Tesla's Battery Swap - What We Really Saw

Jun.22.13 | About: Tesla Motors (TSLA)

Tesla Motors (NASDAQ:TSLA) recently demonstrated an automated battery swapping machine that allows a discharged Model S battery to be exchanged for a fully charged battery in about a minute and a half. While this system, in spite of the implied $100 cost per swap, has some theoretical applications, the significance of this demo is not what it appears. Tesla investors should pay close attention to this system because it may be very important for the company's future. But not for the reason you think.

Technical Dud

Tesla's battery swap system is not robust enough for routine, repetitive use in the real world. Looking closely at the demonstration video, two things are immediately apparent. The car is 'located' by four metal posts that pick up the car at 'index features' on the chassis, and the battery is secured to the car with a lot of little bolts. Compare Tesla's battery swap mechanism with the Better Place system. Notice how the Tesla system requires precise indexing (with the index posts that pick up the car before the swap begins) and the relatively tiny proportions of the Tesla bolts compared to the 'claws' used to attach the battery in the Better Place system. Imagine what happens to the Tesla system if mud has collected in the index features used to locate / position the car. Imagine also what happens to the bolt threads when bolts are repeatedly removed / installed and torqued in a dirty, gritty environment. The Tesla swap system is clearly not intended for routine, repetitive use in a real-world environment, like say, Boston in the wintertime...

Business Dud

The battery swap model fails as a business for several reasons. First, there is the simple matter of return on the investment in batteries inventoried at swap stations. Even at a low $200/kWh cost at the pack level, an 85kWh Tesla battery costs $17,000. Elon Musk suggested that Tesla would see 60% gross margins on battery swaps. With a $100/swap charge, this suggests Tesla costs of $40 per swap. Even if you totally neglect the capital and O&M costs for the swap station, the energy costs for recharging batteries and the capital tied up in the batteries themselves, a battery must be swapped 425 times at $40 to recover the $17,000 battery cost. It is unlikely that automotive grade electrical and coolant connectors - to say nothing the mounting bolts - will perform that many mate / de-mate cycles reliably. This suggests that at $100/swap Tesla's battery swap business model will not work with the hardware shown.

If this very rough analysis is not convincing, suffice it that Better Place operating on this very business model just went bankrupt. Battery swap service for electric cars - even for Tesla electric cars - is a dog that just does not hunt.

What We Really Saw

The demonstrated Tesla battery swap system is a technically marginal swapping system that very likely will not work reliably under real-world conditions. The business model proposed for battery swapping doesn't begin to pencil and in fact this model just put Better Place out of business. But it is not like Elon Musk to build something that doesn't work, so what were we looking at in this demo?

What we actually saw demonstrated was a system for installing Model S batteries on the production line. This is something very important. The demonstrated hardware should perform well and be highly reliable in a clean factory environment. From the demo, the time to install the pack was about 1 minute, which is much better than the 4 minute 40 second tac-time shown in the Tesla 'Mega Factory' video. If Tesla has / will reconfigure the Model S line at Fremont, using innovations like the automated battery installation machine just demonstrated, it would greatly speed up production - by a factor of 2 or more. And that is what is really important about the demo we just saw.

Between now and the Q2 results conference call, investors should be looking very closely to see if production rates have dramatically increased. Judging from this demo, that is precisely what may happen.

Disclosure: I am short 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.

Additional disclosure: My Tesla short position consists of PUTs. I do not have a short position in the shares.