Why The CEOs Of Tesla/SolarCity And BYD Need To Have A 'Giga Factory' Chat

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 |  Includes: BYDDY, SCTY, TSLA
by: Locked Down Investments

Summary

Tesla, BYD, and SolarCity have a common "dream" for a world full of battery giga-factories. It would be smart to work together to share the costs of development.

Tesla and SolarCity could assist BYD in gaining access to the North American market while BYD could assist Tesla and SolarCity in gaining access to the Chinese market.

Despite using the same battery cells, brands can remain unique by using their own pack designs and addressing different market segments (Tesla mid-high end) BYD (mid-low end) of EV market.

"The world needs dreamers and the world needs doers. But above all, the world needs dreamers who do."

- Sarah Ban Breathnach.

Disclosure: Any potential partnership between Tesla/SolarCity and BYD is my own personal theory as there have been no official talks between Tesla/SolarCity and BYD that I am aware of. This article is the result of my own research and I do not claim to be a technical expert in the battery business.

The Problem:

If Tesla (NASDAQ:TSLA) is ever to produce its Gen III vehicle in the hundreds of thousands per year (as is claimed they wish to do in just 3 years) they will require billions of battery cells every year to do so. Just to satisfy Tesla alone worldwide lithium ion battery production needs to double or triple in the next few years.

Similarly if SolarCity (NASDAQ:SCTY) wishes to dominate the solar grid tied energy storage market they will also require access to massive amounts of low cost battery cells.

Likewise if BYD (OTCPK:BYDDY) is serious about "Solving the Whole Problem" in terms of EV's, solar panels, and battery energy storage systems (all of which they make) then they too will need access to phenomenal numbers of battery cells. BYD stands for "Build Your Dreams."As we shall see BYD, SolarCity, and Tesla all share the same dream.

I hope you have picked up on the pattern here. The above scenario represents a great opportunity for the leaders of these companies to put their money where their mouths are in terms of working together on battery giga-factories to rapidly advance the sustainable consumption and production of energy. Mr. Musk has repeatedly said that his main goal with Tesla is to accelerate the mass adoption of electric vehicles by at least ten years. This means battery factories on a scale never before seen. When attempting such lofty goals I think it wise to surround yourself with people who at least understand and share your vision.

Moving forward

Thus far Tesla has enjoyed remaining independent from the battery cell making business, simply choosing the best supplier that fits their needs (currently Panasonic - PCRFF). This allows them the freedom to change suppliers should a superior cell technology emerge in future.

However it is unlikely that any battery maker will, on their own, commit to spending many billions of dollars on a lithium ion "giga factory", as they still view the EV market as a risky bet. Thus the current dilemma and Tesla's most recent moves to build their own battery giga factory with a few select partners. However momentum has since slowed since this announcement, with Panasonic just recently making some "cold feet" statements regarding the proposed Tesla gigafactory.

Update: As of the Tesla Q1 conference call Mr. Musk commented that Panasonic has signed a "letter of intent" to partner in the battery gigafactory. While this is a step in the right direction it seems that Panasonic might still be "on the fence" when it comes to a fully binding agreement on the Tesla gigafactory. All of this leads to my suggestion for Mr. Musk, CEO of Tesla and chairman of SolarCity, to sit down and have a chat with the CEO of BYD, Mr. Wang Chuanfu.

Meet the Chinese Elon Musk - enter BYD's CEO: Wang Chuanfu

I doubt you could find two better people to work together on their shared vision for the future of our planet. Like Elon Musk, Mr. Chuanfu believes in the following:

1. That EV's are the future without question. He is still struggling to make a truly affordable one right now but is confident that we are not far off. BYD builds batteries and automobiles, both electric and gasoline powered. BYD is currently the leader in electric bus technology.

2. That solar energy combined with battery storage technology will eventually provide the majority of power for the planet. BYD builds PV solar panels and large battery bank units to store renewable energy production primarily from solar and wind.

Mr. Chuanfu also shares some other common traits with Mr. Musk:

1. Chuanfu often eats and sleeps in the company staff quarters on site in his factory. Mr. Musk has his desk on the production line floor at Tesla.

2. Chuanfu like Musk is an engineer. While Musk majored in physics, Chuanfu majored in chemistry. Better batteries, I am told, are primarily a chemistry problem. Mr. Chuanfu patented a method of making cell phone batteries at room temperature (instead of expensive heated dry rooms). Therefore I would say Mr. Chuanfu knows a thing or two about battery chemistry. BYD is the largest rechargeable battery maker in China (4th largest in the world) and number one in mobile phone battery supply.

3. Like Musk, Chuanfu is a self made billionaire. He borrowed money from friends to start BYD in 1995 and in just ten years was supplying the majority of entire world's cell phone batteries. BYD Auto was founded in 2003 and went from making just 16,000 cars in 2005 to 1.2 million in 2012 (with hopes to eventually be number 1 in China). In 2009 Chaunfu temporarily became the richest man in China when BYD stock hit a high after Warren Buffett took a 10% stake. Chuanfu knows how to scale up production rapidly in the auto industry...something Musk could use a hand in.

Bottom line: these aren't your typical Ivory tower beancounting CEO's. They are engineers, mostly self taught geniuses, right in the thick of their companies product design and manufacturing techniques. They are both confessed workaholics routinely putting in 100+ hour weeks all in the name of "Building Your Dreams".

Most of you reading this will know Mr. Musk's ambitions in regards to electric vehicles and solar energy via Tesla and SolarCity. To see just how closely BYD's goals align take a look at this short video about BYD's Three Green Dreams.

I am also aware that BYD and Mercedes are currently working on an EV brand called Denza. Which has just been unveiled at the Beijing Motor Show. However with a $60,000 US price tag, lackluster looks and performance with only 150 miles of range it makes the Tesla Model S look like a bargain. This appears to be another compliance car effort from Mercedes and is not the road towards mass EV adoption. Tesla is also working with Mercedes on its electric B class offering, therefore Mercedes should not stand in the way of Tesla/BYD alliance. Both Musk and Chaunfu know that battery giga factories are needed to bring down the price of EV's. Working together will be the fastest way to get these giga factories built.

Differences:

However there are some key differences between the two which bear mentioning.

Chaunfu took advantage of China's low wages to remove expensive automation and machinery from the battery building process.

Musk has built the Tesla factory with as much state of the art automation as possible. Using human labour only where more efficient to do so.

Chaunfu belives in his own Fe (lithium iron phosphate) battery chemistry as having a number of advantages:

1. Safer (much reduced chance of thermal runaway and batteries do not require a thermal management system)

2. Cheaper (when mass produced)

3. Longer life (able to withstand many more charging cycles than other lithium ion chemistries)

4. Better performance in extreme temperatures

5. Easier to recycle.

6. Fe batteries do not mind being frequently charged to 100% of capacity

On the other hand Tesla's LCA (Lithium Nickel Cobalt Aluminum) batteries do require a thermal management system to handle extreme temperatures and do not like frequent charging to 100% of capacity. Therefore Tesla restricts charging to 80% max unless a "range charge" is manually selected by the driver for relatively rare long distance trips (over 200 miles in one day). However this means that more of the battery pack space and weight can be utilized more efficiently with BYD's Fe batteries.

More here about Lithium-iron batteries.

Due to the current level of 18650 battery cell mass production Musk believes in the LCA chemistry from Panasonic as presently offering the highest energy density per kg per $ of all mass produced lithium ion batteries. This is despite the other disadvantages of LCA chemistry and its need for thermal management, which is built in at the pack level by Tesla.

Tesla is also currently enjoying the excess production capacity of 18650 cells, which were previously used in the laptop industry. This bulkier battery cell has recently gone out of favor as most people are switching to thinner devices, such as tablets and smart phones, for their portable computing needs.

Panasonic has reopened some of its mothballed 18650 cell factories in order to satisfy Tesla's increasing demand. However this process can only go so far and it is difficult to say if 18650 LCA technology will remain the cheapest format for EV's if mass adoption takes place, which will require many times more than the current worldwide lithium ion production capacity of today. It would therefore be prudent for Mr.Musk to look at the other formats and chemistries that BYD may have to offer in a potential partnership.

Quantity vs Quality differences

To get to the mass market Chaunfu believes in driving down costs at all levels. BYD has had some quality issues in the past but has improved remarkably in this area over the past few years, with its F5 "Suri" most recently named the "safest car in China" beating out other international brands such as Ford and VW in this category.

Musk believes in the highest quality, safety, and performance at all levels, despite the cost. He seems to have a zero tolerance in this regard and could cause friction with the cost "frugal" Chaunfu.

My remedy for this would be that Tesla continue to stick to satisfying the upper middle class and above market (competing with the likes of BMW and Lexus). Whilst BYD could attempt to satisfy the true mass market with more affordable EV's (competing with the likes of Honda and Toyota).

Therefore, despite the firms using the same battery cells coming from shared giga factories, the brands would remain completely separate. Regardless, if the two firms have access to the cheapest battery cells on the planet there will be more than enough meat for both companies to feast on. Not just in the EV market but in the upcoming solar/renewable energy battery backup business which is only just getting started. No other companies on earth understand better the potential of the EV, solar, and battery grid storage market than Tesla, SolarCity, and BYD.

A good article on this potential can be found here: The Rising Sun on Solar Grid-Tied Energy Storage.

Supercharging differences

BYD's E6 electric vehicle has a 62 kWh battery pack on-board and an EPA approved range of approximately 140 miles. Whilst BYD does offer a 100 kWh fast charging "cabinet" capable of recharging the E6 in 40 minutes, Chaunfu has not yet taken on Musk's vision of a supercharging network nor seems to want to offer any charging for free at this point. Of course BYD isn't selling $75,000+ EV's either. Based on Chinese pricing the BYD E6 currently would sell for around $52,500 USD after incentives, but I have seen numbers as low as $39,000 USD stated in the US media. However the E6 has never been mass produced and sold just over 1,500 total units in 2013. Chaunfu does believe that costs would be reduced dramatically with mass production.

I believe that the Tesla supercharging approach is absolutely critical to the mass market adoption of EV's as it allows the long distance problem to be solved without waiting around for a 500+ mile range EV. Supercharging stations are relatively cheap to deploy ($200k each) and provide comfort to those who think they might need to travel more than 200 miles in one day (when 95% of the time they don't). BYD should adopt the Tesla supercharging approach here and start their plans for the mass production of the E6 and other more affordable EV's. Initially in the Chinese market, but eventually with battery giga factory expansion with Tesla, they could expand sales to international markets.

Furthermore if the two companies also agreed to share the costs of expanding the supercharging network that might be another incentive to agree on a common cell chemistry in order to sell more vehicles and build more battery giga factories together. The collaborations here could be truly awe inspiring if the two could only work out their differences.

Regardless it appears that for both Mr. Musk's and Mr. Chaunfu's dreams to come true they both require a battery giga factory just to get started. Musk has had no problem raising money so far and Chaunfu has already gained the respect of Warren Buffet (who owns a 10% stake in BYD) calling Chaunfu "a combination of Thomas Edison and Jack Welch".

Therefore raising the money for a giga factory needed to supply Tesla and BYD might not be so hard. BYD certainly has the cell building expertise to do it. Perhaps Tesla could help BYD with the best pack design, supercharging stations, and finally getting the E6 approved for US sales? BYD could in turn sell their solar panels to SolarCity who could provide them with more exposure to the US market as the world's largest single buyer of solar panels.

But which chemistry to use?

Looking at the Lithium Iron Phosphate of BYD it certainly has a long list of advantages. The Tesla Model S 60 kW is able to travel just over 200 miles EPA. The 62 kW BYD E6 on the other hand can only manage 140 miles EPA. But how much of this is really down to the batteries? Perhaps we should take a look at the design and materials used to build the two cars:

1. The Tesla is all aluminum (weighing in at 4,647 pounds), has the best coefficient of drag in the mass market auto world today (0.23), has the motor mounted between the rear wheels and battery pack at the lowest point on the car (the floorpan). It has an automatic suspension that lowers itself at higher speeds, with an active thermal battery management system allowing for even better aerodynamics and optimal range at all temperatures. Tesla builds their motors in house specifically for EV requirements and by all accounts is state of the art in terms of efficiency (Tesla couldn't find any other motor manufacturer in the world that satisfied their needs so they built their own!) Tesla's regenerative braking is said to be extremely aggressive compared to other EV's. All of this will allow for the 200 EPA range but almost all at additional cost over the BYD E6.

2. The BYD E6 is steel based (weighing in at 5,247 pounds), a rumored Cd of 0.30 (but looks worse than that). Its motor is mounted in the front above front axle, with no special suspension, and no thermal management system. Due to the low production volumes BYD may not make the e6 motor in house, even if they do it is unlikely to be as efficient as the Tesla drivetrain and motor. For all these reasons it may not be the battery chemistry at fault when it comes to the E6's perceived lack of range despite a 62 kWh battery. To me it appears that the difference in energy density may not be all that great between BYD's iron phosphate battery and Tesla's LCA batteries.

In fact it might be interesting to see what would happen if BYD's Iron Phosphate batteries were installed in a Tesla Model S (minus the weight of the Tesla thermal management system and coolant required for its current LCA batteries). Just how far it would go?

I would be the last person to underestimate Mr.Musk and do assume that Tesla would have looked closely at Lithium Iron Phosphate as a chemistry and chose to not use it for a reason. Again perhaps it was because this chemistry was not made in a commodity 18650 format or in large enough volumes to bring costs down to the LCA level? If these were the reasons a giga factory putting out lithium iron phosphate batteries could possibly remedy that problem. The fact that they seem to have superior cycle life, can handle supercharging, and do not require thermal management looks pretty enticing to me.

More here on the different types of lithium ion batteries.

Conclusion

It seems clear that Mr. Musk and Mr. Chaunfu share the same dream but have envisioned slightly different paths to get to the end goal. If they could somehow both compromise slightly and align their paths I think we would have a formidable powerhouse in a Tesla/BYD and SolarCity alliance.

Certainly having a Chinese partner would open Asia up for Tesla much more quickly than going it alone. Tesla has mentioned opening up production in China in the future. Having BYD as an EV friendly partner could help with this. Not to mention allowing Tesla access to the very generous subsidies that the Chinese government is offering to EV buyers in an effort to clean up the smog in their cities. We shall see what happens but if Tesla is serious about the Gen III happening in just 3 years then work on the battery Giga factory needs to start right away.

Whilst BYD and Tesla/SolarCity may appear to be competitors on the surface their only way forward may be to work together on a common battery platform for the world's first gigafactory. That is of course if either CEO is serious about "Solving the whole problem" when it comes to electric vehicles, renewable energy, and grid level energy storage.

Disclosure: I am long BYDDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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