TESLA: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)


The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the related notes included elsewhere in
this Quarterly Report on Form 10-Q.

Overview

Our mission is to accelerate the world's transition to sustainable energy. We
design, develop, manufacture, lease and sell high-performance fully electric
vehicles, solar energy generation systems and energy storage products. We also
offer maintenance, installation, operation, financial and other services related
to our products.

In 2021, we produced 624,582 vehicles and delivered 627,572 vehicles in the third quarter. We are currently focused on increasing vehicle production and capacity, improving and developing battery technologies, improving our FSD and autopilot capabilities, increasing accessibility and the efficiency of our vehicles and the expansion of our global infrastructure.

In 2021, we have deployed 3.01 GWh of energy storage products and 260 megawatts
of solar energy systems through the third quarter. We are currently focused on
ramping production of energy storage products, improving our Solar Roof
installation capability and efficiency, and increasing market share of retrofit
and new build solar energy systems.

During the three and nine months ended September 30, 2021, we recognized total
revenues of $13.76 billion and $36.10 billion, respectively, representing
increases of $4.99 billion and $15.31 billion, respectively, over the same
periods ended September 30, 2020. We continue to ramp production, build new
manufacturing capacity and expand our operations to enable increased deliveries
and deployments of our products and further revenue growth.

During the three and nine months ended September 30, 2021, our net income attributable to common shareholders was $ 1.62 billion and $ 3.20 billion, respectively, representing increases of $ 1.29 billion and $ 2.75 billion, respectively, over the same periods ended September 30, 2020. We continue to focus on improving our profitability through efficient production and operations.

We ended the third quarter of 2021 with $16.07 billion in cash and cash
equivalents, representing a decrease of $3.32 billion from the end of 2020. Our
cash flows provided by operating activities during the nine month period ended
September 30, 2021 was $6.91 billion, representing an increase of $3.99 billion
compared to our cash flows provided by operating activities during the same
period ended September 30, 2020 of $2.92 billion, and capital expenditures
amounted to $4.67 billion during the nine month period ended September 30, 2021,
compared to $2.01 billion during the same period ended September 30, 2020.
Sustained growth has allowed our business to generally fund itself, but we will
continue investing in a number of capital-intensive projects in upcoming
periods.

Management opportunities, challenges and risks

Impact of the COVID-19 pandemic



Beginning in the first quarter of 2021, there has been a trend in many parts of
the world of increasing availability and administration of vaccines against
COVID-19, as well as an easing of restrictions on social, business, travel and
government activities and functions. On the other hand, infection rates and
regulations continue to fluctuate in various regions and there are ongoing
global impacts resulting from the pandemic, including challenges and increases
in costs for logistics and supply chains, such as increased port congestion,
intermittent supplier delays and a shortfall of semiconductor supply. We have
also previously been affected by temporary manufacturing closures, employment
and compensation adjustments, and impediments to administrative activities
supporting our product deliveries and deployments.



Ultimately, we cannot predict the duration of the COVID-19 pandemic. We will
continue to monitor macroeconomic conditions to remain flexible and to optimize
and evolve our business as appropriate, and we will have to accurately project
demand and infrastructure requirements globally and deploy our production,
workforce and other resources accordingly.

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Automotive-Production

The following is a summary of the production status of each of our vehicle models advertised in production and in development, as of the date of this Quarterly Report on Form 10-Q:


Production Location    Vehicle Model(s)    Production Status
Fremont Factory        Model S / Model X   Active
                       Model 3 / Model Y   Active
Gigafactory Shanghai   Model 3 / Model Y   Active
Gigafactory Berlin     Model Y             Constructing manufacturing facilities
Gigafactory Texas      Model Y             Constructing manufacturing facilities
                       Cybertruck          In development
TBD                    Tesla Semi          In development
TBD                    Tesla Roadster      In development




Our new versions of Model S and Model X are in production, and we are focused on
ramping all of our production vehicles to their installed production capacities
as well as increasing capacity at our current factories. Our current production
continues to be affected by the industry-wide semiconductor and other component
shortages, requiring additional workaround manufacturing and production design
solutions to be implemented which may be difficult to sustain. The next phase of
production growth will depend on the construction of Gigafactory Berlin and
Gigafactory Texas, each of which is progressing as planned for production
beginning in late 2021, as well as our ability to add to our available sources
of battery cell supply by manufacturing our own cells that we are developing to
have high-volume output, lower capital and production costs and longer range.
Consistent with our approach of innovating manufacturing techniques at our new
factories, we expect as well to pioneer new methods related to the mass
production of these cells and our unique structural battery pack concept. Our
goals are to improve vehicle performance, decrease production costs and increase
affordability.

However, these plans are subject to uncertainties inherent in establishing and
ramping manufacturing operations, which may be exacerbated by the number of
concurrent international projects, any industry-wide component constraints which
may increase the number of manufacturing and production design workaround
solutions required and any future impact from events outside of our control such
as the COVID-19 pandemic. Moreover, we must meet ambitious technological targets
with our plans for battery cells as well as for iterative manufacturing and
design improvements for our vehicles with each new factory.

Automotive-Demand and Sales

Our cost reduction efforts and additional localized procurement and
manufacturing are key to our vehicles' affordability, and for example, have
allowed us to competitively price our vehicles in China. In addition to opening
new factories in 2021, we will also continue to generate demand and brand
awareness by improving our vehicles' performance and functionality, including
Autopilot, FSD and software features and introducing anticipated future
vehicles. Moreover, we expect to continue to benefit from a recent spike in
demand in the automotive industry generally, as well as ongoing electrification
of the automotive sector and increasing environmental awareness.

However, we operate in a cyclical industry that is sensitive to trade,
environmental and political uncertainty, all of which may also be compounded by
any future global impact from the COVID-19 pandemic. Moreover, as additional
competitors enter the marketplace and help bring the world closer to sustainable
transportation, we will have to continue to execute well to maintain our
momentum.

Automotive-Deliveries and Customer Infrastructure



As our deliveries increase, we must work constantly to prevent our vehicle
delivery capability from becoming a bottleneck on our total deliveries.
Increasing the exports of vehicles manufactured at Gigafactory Shanghai has been
effective in mitigating the strain on our deliveries in markets outside of the
United States, and we expect to benefit further from situating additional
factories closer to local markets. As we expand our manufacturing operations
globally, we will have to continue to increase and staff our delivery, servicing
and charging infrastructure accordingly, maintain our vehicle reliability and
optimize our Supercharger locations to ensure cost effectiveness and customer
satisfaction. In particular, we remain focused on increasing the capability and
efficiency of our servicing operations.

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Energy production and storage, demand, production and deployment



The long-term success of this business is dependent upon increasing margins
through greater volumes. We continue to increase the production of our energy
storage products to meet high levels of demand, including beginning construction
of our Megafactory in Lathrop, California, but such production is also sensitive
to global component constraints. For Megapack, energy storage deployments can
vary meaningfully quarter to quarter depending on the timing of specific project
milestones. For Powerwall, better availability and growing grid stability
concerns drive higher customer interest, and we are emphasizing cross-selling
with our residential solar energy products. We remain committed to growing our
retrofit solar energy business by offering a low-cost and simplified online
ordering experience. In addition, we continue to improve our installation
capabilities and price efficiencies for Solar Roof by on-boarding and training
new installers, as well as collaborating with real estate developers and
builders on new homes to reduce installation time and costs. As these product
lines grow, we will have to maintain adequate battery cell supply for our energy
storage products and hire additional personnel, particularly skilled
electricians, to support the ramp of Solar Roof.

Trends in cash flow and capital expenditure

Our capital expenditures are typically difficult to project beyond the short
term given the number and breadth of our core projects at any given time, and
may further be impacted by uncertainties in future global market conditions. We
are simultaneously ramping new products in the new Model S and Model X, Model Y,
Megapack and Solar Roof, constructing or ramping manufacturing facilities on
three continents and piloting the development and manufacture of new battery
cell technologies, and the pace of our capital spend may vary depending on
overall priority among projects, the pace at which we meet milestones,
production adjustments to and among our various products, increased capital
efficiencies and the addition of new projects. Owing and subject to the
foregoing as well as the pipeline of announced projects under development and
all other continuing infrastructure growth, we currently expect our capital
expenditures to exceed $6 billion in 2021 and be between $5 to $7 billion in
each of the next two fiscal years.

Our business has recently been consistently generating cash flow from operations
in excess of our level of capital spend, and with better working capital
management resulting in shorter days sales outstanding than days payable
outstanding, our sales growth is also facilitating positive cash generation. On
the other hand, we are likely to see heightened levels of capital expenditures
during certain periods depending on the specific pace of our capital-intensive
projects. Moreover, as our stock price has significantly increased, we have seen
higher levels of early conversions of "in-the-money" convertible senior notes,
which obligates us to deliver cash and or shares pursuant to the terms of those
notes. Overall, we expect our ability to be self-funding to continue as long as
macroeconomic factors support current trends in our sales.

Trends in operating expenses

As long as we see expanding sales, and excluding the potential impact of
non-cash stock compensation expense attributable to the 2018 CEO Performance
Award and impairment charges on certain assets as explained below, we generally
expect operating expenses relative to revenues to decrease as we continue to
increase operational efficiency and process automation.

In March 2018, our stockholders approved a performance-based stock option award
to our CEO (the "2018 CEO Performance Award"), consisting of 12 vesting tranches
contingent on the achievement of specified market capitalization and operational
milestones. We incur non-cash stock-based compensation expense for each tranche
only after the related operational milestone initially becomes probable of being
achieved based on a subjective assessment of our future financial performance,
and if this happens following the grant date, we record at such time a
cumulative catch-up expense that may be significant based on the length of time
elapsed from the grant date. Moreover, the remaining expense for that tranche is
ratably recorded over the period remaining until the later of (i) the expected
achievement of the relevant operational milestone (if it has not yet been
achieved) and (ii) the expected achievement of the related market capitalization
milestone (if it had not yet been achieved). Upon the achievement of both
milestones related to a tranche, all remaining associated expense is recognized
immediately. Because the market capitalization milestone achievements were
generally expected to occur later than the related expected operational
milestone achievements, the achievement of the former earlier than expected may
increase the magnitude of any catch-up expense and/or accelerate the rate at
which the remaining expense is recognized. Since 2020, several operational
milestones have become probable and/or have been achieved and all market
capitalization milestones have been achieved, resulting in the recognition or
acceleration of related expense earlier than anticipated and within a relatively
short period of time. See Note 11, Equity Incentive Plans-2018 CEO Performance
Award, to the consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q for further details regarding the stock-based
compensation relating to the 2018 CEO Performance Award.

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In the first quarter of 2021, we invested an aggregate $1.50 billion in bitcoin
and accepted bitcoin as a form of payment for sales of certain of our products
in specified regions, subject to applicable laws, and suspended this practice in
May 2021. We believe in the long-term potential of digital assets both as an
investment and also as a liquid alternative to cash. As with any investment and
consistent with how we manage fiat-based cash and cash-equivalent accounts, we
may increase or decrease our holdings of digital assets at any time based on the
needs of the business and our view of market and environmental conditions.
Digital assets are considered indefinite-lived intangible assets under
applicable accounting rules. Accordingly, any decrease in their fair values
below our carrying values for such assets at any time subsequent to their
acquisition will require us to recognize impairment charges, whereas we may make
no upward revisions for any market price increases until a sale. For any digital
assets held now or in the future, these charges may negatively impact our
profitability in the periods in which such impairments occur even if the overall
market values of these assets increase. For example, in the nine month period
ended September 30, 2021, we recorded approximately $101 million of impairment
losses resulting from changes to the carrying value of our bitcoin and gains of
$128 million on certain sales of bitcoin by us.

Critical accounting conventions and estimates

The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S. ("GAAP"). The preparation of the
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, costs and
expenses and related disclosures. We base our estimates on historical
experience, as appropriate, and on various other assumptions that we believe to
be reasonable under the circumstances. Changes in the accounting estimates are
reasonably likely to occur from period to period. Accordingly, actual results
could differ significantly from the estimates made by our management. We
evaluate our estimates and assumptions on an ongoing basis. To the extent that
there are material differences between these estimates and actual results, our
future financial statement presentation, financial condition, results of
operations and cash flows may be affected.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the
global economy and financial markets. The estimates used for, but not limited
to, determining significant economic incentive for resale value guarantee
arrangements, sales return reserves, the collectability of accounts receivable,
inventory valuation, fair value of long-lived assets, goodwill, fair value of
financial instruments, fair value and residual value of operating lease vehicles
and solar energy systems subject to leases could be impacted. We have assessed
the impact and are not aware of any specific events or circumstances that
required an update to our estimates and assumptions or materially affected the
carrying value of our assets or liabilities as of the date of issuance of this
Quarterly Report on Form 10-Q. These estimates may change as new events occur
and additional information is obtained. Actual results could differ materially
from these estimates under different assumptions or conditions.

For a description of our critical accounting policies and estimates, refer to
Part II, Item 7, Critical Accounting Policies and Estimates in our Annual Report
on Form 10-K for the year ended December 31, 2020. There have been no material
changes to our critical accounting policies and estimates since our Annual
Report on Form 10-K for the year ended December 31, 2020.

Recent accounting positions

See Note 2, Summary of Significant Accounting Policies, to the consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations



Revenues



                               Three Months Ended                                Nine Months Ended
                                  September 30,               Change               September 30,                Change
(Dollars in millions)           2021          2020          $          %         2021          2020          $           %
Automotive sales             $    11,672     $ 7,346     $ 4,326        59 %   $  30,251     $ 17,150     $ 13,101        76 %
Automotive leasing                   385         265         120        45 %       1,014          772          242        31 %
Total automotive revenues         12,057       7,611       4,446        58 %      31,265       17,922       13,343        74 %
Services and other                   894         581         313        54 %       2,738        1,628        1,110        68 %
Total automotive &
services and other
  segment revenue                 12,951       8,192       4,759        58 %      34,003       19,550       14,453        74 %
Energy generation and
storage segment revenue              806         579         227        39 %       2,101        1,242          859        69 %
Total revenues               $    13,757     $ 8,771     $ 4,986        57 %   $  36,104     $ 20,792     $ 15,312        74 %




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Automotive & Services and Others Segment

Automotive sales revenue includes revenues related to cash deliveries of new
Model S, Model X, Model 3 and Model Y vehicles, including access to our
Supercharger network, internet connectivity, FSD features and over-the-air
software updates, as well as sales of regulatory credits to other automotive
manufacturers. Cash deliveries are vehicles that are not subject to lease
accounting. Our revenue from regulatory credits fluctuates depending on when a
contract is executed with a buyer and when the credits are delivered.

Automotive leasing revenue includes the amortization of revenue for vehicles
under direct operating lease agreements as well as those sold with resale value
guarantees accounted for as operating leases under lease accounting. We began
offering direct leasing for Model Y vehicles in the third quarter of 2020.
Additionally, automotive leasing revenue includes direct sales-type leasing
programs where we recognize all revenue associated with the sales-type lease
upon delivery to the customer, which we introduced in volume during the third
quarter of 2020.

Services and other products include aftermarket services for out-of-warranty vehicles, used vehicle sales, retail merchandise, sales of our acquired subsidiaries to third party customers, and auto insurance products.

Automotive sales revenue increased $4.33 billion, or 59%, in the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020, primarily due to an increase of 101,183 Model 3 and Model Y cash
deliveries. This increase was partially offset by a decrease from 5,855 fewer
Model S and Model X cash deliveries in the three months ended September 30, 2021
compared to the prior period as deliveries of the new version of Model S only
began ramping in the second quarter of 2021. Additionally, there was a reduction
in the average selling price of Model Y due to changes in regional sales mix
compared to the prior period and a decrease of $118 million from sales of
regulatory credits to $279 million in the three months ended September 30, 2021.

Automotive sales revenue increased $13.10 billion, or 76%, in the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020, primarily due to an increase of 304,919 Model 3 and Model Y cash
deliveries year over year from production ramping at both Gigafactory Shanghai
and the Fremont Factory. The increase in automotive sales revenue was partially
offset by a decrease from 21,767 fewer Model S and Model X cash deliveries in
the nine months ended September 30, 2021 compared to the prior period as
deliveries of the new version of Model S only began ramping in the second
quarter of 2021. Additionally, there was a reduction in the average selling
price of Model Y due to changes in regional sales mix compared to the prior
period and a decrease of $28 million from additional sales of regulatory credits
to $1.15 billion in the nine months ended September 30, 2021.

Automotive leasing revenue increased $120 million, or 45%, in the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020, primarily due to increases in cumulative vehicles and purchase options
exercised under our direct operating lease program compared to the prior period.

Automotive leasing revenue increased $242 million, or 31%, in the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020, primarily due to an increase in cumulative vehicles under our direct
operating lease program, the introduction of direct sales-type leasing programs
which we began offering in volume during the third quarter of 2020 where we
recognize all revenue associated with the sales-type lease upon delivery to the
customer and an increase in purchase options exercised under our direct
operating lease program compared to the prior period. These increases were
partially offset by the decrease in automotive leasing revenue associated with
our resale value guarantee leasing programs accounted for as operating leases as
those portfolios have declined.

Services and other revenue increased $313 million, or 54%, in the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020. Services and other revenue increased $1.11 billion, or 68%, in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020. These increases were primarily due to an increase in used vehicle
revenue driven by increases in volume and average selling prices of trade-ins,
non-warranty maintenance services revenue as our fleet continues to grow and
retail merchandise revenue.

Energy production and storage segment

Energy generation and storage revenue includes sales and leasing of solar energy
generation and energy storage products, services related to such products and
sales of solar energy systems incentives.

Energy generation and storage revenue increased by $227 million, or 39%, in the
three months ended September 30, 2021 as compared to the three months ended
September 30, 2020. Energy generation and storage revenue increased by $859
million, or 69%, in the nine months ended September 30, 2021 as compared to the
nine months ended September 30, 2020. These increases were primarily due to
increases in deployments of Megapack, solar cash and loan jobs and Powerwall,
partially offset by a decrease in Powerpack deployments as we phase out the
product following the introduction of Megapack. Additionally, there was a
reduction in average selling prices on our solar cash and loan jobs in the nine
months ended September 30, 2021 compared to the prior period as a result of our
low cost solar strategy introduced mid-2020.

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Cost of revenues and gross margin


                               Three Months Ended                                   Nine Months Ended
                                  September 30,                Change                 September 30,             Change
(Dollars in millions)           2021          2020          $          %          2021         2020          $           %
Cost of revenues
Automotive sales             $     8,150     $ 5,361     $ 2,789         52 %   $ 21,726     $ 12,774     $  8,952         70 %
Automotive leasing                   234         145          89         61 %        582          415          167         40 %
Total automotive cost of
revenues                           8,384       5,506       2,878         52 %     22,308       13,189        9,119         69 %
Services and other                   910         644         266         41 %      2,858        1,850        1,008         54 %
Total automotive &
services and other
  segment cost of revenues         9,294       6,150       3,144         51 %     25,166       15,039       10,127         67 %
Energy generation and
storage segment                      803         558         245         44 %      2,179        1,189          990         83 %
Total cost of revenues       $    10,097     $ 6,708     $ 3,389         51 %   $ 27,345     $ 16,228     $ 11,117         69 %
Gross profit total
automotive                   $     3,673     $ 2,105                            $  8,957     $  4,733
Gross margin total
automotive                            30 %        28 %                                29 %         26 %
Gross profit total
automotive & services and
other
  segment                    $     3,657     $ 2,042                            $  8,837     $  4,511
Gross margin total
automotive & services and
other
  segment                             28 %        25 %                                26 %         23 %
Gross profit energy
generation and storage
segment                      $         3     $    21                            $    (78 )   $     53
Gross margin energy
generation and storage
segment                                0 %         4 %                                -4 %          4 %
Total gross profit           $     3,660     $ 2,063                            $  8,759     $  4,564
Total gross margin                    27 %        24 %                                24 %         22 %



Automotive & Services and Others Segment

Cost of automotive sales revenue includes direct parts, material and labor
costs, manufacturing overhead, including depreciation costs of tooling and
machinery, shipping and logistic costs, vehicle connectivity costs, allocations
of electricity and infrastructure costs related to our Supercharger network and
reserves for estimated warranty expenses. Cost of automotive sales revenues also
includes adjustments to warranty expense and charges to write down the carrying
value of our inventory when it exceeds its estimated net realizable value and to
provide for obsolete and on-hand inventory in excess of forecasted demand.

Cost of automotive leasing revenue includes the amortization of operating lease
vehicles over the lease term, cost of goods sold associated with direct
sales-type leases which were introduced in volume in the third quarter of 2020,
as well as warranty expenses related to leased vehicles. Cost of automotive
leasing revenue also includes vehicle connectivity costs and allocations of
electricity and infrastructure costs related to our Supercharger network for
vehicles under our leasing programs.

Cost of services and other revenue includes costs associated with providing
non-warranty after-sales services, costs to acquire and certify used vehicles,
costs for retail merchandise, and costs to provide vehicle insurance. Cost of
services and other revenue also includes direct parts, material and labor costs
and manufacturing overhead associated with the sales by our acquired
subsidiaries to third party customers.

Cost of automotive sales revenue increased $2.79 billion, or 52%, in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020, primarily due to an increase of 101,183 Model 3 and Model Y cash
deliveries, partially offset by a decrease in combined average Model 3 and Model
Y costs per unit due to changes in regional production mix, as Gigafactory
Shanghai has ramped in capacity, despite a higher proportion of Model Y compared
to the prior period. Additionally, there was a decrease of 5,855 Model S and
Model X cash deliveries in the three months ended September 30, 2021 compared to
the prior period.

Cost of automotive sales revenue increased $8.95 billion, or 70%, in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020, primarily due to an increase of 304,919 Model 3 and Model Y cash
deliveries. These increases were partially offset by a decrease of 21,767 Model
S and Model X cash deliveries at higher costs per unit due to temporary
under-utilization of manufacturing capacity at lower production volumes during
our current production ramp of the new version of Model S. Additionally, there
was a decrease in combined average Model 3 and Model Y costs per unit due to
changes in regional production mix, as Gigafactory Shanghai has ramped in
capacity, despite a higher proportion of Model Y compared to the prior period
and lower material, manufacturing, inbound freight and duty costs from localized
procurement and manufacturing in China.

Cost of automotive leasing revenue increased $89 million, or 61%, in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020, primarily due to increases in cumulative vehicles and purchase options
exercised under our direct operating lease program compared to the prior period.

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Cost of automotive leasing revenue increased $167 million, or 40%, in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020, primarily due to increases in cumulative vehicles and purchase options
exercised under our direct operating lease program compared to the prior period
and the introduction of direct sales-type leasing programs which we began
offering in volume during the third quarter of 2020 where we recognize all cost
of revenue associated with the sales-type lease upon delivery to the customer.
These increases were partially offset by the decrease in cost of automotive
leasing revenue associated with our resale value guarantee leasing programs
accounted for as operating leases as those portfolios have declined.

Cost of services and other revenue increased $266 million, or 41%, in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020, primarily due to increases in costs to support our increase in
non-warranty maintenance services revenue, used vehicle cost of revenue driven
by increases in volume and values of trade-ins and costs of retail merchandise
as our sales have increased.

Cost of services and other revenue increased $1.01 billion, or 54%, in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020, primarily due to increases in used vehicle cost of revenue driven by
increases in volume and values of trade-ins, costs to support our increase in
non-warranty maintenance services revenue and costs of retail merchandise as our
sales have increased.

Gross margin for total automotive increased from 28% to 30% in the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020. Gross margin for total automotive increased from 26% to 29% in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020. The increases were primarily due to favorable changes in sales and
production mix of Model 3 and Model Y as Gigafactory Shanghai has ramped in
capacity. The average Model 3 and Model Y costs per unit have decreased
significantly due to lower material, manufacturing, inbound freight and duty
costs from localized procurement and manufacturing in China. Increased sales in
Asia and exporting vehicles manufactured in Gigafactory Shanghai instead of the
Fremont Factory to other regions have resulted in higher gross margins for both
our Model 3 and Model Y product lines.

Gross margin for total automotive & services and other segment increased from
25% to 28% in the three months ended September 30, 2021 as compared to the three
months ended September 30, 2020. Gross margin for total automotive & services
and other segment increased from 23% to 26% in the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020. These
increases were primarily due to the automotive gross margin impacts discussed
above and an improvement in our services and other gross margin. Additionally,
there was a lower proportion of services and other, which operated at a lower
gross margin than our automotive business, within the segment in the three and
nine months ended September 30, 2021 as compared to the prior period.

Energy production and storage segment

Cost of energy generation and storage revenue includes direct and indirect
material and labor costs, warehouse rent, freight, warranty expense, other
overhead costs and amortization of certain acquired intangible assets. Cost of
energy generation and storage revenue also includes charges to write down the
carrying value of our inventory when it exceeds its estimated net realizable
value and to provide for obsolete and on-hand inventory in excess of forecasted
demand. In agreements for solar energy system and PPAs where we are the lessor,
the cost of revenue is primarily comprised of depreciation of the cost of leased
solar energy systems, maintenance costs associated with those systems and
amortization of any initial direct costs.

Cost of energy generation and storage revenue increased by $245 million, or 44%,
in the three months ended September 30, 2021 as compared to the three months
ended September 30, 2020. These increases were primarily due to increases in
deployments of Megapack, solar cash and loan jobs, Solar Roof and Powerwall,
partially offset by a decrease in Powerpack deployments as we phase out the
product following the introduction of Megapack.

Cost of energy generation and storage revenue increased by $990 million, or 83%,
in the nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. These increases were primarily due to increases in
deployments of solar cash and loan jobs, Megapack, Solar Roof and Powerwall,
partially offset by reductions in average costs per unit of solar cash and loan
jobs and Solar Roof as deployments have increased and a decrease in Powerpack
deployments as we phase out the product following the introduction of Megapack.

Gross margin for energy generation and storage decreased from 4% to 0% in the
three months ended September 30, 2021 as compared to the three months ended
September 30, 2020, primarily due to a higher proportion of Solar Roof in our
overall energy business, which operated at lower gross margins as a result of
temporary manufacturing underutilization during product ramp, despite gross
margin improvements compared to the prior period, partially offset by improved
gross margins in our energy storage business.

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Gross margin for energy generation and storage decreased from 4% to -4% in the
nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020, primarily due to a higher proportion of Solar Roof in our
overall energy business which operated at lower gross margins as a result of
temporary manufacturing underutilization during product ramp despite
improvements in gross margins compared to the prior period and increased service
maintenance costs on solar energy systems where we are the lessor, partially
offset by a higher proportion of Powerwall in our overall energy business which
operated at higher gross margins.

Research and development costs


                                 Three Months Ended                                Nine Months Ended
                                    September 30,                Change              September 30,               Change
(Dollars in millions)           2021            2020          $          % 

2021 2020 $% Research and development $ 611 $ 366 $ 245 67% $ 1,853 $ 969 $ 884 91% As a percentage of sales

           4 %             4 %                                  5 %        5 %




Research and development ("R&D") expenses consist primarily of personnel costs
for our teams in engineering and research, manufacturing engineering and
manufacturing test organizations, prototyping expense, contract and professional
services and amortized equipment expense.

R&D expenses increased $245 million, or 67%, in the three months ended September
30, 2021 as compared to the three months ended September 30, 2020. The increase
was primarily due to a $111 million increase in employee and labor related
expenses due to an increase in headcount, a $60 million increase in facilities,
outside services, freight and depreciation expenses, a $44 million increase in
R&D expensed materials, and a $29 million increase in stock-based compensation
expense. These increases were to support our expanding product roadmap such as
the new versions of Model S and Model X and technologies including our
proprietary battery cells.

R&D expenses increased $884 million, or 91%, in the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020. The increase
was primarily due to a $393 million increase in employee and labor related
expenses due to an increase in headcount, a $221 million increase in R&D
expensed materials, a $148 million increase in facilities, outside services,
freight and depreciation expense and a $120 million increase in stock-based
compensation expense. These increases were to support our expanding product
roadmap such as the new versions of Model S and Model X and technologies
including our proprietary battery cells.

R&D expenses as a percentage of revenue remained consistent at 4% in the three
months ended September 30, 2021 and 2020. R&D expenses as a percentage of
revenue remained consistent at 5% in the nine months ended September 30, 2021
and 2020. R&D expenses increased proportionately with the increase in total
revenues from expanding sales.

Selling, general and administrative expenses


                                Three Months Ended                                Nine Months Ended
                                   September 30,                Change              September 30,               Change
(Dollars in millions)          2021            2020          $          %          2021         2020         $          %
Selling, general and
administrative               $     994       $     888     $  106        12 %   $    3,023     $ 2,176     $  847        39 %
As a percentage of
revenues                             7 %            10 %                                 8 %        10 %



Selling, general and administrative (“SG&A”) expenses generally include personnel and installation costs related to our stores, marketing, sales, management, finance, human resources, business technology. information and legal organizations, as well as fees for professional and contractual services and dispute resolution.

SG&A expenses increased $106 million, or 12%, in the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020. The
increase is primarily due to an increase of $134 million in employee and labor
related expenses from increased headcount and a $106 million increase in office,
information technology, facilities-related expenses, sales and marketing
activities and other costs. The increases were partially offset by a decrease of
$134 million in stock-based compensation expense, of which $148 million was
attributable to the 2018 CEO Performance Award. See Note 11, Equity Incentive
Plans, to the consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q and Note 14, Equity Incentive Plans, in our Annual
Report on Form 10-K for the year ended December 31, 2020.

                                       37

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SG&A expenses increased $847 million, or 39%, in the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020. The increase
is primarily due to an increase of $445 million in employee and labor related
expenses from increased headcount and a $223 million increase in office,
information technology, facilities-related expenses, sales and marketing
activities and other costs. Additionally, there was an increase of $179 million
in stock-based compensation expense, of which $94 million was attributable to
the 2018 CEO Performance Award. See Note 11, Equity Incentive Plans, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q and Note 14, Equity Incentive Plans, in our Annual Report on Form 10-K
for the year ended December 31, 2020.

SG&A expenses as a percentage of revenue decreased from 10% to 7% in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020. SG&A expenses as a percentage of revenue decreased from 10% to 8% in
the nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. This was driven by the increase in total revenues from
expanding sales, despite an increase in our SG&A expenses as detailed above.

Restructuring and other expenses



                                  Three Months Ended                                          Nine Months Ended
                                    September 30,                     Change                    September 30,                 Change
(Dollars in millions)            2021             2020         $              %            2021           2020         $              %
Restructuring and other       $       51         $     -     $   51     Not meaningful   $     (27 )     $     -     $  (27 )   Not meaningful
As a percentage of revenues            0 %             0 %                                       0 %           0 %




During the three and nine months ended September 30, 2021, we recorded $51
million and $101 million, respectively, of impairment losses on bitcoin. We also
realized gains of $128 million in March 2021. See Note 2, Summary of Significant
Accounting Policies, and Note 3, Digital Assets, Net, to the consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q
for further details.

Interest Expense



                                Three Months Ended                                Nine Months Ended
                                   September 30,               Change               September 30,            Change
(Dollars in millions)           2021           2020         $          %         2021         2020        $          %
Interest expense              $    (126 )     $  (163 )   $   37       -23 %   $   (300 )    $ (502 )   $  202       -40 %
As a percentage of revenues           1 %           2 %                               1 %         2 %




Interest expense decreased by $37 million, or 23%, in the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020.
Interest expense decreased by $202 million, or 40%, in the nine months ended
September 30, 2021 as compared to the nine months ended September 30, 2020.
These decreases were primarily due to the adoption of ASU 2020-06, Accounting
for Convertible Instruments and Contracts in an Entity's Own Equity, on January
1, 2021, whereby we have de-recognized the remaining debt discounts on the 2022
Notes and 2024 Notes and therefore no longer recognize any amortization of debt
discounts as interest expense, as well as the continued reduction in our overall
debt balance. See Note 2, Summary of Significant Accounting Policies, to the
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q for further details. These decreases were partially offset by an
extinguishment of debt charge of $60 million related to the redemption of our
5.30% Senior Notes due in 2025.

Other (expenses) income, net


                                Three Months Ended                                Nine Months Ended
                                   September 30,               Change               September 30,            Change
(Dollars in millions)          2021           2020          $          %        2021         2020         $          %
Other (expense) income, net   $    (6 )     $     (97 )   $   91       -94 %   $   67       $  (166 )   $  233       -140 %
As a percentage of revenues         0 %             1 %                             0 %           1 %




Other (expense) income, net, consists primarily of foreign exchange gains and
losses related to our foreign currency-denominated monetary assets and
liabilities and changes in the fair values of our fixed-for-floating interest
rate swaps. We expect our foreign exchange gains and losses will vary depending
upon movements in the underlying exchange rates.

Other (expense) income, net, changed favorably by $91 million in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020, primarily due to favorable fluctuations in foreign currency exchange
rates.

Other (expense) income, net, changed favorably by $233 million in the nine
months ended September 30, 2021 as compared to the nine months ended September
30, 2020, primarily due to favorable fluctuations in foreign currency exchange
rates and a $54 million favorable change in the mark-to-market remeasurement of
our interest rate swaps.

                                       38
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Provision for Income Taxes



                                Three Months Ended                                 Nine Months Ended
                                   September 30,                Change               September 30,            Change
(Dollars in millions)          2021            2020          $          %         2021         2020        $          %
Provision for income taxes   $     223       $     186     $   37        20 %   $    407       $ 209     $  198        95 %
Effective tax rate                  12 %            34 %                              11 %        27 %




Our provision for income taxes increased by $37 million, or 20%, in the three
months ended September 30, 2021 as compared to the three months ended September
30, 2020. Our provision for income taxes increased by $198 million, or 95%, in
the nine months ended September 30, 2021 as compared to the nine months ended
September 30, 2020. The increases were primarily due to the increases in taxable
profits within our foreign jurisdictions year over year.

Our effective tax rate decreased from 34% to 12% in the three months ended
September 30, 2021 as compared to the three months ended September 30, 2020. Our
effective tax rate decreased from 27% to 11% in the nine months ended September
30, 2021 as compared to the nine months ended September 30, 2020. The decreases
were primarily due to growth in pre-tax income and changes in mix of
jurisdictional earnings.

See Note 2, Summary of significant accounting policies, to the consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for further details.

Net Income Attributable to Noncontrolling Interests and Redeemable
Noncontrolling Interests



                                 Three Months Ended                                 Nine Months Ended
                                   September 30,                 Change               September 30,               Change
(Dollars in millions)          2021              2020         $          %         2021           2020         $          %
Net income attributable to
noncontrolling interests
and
  redeemable
noncontrolling interests
in subsidiaries              $      41         $     38     $    3        
8 %   $     103       $   115     $  (12 )   -10%




Net income attributable to noncontrolling interests and redeemable
noncontrolling interests increased by $3 million, or 8%, in the three months
ended September 30, 2021 as compared to the three months ended September 30,
2020. Net income attributable to noncontrolling interests and redeemable
noncontrolling interests decreased by $12 million, or 10%, in the nine months
ended September 30, 2021 as compared to the nine months ended September 30,
2020. Our changes in net income attributable to noncontrolling interests and
redeemable noncontrolling interests, which was related to activities in our
financing fund arrangements, have been immaterial.

Liquidity and capital resources

We expect to continue to generate net positive operating cash flow as we have
done in the last three fiscal years. The cash we generate from our core
operations enables us to fund ongoing operations and production, our research
and development projects for new products and technologies including our
proprietary battery cells, additional manufacturing ramps at existing
manufacturing facilities such as the Fremont Factory, Gigafactory Nevada,
Gigafactory Shanghai and Gigafactory New York, the construction of Gigafactory
Berlin and Gigafactory Texas, and the continued expansion of our retail and
service locations, body shops, Mobile Service fleet, Supercharger network and
energy product installation capabilities.

In addition, because a large portion of our future expenditures will be to fund
our growth, we expect that if needed we will be able to adjust our capital and
operating expenditures by operating segment. For example, if our near-term
manufacturing operations decrease in scale or ramp more slowly than expected,
including due to global economic or business conditions, we may choose to
correspondingly slow the pace of our capital expenditures. Finally, we
continually evaluate our cash needs and may decide it is best to raise
additional capital or seek alternative financing sources to fund the rapid
growth of our business, including through drawdowns on existing or new debt
facilities or financing funds. Conversely, we may also from time to time
determine that it is in our best interests to voluntarily repay certain
indebtedness early.

Therefore, we believe that our current sources of funds will provide us with adequate liquidity over the following 12 month period. September 30, 2021, including to repay short-term debts, as well as long-term.

See the sections below for more details regarding the significant liquidity needs in our business and our sources of liquidity to meet those needs.

                                       39

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Significant cash flow requirements

From time to time in the ordinary course of business, we enter into agreements
with vendors for the purchase of components and raw materials to be used in the
manufacture of our products. However, due to contractual terms, variability in
the precise growth curves of our development and production ramps, and
opportunities to renegotiate pricing, we generally do not have binding and
enforceable purchase orders under such contracts beyond the short term, and the
timing and magnitude of purchase orders beyond such period is difficult to
accurately project.

As discussed in and subject to the considerations referenced in Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Management Opportunities, Challenges and Risks-Cash Flow and Capital
Expenditure Trends in this Quarterly Report on Form 10-Q, we currently expect
our capital expenditures to support our projects globally to exceed $6 billion
in 2021 and be between $5 to $7 billion in each of the next two fiscal years. In
connection with our operations at Gigafactory New York, we have an agreement to
spend or incur $5.0 billion in combined capital, operational expenses, costs of
goods sold and other costs in the State of New York through December 31, 2029
(pursuant to a deferral of our required timelines to meet such obligations that
was granted in April 2021 and which was memorialized in an amendment to our
agreement with the SUNY Foundation in August 2021). We also have an operating
lease arrangement with the local government of Shanghai pursuant to which we are
required to spend RMB 14.08 billion in capital expenditures at Gigafactory
Shanghai by the end of 2023. For details regarding these obligations, refer to
Note 12, Commitments and Contingencies, to the consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

As of September 30, 2021, we and our subsidiaries had outstanding $6.70 billion
in aggregate principal amount of indebtedness, of which $1.22 billion is
scheduled to become due in the succeeding 12 months. For details regarding our
indebtedness, refer to Note 10, Debt, to the consolidated financial statements
included elsewhere in this Quarterly Report on Form 10-Q.

Sources and conditions of liquidity

Our sources to fund our material cash requirements are predominantly from our
deliveries of vehicles, sales and installations of our energy storage products
and solar energy systems, proceeds from debt facilities and proceeds from equity
offerings.

As of September 30, 2021, we had $16.07 billion of cash and cash equivalents.
Balances held in foreign currencies had a U.S. dollar equivalent of $5.79
billion and consisted primarily of Chinese yuan, euros and Canadian dollars. In
addition, we had $475 million of unused committed amounts under our credit
facilities as of September 30, 2021. Certain of such unused committed amounts
are subject to satisfying specified conditions prior to draw-down (such as
pledging to our lenders sufficient amounts of qualified receivables,
inventories, leased vehicles and our interests in those leases, solar energy
systems and the associated customer contracts or various other assets). For
details regarding our indebtedness, refer to Note 10, Debt to the consolidated
financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We continue adapting our investment strategy to meet our liquidity and risk
objectives, such as investing in U.S. government and other marketable
securities, digital assets and providing product related financing. In the first
quarter of 2021, we invested an aggregate $1.50 billion in bitcoin. In addition,
during the three months ended March 31, 2021, we accepted bitcoin as a form of
payment for sales of certain of our products in specified regions, subject to
applicable laws, and suspended this practice in May 2021. We may in the future
restart the practice of transacting in digital assets for our products and
services. The fair market value of our bitcoin holdings as of September 30, 2021
was $1.83 billion. We believe in the long-term potential of digital assets both
as an investment and also as a liquid alternative to cash. As with any
investment and consistent with how we manage fiat-based cash and cash-equivalent
accounts, we may increase or decrease our holdings of digital assets at any time
based on the needs of the business and our view of market and environmental
conditions. However, digital assets may be subject to volatile market prices,
which may be unfavorable at the times when we may want or need to liquidate
them.

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