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Tesla (NASDAQ:TSLA) had a rough 3rd quarter. But those troubles seem to be behind and it appears that not only did Mr. Musk and his team at Tesla design a spectacularly good car, they have figured out how to make them. Model S just bagged Motor Trend's Car of the Year, and for the first time ever, the judging was unanimous. Even quiet, conservative Consumer Reports said "...it's fantastic and it's addictive." All of which means Tesla will live to fight another day. Does it also mean investors should dive into this stock? Should prudent investors wait to see a few quarters of solid profitability, sustained sales, resolution of Tesla's dealer / stores issues and so on?

The answer depends on your view of Tesla and of electric cars in general. If you see Tesla as a potentially successful niche car maker and electric cars as specialty vehicles, then maybe this is a good time to wait and see. After all, niche players if they survive and become established can enjoy good margins and be very profitable, but right now Tesla isn't established or financially stable, and the stock is way overpriced. Even a successful niche player with 25% margins will never bring enough to the bottom line to support the current market cap, let alone offer investors an upside. But "niche builder of specialty electric cars" isn't the only way to see Tesla.

Tesla's Chairman Elon Musk has said Tesla will revolutionize the car business and kick the ICE into the dustbin of history. Whatever shortcomings this vision may have, excessive modesty and conservatism aren't among them. This view sees Tesla introducing successive electric car models at lower and lower price points achieving higher and higher volumes and becoming a mainstream automaker as the world switches from ICE to all electric cars. If you view Tesla this way, it is a good time to buy. The risk attendant on Tesla building its own cars has just been laid to rest as the Model S ramp rises toward 400 cars a week. The stock has taken a beating while production ramped, schedule slipped by five weeks and Tesla raised additional capital. The train is now leaving. It's time to get onboard.

So, which view of Tesla is correct? Is Tesla a someday niche player, or is it about to disrupt two of the world's biggest industries, cars and oil? Does the recent news surrounding Model S help us decide, or do we need to look at something else?

What matters to investors isn't whether Tesla can build an expensive, niche supercar, but whether Tesla can disrupt how cars are made and powered. Great as Tesla's Model S is, it costs too much to change the world of GM's (NYSE:GM) Malibu, Ford's (NYSE:F) Fusion, Honda's (NYSE:HMC) Accord, Toyota's (NYSE:TM) Camry and other mid-size sedans. But Tesla's coming Gen III car, sometimes called BlueStar, just might be disruptive. And it's all about the battery.

Electric cars with long range - ones that can displace mainstream ICE cars and the kind Tesla is making - are extremely cost and weight sensitive to the specific energy (W-hr/kg) of the battery. If next generation Li-ion batteries deliver high enough specific energy, Tesla's BlueStar will be a real game changer.

Three advancements are in play near term for Li-ion batteries: Higher capacity anode materials that incorporate silicon; Higher capacity cathode materials that use far less cobalt and nickel and have improved stability and life; Improved electrolytes, allowing cells to accept more charge at higher voltage. Argone National Laboratory (ANL) is one center doing research in all three areas. These technologies aren't just in the lab. Commercial licensees are already building batteries and scaling up production of key materials. Batteries with these advances should be available for Tesla's BlueStar, expected to arrive in the 2015 time frame.

ANL licensee Envia Systems has demonstrated 400 W-hr/kg specific energy and predicts cell level pricing of $125/kWh. California Lithium Battery (CaLiB), another ANL licensee, announced a 525 W-hr/kg battery and predicts a $175/kWh cell price. And it is not just these start-up companies that are involved. Chemical giant BASF (BASFY.PK) and Japanese materials supplier Toda Kogyo (OTC:TDAKF) have licensed ANL's battery materials. While ANL's work doesn't directly relate to Tesla investor and battery supplier Panasonic (PC), which by the way has already begun commercial production of 18,650 Li-ion cells with silicon based anode material, it does indicate the battery performance likely available for future Tesla cars. Panasonic, the world's leading high performance Li-ion battery company, is likely to supply Tesla three years from now with batteries at least as good as ANL's licensees have already demonstrated.

Let's compare coming Li-ion batteries with the current Nickel Cobalt Aluminum (NCA) batteries used in Model S. The following table contains data for the current Model S85 with NCA batteries and extrapolations based on the cell energy density, number of cells and weight of packaging for batteries of two price / performance levels. The "price" is the Tesla selling price increment for battery capacity [$20,000 / (85kWh - 40kWh) = $444.44/kWh for Model S]. For the expected case, the "price" is adjusted downwards 10%/year from 2011 to 2015. The optimistic case sets the price at twice Envia's estimate of $125/kWh at the cell level.

Current and Future Li-ion Batteries

Time FrameCell Type

W-hr/kg cell

W-hr/kg pack$/kWh (price)
NowNCR18650A (Panasonic)245142444.44
2015 (Expected)Envia400231.6291.60
2015 (Optimistic)CaLiB525307.2250.00

To understand if Tesla can build disruptive electric cars with these new batteries, we must understand the knock-on effect of battery specific energy (a lighter battery means a lighter car which in turn requires a smaller battery which is lighter still...). A simple model that considers cars with the same range and acceleration as the Model S85 but takes account of vehicle size, the effect of battery specific energy and battery pricing, offers some surprising results. (More about this model later.) The following graph shows how the price of a "Model S85 like" Tesla (300 mi. range; 0-60 acceleration in 5.6 seconds) would vary with vehicle size using the current Model S battery and with the 2015 (expected) and 2015 (optimistic) batteries from the table. The "price" here is the price after $7,500 rebate for a basic, no options car, not including delivery charge.

The following table shows how battery specific energy drives both weight and price of a long range electric car like Model S. Listed are three "versions" of Model S85, all the same size, all the same 300 mi. range, and all the same 0-60 acceleration in 5.6 seconds. The only difference is having a design optimized for different battery technology.

Model S85 Optimized for Different Battery Technologies

BatteryWeight lbs.Battery kWh

Price (after rebate)

2012 NCR18650A4,63085.0$69,900
2015 (expected)3,69267.8$43,852
2015 (optimistic)3,42162.8$37,473

This shows that optimizing an electric car for coming battery technology can dramatically reduce the car's weight and price - by more than half a ton and $30,000 for a Model S size vehicle using optimistic case 2015 batteries. Still, a $37.5k base price sedan isn't going to mean much to Chevy Malibu, Ford Fusion or Toyota Camry buyers. But then, the Model S is bigger than a Malibu, Camry or Fusion and word has it the BlueStar will be a smaller car, aimed at the BMW 3 series. Here is where things get interesting.

If we apply our model to a hypothetical Tesla "BlueStar" a bit larger than an Audi A4 or BMW 3 and smaller than a Toyota Camry, look what we get. (Remember, even if the BlueStar is smaller overall than a Camry, the useful interior and trunk volume may be equal or greater due to the compact electric powertrain...)

2015 Tesla BlueStar with 2015 (optimistic) Battery

ModelRange milesBattery kWhPrice
B55P30056.1$47,658
B5530056.1$32,658
B3924039.6$28,574
B2616026.4$25,235

The Model B55 in the table is fully optimized using the 2015 (optimistic case) battery. The B39 and B26 model prices were adjusted for lower battery capacity at the battery price increment rate but not otherwise optimized. The B55P price includes a $15k price premium, same as the S85P.

Since the model sets the power-to-weight ratio for the B55 to be the same as that of the S85, these BlueStars will not only keep up with the target BMWs and Audis, they will blow the doors off any Camry, Accord, Malibu, Fusion or Passat out there.

As the following graph shows, a prospective 300 mile range BlueStar B55 designed around 2015 (optimistic case) Li-ion batteries handily beats any BMW 3 or Audi A4 on price. And the 160 mile and 240 mile range B26 and B39 offer a lot of competition to some very mainstream mid-size cars including Toyota's Camry, GM's Malibu and Ford's Fusion. According to the Wall Street Journal, a quarter million mid-size cars were sold in the United States. In October. If Tesla can crack the mid-size sedan market with BlueStar, it could easily sell hundreds of thousands of units a year. This is disruptive.

There is one more thing. These smaller Teslas have smaller battery packs than Model S85. You could get a 150 mile recharge from a 120 kW Supercharger in 15 minutes, half the time needed for Model S85. And that is disruptive too, not just for car companies, but for gas stations.

The next question of course is what the big auto companies will do about BlueStar. Surely GM, Ford and Toyota are aware of current battery developments and they can make models at least as informative as the simple one used here. But what can they do and what will they do about Tesla? I'll leave this interesting question for another time. But until then, this analysis does suggest Tesla will be more than a one trick pony niche electric car company. It just might disrupt the car business. And if you think it will, this is a good time to get on board.

Now, about the model.

With all this talk of disruption, you probably are asking whether the model that predicts these BlueStar prices and battery capacities is accurate. So, let me tell you about the model. You can decide if it is any good. Or not.

The model is a simple one. It does not attempt to include economy of scale (lower prices resulting from higher volumes) or inflation between now and 2015. The model ONLY portrays vehicles with the same energy to weight and power to weight ratios as the current Model S85. The assumption is that any car model will have the same 300 mile range and 0-60 acceleration in 5.6 seconds as the S85. Of course the exact design of a given vehicle may result in different aerodynamic drag that would increase or decrease the range, but the model doesn't consider this.

The model operates in three parts. The first part generates a specific energy (W-hr/kg) for the battery pack and a battery capacity pricing factor ($/kWh). This element of the model was described at the top of the article and the relevant W-hr/kg and $/kWh numbers are given in the first table.

The second part of the model generates the weight of a vehicle based on vehicle size and which kind of battery is to be used. Vehicle size is taken as the vehicle height x length x width = Volume, in cubic feet. This is simply the volume of the smallest "shoebox" the car will fit into. ('width' does not include the side mirrors.)

Vehicle weight, W = Vv x Dv / (1 - SEp/SEv - CFv) in pounds.

Vv is the vehicle h x l x w in cubic feet (495.383 cu. ft. for Model S)

Dv = 4.047437 lbs/cu.ft. It is a factor relating the incremental vehicle size to incremental weight assuming a constant engine and drive train weight. This value was obtained by comparing the Audi A3 and A6, both with the 2.0L turbo motor and automatic transmission and adjusting the value downward by 10.8% to account for a Tesla with aluminum BIW rather than the steel body of the Audi.

SEp is the specific energy of the battery pack for the chosen battery type. It is the pack W-hr/kg from the battery table.

SEv = 40.38876 W-hr/kg - It is the specific energy of the modeled vehicle and is equal to the energy-to-weight ratio of the Model S85.

CFv = 0.2829 is the fraction of vehicle weight representing the chassis, driveline, etc., but excluding the battery pack, that varies with the weight of the vehicle. The value was obtained by fitting the model to the Model S85 size and weight.

The third part of the model computes the battery capacity and vehicle price.

Battery_Capacity = W x SEv / 1000 in kWh

and

Price = W x WPF + Battery_Capacity x BPF - $7,500.00

BPF, the battery price factor, is the $/kWh pricing factor from the battery table for the chosen battery.

WPF = $8.556637/lb is a weight pricing factor obtained by fitting the price formula to the Model S85 with 4630 lb basic weight, 85 kWh battery capacity, $444.44 BPF derived earlier, and an after-rebate price of $69,900.00.

Disclaimer

This model is entirely of my own design and based on data for battery performance and vehicle characteristics taken from the literature. While I believe this model reasonably represents the relationship of vehicle size, battery characteristics and pricing for possible future Tesla vehicles, it is not based on any specific understanding of Tesla's business strategy or any "inside" information from Tesla or any other company. The presented model and the resulting projections are believed accurate but are not guaranteed. The choice of "size" for the BlueStar vehicle described was made by me and represents an arbitrary decision to size BlueStar between the Audi A4 and the Toyota Camry. Specific vehicle sizes, weights, battery capacities and prices presented here should be regarded solely as objects of my individual opinion.

Source: Will Tesla Disrupt?