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Summary

  • Growth in lithium battery investments.
  • Power electronic and hardware companiesto Watch.
  • Battery companies which will benefit from the current price decline.

Tesla Motor Inc. (NASDAQ: TSLA) recently announced its planned "Giga Factory", which has created an overwhelming amount of interest in the energy storage space. The Giga Factory will be the largest battery-making facility in the world, producing, at its peak, 500,000 lithium-ion packs per year. It is possible that Tesla could deliver battery packs to other automotive companies and other applications including the stationary energy storage market. Tesla followed up the announcement with a $1.6 billion convertible debt offering and is looking to offer convertible debt notes to increase the funding. The Giga Factory, which will have a capital cost between $4-5 billion, is expected to begin construction in 2014 with production starting in 2017. The facility is expected to employ 6000 people in a 10 million square foot facility. Tesla expects that this new facility will reduce the cost of lithium ion batteries by about 30%. As Tesla begins to move forward with the Giga Factory, a number of direct investment opportunities have arisen primarily in the battery and lithium supply chain.

SolarCity (NASDAQ: SCTY) and Tesla have been working together to deploy residential energy storage systems and have recently expanded their relationship to include energy storage systems for the commercial market. In late 2013, they unveiled the "SolarCity DemandLogic", which integrates intelligent management software and Tesla battery technology. The system is aimed at reducing businesses' peak demand and providing backup power during outages, potentially saving thousands on energy costs. These types of energy storage systems are available in Europe and Japan where the governments currently offer an incentive for residential and commercial customers to acquire such systems (Seeking Alpha: The Rising Sun On Solar Grid-Tied Energy Storage). This is expected to drive early market demand while a ramp-up in lithium ion and next-generation battery technologies will drive down battery costs. The reduction in battery costs will not only have a major impact on Tesla but SolarCity will also benefit as the storage system costs will be lowered as well.

Power electronics companies will certainly benefit from the lowering cost of battery systems. Power electronics remain the most critical component of energy storage systems: inverters convert electricity in the charging and discharging of batteries and each stationary energy storage system requires a bi-directional energy storage inverter. One of the few companies in this space is Ideal Power Inc (NASDAQ: IPWR). Ideal Power would benefit from the decreasing cost of batteries as it would lower the overall cost of energy storage systems, making these systems more affordable and less dependent on government incentives. Overall, it would drive the demand for power electronics.

Through their Energy Systems division, Panasonic Corp. (OTCMKTS:OTCPK:PCRFY) supplies lithium ion batteries to the automotive sector, with their largest customer being Tesla. In October 2013, Tesla and Panasonic signed an auto grade lithium ion battery cell agreement, which will see Panasonic supply 2 billion cells over the course of four years. In fact, Panasonic was an early investor in Tesla; it made a $30 million investment in 2010 and it is speculated that Panasonic will invest $1 billion in Tesla's Giga Factory.

Another battery player who could benefit from the Giga Factory is Korean-based Samsung Electronics Co. (OTCMKTS:OTC:SSNLF), which is currently selling electric vehicle batteries for BMW's i3 electric car through their Samsung SDI division. Both Tesla and Samsung SDI confirmed in late 2013 that the two companies were in talks about Samsung SDI supplying battery systems to Tesla.

Toyota Motor Co. (NYSE:TM), which is by far the most progressive automaker in the EV market today, is another player that could surface. Toyota offers PHEV, EV, and HEV vehicles and they are expanding their battery manufacturing capabilities, thereby securing their lithium supply. Additionally, Toyota has made a $50 million investment in Tesla Motors (Seeking Alpha: Toyota's Lithium Based Future).

Panasonic and Toyota are already benefiting through their previous direct investments in Tesla. Furthermore, Tesla has been supplying Toyota with power-train equipment under a 3-year agreement worth about $100 million. There have been no formal announcements from Samsung but this could change on the back of the Giga Factory announcement. It is important to note that Samsung has recently announced that they will set up a battery manufacturing facility in China to service the emerging Chinese EV market; this is a clear indication that Samsung is looking to remain a key player in the global battery space in which natural progression could see them working with Tesla in the USA.

As the Giga Factory moves forward, investors can expect ongoing news out of Tesla that will surely impact shares in companies that are referenced in this article. Long-term investors should review the various opportunities that have presented themselves as we are likely experiencing a paradigm shift toward EVs. On the other side of the fence, if Tesla runs into difficulties or delays with its project, this will have a significant negative impact on these supply companies. Buying companies in the supply chain will allow investors to diversify their dependence away from a single company.

Source: Companies To Watch As Tesla Drives Down Lithium Battery Cost