The real challenge facing Tesla Motors (NASDAQ:TSLA) is the problem of energy density. Simply put, energy density is the amount of potential power in a fuel or energy source. It's also Tesla's Achilles' heel, as Elon Musk undoubtedly knows.
Present-generation rechargeable lithium-ion batteries like those used in Tesla vehicles have an energy density of between .9 and 2.63 megajoules per kilogram. That means each kilogram of lithium battery is capable of storing the equivalent of .252 to .7364 kilowatt hours of electricity.
In contrast, gasoline has an energy density of 34.2 megajoules a liter, or the equivalent of 9.57 kilowatt hours of electricity. In other words, gasoline has around nine times the energy density of rechargeable lithium ion. That's why your Toyota Corolla will go a lot farther on a tank of gas than your neighbor's shiny new Tesla will go on a charge of electricity.
Why There Is No Commercial Market for Electric Vehicles
This also is what adds the weight to electric-powered vehicles; they have to carry several hundred pounds of batteries to carry the same amount of energy contained in a tank of gasoline or diesel fuel. This extra weight is what will probably keep Tesla from tapping the market for vans and other commercial vehicles.
United Parcel Service (NYSE:UPS) is not going to put an electric van on the road anytime soon, because it will carry far fewer packages than a gasoline-powered van. It's also why UPS is using propane and liquefied natural gas, or LNG, as its alternative fuels of choice.
A liter of LNG has an energy density of 22.2 megajoules, the equivalent of 6.2 kilowatt hours of electricity. A liter of propane has an energy density of 25.3 megajoules, the equivalent of 7 kilowatt hours of electricity. These gases are not as good as diesel fuel, but they deliver several times the energy density of lithium ion. Diesel fuel has an energy density level of 37 megajoules, the equivalent of 10.36 kilowatt hours of electricity.
Energy Density Is the Key to Tesla's Future
If Tesla is ever going to be a serious player in the automotive industry, it will have to increase the energy density of lithium-ion batteries by several times. That's why Musk is taking on mountains of debt to build his Giga Factory. Making lithium ion competitive with fossil fuels is going to take a lot of research and development and cost a lot of money.
Tesla might not have that money; the company reported TTM revenues of just $2.072 billion on March 31, 2014, which is a record high for the company. Tesla also reported a free cash flow of -$80.72 million on March 31, 2014. Tesla is losing money despite those record revenues.
I have to wonder how long this can go on and if it can go on long enough for Tesla to be able to develop a lithium-ion battery with a high enough energy density level to compete with gasoline. My purely unscientific opinion is that Tesla would need an energy density level of around 20 megajoules per kilogram of lithium ion to be competitive with gasoline-powered vehicles. That may not be possible, or it might require a whole new kind of battery technology, which would also be expensive.
The Fuel Cell Challenge
Tesla also faces the problem of Fuel Cell Vehicles (FCV), which Toyota Motor (NYSE:TM) and Honda Motor Company (NYSE:HMC) will start marketing in Japan and California next year. The present-generation FCV models run on compressed hydrogen gas, which has an energy density of around 5.6 megajoules a liter - the equivalent of 1.568 kilowatt hours of electricity. That means an FCV already delivers the same or slightly more energy density than an electric car.
One has to wonder how Tesla could compete if an FCV that runs on a more energy-dense fuel, such as gasoline or natural gas, ever hit the road. The big attraction of fuel cells is that like electric cars, they put out no pollution. Fuel cell cars don't pollute, because they use a chemical reaction and not an engine to make electricity. The reaction creates heat and a cloud of water vapor, not smog.
Toyota and Honda also have a lot more money to spend on improving fuel cell technology than Tesla has to spend on batteries. Toyota reported a free cash flow of $1.82 billion on March 31, 2014; in other words, Toyota's free cash flow is almost as big as Tesla's revenue. Toyota also reported a TTM revenue of $256.26 billion; that's over 100 times Tesla's revenue.
Honda also has a lot of money to spend on fuel cells; it reported a TTM revenue of $118.09 billion on March 31, although it did report a negative free cash flow of -$1.914 billion on March 31.
Toyota can afford to spend a lot of money developing fuel cell technology without taking any real financial risks. Honda can afford to maintain a negative free cash flow that's almost as large as Tesla's revenue, so it, too, can spend a fortune commercializing fuel cells.
The numbers show that Tesla faces serious technological challenges and competitors with far greater resources. When judged from an energy density or a financial standpoint, it's hard to see how Tesla could survive and easy to see why Elon Musk might want out of the electric car business.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. The author is long on the natural gas producer Chesapeake Energy (NYSE:CHK) and the fuel cell company Plug Power (NASDAQ:PLUG).