currency controls.

Cathie Wood:  Yes.

Elon Musk: Yeah, yes. Paper money is going away, and crypto is a far better way to transfer value than pieces of paper, that's for sure.

Cathie Wood:  Without a doubt.

Elon Musk: That has its pros and cons.

Tasha Keeney: Just to clarify, Tesla's not going to start selling Bitcoin any time soon.

Elon Musk: No, we're not.

Tasha Keeney: Okay. You heard it here first. Even though everyone thought that.

Cathie Wood:  Well, we thank you so much for doing this. And thank you for just doing what you're doing to change the world and make it a better place.

Elon Musk: Thanks.

 

 

Nikko AM Australia is pleased to bring the ARK Investment Management strategies and capabilities to Australia. Click here to find out more

 



Comments

Please sign in to comment on this wire.

Bart Lawler

Hi, could ARK explain their views on Tesla as a stock seeing as they have recently reduced their position by ~45%?

Nikko Asset Management Australia

Hi Bart, thank you for your comment and for listening to ARK's latest podcast with Elon Musk. Tesla remains one of their highest conviction stocks. ARK utilises an iterative top-down and bottom-up investment process that results in theme-based portfolios consisting of high conviction securities. During risk-off or high volatility periods, ARK opportunistically consolidates into its highest conviction securities (buy into price weakness) as opposed to some managers who off-load risk by diversifying their portfolios during these periods. If these securities subsequently appreciate in value and their position sizes increase above a specified percentage of a portfolio, they are trimmed to ensure compliance with client investment guidelines as part of the portfolio management process.