The Hard Questions About Tesla's Battery Swap

| About: Tesla Motors (TSLA)

Tesla Motors (NASDAQ:TSLA) is expected to demonstrate battery swapping this evening and CEO Elon Musk has said that feature "works with all Tesla Model S cars, past and present"... "It was always there." Battery swapping may have always been built into the Model S, but the infrastructure for doing so was NOT available. Broadly available battery swapping is undeniably a boon for long distance trips, but the practice raises several important questions for both investors and consumers:

What will be Tesla's associated build out and maintenance infrastructure costs? The company has said that build-out of solar powered charging stations will average about 300K each, but has been very short on details of maintenance costs. This is by far the most important question for investors. For the build-out of the 100 stations planned in 2013, that meant Capital Expenditure equal to 3% of the $1.08 billion that Tesla raised off the recent short squeeze, and that slice is probably set to rise now. To really make recharging on the go convenient, however, would require not having to drive miles out your way, and thus a number closer to the order of the over 120,000 gas stations currently in the U.S. Certainly Tesla does not have to build and maintain all of these now, but until it is certain that their model will be dominant, and the company can franchise it, CapEx represents a significant risk.

Presumably battery swapping will be a cost-added option. Exact pricing should be available, given that this feature has been there, and thus planned, all along. It stands to reason that there would be no up-front cost to the car owner for a feature that was designed into each and every car from the beginning, but one never knows.

However, if there is no up-front cost, will customers who opt-in own the battery packs in their cars at all? They are not keeping the battery-pack, so in a very real sense they don't own in it in the same way they own the car. I would expect there to be a fee per swap in order for the infrastructure to be self-sustaining. Hopefully it will be modest otherwise owners ought to worry about the quality of the pack they are swapping in. The full (dis)charge cycles best suited for the long trips that battery swapping is meant to address are not optimal for battery life, and swapping certainly doesn't incentivize best care. So this seems a particularly thorny question.

As usual, the devil is in the details. Both investors and owners will want to look carefully at the answers to these questions in order to judge the sustainability of Tesla's latest advance.

Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.