How Tesla's battery costs impact its gross margins
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As long as Tesla is battery cell constrained (e.g. next 5 years or longer) every kWh of cells they sell needs to be attached to a certain amount of profit. This is why Semi is not going to ship in volume for a while.
There’s rumor Tesla will build a cheaper compact car for China and EU. If you allocate 45kWh of cells to a car which sells for $20k and earns $4k of profit, versus 75kWh of cells to a car that sells for $50k and $10k of profit, all else being equal (20% GM) you want to sell more of Option B because the battery cell is your manufacturing limit and profit per kWh is $133 vs $89.
Or to put it another way, a car that clears $4k for Tesla can only have a 30kWh battery, or else selling that car drives down profit.
Tesla is rumored to be planning on making their own chemistry cells at GF4. I expect we will see real volume in their next-gen chemistry by the end of 2022 or mid-2023, at which point their annual production run rate will likely be greater than 1.5m vehicles requiring 100GWh of batteries per year. Currently they are closer to 35GWh, and IMO scaling the battery production is by far the hardest part.
They have started using LG Chem cells in China, whereas up until now they were only sourcing cells from Panasonic. This is because it’s simply not feasible to produce the needed cells for GF3’s 150k/year run rate at GF1 and ship them overseas. Although that’s what they did for the initial China production run.
Do you have a source for this by chance?
https://electrek.co/2019/10/05/tesla-quietly-acquires-batter...
In addition Musk seems to be saying they will need an incredible ramp in battery production (to 2-3twh/year!!!) to make an important contribution to global warming. Given his style, I wouldn’t doubt he intends to have Tesla do the manufacturing: Q2 2019 earnings call:
Obviously he doesn’t want to upset Panasonic too much in the short term: they have a lot to lose if Panasonic pulls the plug early.
They also bought a trucking company and said they were going to start building their own car carriers.
That's true, but I'm not sure it makes any more sense than car carriers. The cells that Tesla users for their battery packs are commodity products. Why would you bother to try to manufacture those? I mean, batteries are core to Apple's business too, but they aren't producing them.
The value-add is in their pack technology. The move back to vertical integration is odd.
I think the same will be true for batteries. They won't be making a copy of the Panasonic cell design. They will only become a manufacturer if there is some advantage to be gained. They will probably seek to integrate IP from their Maxwell acquisition and improvements from their research group in Canada.
That's what they think. What do you think? Do you think it's possible for a single player to be the best builder in everything?
When it comes to manufacturing, the world is flattening out. You can produce things from components built and sourced all over the world. But Tesla is going in the other direction. One has to at least question their reasoning, and not assume "Elon knows best".
For commodities like semiconductors it would be insane to try and open your own fab: those players are so much more sophisticated than anyone else. For mechanical components I think they logic is a lot more complicated. In a phrase: it depends. I’ve been working in product development for a few years and have been to overseas factories to help set up assembly lines. Some suppliers are fantastic and we won’t beat the quality / price. Others just don’t seem to get it and we’ll spend months and many engineering hours basically teaching them how to build what we need. It’s those cases where I would personally prefer to be more vertically integrated.
Not in the volumes Tesla will require over the next decade. I have a hunch that every EV manufacturer that tries to get serious about volume production (> 1 million vehicles per year, say) will hit a brick wall of supply shortage. There either won't be enough cell production capacity available, or competing manufacturers will bid it up enough to seriously impact the profitability of the vehicles.
Until EVs are established as the obviously best alternative for most vehicles, global production capacity will lag to the degree that in-house battery cell production is a necessary strategic advantage.
Add that to the fact that the ~90% efficiency of electric drivetrains makes single-digit improvements in component properties hugely impactful on the economics of the final product, and battery cells seems like something that should mainly not be outsourced.
There's a similar effect with the component properties. Really, you are looking at the properties per dollar spent, so if you take a wrong term, in-sourcing costs you relative to the market.
Surely once they actually have full self driving nailed the cars will just deliver themselves. It's just a question of where in the 1-20 years away that is.
https://www.tesmanian.com/blogs/tesmanian-blog/tesla-gigafac...
Apparently they said they would do it in their 2019 Shareholder letter even.
Cell production will not be part of “Stage 1” of GF4 however, according to;
https://m.manager-magazin.de/unternehmen/autoindustrie/tesla...
Tesla has long bought cells from others for its stationary storage products. They could pursue a similar strategy for Semi if they wanted (in the near term). The lower range Semi does not push battery chemistry particularly hard, so a third party cell is easily feasible there.
So I don't buy that they're cell constrained on such a long timescale. They're constrained by other things.
This seems somewhat doubtful to me, given how strategically important battery cells are for EVs, and how everyone and his dog has announced that they will make an EV.
Announcement of EVs doesn't count for much. The last 5 years have seen lots of announcements and not a ton of deployment.
Cylindrical cells (except for the longest range or highest performance vehicles) are nearly commodities. Tesla's early decision to go with cylindrical cells keeps being validated. It's a major risk reduction to be able to switch cell producers without redesigning the whole battery pack or car. Other car companies like Rivian are also using cylindrical cells.
There are doubts as to how willing Panasonic is to expand as rapidly as Tesla needs https://qz.com/1593009/telsa-battery-partner-panasonic-backs...
Their strategy seems pretty clear to me as they have plenty of products in a late stage of R&D that they could sell many off if only they had the production capacity to meet demand. They are basically tackling this in order of profitability. Model Y is next. They have the Tesla semi ready to go as well in limited volumes and they've been talking about a new roadster and model s as well. That should keep them absorbing whatever amount of kwh they can squeeze out of their factories for years to come.
So, I don't see what value a low capacity cheap car would add. They'd need to sell many more of those than of their other products to make the same amount of profit and they are basically bottle necked on production capacity already. It doesn't make sense for them to even consider sacrificing factory space for this until after they build a lot more production capacity and the market for higher end options is saturated (which will take quite a few years).
People keep saying stuff like this, which has no basis in reality. Here is the data:
https://ycharts.com/companies/TSLA/r_and_d_expense
They haven't even doubled R&D with the Model 3, from a low base, and R&D has actually DECREASED since 3 years ago. Where do you see them "ramping up the R&D"?
Tesla is averaging about $1.5B annually in R&D spend. For comparison, GM spent $7.8B last year. VW spent over $13B.
Tesla aren't even investing fast enough to keep up with their capital depreciation, but somehow people keep saying things like, "they're re-investing all their profits". If they are, show the data.
>They have the Tesla semi ready to go as well in limited volumes
Really? Where are they building it?
Semi is likely at least a year away from any significant scaling.
This is not conspiracy, it's in their disclosures. I simply cannot understand what people root for a company doing these things.
[1] http://thestoreyteller.online/2020/01/17/tesla-surges-to-92b...
[2] https://nypost.com/2019/08/28/cuomos-buffalo-billion-tainted...
[3]https://www.vox.com/identities/2019/9/30/20891314/elon-musk-...
[4]https://www.autonews.com/china/tesla-pay-china-323-million-y...
Elon Musk has, on a few occasions, blamed "ramping up", be it R&D or production lines, as a reason for not meeting goals.
I do agree that Tesla isn't investing that heavily in R&D but they also cannot afford to. They are not turning profits. And they are already 5-10 years ahead of many competitors on tech, so I think it's wise to invest in production capacity instead. This year and in 2021, VW, GM, Mercedes, BMW etc. are getting into the EV market with cars that in specs seem to be competing with Tesla's 2012 model S.
The most important spec right now is price and range. None of the old companies are close to delivering competing range at a competing price. None of them have a charging network or battery efficiency or battery production capacity close to what Tesla has.
The Hyundai Kona, the Volkswagen ID.3 Pro, and the Chevy Bolt are all cheaper than the Tesla Model 3 Standard Range Plus and all have more range.
No, they don't spend "much more".
Old, dying GM and high-flying, take-over-the-world Tesla spend nearly identical amounts as a percentage of revenue. How can that be possible? One is building factories and semi-trucks and solar roofs and AI chips and robo-taxis and "ramping up investment" and the other is going out of business (so I hear).
>None of them have a charging network or battery efficiency or battery production capacity close to what Tesla has.
Tesla arguably makes the best EV on the market right now, that's true. But this idea that no one wants anything else, once again, flies in the face of the data. Competitors are selling well all over the world. And that's what we want, isn't it?
>None of them have a charging network
The charging network was a genius way to get people to buy EVs at time when range anxiety was an issue. It was one of Elon's best moves.
But the days of it being a real competitive advantage are almost gone. Car companies don't own gas stations. It's cost center. Did you see the lines over the Thanksgiving and Christmas holidays? Who wants that?
In that case, trading lower profit per kWh on the initial sale for more cars/situations to train their models might be worthwhile, especially if better ADAS also encourages more people to purchase it when they buy the car or after.
It's an interesting analysis but it doesn't define what tesla will do or why they do it. It only defines what sets the upper and lower bounds on expectations of return on investment.