Creativity doesn’t have a deep history. The Oxford English Dictionary records just a single usage of the word in the 17th century, and it’s religious: ‘In Creation, we have God and his Creativity.’ Then, scarcely anything until the 1920s – quasi-religious invocations by the philosopher A N Whitehead. So creativity, considered as a power belonging to an individual – divine or mortal – doesn’t go back forever. Neither does the adjective ‘creative’ – being inventive, imaginative, having original ideas – though this word appears much more frequently than the noun in the early modern period. God is the Creator and, in the 17th and 18th centuries, the creative power, like the rarely used ‘creativity’, was understood as divine. The notion of a secular creative ability in the imaginative arts scarcely appears until the Romantic Era, as when the poet William Wordsworth addressed the painter and critic Benjamin Haydon: ‘Creative Art … Demands the service of a mind and heart.’
This all changes in the mid-20th century, and especially after the end of the Second World War, when a secularised notion of creativity explodes into prominence. The Google Ngram chart bends sharply upwards from the 1950s and continues its ascent to the present day. But as late as 1970, practically oriented writers, accepting that creativity was valuable and in need of encouragement, nevertheless reflected on the newness of the concept, noting its absence from some standard dictionaries even a few decades before.
Before the Second World War and its immediate aftermath, the history of creativity might seem to lack its object – the word was not much in circulation. The point needn’t be pedantic. You might say that what we came to mean by the capacity of creativity was then robustly picked out by other notions, say genius, or originality, or productivity, or even intelligence – or whatever capacity it was believed enabled people to think thoughts considered new and valuable. And in the postwar period, a number of commentators did wonder about the supposed difference between emergent creativity and such other long-recognised mental capacities. The creativity of the mid-20th century was entangled in these pre-existing notions, but the circumstances of its definition and application were new.
With those definitional considerations in mind, there were consequential changes during the 19th and early 20th centuries in views of the nature and circumstances of such diffuse categories as original and productive thought. Increasingly, these categories were being respecified as mundane, as inflections and manifestations of ordinary abilities, as competences that might even belong to an entity other than a specially and mysteriously endowed individual.
The idea of genius – of truly exceptional mental abilities – conceived in secular terms or as an inexplicable gift from above – remained alive and well, but it became both possible and, in some cases, prudent, for people who had done remarkably innovative things and who had thought remarkably new thoughts to disdain the designation of genius and to deny that they possessed unique intellectual endowments. You should understand that nothing special was going on.
In the same year that Charles Darwin’s On the Origin of Species (1859) was published, a book called Self-Help by the Scottish author Samuel Smiles sold far more copies. Self-Help was a kind of entrepreneur’s guide to success through hard work, and Smiles made clear what he thought about the relative significance of genius versus disciplined application in making new knowledge. There is such a thing as genius, Smiles wrote, but its role has been systematically exaggerated: ‘fortune is usually on the side of the industrious’; what’s needed is ‘common sense, attention, application, and perseverance’.
The Victorian novelist Anthony Trollope kept genius at arm’s length by telling us that fluent novel-writing was little more than a matter of 250 words per quarter-hour, adding up to 2,500 words before breakfast, every day. And when Darwin himself was asked whether he possessed any special talents, he replied that he had none, except that he was very methodical. ‘I have,’ he said, ‘a fair share of invention, and of common sense or judgment, such as every fairly successful lawyer or doctor must have, but not, I believe, in any higher degree.’
The old way to profits was monopolistic control; the new way was said to be constant innovation
These sorts of democratic sentiment were fast moving towards the norm. In 1854, the French biologist Louis Pasteur deflated the idea of scientific originality as a special gift: ‘Fortune favours the prepared mind.’ Be in the right place, with the right training, and you too can have important new ideas. Around 1903, the American inventor Thomas Edison gave us the still-popular formula that genius was ‘1 per cent inspiration, 99 per cent perspiration’, and the most celebrated scientific thinker of the 20th century – Albert Einstein – thought it intellectually and morally wrong to attribute mysterious gifts to people like him: ‘It strikes me as unfair, and even in bad taste, to select a few [individual personalities] for boundless admiration, attributing superhuman powers of mind and character to them.’
By the early 20th century, original work in the sciences was, in any case, being moved out of its once-religious Ivory Tower cloisters and entering the world of commerce, and this too encouraged demotic sentiments about pertinent intellectual capacities. First, the great German – and then the British and American – chemical, pharmaceutical and electrical companies were investing in both applied and basic research, hiring large numbers of academically trained scientists, with the idea that innovation was key to commercial success and that science properly belonged in commercial organisations. The old way to profits was monopolistic control; the new way was said to be constant innovation.
The wider culture at the time accounted the combination of professors and profits an odd one – academic eccentricity and demands for autonomy might rub up against corporate norms – and much reflective and practical thought went into arranging the circumstances that would allow companies to secure innovative people, permit them to do innovative things, and enhance their innovative output while, at the same time, keeping their attention on the right sorts of innovations, those that might yield corporate profit.
In such settings, the relevant category was still not creativity but a loosely connected set of competences, sometimes designated as originality, sometimes as productivity, more often not specially dwelt on or defined. Whatever those capacities were, they lay behind the outcomes for which scientific workers were employed. And employers tended to infer the competences from the concrete outcomes. There was, however, one notion of workers’ capacities from which corporate managers wished to dissociate themselves – and that was genius. Different firms had different sensibilities about scientific workers’ competences, but one response emerging from the new research labs of companies such as General Electric and Eastman Kodak was that creative and productive work didn’t have to do with hiring awkward geniuses but with finding the organisational forms that allowed people of ordinary gifts to achieve extraordinary things.
In 1920, a reflective director of industrial research at Eastman Kodak acknowledged the reality and value of genius, though he doubted that any company could expect to secure an adequate supply of such exceptional people. No matter: scientific workers who were well-trained and well-motivated could make valuable contributions even though they were ‘entirely untouched by anything that might be considered as the fire of genius’. At mid-century, corporate and bureaucratic employers varied in their opinions about whether the organisational difficulties attending genius were worth putting up with; some insisted that they were; others thought that the disruption caused by genius was too big a price to pay; and still others reckoned that a properly organised team of people of average abilities might constitute ‘a very good substitute for genius’.
Organisations should be designed to induce scientists from different disciplines to focus on a common project; to keep them talking to each other while maintaining ties with their home academic disciplines; and to get them to concentrate on commercially relevant projects while permitting enough freedom to ‘stare out the window’ and to think ‘blue sky’ thoughts. If you want profits, then – it was widely conceded – one price you pay is a significant amount of intellectual freedom, allowing the scientific workers to do just what they wanted to do, at least some of the time. The one-day-a-week-for-free-thought notion is not the recent invention of Google; it goes back practically forever in industrial research labs, and its justification was always hard-headed.
After the war, the Manhattan Project was often celebrated as a shining example of what effective organisation could achieve. True, many of the scientists building the bomb were regarded as geniuses, but many were not, and huge amounts of design and testing work and isotope manufacture was done by legions of scientists and engineers with ordinary qualifications. J Robert Oppenheimer was acclaimed for his administrative genius as much as for his scientific brilliance, though much of the organisational structure at Los Alamos and at isotope-producing sites was adapted from such companies as Westinghouse Electric. The Manhattan Project was proof that you could, after all, ‘herd cats’, organise geniuses and achieve things that were new and consequential – things that no lone genius or random aggregate of geniuses could have done.
The atomic bomb marked the end of the Second World War and the beginning of the Cold War. The creativity of Manhattan Project scientists and engineers has been abundantly celebrated by later commentators, not so much in the immediate aftermath: the word ‘creativity’ doesn’t appear in the official Smyth Report (1945) on the Project. And the only invocation of the notion of genius is deflationary and morally exculpatory: ‘This weapon has been created not by the devilish inspiration of some warped genius but by the arduous labour of thousands of normal men and women.’ But the new atomic world was just the institutional and cultural environment in which creativity emerged, flourished and was variously interpreted.
Among people with the relevant intellectual capacities, it would be useful to determine who might become ‘creative’
The military was a key actor in creativity’s Cold War history. That helps to make it a particularly American history, though there was uptake in other ‘free world’ settings. The American national requirement for ever-growing ‘stockpiles’ of scientific talent was clear in the earliest stages of superpower conflict, and it became urgent after Sputnik. ‘In the presence of the Russian threat,’ a psychologist wrote:
‘creativity’ could no longer be left to the chance occurrence of genius; neither could it be left in the realm of the wholly mysterious and the untouchable. Men had to be able to do something about it; creativity had to be a property in many men; it had to be something identifiable; it had to be subject to efforts to gain more of it.
There were proposals for scientific manpower boards to arrange continuing supplies of scientific personnel and to organise them in a way that enhanced ‘creative work’. Quantity was important, and the flow of scientific personnel depended in part on identifying populations of young people with the potential to become productive technical workers. Quality was very important too: among people with the right intellectual capacities, it would be useful to determine which of them might become ‘creative’. Could that psychological capacity be identified, broken out from other mental traits, measured?
It was this capacity that was increasingly called creativity, and there were many consumers for a stabilised and reliable characterisation of creativity and for means of assessing it. The bits of government – both military and civilian – concerned with the supply of technical personnel wanted less chancy, more dependable ways of identifying all sorts of talent; the military wanted techniques for spotting officers capable of initiative, improvisation and the ability to imagine new forms of warfare – in the American military strategist Herman Kahn’s Kennedy-era encouragement to contemplate fighting and surviving a thermonuclear war: to ‘think the unthinkable’. Businesses and governmental bureaucracies wanted the ability to spot adaptable managers; educational institutions wanted to select imaginative teachers; the new National Science Foundation (NSF) wanted better ways of deciding which grant applicants were most likely to produce significant breakthroughs. And, of course, institutions concerned with the arts and humanities wanted something similar, though these less-practically oriented concerns were not as significant in creativity’s Cold War history as were the making of war, profits and technical knowledge.
The expert human-science practices of defining and measuring mental abilities and supplying the results to institutional clients were, of course, well developed before the war. But, in the case of creativity, new military and corporate demand stimulated new academic supply, and this new self-fertilising academic supply encouraged yet more demand. In 1950, a leading psychologist lamented that only a tiny proportion of the professional literature was then concerned with creativity; within the decade, a self-consciously styled and elaborately supported ‘creativity movement’ developed. Bibliographies were produced giving the field a distinct identity; conferences were held; journals were founded; influential seminars on ‘creative engineering’ were held at MIT, Stanford and in commercial corporations, asking what creativity is, why it’s important, what factors influence it, and how it ought to be deployed; and the personnel divisions of all branches of the US military were intimately involved in Cold War creativity research.
Definitions of creativity were offered; tests were devised; testing practices were institutionalised in the processes of educating, recruiting, selecting, promoting and rewarding. Creativity increasingly became the specific psychological capacity that creativity tests tested. There was never overwhelming consensus about whether particular definitions were the right ones or about whether particular tests reliably identified the desired capacity, but sentiment settled around a substantive link between creativity and the notion of divergent thinking. Individuals were said to have creativity if they could branch out, imagine a range of possible answers to a problem and diverge from stable and accepted wisdom, while convergent thinking moved fluently towards ‘the one right answer’. Asked, for example, how many uses there are for a chair, the divergent thinker could come up very many; the convergent thinker said only that you sat on it. Convergent and divergent thinking stood in opposition, just as conformity was opposed to creativity.
There was an essential tension between the capacities that made for group solidarity and those that disrupted collective ways of knowing, judging and doing. And much of that tension proceeded not just from practical ways of identifying mental abilities but from the moral and ideological fields in which creativity and conformity were embedded. For human science experts in the creativity movement and for their clients, conformity was not only bad for science, it was also morally bad; creativity was good for science, and it was also morally good.
The historian Jamie Cohen-Cole has described the Cold War conjuncture of moral and instrumental sensibilities surrounding the supposed conflict between creativity and conformity. Creativity was valued for its practical outcomes – in science, technology, military and diplomatic strategy, advertising, business and much else – and it was integral to conceptions of what American citizens were, why they were free, why they were not the dupes of authoritarian dogma: why, in short, they were resistant to communism and able to maintain their authentic individuality. Creativity was a capacity that belonged, and should be encouraged to belong, he argued, to ‘a form of the exemplary self that would inoculate America against the dangers of mass society’. There were Cold War appreciations of creativity arising from specific forms of social interaction, but the opposition with conformity indexed creativity as a capacity belonging to the free-acting individual. The celebration of creativity was here an aspect of the celebration of individualism. The good society was a creative society, and open-mindedness had as much moral and political value as it promised cash-value. There was no choice but to embrace creativity and push back against conformity. To understand the stark realities of ‘the atomic age’ – wrote the psychologist Carl Rogers in 1954 – is to understand that ‘international annihilation will be the price we pay for a lack of creativity’.
The forces of conformity were the conditions for passages of science that came to be seen as creative
At the height of the Cold War, the upward curve of US expert enthusiasm for creativity met an ascending curve of concern that creativity was being squashed by social forms increasingly entrenched in US society. The Organization Man (1956) by the Fortune journalist and urbanist William H Whyte was a bestseller, sparking anxiety that business intentions to manage creativity were self-defeating, even a thin hypocritical veneer laid over crushing corporate conformity. Creativity was, in its nature, individual, eccentric and antagonistic to attempts to plan or organise it. If you seriously attempted to manage creative people, you might get the appearance of creativity but not its reality. President Dwight Eisenhower’s Farewell Address of 1961 warned against the dangers of the ‘military-industrial complex’, but it also fretted about the loss of ‘intellectual curiosity’ attendant on the rise of collectivised science, done on government contract or sponsored by industry.
From 1955 to 1971, the NSF sponsored a series of conferences on scientific creativity at the University of Utah, also partly funded by the Air Force. They were presided over by leading psychologists in the creativity movement, and they were attended by representatives of US education, government, the military and business (including General Electric, Boeing, Dow Chemical Company, Aerojet-General and the Esso Research Center). Everyone who was anyone in creativity research and its applications was there. The third of these Utah conferences in June 1959 was attended by a young Harvard physicist-turned-historian, Thomas S Kuhn. His contribution to proceedings began with an expression of bewilderment: he supposed that he was also concerned with creativity but, listening to the psychologists over the course of the meeting, he wondered why he had been invited, unsure about ‘how much we do, or even should, have to say to each other’.
Kuhn expressed deep scepticism about the foundational identification between creativity and divergent thinking. He noted the psychologists’ repeated depictions of the scientist free of preconceptions, continually rejecting tradition and continually embracing novelty; he wondered whether ‘flexibility and open-mindedness’ had not been too much stressed as requisites for basic scientific research; and he suggested that ‘something like “convergent thinking”’ was better talked about as essential to scientific advance than as an obstacle. What Kuhn was offering, and what he delivered a few years later as The Structure of Scientific Revolutions (1962), was something that might be described as a theory of scientific creativity without the psychologists’ category of creativity.
‘Normal science’ – science under a paradigm – was a form of puzzle-solving, its practitioners embracing tradition, accepting communal ‘dogma’, trying to extend the reach of the paradigm and to refine the fit between paradigm and evidence, aiming to converge on the unique and stable correct answer. Revolutionary change might involve individual acts of imagination, but the condition for the crises that provoked revolution was a community of scientists doing whatever they could to reduce anomaly, to fit pegs into holes until it was realised that the pegs might be square and the holes round. That is to say, the psychological and sociological forces of conformity were the necessary conditions for passages of science that came to be seen as creative. Tellingly, the word creativity never appears in Structure. You might, following Kuhn, say that the institution of science was creative, but you couldn’t say that this flowed from scientists’ divergent-thinking creativity.
Is creativity’s history progressive? The word itself, and the expert practices for identifying it, became prominent in the Cold War but, if you’re not bothered about that, you might say that related categories – being creative, a creative person – transitioned over time from the sacred power to a secular capacity, from a sacred to a secular value, from categories belonging to the vernacular to controlled ownership by academic experts, from something no one pays to find out about to elaborately funded expert practices. From the 1950s to the present, creativity has been established as something that everybody wants: in 1959, the director of scientific research at General Electric began an address to government officials with the bland assertion: ‘I think we can agree at once that we are all in favour of creativity,’ and he was right. Creativity had become an institutional imperative, a value that was the source of many other values.
That linear story is almost, but not quite, right. Kuhn’s case for tradition and dogma was a reactionary move, and a condition for its being even thinkable was reaction to mid-century celebrations of individualism, free-thinking and market-place models of progressive enquiry. But Kuhn’s small-c conservativism was widely misunderstood and confused with iconoclasm, and some radical ‘Kuhnians’ oddly took his book as a licence for political revolution.
About the same time, there was a more consequential response to creativity-enthusiasm emerging from the heart of forward-facing capitalism. The Harvard Business Review published an essay by Theodore Levitt, a marketing expert at the Harvard Business School, called ‘Creativity Is Not Enough’ (1963). Levitt didn’t doubt that there was an individual capacity called creativity, or that this capacity might be a psychological source of new ideas. Creativity was not, however, the royal road to good business outcomes, and conformity was being seriously undervalued. New ideas were not in short supply; executives were drowning in them: ‘there is really very little shortage of creativity and of creative people in American business,’ he wrote.
Many businesspeople didn’t dwell on distinctions between creativity and innovation, but Levitt did: creativity was having a new idea; innovation was the realisation of an idea in a specific outcome that the organisation valued; and it was innovation that really mattered. Creative people tended to be irresponsible, detached from the concrete processes of achieving organisational ends: ‘what some people call conformity in business is less related to the lack of abstract creativity than to the lack of responsible action.’ Levitt’s views were widely noted, but in the 1960s he was swimming against the tide. Creativity had been incorporated.
From that time to the present, you can say that creativity rose and rose. Everyone still wants it, perhaps more than ever; politicians, executives, educators, urban theorists and economists see it as the engine of economic progress and look for ways to have more of it. The creativity tests are still around, most continuing to identify creativity with divergent thinking; they have gone through successive editions; and there is a greater variety of them than there used to be. There are academic and professional organisations devoted to the study and promotion of creativity; there are encyclopaedias and handbooks surveying creativity research; and there are endless paper and online guides to creativity – or how, at least, to convince others that you have it.
The identity of the capacity called creativity has been affected by its normalisation
But this proliferating success has tended to erode creativity’s stable identity. On the one hand, creativity has become so invested with value that it has become impossible to police its meaning and the practices that supposedly identify and encourage it. Many people and organisations utterly committed to producing original thoughts and things nevertheless despair of creativity-talk and supposed creativity-expertise. They also say that undue obsession with the idea of creativity gets in the way of real creativity, and here the joke asks: ‘What’s the opposite of creativity?’ and the response is ‘Creativity consultants.’
Yet the expert practices of identifying people, social forms and techniques that produce the new and the useful are integral to the business world and its affiliates. There are formally programmed brainstorming sessions, brainwriting protocols to get participants on the same page, proprietary creative problem-solving routines, creative sessions, moodboards and storyboards, collages, group doodles, context- and empathy-mapping as visual representations of group thinking, lateral thinking exercises, and on and on. The production of the new and useful is here treated as something that can be elicited by expert-designed practices. Guides to these techniques now rarely treat creativity as a capacity belonging to an individual, and there are few if any mentions of creativity tests.
In the related worlds of high-tech and technoscience, Google (collaborating with Nature magazine and a media consultancy) sponsors an annual interdisciplinary conference called SciFoo Camp: it’s a freeform, no-agenda occasion for several hundred invited scientists, techies, artists, businesspeople and humanists – meant only to yield new, interesting and consequential ideas: Davos for geeks and fellow-travellers. There’s a YouTube video explaining SciFoo and very many online accounts of the thing.
So SciFoo is a star-dusted gathering of creative people, intended to elicit creative thoughts. I might well have missed something, but when I Googled ‘SciFoo’ and searched the first several pages of results, I didn’t find a single mention of creativity. When Google – and other high-tech and consulting businesses – hire people in nominally creative capacities, typical interview questions aim to assess personality – ‘What would you pick as your walk-up song?’ – or specific problem-solving abilities and dispositions – ‘How many golf balls can fit into a school bus?’ or ‘How would you solve the homelessness crisis in San Francisco?’ They want to find out something concrete about you and how you go about things, not to establish the degree to which you possess a measurable psychological quality.
In educational settings, creativity testing continues to flourish – where it is used to assess and select both students and teachers – but it is scarcely visible in some of late modernity’s most innovative settings. Producing new and useful things is not less important than it once was, but the identity of the capacity called creativity has been affected by its normalisation. A standard criticism of much creativity research, testing and theorising is that whatever should be meant by the notion is in fact task-specific, multiple not single. Just as critics say that there can be no general theory of intelligence, so you shouldn’t think of creativity apart from specific tasks, settings, motivations and individuals’ physiological states.
Creativity was a moment in the history of academic psychology. As an expert-defined category, creativity was also summoned into existence during the Cold War, together with theories of its identity, distinctions between creativity and seemingly related mental capacities, and tests for assessing it. But creativity also belongs to the history of institutions and organisations that were the clients for academic psychology – the military, business, the civil service and educational establishments. Creativity was mobilised too in the moral and political conflict between supposedly individualistic societies and their collectivist opponents, and it was enlisted to talk about, defend and pour value over US conceptions of the free-acting individual. This served to surround creativity with an aura, a luminous glow of ideology.
The Cold War ended, but the rise of creativity has continued. Many of its expert practices have been folded into the everyday life of organisations committed to producing useful novelty, most notably high-tech business, the management consultancies that seek to serve and advise innovatory business, and other institutions that admire high-tech business and aim to imitate its ways of working. That normalisation and integration have made for a loss of expert control. Many techniques other than defining and testing have been put in place that are intended to encourage making the new and useful, and the specific language of creativity has tended to subside into background buzz just as new-and-useful-making has become a secular religion. Should this continue, one can imagine a future of creativity without ‘creativity’.
Why 780 retired generals and former national security leaders spoke out against Trump
On June 1, retired Army vice chief of staff Gen. Peter Chiarelli sat staring out at the Pacific Ocean in Gearhart, Ore., where his family had vacationed throughout his long military career. The peaceful scene was occasionally interrupted by the news flashing across the notebook computer in his lap. In a Rose Garden speech that afternoon, President Trump addressed the racial justice protests spreading across the nation after the brutal killing of George Floyd in police custody a week earlier.
In the speech, Trump proclaimed himself “your president of law and order,” and claimed the protests had been hijacked by “professional anarchists, violent mobs, arsonists, looters, criminals, rider rioters, antifa and others” intent on “domestic terror.” News cameras showed some of the hundreds of National Guard troops from around the country that had been sent to reinforce the D.C. Guard, and there were reports that 1,600 active-duty troops were on high alert just outside the capital. Privately, Trump was threatening to invoke the Insurrection Act in order to send thousands more active-duty troops onto the nation’s streets in a show of dominant military force, criticizing weak governors and mayors around the country for not doing more to forcefully stamp out the protests.
The television cameras shifted to a mostly peaceful crowd of protesters across Lafayette Park from the White House. Chiarelli sat up when a phalanx of federal police and National Guard troops suddenly marched into the peaceful crowd, backed by a small cavalry of Park Police on horseback. There were flash-bang explosions, clouds of tear gas and the crackle of pepper balls as riot police used shields and batons to pummel some in the crowd. A woman could be heard plaintively shouting above the din, “Why are you shooting at us?!”
After the crowd was dispersed, Chiarelli watched with growing alarm as President Trump strode purposefully across Lafayette Park flanked by Attorney General William Barr, Defense Secretary Mark Esper, and Gen. Mark Milley, chairman of the Joint Chiefs of Staff. Chiarelli had served in combat with Milley in Iraq, and considered him a good friend. That Mark Milley would have known better than to appear at the president’s side in his camouflage uniform after a show of dominant force against protesters on the streets of America.
In front of historic Saint John’s Church, damaged by fire during earlier protests, Trump posed silently holding a bible aloft for a 2-minute photo op. At long last, President Trump had the image of the “American carnage” that he had promised to end in his inauguration speech, insisting that he alone could fix it.
Along with a cadre of other retired generals, a very upset Peter Chiarelli decided to contact his old friend General Milley, the most senior uniformed leader in the country. After serving as commander of the 147.000 U.S. and coalition troops of Multi-National Corps – Iraq, Chiarelli as vice chief of the Army had led Defense Department efforts to treat post-traumatic stress, traumatic brain injury and suicide prevention. On his retirement in 2012, he became the first CEO of One Mind, which supports research into brain illnesses and injuries.
“That whole incident around Lafayette Square was stunning to me, because those were mostly peaceful demonstrators exercising a right guaranteed by the Constitution that I’ve sworn allegiance to throughout my entire career,” said Chiarelli in an interview. That allegiance is not given to a political party, Congress or the president of the United States, he noted, making the image of a uniformed chairman of the Joint Chiefs and the defense secretary at Trump’s side that day so alarming. General Milley later apologized for his presence in Lafayette Square, and Defense Secretary Mark Esper earned the president’s enmity by publicly opposing invocation of the Insurrection Act in order to use U.S. military troops to “dominate” the streets.
Along with more than 780 retired high-ranking officers and former national security leaders — including 22 retired four-star generals and admirals and five former secretaries of defense — Chiarelli signed an “Open Letter to America” endorsing Joe Biden for president. “We love our country,” the signatories wrote. “Unfortunately, we also fear for it.”
“Signing that letter was very hard for me to do, because I have never done that before or even given a dollar to a political campaign. Frankly, even as a retired general I didn’t think it was the right thing to do,” said Chiarelli, stressing that active-duty military officers are indoctrinated from a young age to remain strictly nonpartisan and apolitical. “But this president has assaulted the military justice system on behalf of individuals charged with war crimes. He has ended the career of service members like [impeachment witness Lt. Col. Alexander] Vindman for doing his duty and what was right. He has maligned mail-in voting as a fraud and suggested he might claim victory in a close election before all the ballots are counted, when as a service member I have voted absentee by mail my entire life. So like everyone else I’ve become numb after four years of this, but we have gone places in that time that I never dreamt we would go as a nation. I really do fear that the republic that I swore allegiance to is now under threat.”
Even among the cascade of scandals and controversies that have characterized the Trump presidency, the use of excessive force against mostly peaceful protesters near Lafayette Square, and the involvement of the top ranks of the U.S. military, still stands out. The incident conjured a truly dystopian vision of a U.S. president not only willing but eager to use the world’s most powerful military to crush domestic protests and “dominate” the streets of America, one that an increasing number of retired generals and senior national security experts believe could become all too real in a second Trump term.
Lafayette Square was so alarming that it shook Trump’s former Defense Secretary, retired four-star Marine Gen. Jim Mattis, out of his long silence on the president’s leadership, writing afterwards that “Donald Trump is the first president in my lifetime who does not try to unite the American people — does not even pretend to try.”
Trump’s troubling authoritarian instincts, focus on image over substance, constant misuse and politicization of nonpartisan institutions and penchant for chaos were all on clear display in Lafayette Square, and the incident crystalized the concerns expressed in the open letter. Traditionally both active-duty and retired U.S. military and intelligence officials have steered clear of politics, but in mid-September the Trump campaign released a letter signed by 235 retired senior military officers endorsing the president for reelection with the claim that Americans’ “historic way of life is at stake” if the “socialists and Marxists” of the Democratic Party take control of the government.
The willingness of hundreds of career officers to break with tradition and speak out on behalf of one candidate reflects beliefs, on both sides, that the nation faces an uncertain future, facing the worst pandemic in over a century, the worst economic decline since the Great Depression and the worst racial unrest since the 1960s. To the signers of the “Open Letter to America,” a second Trump term would only make things worse.
“Over the last three-plus years, I’ve watched the Trump administration politicize the Department of Justice and eviscerate the State Department, and the situation in Lafayette Square made clear that if reelected, Trump will politicize the Defense Department as well,” said retired Rear Adm. Mike Smith, who was instrumental in organizing the “Open Letter to America.” “A lot of us who spent our careers in the military would rather have stayed out of politics, but we have a deep moral conviction that the country can’t afford to go through another four years of this kind of leadership.”
Already the Lafayette Square incident has sunk beneath a wave of subsequent controversies and scandals, including recent revelations in investigative reporter Bob Woodward’s book “Rage,” based on numerous on-the-record interviews with Trump, that the president knew early on about the deadly and extremely contagious nature of the COVID-19 virus, but chose to continually play down the threat; the revelations in an article in the Atlantic, backed by reporting by the Washington Post, Fox News and other outlets, that Trump has repeatedly shown contempt for U.S. service members killed in combat, including referring to fallen soldiers and marines in cemeteries overseas as “losers” and “suckers”; Trump’s bullying and hectoring performance in the first presidential debate that astounded viewers at home and abroad; the president’s decision to put the health and lives of his Secret Service detail in jeopardy for a photo op after he tested positive for the coronavirus; and Trump’s insistence that the presidential election weeks away will be “the most rigged” in history, and his refusal to commit to accepting its results and peacefully transfer power if he loses.
President Trump’s relationship with military commanders might have been an asset in his reelection campaign. He has increased defense spending each year of his presidency, with the United States on track to spend more on the military in 2020 (adjusted for inflation) than at any point since World War II, with the exception of a few years at the height of the Iraq War. Early in his term, Trump pleased commanders by relaxing battlefield restrictions in the fight against the Islamic State of Iraq and Syria (ISIS), and he ordered successful strikes that killed ISIS leader Abu Bakr al-Baghdadi and Iranian Quds Force leader Qassem Soleimani.
As commander in chief, Trump also clearly revels in the pomp and spectacle of military parades, and in salutes to the troops. Yet from the early days of his presidency there were signs of severe tension between a president who has racked up an unprecedented 20,000 falsehoods since taking the oath, according to the Washington Post’s “Fact Checker,” and an institution built on the ethos that officers “will not lie, cheat, steal, or tolerate those who do.” There were also early indications that Trump was willing to politicize the most stringently apolitical institution in the U.S. government, treating appearances with the troops like political rallies where he excoriated Democrats and signed “Make America Great Again” hats. Before the 2018 midterm elections, Trump alarmed senior military leaders by sending active-duty troops to the southern border to confront a ragtag caravan of asylum seekers and migrants in a nakedly political stunt, and he diverted Pentagon funds to build sections of the wall he promised that Mexico would pay for.
From the beginning of his term, Trump has also exhibited indifference bordering on contempt for the sacrifices and principle of selfless service that underlies the military profession. Many officers were willing to look past the five draft deferments Trump received during the Vietnam War, including one for a “bone spur” diagnosis from a New York podiatrist who reportedly rented an apartment from Trump’s father.
More troubling to many uniformed leaders was Trump’s belittling of the Muslim Gold Star parents of a slain U.S. soldier who criticized him during the 2016 Democratic National Convention, and the president’s casual dismissal of the wartime service of the late Sen. John McCain, a former Navy pilot who spent more than five years being tormented in the notorious “Hanoi Hilton” prison. “He’s not a war hero,” said candidate Trump, when he was feuding with the Arizona senator. “He was a war hero because he was captured. I like people who weren’t captured.”
In his first briefing inside the Pentagon’s classified “tank” with then Defense Secretary Mattis and the Joint Chiefs, Trump famously bristled at their arguments supporting NATO and ongoing operations in Afghanistan. “You’re all losers,” Trump reportedly said to a room full of four-star flag officers and combat veterans. “You don’t know how to win anymore.” After Mattis later resigned to protest Trump’s rash decision to pull U.S. troops out of Syria and abandon Kurdish allies in the fight against ISIS, Trump publicly dissed him as “the world’s most overrated general.”
“President Trump routinely shows disrespect towards exemplary leaders like Senator McCain, and towards General Jim Mattis, one of our very best,” said retired Marine Lt. General Frank Libutti, a combat veteran and Purple Heart recipient who signed the “Open Letter to America.” “It recalls his public ridicule of many of his top military and intelligence community leaders, and his insistence that he knows more about issues of national security than they do, which is nonsense. But what I found truly shocking were Trump’s comments about the Marines who sacrificed their lives for victory at Belleau Wood. I believe words count. Character counts. Temperament counts. And President Trump has shown himself beneath the dignity of the office.”
A seeming contempt for military service came through most clearly when Trump canceled a planned visit to a World War I military cemetery near Paris because of rain during a 2018 trip. Quoting four anonymous sources with firsthand knowledge of the discussion that day, the Atlantic’s editor in chief Jeffrey Goldberg reported that Trump said, “Why should I go to that cemetery? It’s filled with losers.” In a separate conversation on the same trip, Trump reportedly referred to the more than 1,800 Marines who lost their lives at Belleau Wood as “suckers” for getting killed. Fox News and the Washington Post later confirmed similar episodes of the president denigrating military service.
Retired Air Force Gen. Charles Boyd spent more than six years as a prisoner of war in North Vietnam, and he is the only Vietnam War POW to later reach four-star rank. “When I read the Atlantic article, I found it absolutely disgusting. The idea that the commander in chief holds those who serve under him with such contempt, just because they are not driven by the same desire for money and wealth as him, made me sick to my stomach. In all of my experiences in life, I’ve never known any group that is more honorable than military professionals, who sign an unlimited liability contract to sacrifice their lives if called to for this nation.”
In the past, Boyd has also opposed even retired flag officers endorsing candidates or becoming involved in partisan politics, but he made an exception this year by signing the “Open Letter to America.” “There’s a saying in the military that ‘officers eat last,’ which means that leadership is all about what’s best for your troops, and for the nation. President Trump has no concept of that kind of leadership. Everything he does is driven by what’s best for him personally, including casting doubt on any election results that don’t declare him the winner. That’s destructive to the very fiber of our democracy.”
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Twin Cities area youth sports coaches add COVID-19 protocols to daily routines
Mary Guzek is used to playing the role of “Team Mom” for her two sons’ Fridley youth football, basketball and baseball squads. Time was, that meant supplying snacks or filling water bottles.
But this fall, in the midst of a global pandemic, it means taking players’ temperatures before every practice and game, counseling parents of sick kids to keep them home and running down a checklist of whether any of the 22 players on the fifth-grade football team have a cough or feel short of breath.
“Unfortunately, it’s what we have had to do to make sure our kids can play,” said Guzek, whose boys are 12 and 10. “But it was worse in the spring, when seasons were canceled, and the kids were sad and depressed. Now, they can play.”
It’s hard enough for some parents to volunteer their time and energy at the end of a workday to coach youth sports. But with COVID-19 rapidly spreading, they’re now forced to do more than manage lineups and the Xs and Os to keep players on the field and the virus at bay.
Many parents and volunteer coaches across the metro have added COVID-19 protocols to their duties. Taking player temperatures, scrubbing down equipment and alternating practice times have, for most, become routine. Meanwhile, some park and recreation departments, not wanting to saddle volunteers with such responsibility, have moved away from traditional soccer and football games, offering instead skills camps run by paid staff members at a handful of hub sites.
Jayme Murphy, who focuses on COVID-19 issues for the Minnesota Amateur Sports Commission, said youth sports groups across the state spent much of the summer exploring ways they could safely play in the fall. Some, he said, were committed to playing out the season. Others created scaled-down versions of their usual offerings. Still others canceled seasons altogether.
Key to those decisions was determining whether coaches and parent volunteers would feel overwhelmed by the responsibility for keeping COVID-19 in check. The Minnesota Department of Health has issued 13 pages of guidelines for safely conducting youth and adult sports.
“The question for volunteers and parents to ask themselves is how comfortable are they with risk?” Murphy said. “If you’re uncomfortable with this, if you’re uncomfortable with your child’s participation in this, that’s ok.”
With COVID-19 cases continuing to rise across the state this fall, those comfort levels may be challenged even more as the winter sports season approaches.
In St. Paul, officials at the city’s Parks and Recreation department canceled sports at 26 recreation centers over the spring and summer. This fall, they replaced tackle football and competitive soccer with flag football and soccer skills programs hosted at six recreation centers.
They did so, because “we didn’t want to throw the responsibility for following those protocols onto volunteer coaches,” said Andy Rodriguez, recreation services manager.
By limiting offerings to six sites, supervised by city employees with help from coaches at Cretin-Derham Hall and the Sanneh Foundation, Rodriguez said the city can better control social distancing, sanitizing equipment and health screening. Nearly 600 kids, ages 3-14, registered for soccer in St. Paul, Rodriguez said. Almost 400 kids, ages 8-12, signed up for flag football.
“For the most part, the families we have been working with are just thankful for something for their kids to do in the fall,” he said.
Davis Vue who helped his 7-year-old son Memphis tie his shoes on a recent night, said he is one of the happy parents. The St. Paul native watched the coronavirus wipe out his own flag football league season, so he appreciates the city finding a way for Memphis to participate. It’s his son’s first year playing and he hasn’t missed a night, his father said.
“With this pandemic going on, I’m surprised Parks and Rec had this going on for kids,” Vue said. “I’m really glad they did.”
There’s also no tackle football in Minneapolis, where the city’s Park Board has offered flag football for young athletes 6-18. The soccer season has continued with a citywide schedule and volunteer coaches, said Mimi Kalb, director of Athletic Programs and Aquatics for the Minneapolis Park Board. Younger children — on 6U and 8U teams — are playing games in “smaller service areas” with city staff members conducting many of the COVID-19 protocols, she said.
Some coaches and players and families opted out of playing, “but for those who wanted to play, we tried to take a lot of the responsibility off the coaches,” she said. “Our park staff and league directors are doing a lot of that.”
Tim Grate, athletics program director for Minneapolis Parks and Recreation, said many coaches have successfully incorporated their new responsibilities.
“I’ve seen coaches who laid out cones to make sure [players are] social distancing,” he said. “I haven’t heard a lot of complaints.”
John Swanson, a Fridley varsity football coach who oversees more than 200 youth teams across the north metro, said about 30 % of them opted out of play due to COVID-19 concerns. Those that remained were committed to following all the necessary rules to keep playing.
“It’s one of the few things that still connects community,” he said. “Youth sports help us maintain that connectivity.”
Coaches and team moms and dads are keeping spreadsheets, taking temperatures, cleaning equipment, staggering practice nights and holding kids out if they show symptoms or test positive, he said. Teams have built time into their schedules to play makeup games when any had to quarantine for 14 days. So far, he said, there have been no COVID-19 cases transmitted on the football field.
“I don’t think we are asking the coaches to do too much,” Swanson said. “Volunteer coaches have proved they can do it.”
Q3 2020 Update Exhibit 99.1
Highlights 03 Financial Summary04 Operational Summary06 Vehicle Capacity 07 Core Technology 08 Other Highlights09 Outlook10 Battery Day Highlights11 Photos & Charts13 Financial Statements23 Additional Information28
The third quarter of 2020 was a record quarter on many levels. Over the past four quarters, we generated over $1.9B of free cash flow while spending $2.4B on new production capacity, service centers, Supercharging locations and other capital investments. While we took additional SBC expense in Q3, our GAAP operating margin reached 9.2%. We are increasingly focused on our next phase of growth. Our most recent capacity expansion investments are now stabilizing with Model 3 in Shanghai achieving its designed production rate and Model Y in Fremont expected to reach capacity-level production soon. During this next phase, we are implementing more ambitious architectural changes to our products and factories to improve manufacturing cost and efficiency. We are also expanding our scope of manufacturing to include additional areas of insourcing. At Tesla Battery Day, we announced our plans to manufacture battery cells in-house to aid in our rapid expansion plan. We believe our new 4680 cells are an important step forward to reduce cost and improve capital efficiency, while improving performance. We continue to see growing interest in our cars, storage and solar products and remain focused on cost-efficiency while growing capacity as quickly as possible. $5.9B increase in our cash and cash equivalents in Q3 to $14.5B Operating cash flow less capex (free cash flow) of $1.4B in Q3 Cash Record vehicle deliveries, profitability and free cash flow Buildout of three new factories on three continents continues as planned First step of FSD beta rollout started in Oct. 2020 Profitability $809M GAAP operating income; 9.2% operating margin in Q3 $331M GAAP net income; $874M non-GAAP net income (ex-SBC) in Q3 SBC expense increased to $543M (driven by 2018 CEO award milestones) Operations S U M M A R Y H I G H L I G H T S 3 SBC = stock-based compensation
F I N A N C I A L S U M M A R Y (Unaudited) 4 ($ in millions, except percentages and per share data) Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 QoQ YoY Automotive revenues 5,353 6,368 5,132 5,179 7,611 47% 42% of which regulatory credits 134 133 354 428 397 -7% 196% Automotive gross profit 1,222 1,434 1,311 1,317 2,105 60% 72% Automotive gross margin 22.8% 22.5% 25.5% 25.4% 27.7% 223 bp 483 bp Total revenues 6,303 7,384 5,985 6,036 8,771 45% 39% Total gross profit 1,191 1,391 1,234 1,267 2,063 63% 73% Total GAAP gross margin 18.9% 18.8% 20.6% 21.0% 23.5% 253 bp 462 bp Operating expenses 930 1,032 951 940 1,254 33% 35% Income from operations 261 359 283 327 809 147% 210% Operating margin 4.1% 4.9% 4.7% 5.4% 9.2% 381 bp 508 bp Adjusted EBITDA 1,083 1,175 951 1,209 1,807 49% 67% Adjusted EBITDA margin 17.2% 15.9% 15.9% 20.0% 20.6% 57 bp 342 bp Net income attributable to common stockholders (GAAP) 143 105 16 104 331 218% 131% Net income attributable to common stockholders (non-GAAP) 342 386 227 451 874 94% 156% EPS attributable to common stockholders, diluted (GAAP) (1) 0.16 0.11 0.02 0.10 0.27 170% 69% EPS attributable to common stockholders, diluted (non-GAAP) (1) 0.37 0.41 0.23 0.44 0.76 73% 105% Net cash provided by (used in) operating activities 756 1,425 (440) 964 2,400 149% 217% Capital expenditures (385) (412) (455) (546) (1,005) 84% 161% Free cash flow 371 1,013 (895) 418 1,395 234% 276% Cash and cash equivalents 5,338 6,268 8,080 8,615 14,531 69% 172% (1) Prior period results have been retroactively adjusted to reflect the five-for-one stock split effected in the form of a stock dividend in August 2020. EPS = Earnings per share
F I N A N C I A L S U M M A R Y Revenue Profitability Cash Total revenue grew 39% YoY in Q3. This was achieved mainly through substantial growth in vehicle deliveries as well as growth in other parts of the business. At the same time, vehicle average selling price (ASP) declined slightly compared to the same period last year as our product mix continues to shift from Model S and Model X to the more affordable Model 3 and Model Y. Our operating income improved in Q3 to a record level of $809M, resulting in a 9.2% operating margin. This profit level was reached while we took increased SBC expense in Q3 attributable to the 2018 CEO award, of which $290M was triggered by a significant increase in share price and market capitalization and a new operational milestone becoming probable. Positive profit impacts included strong volume, better fixed cost absorption and continuous cost reduction. Quarter-end cash and cash equivalents increased by $5.9B QoQ to $14.5B, driven mainly by our recent capital raise of $5.0B (average price of this offering was ~$449/share) combined with free cash flow of $1.4B and partially offset by reduced use of working capital credit lines. Since our days payable outstanding (DPO) are higher than days sales outstanding (DSO), revenue growth results in additional cash generation from working capital. DPO and DSO both declined sequentially in Q3 2020. 5
Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 QoQ YoY Model S/X production 16,318 17,933 15,390 6,326 16,992 169% 4% Model 3/Y production 79,837 86,958 87,282 75,946 128,044 69% 60% Total production 96,155 104,891 102,672 82,272 145,036 76% 51% Model S/X deliveries 17,483 19,475 12,230 10,614 15,275 44% -13% Model 3/Y deliveries 79,703 92,620 76,266 80,277 124,318 55% 56% Total deliveries 97,186 112,095 88,496 90,891 139,593 54% 44% of which subject to operating lease accounting 9,086 8,848 6,104 4,716 10,014 112% 10% Total end of quarter operating lease vehicle count 44,241 49,901 53,159 54,519 61,638 13% 39% Global vehicle inventory (days of supply)(1) 18 10 25 17 14 -18% -22% Solar deployed (MW) 43 54 35 27 57 111% 33% Storage deployed (MWh) 477 530 260 419 759 81% 59% Store and service locations 417 433 438 446 466 4% 12% Mobile service fleet 719 743 756 769 780 1% 8% Supercharger stations 1,653 1,821 1,917 2,035 2,181 7% 32% Supercharger connectors 14,658 16,104 17,007 18,100 19,437 7% 33% (1) Days of supply is calculated by dividing new car ending inventory by the quarter’s deliveries and using 75 trading days (aligned with Automotive News definition). 6 O P E R A T I O N A L S U M M A R Y (Unaudited)
Delivery percentage of locally-made vehicles* V E H I C L E C A P A C I T Y Fremont We have recently increased capacity of Model 3 / Model Y to 500,000 units a year. In order to do this, we restarted our second paint shop, installed the largest die-casting machine in the world and upgraded our Model Y general assembly line. Production should reach full capacity toward the end of this year or beginning of next year. Shanghai Model 3 production capacity has increased to 250,000 units a year. We reduced the price of Model 3 to 249,900 RMB after incentives, making it the lowest-price premium mid-sized sedan1 in China. This was enabled both by lower-cost batteries and an increased level of local procurement. As a result of this shift in cost and starting price, we recently added a third production shift to our Model 3 factory. Berlin-Brandenburg Construction of the Gigafactory in Berlin continues to progress rapidly. Buildings are under construction and equipment move-in will start over the coming weeks. At the same time, the Giga Berlin team continues to grow. Production is expected to start in 2021. Installed Annual Capacity Current Status Fremont Model S / Model X 90,000 Production Model 3 / Model Y 500,000 Production Shanghai Model 3 250,000 Production Model Y – Construction Berlin Model 3 – In development Model Y – Construction Texas Model Y – Construction Cybertruck – In development United States Tesla Semi – In development Roadster – In development 7 Installed capacity ≠ Current production rate. Production rate depends on pace of factory ramp, supply chain ramp, downtime related to factory upgrades, national holidays and other factors. * Locally-made is defined as (i) cars made in Fremont and delivered in North America and (ii) cars made in China and delivered in China. 1 Premium mid-sized sedan segment in China defined as Audi A4, BMW 3-Series, Mercedes C-Class and Tesla Model 3.
C O R E T E C H N O L O G Y Autopilot & Full Self Driving (FSD) Our Autopilot team has been focused on a fundamental architectural rewrite of our neural networks and control algorithms. This rewrite will allow the remaining driving features to be released. In October, we sent the first FSD software update enabled by the rewrite to a limited number of Early Access Program users — City Streets. As we continue to collect data over time, the system will become more robust. Vehicle Software New software functionality was introduced since the start of Q3. In order to make our products safer from unauthorized access, we introduced the ability to enable 2-step verification via a smartphone. Additionally, among many other updates, we improved active suspension comfort, updated Powerwall-to-vehicle charging coordination and added an automated window close function and glovebox PIN access. Our Model Y AWD customers can now purchase a $2,000 software update that improves 0-60 mph time to just 4.3s. Battery & Powertrain On September 22, we hosted Tesla Battery Day where we described a path to reducing battery pack cost per kWh by 56%, enabling production of a profitable $25,000 vehicle. This, in our view, is a critical component to exceed cost parity with internal combustion engine vehicles. Additionally, due to a simpler cell manufacturing process, we believe capex per GWh of battery capacity should decline by 69% compared to today’s production process. How our vehicles see an intersection 8 How our Neural Net understands the same intersection (generalized approach for any unmapped intersection)
O T H E R H I G H L I G H T S Energy Business Our energy storage business reached record deployments of 759 MWh in Q3. Megapack production continued to ramp at Gigafactory Nevada as production volumes more than doubled in Q3. Powerwall demand remains strong and is growing, particularly as our solar business grows as many customers include a Powerwall with their solar installation. Additionally, we are seeing accelerating interest in Powerwall as concerns with grid stability grow, particularly in California. We continue to believe that the energy business will ultimately be as large as our vehicle business. Our recently introduced strategy of low cost solar (at $1.49/watt in the US after tax credit) is starting to have an impact. Total solar deployments more than doubled in Q3 to 57 MW compared to the prior quarter, with Solar Roof deployments almost tripling sequentially. While not yet at scale, we recently demonstrated a ~1.5-day Solar Roof install, as shown below in the photos. For Solar Roof, installation time is a key area of focus to accelerate the growth of this program. We continue to onboard hundreds of electricians and roofers to grow this business. 9 7:30 am Noon 2:00 pm (the next day)
O U T L O O K Volume Cash Flow Profit Product We have the capacity installed to produce and deliver 500,000 vehicles this year. While achieving this goal has become more difficult, delivering half a million vehicles in 2020 remains our target. Achieving this target depends primarily on quarter over quarter increases in Model Y and Shanghai production, as well as further improvements in logistics and delivery efficiency at higher volume levels. We should have sufficient liquidity to fund our product roadmap, long-term capacity expansion plans and other expenses. For the trailing 12 months, we achieved an operating margin of 6.3%. We expect our operating margin will continue to grow over time, ultimately reaching industry-leading levels with capacity expansion and localization plans underway. We are currently building Model Y capacity at Gigafactory Shanghai, Gigafactory Berlin and Gigafactory Texas, and remain on track to start deliveries from each location in 2021. Tesla Semi deliveries will also begin in 2021. We continue to significantly invest in our product roadmap. 10
B A T T E R Y D A Y H I G H L I G H T S
Area of improvement Description Range Increase* $/kWh Cost Reduction* $/GWh Capex Reduction* Cell Design After considering every form factor and cell size across quantifiable factors, we deemed 80 mm height by 46 mm diameter cylindrical to be best These dimensions maximize vehicle range (pack level energy density) while minimizing manufacturing and product cost The challenge is that large diameter cylindrical cells easily overheat during supercharging We identified a tab-less design solution to resolve the overheating challenge and simplify manufacturing 16% 14% 7% Cell Factory Electrode Current electrode production process involves mixing liquids with cathode or anode powders and using massive machinery to coat and dry electrode New process allows going directly from cathode or anode powder to an electrode film 0% 18% 34% Winding Larger cells improve winder productivity Incorporates our tab-less design Assembly Large cells moving at high speed with simplification in process steps enables a single production line to have 20 GWh of capacity Formation Leveraging our power electronics to densify and reduce costs of the final charging and testing step of millions of cells Anode Material Silicon is a better anode material than graphite – stores 9x more lithium, but silicon expansion brings challenges Silicon used in anodes today is highly engineered and expensive Raw silicon with our coating design will cost just $1.20/kWh Expansion of silicon is managed by stabilizing surface and by creating an elastic binder network 20% 5% 4% Cathode Material We are taking a diversified cathode approach to maximize available supply options: all usable in our 4680 cells We are planning to manufacture cathode in-house, using far less water and reagents in a simplified production process Focus on local sourcing for each cell factory to avoid unnecessary transportation cost Actively pursuing pathways to vertically integrate lithium production for a portion of supply 4% 12% 16% Cell-Vehicle Integration Current EV design: cells to modules, modules to battery pack, battery pack to vehicle Future EV design: cells directly integrated into vehicle body with giga castings Battery is no longer carried as “luggage”, will provide new utility as a load-bearing frame element This unlocks high-efficiency factories and mechanical structures— best manufacturability, weight, range and cost 14% 7% 8% Projected Total Improvement 54% 56% 69% F I V E A R E A S O F F O C U S 12 * Our current projections.
P H O T O S & C H A R T S
G I G A F A C T O R Y S H A N G H A I – M O D E L Y F A C T O R Y ( F O R E G R O U N D ) ; M O D E L 3 F A C T O R Y ( B A C K G R O U N D ) 14
G I G A F A C T O R Y S H A N G H A I – M O D E L Y D I E C A S T 15
G I G A F A C T O R Y S H A N G H A I – M O D E L Y B O D Y S H O P 16
G I G A F A C T O R Y S H A N G H A I – M O D E L Y P A I N T S H O P 17
18 G I G A F A C T O R Y B E R L I N – M O D E L Y F A C T O R Y C O N S T R U C T I O N
19 G I G A F A C T O R Y T E X A S
20 M E G A P A C K P R O J E C T AT M O S S L A N D I N G
Vehicle Deliveries (units) Net Income ($B) K E Y M E T R I C S Q U A R T E R L Y (Unaudited) 21 Operating Cash Flow ($B) Free Cash Flow ($B)
K E Y M E T R I C S T R A I L I N G 1 2 M O N T H S ( T T M ) (Unaudited) Vehicle Deliveries (units) Operating Cash Flow ($B) Free Cash Flow ($B) Net Income ($B) 22
F I N A N C I A L S T A T E M E N T S
In millions of USD or shares as applicable, except per share data Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 REVENUES Automotive sales 5,132 6,143 4,893 4,911 7,346 Automotive leasing 221 225 239 268 265 Total automotive revenue 5,353 6,368 5,132 5,179 7,611 Energy generation and storage 402 436 293 370 579 Services and other 548 580 560 487 581 Total revenues 6,303 7,384 5,985 6,036 8,771 COST OF REVENUES Automotive sales 4,014 4,815 3,699 3,714 5,361 Automotive leasing 117 119 122 148 145 Total automotive cost of revenues 4,131 4,934 3,821 3,862 5,506 Energy generation and storage 314 385 282 349 558 Services and other 667 674 648 558 644 Total cost of revenues 5,112 5,993 4,751 4,769 6,708 Gross profit 1,191 1,391 1,234 1,267 2,063 OPERATING EXPENSES Research and development 334 345 324 279 366 Selling, general and administrative 596 699 627 661 888 Restructuring and other – (12) – – – Total operating expenses 930 1,032 951 940 1,254 INCOME FROM OPERATIONS 261 359 283 327 809 Interest income 15 10 10 8 6 Interest expense (185) (170) (169) (170) (163) Other income (expense), net 85 (25) (54) (15) (97) INCOME BEFORE INCOME TAXES 176 174 70 150 555 Provision for income taxes 26 42 2 21 186 NET INCOME 150 132 68 129 369 Net income attributable to noncontrolling interests and redeemable noncontrolling interests 7 27 52 25 38 NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS 143 105 16 104 331 Less: Buy-out of noncontrolling interest – – – – 31 NET INCOME USED IN COMPUTING NET INCOME PER SHARE OF COMMON STOCK 143 105 16 104 300 Net income per share of common stock attributable to common stockholders(1) Basic $ 0.16 $ 0.12 $ 0.02 $ 0.11 $ 0.32 Diluted $ 0.16 $ 0.11 $ 0.02 $ 0.10 $ 0.27 Weighted average shares used in computing net income per share of common stock(1) Basic 897 902 915 928 937 Diluted 922 935 994 1,036 1,105 S T A T E M E N T O F O P E R A T I O N S (Unaudited) 24 (1) Prior period results have been retroactively adjusted to reflect the five-for-one stock split effected in the form of a stock dividend in August 2020
B A L A N C E S H E E T (Unaudited) In millions of USD 30-Sep-19 31-Dec-19 31-Mar-20 30-Jun-20 30-Sep-20 ASSETS Current assets Cash and cash equivalents 5,338 6,268 8,080 8,615 14,531 Accounts receivable, net 1,128 1,324 1,274 1,485 1,757 Inventory 3,581 3,552 4,494 4,018 4,218 Prepaid expenses and other current assets 893 959 1,045 1,218 1,238 Total current assets 10,940 12,103 14,893 15,336 21,744 Operating lease vehicles, net 2,253 2,447 2,527 2,524 2,742 Solar energy systems, net 6,168 6,138 6,106 6,069 6,025 Property, plant and equipment, net 10,190 10,396 10,638 11,009 11,848 Operating lease right-of-use assets 1,234 1,218 1,197 1,274 1,375 Goodwill and intangible assets, net 537 537 516 508 521 Other non-current assets 1,473 1,470 1,373 1,415 1,436 Total assets 32,795 34,309 37,250 38,135 45,691 LIABILITIES AND EQUITY Current liabilities Accounts payable 3,468 3,771 3,970 3,638 4,958 Accrued liabilities and other 2,938 3,222 2,825 3,110 3,252 Deferred revenue 1,045 1,163 1,186 1,130 1,258 Customer deposits 665 726 788 713 708 Current portion of debt and finance leases (1) 2,030 1,785 3,217 3,679 3,126 Total current liabilities 10,146 10,667 11,986 12,270 13,302 Debt and finance leases, net of current portion (1) 11,313 11,634 10,666 10,416 10,559 Deferred revenue, net of current portion 1,140 1,207 1,199 1,198 1,233 Other long-term liabilities 2,714 2,691 2,667 2,870 3,049 Total liabilities 25,313 26,199 26,518 26,754 28,143 Redeemable noncontrolling interests in subsidiaries 600 643 632 613 608 Convertible senior notes — — 60 44 48 Total stockholders’ equity 6,040 6,618 9,173 9,855 16,031 Noncontrolling interests in subsidiaries 842 849 867 869 861 Total liabilities and equity 32,795 34,309 37,250 38,135 45,691 (1) Breakdown of our debt is as follows: Vehicle and energy product financing (non-recourse) 3,702 4,183 4,022 4,043 4,141 Other non-recourse debt 155 355 708 1,415 605 Recourse debt 7,882 7,263 7,600 7,106 7,448 Total debt excluding vehicle and energy product financing 8,037 7,618 8,308 8,521 8,053 25
In millions of USD Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income 150 132 68 129 369 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, amortization and impairment 530 577 553 567 584 Stock-based compensation 199 281 211 347 543 Other 69 204 175 167 269 Changes in operating assets and liabilities, net of effect of business combinations (192) 231 (1,447) (246) 635 Net cash provided by (used in) operating activities 756 1,425 (440) 964 2,400 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (385) (412) (455) (546) (1,005) Purchases of solar energy systems, net of sales (25) (37) (26) (20) (16) Purchase of intangible assets — — — — (5) Receipt of government grants — 46 1 — — Business combinations, net of cash acquired (76) — — — (13) Net cash used in investing activities (486) (403) (480) (566) (1,039) CASH FLOWS FROM FINANCING ACTIVITIES Net cash flows from debt activities (55) (591) 544 164 (630) Collateralized lease repayments (83) (87) (97) (71) (56) Net borrowings (repayments) under vehicle and solar financing 183 478 (160) 18 99 Net cash flows from noncontrolling interests – Auto 30 19 (8) (3) (31) Net cash flows from noncontrolling interests – Solar (28) 6 (40) (42) (49) Proceeds from issuances of common stock in public offerings, net of issuance costs — — 2,309 — 4,973 Other 71 96 160 57 144 Net cash provided by (used in) financing activities 118 (79) 2,708 123 4,450 Effect of exchange rate changes on cash and cash equivalents and restricted cash (11) 14 (24) 38 86 Net increase in cash and cash equivalents and restricted cash 377 957 1,764 559 5,897 Cash and cash equivalents and restricted cash at beginning of period 5,449 5,826 6,783 8,547 9,106 Cash and cash equivalents and restricted cash at end of period 5,826 6,783 8,547 9,106 15,003 S T A T E M E N T O F C A S H F L O W S (Unaudited) 26
In millions of USD or shares as applicable, except per share data Q3-2019 Q4-2019 Q1-2020 Q2-2020 Q3-2020 Net income attributable to common stockholders (GAAP) 143 105 16 104 331 Stock-based compensation expense 199 281 211 347 543 Net income attributable to common stockholders (non-GAAP) 342 386 227 451 874 Less: Buy-out of noncontrolling interest – – – – 31 Net income used in computing EPS attributable to common stockholders (non-GAAP) 342 386 227 451 843 EPS attributable to common stockholders, diluted (GAAP)(1) 0.16 0.11 0.02 0.10 0.27 Stock-based compensation expense per share(1) 0.21 0.30 0.21 0.34 0.49 EPS attributable to common stockholders, diluted (non-GAAP)(1) 0.37 0.41 0.23 0.44 0.76 Shares used in EPS calculation, diluted (GAAP and non-GAAP)(1) 922 935 994 1,036 1,105 Net income attributable to common stockholders (GAAP) 143 105 16 104 331 Interest expense 185 170 169 170 163 Provision for income taxes 26 42 2 21 186 Depreciation, amortization and impairment 530 577 553 567 584 Stock-based compensation expense 199 281 211 347 543 Adjusted EBITDA (non-GAAP) 1,083 1,175 951 1,209 1,807 Total revenues 6,303 7,384 5,985 6,036 8,771 Adjusted EBITDA margin (non-GAAP)(2) 17.2% 15.9% 15.9% 20.0% 20.6% Automotive gross margin (GAAP) 22.8% 22.5% 25.5% 25.4% 27.7% Less: Total regulatory credit revenue recognized 2.0% 1.6% 5.5% 6.7% 4.0% Automotive gross margin excluding regulatory credits (non-GAAP) 20.8% 20.9% 20.0% 18.7% 23.7% R e c o n c I l I a t I o n o f G A A P t o N o n – G A A P F I n a n c I a l I n f o r m a t I o n (Unaudited) 27 In millions of USD 4Q-2017 1Q-2018 2Q-2018 3Q-2018 4Q-2018 1Q-2019 2Q-2019 3Q-2019 4Q-2019 1Q-2020 2Q-2020 3Q-2020 Net cash provided by (used in) operating activities (GAAP) 510 (398) (130) 1,391 1,235 (640) 864 756 1,425 (440) 964 2,400 Capital expenditures (787) (656) (610) (510) (325) (280) (250) (385) (412) (455) (546) (1,005) Free cash flow (non-GAAP) (277) (1,054) (740) 881 910 (920) 614 371 1,013 (895) 418 1,395 In millions of USD 4Q-2017 1Q-2018 2Q-2018 3Q-2018 4Q-2018 1Q-2019 2Q-2019 3Q-2019 4Q-2019 1Q-2020 2Q-2020 3Q-2020 Net cash (used in) provided by operating activities – TTM (GAAP) (61) (389) (319) 1,373 2,098 1,856 2,850 2,215 2,405 2,605 2,705 4,349 Capital expenditures – TTM (3,415) (3,518) (3,169) (2,563) (2,101) (1,725) (1,365) (1,240) (1,327) (1,502) (1,798) (2,418) Free cash flow – TTM (non-GAAP) (3,476) (3,907) (3,488) (1,190) (3) 131 1,485 975 1,078 1,103 907 1,931 (1) Prior period results have been retroactively adjusted to reflect the five-for-one stock split effected in the form of a stock dividend in August 2020 (2) Adjusted EBITDA margin is Adjusted EBITDA as a percentage of total revenues
A D D I T I O N A L I N F O R M A T I O N WEBCAST INFORMATION Tesla will provide a live webcast of its third quarter 2020 financial results conference call beginning at 2:30 p.m. PT on October 21, 2020 at ir.tesla.com. This webcast will also be available for replay for approximately one year thereafter. CERTAIN TERMS When used in this update, certain terms have the following meanings. Our vehicle deliveries include only vehicles that have been transferred to end customers with all paperwork correctly completed. Our energy product deployment volume includes both customer units installed and equipment sales; we report installations at time of commissioning for storage projects or inspection for solar projects, and equipment sales at time of delivery. “Adjusted EBITDA” is equal to (i) net income (loss) attributable to common stockholders before (ii)(a) interest expense, (b) provision for income taxes, (c) depreciation, amortization and impairment and (d) stock-based compensation expense, which is the same measurement for this term pursuant to the performance-based stock option award granted to our CEO in 2018. “Free cash flow” is operating cash flow less capital expenditures. NON-GAAP FINANCIAL INFORMATION Consolidated financial information has been presented in accordance with GAAP as well as on a non-GAAP basis to supplement our consolidated financial results. Our non-GAAP financial measures include non-GAAP automotive gross margin, non-GAAP net income (loss) attributable to common stockholders, non-GAAP net income (loss) attributable to common stockholders on a diluted per share basis (calculated using weighted average shares for GAAP diluted net income (loss) attributable to common stockholders), Adjusted EBITDA, Adjusted EBITDA margin, and free cash flow. These non-GAAP financial measures also facilitate management’s internal comparisons to Tesla’s historical performance as well as comparisons to the operating results of other companies. Management believes that it is useful to supplement its GAAP financial statements with this non-GAAP information because management uses such information internally for its operating, budgeting and financial planning purposes. Management also believes that presentation of the non-GAAP financial measures provides useful information to our investors regarding our financial condition and results of operations so that investors can see through the eyes of Tesla management regarding important financial metrics that Tesla uses to run the business, and allowing investors to better understand Tesla’s performance. Non-GAAP information is not prepared under a comprehensive set of accounting rules and therefore, should only be read in conjunction with financial information reported under U.S. GAAP when understanding Tesla’s operating performance. A reconciliation between GAAP and non-GAAP financial information is provided above. FORWARD-LOOKING STATEMENTS Certain statements in this update, including statements in the “Outlook” section; statements relating to the future development, production capacity and output rates, demand and market growth, deliveries, deployment, safety, range and other features and improvements, and timing of existing and future Tesla products and technologies such as Model 3, Model Y, Cybertruck, Tesla Semi, Roadster, Autopilot and Full Self Driving, our energy products and services such as Megapack, Solar Roof and Powerwall, and the battery cells we are developing and related technologies; statements regarding operating margin, spending and liquidity targets; statements regarding manufacturing and procurement improvements, cost reductions and efficiencies; statements regarding construction, expansion, improvements and/or ramp at the Tesla Factory, Gigafactory Shanghai, Gigafactory Berlin and Gigafactory Texas; and statements regarding our hiring targets are “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements are based on management’s current expectations, and as a result of certain risks and uncertainties, actual results may differ materially from those projected. The following important factors, without limitation, could cause actual results to differ materially from those in the forward-looking statements: uncertainties in future macroeconomic and regulatory conditions arising from the current global pandemic; the risk of delays in launching and manufacturing our products and features cost-effectively; our ability to grow our sales, delivery, installation, servicing and charging capabilities and effectively manage this growth; consumers’ willingness to adopt electric vehicles generally and our vehicles specifically; the ability of suppliers to deliver components according to schedules, prices, quality and volumes acceptable to us, and our ability to manage such components effectively; any issues with lithium-ion cells or other components manufactured at Gigafactory Nevada; our ability to build and ramp Gigafactory Shanghai, Gigafactory Berlin and Gigafactory Texas in accordance with our plans; our ability to procure supply of battery cells, including through our own manufacturing; risks relating to international expansion; any failures by Tesla products to perform as expected or if product recalls occur; the risk of product liability claims; competition in the automotive and energy product markets; our ability to maintain public credibility and confidence in our long-term business prospects; our ability to manage risks relating to our various product financing programs; the unavailability, reduction or elimination of government and economic incentives for electric vehicles and energy products; our ability to attract and retain key employees and qualified personnel and ramp our installation teams; our ability to maintain the security of our information and production and product systems; our compliance with various regulations and laws applicable to our operations and products, which may evolve from time to time; risks relating to our indebtedness and financing strategies; and adverse foreign exchange movements. More information on potential factors that could affect our financial results is included from time to time in our Securities and Exchange Commission filings and reports, including the risks identified under the section captioned “Risk Factors” in our quarterly report on Form 10-Q filed with the SEC on July 28, 2020. Tesla disclaims any obligation to update information contained in these forward-looking statements whether as a result of new information, future events, or otherwise. 28
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