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Has Tesla hit a wall on battery cost improvements?

Cylindrical lithium-ion batteries. (Photo: Wikimedia Commons)

Best estimate: Tesla makes battery packs for $157/kwh by 2020

Tesla Semi battery will cost $157K

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On February 23, Tesla filed its 10-K annual report for 2017 with the Security and Exchange Commission. The 10-K report is an expansive 156 page document detailing the company’s business operations and corporate governance, with another 100 pages of exhibits mostly related to loan agreements attached at the end. Tesla observers immediately set about scouring the document for clues about the notoriously opaque corporation’s operations and guidance, and they’ve discovered some interesting differences from the 2016 version.

Some of the differences in the 2017 and 2016 reports are comparatively minor: Tesla stopped reporting the number of the service centers in its network in the 2017 report, perhaps because construction of those facilities is lagging behind what the company promised. Other minor tweaks are more telling, and could hold major implications for Tesla’s future profitability—they’re now referring to the $35K version of the Model 3 as a ‘variant’, a word Tesla introduced in the 2017 10-K to describe that price point for the first time. We’ve known that Tesla has produced few if any of the $35K Model 3s to date: so far they’re focusing on the higher spec models that cost upwards of $50K, but now Tesla seems to be admitting that only a small portion of the Model 3s it produces will be priced at the lowest ‘mass market’ price point. 

Today we’re going to focus in on a different discrepancy between the 2016 and 2017 annual filings. To put it bluntly, Tesla used to claim that it was continuing to ‘improve’ battery costs. Now Tesla no longer does so. Consider this paragraph from the 2016 10-K report:

“Our engineering and manufacturing efforts have been performed with a longer-term goal of building a foundation for further development. For instance, we have designed our battery pack to permit flexibility with respect to battery cell chemistry and form factor. In so doing, we can leverage the substantial investments and advancements being made globally by battery cell manufacturers to continue to improve cost.”

In the just-released annual filing, Tesla removed the italicized sentence. What does it mean that Tesla is no longer willing to tell the federal government and specifically the agency that regulates its relationship with its investors that it can continue to bring down the cost of batteries? 

One thing that Tesla does not disclose is how much exactly it costs the company to install 1 kwh worth of battery pack. The $100/kwh threshold is commonly cited as the point at which electric vehicles can truly compete with internal combustion engine vehicles on a cost basis. A December 2017 report by Bloomberg New Energy Finance, based on its survey of more than 50 companies, said that lithium-ion battery packs now cost an average of $209/kwh. 

Tesla, of course, builds its own battery packs through a partnership with Panasonic, which supplies the battery cells. Total Battery Consulting’s Dr. Menahem Anderman estimated two weeks ago that Tesla’s cathode powders alone cost $50/kwh at spot metal prices. John Petersen, who reported on Anderman’s study, wrote, “It’s becoming increasingly clear that Tesla’s guidance of sub-$100 cell costs is pure fantasy. That number might have made sense a couple years ago when precursor metal prices were lower. But it does not make sense today and it will not make sense in the future unless a natural resource fairy wearing a cobalt blue dress blesses our species with unlimited quantities of cheap technology metals.” Cobalt prices have skyrocketed from $22K a ton in Feb. 2016 to $81K per ton this week. FreightWaves reported on the supply chain risks posed to electric vehicle manufacturers by cobalt in January.

“In a subsequent email exchange, Dr. Anderman explained that assuming pack production volume of 200,000 units per year in 2020, he expects Tesla to have cell level costs of $122 per kWh and pack level costs of $157 per kWh,” wrote Petersen. 

Beyond the absolute cost of cobalt and other natural resource metals—lithium and nickel, the two other main components in Tesla’s battery chemistry, have also seen significant increases in price—the production capacity of Tesla’s suppliers, primarily Panasonic, may limit how much Tesla can reduce battery cost.

In the ‘Risk Factors’ section of its 2017 10-K filing, Tesla acknowledged the potential bottlenecks its single source suppliers could cause the business. “We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver the necessary components of our products according to our schedule and at prices, quality levels, and volumes acceptable to us, or our inability to efficiently manage these components, could have a material adverse effect on our financial condition and operating results,” Tesla wrote. “This limited, and in many cases single source, supply chain exposes us to multiple potential sources of delivery failure or component shortages for the production of our products, such as those which we experienced in 2012 and 2016 in connection with our slower-than-planned Model S and Model X ramps.”

In December, USA Today reported on a deal struck between Panasonic and Toyota to produce a newer generation of battery cells, ‘prismatic’ rather than cylindrical, and characterized the partnership as a threat to Tesla and encroachment on Tesla’s territory. On its Feb. 5 earnings call, Panasonic said it missed targets for its rechargeable battery division, which includes its automotive batteries for Tesla. “We didn't earn as much as we hoped in areas we considered promising, but we surpassed expectations everywhere else,” Chief Financial Officer Hirokazu Umeda told reporters. Panasonic expects its battery business to lose 5.4B yen in 2018. 

The ultimate floor on Tesla’s battery costs might not be commodity metals prices but its lack of control over its supply chain, and the rise of Chinese lithium-ion battery production. China has moved aggressively to secure metals sources in Southeast Asia and Africa. Contemporary Amperex Technology Ltd, or CATL, is building a $1.3B battery factory in China that will surpass Tesla’s production capacity; when combined with BYD, China is in a position to dictate battery price to Tesla, not the other way around.

Check out this video by Youtuber Aries RC: he dissects a Tesla Model 3 battery cell and explains the engineering and chemistry behind the device:

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