Tesla's GigaFactory: A Christmas In July?

| About: Tesla Motors (TSLA)


Next month Tesla will hold a "Grand Opening" of their Nevada GigaFactory and kick off implementation of cell through battery pack integrated manufacturing.

Analysis of the coming Model 3 design, together with recent advances in battery control electronics, points to a battery manufacturing breakthrough at Tesla's GigaFactory.

Tesla and Panasonic will see minimum 20% additional cell cost saving and 25% reduction in cell related capex. Competitors using large format cells will have difficulty applying this innovation.

Tesla's savings will be additional to those from improved chemistry, optimized cell design, and economies of scale. Tesla's pack-level costs will drop dramatically, perhaps as low as $100/kWh.

Tesla (NASDAQ:TSLA) will hold a "Grand Opening" of their huge Nevada battery factory this coming July. Many Tesla enthusiasts and even some Tesla investors are hoping Mr. Musk will break free of his demanding party schedule to attend. Tesla has nearly 400,000 reservations (with deposits) from customers wanting its recently unveiled Model 3 car and the new battery plant is required to meet this demand.

Tesla Model 3 Logos Click to enlarge

Tesla needs the GigaFactory to produce Model 3.

GigaFactory Economics

Tesla has said cells from the big Nevada battery factory will cost at least 30% less than cells Tesla buys from Panasonic (OTCPK:PCRFF) factories in Japan for Model S/X. But Tesla has been vague on exactly how these cost savings will be achieved. Aside from generalities like 'saving on shipping' and 'streamlining production' Tesla hasn't told us much about how the GigaFactory works.

Of course, if there are interesting battery innovations going on in the Nevada desert, would-be competing car companies really don't need to know... do they? On the other hand, knowing if Tesla has a battery making surprise up its sleeve is something an investor might use to better gauge the company. Let's see if Tesla is planning a Christmas in July.

With the unveiling of Model 3, we learned a bit about the car and how Tesla will build it. An earlier article describes some simplifying innovations exposed and/or inferred from images and public comments. One innovation is an air-cooled battery module. The large size modules shown at the unveiling would be inconsistent with the weight of Model 3 if Tesla's very dense liquid cooling scheme is used. More importantly, an air-cooled battery module can have - in combination with the GigaFactory - a profound impact on cell cost and battery factory capital needs. It has already changed the Tesla - Panasonic business relationship in interesting ways.

Air-cooled vs. liquid-cooled battery modules for Model 3 Click to enlarge

Disclosure of battery modules for Model 3 that are much larger than earlier predicted strongly suggest air rather than liquid cooling of the cells. - Author

Air-Cooled Modules

Earlier weight estimates for Model 3, recently confirmed through analysis of tire loading under accelerationClick to enlarge, are consistent with Tesla using high energy density, next generation chemistry cells in the 360 - 380 Whr/kg specific energy range. Such high energy cells will require active thermal management to achieve acceptable cycle life and even safe operation in an automotive environment. Active cooling will also be essential if Model 3 is to achieve improved SuperCharger charging times.

Passively air-cooled batteries like those in early Nissan LEAF cars have demonstrated unacceptable hot weather performance, even when using a lower energy, thermally tolerant battery chemistry. Clearly, Tesla will need robust temperature control for Model 3 batteries as they have for the batteries in Models S/X.

Cooling (and heating) the battery cells by circulating air within the sealed battery pack through a heat exchanger connected to the car's HVAC system, and then over the cells can achieve the same or even better thermal control as Tesla's current liquid cooling scheme. The difficulty is that quite large volumes of air must be moved past the cells, and that requires large cooling passages and much larger battery modules to hold a given number of cells.

Air0cooled battery module Click to enlarge

This air-cooled battery module is sized for extreme SuperCharging. Eight such modules would allow a 320-mile range Model 3 with 65.7kWh battery to charge 190 miles of range in 15 minutes (160kW). - Author

Before We Go On...

This article is an exploration of the Panasonic-Tesla scheme for making electric car batteries at Tesla's new Nevada factory. Use of air-cooled battery modules, together with manufacturing flow changes such modules permit, explains why Tesla has taken the "GigaFactory approach", and the large advantage this approach will provide Tesla over competitors.

It is basically a "reverse engineering" analysis built on observations from the Model 3 unveiling and other available technical information about electric cars, battery systems, cell manufacturing and the like. A minimally technical approach is used and interested Tesla investors should not have difficulty.

Tesla engineers are better at this. Nothing presented is intended to "suggest" to Tesla how they ought to proceed, and indeed, Tesla should be expected to do as well and likely much better than I have done.

As for real world competing carmakers, nothing presented here should be a revelation. I'm not giving anything away. Any carmaker worth their market cap has engineers and analysts who have by now figured all this out. Whether or not such companies have management astute enough to listen is another matter for investors to ponder.

Air-Cooled Module Is Different

Air-cooled battery modules offer a number of advantages and some shortcomings when compared with liquid cooled modules such as Tesla currently uses. The Air-cooled module is much simpler because air being an electrical insulator can be in direct contact with the cells without short circuiting the battery. Water-glycol liquid coolant is electrically conductive so special thermally conductive and electrically insulating materials must separate battery cells and coolant at all times.

Liquid-cooled modules require coolant tubes, fittings, insulating coverings and the like to channel coolant amongst the cells. Air, on the other hand, can be routed through the array of cells by nothing more than simple passages molded into the plastic module housing.

The drawback is that air being less dense requires larger channels between cells making the air-cooled module substantially larger.

We will consider only battery modules containing lots of little round cells because that is the type of cell Tesla has committed to, unlike legacy carmakers who mostly prefer using fewer, bigger flat prismatic or pouch cells. Incidentally, we will in a bit, see once again, why Tesla's is the right choice.

In a Tesla style battery module, cells are connected in parallel to form cell groups, and these groups are then connected in series. Small gage wires connect each cell's positive and negative terminal to a buss-bar that connects the cell to other cells in its parallel cell group. By arranging the air-cooled module with each group of parallel cells in single-file, and spacing the cell groups apart to form cooling air passages, the buss-bars can be aligned with the cooling air passages as illustrated below.

Air-Cooled battery module Click to enlarge

In the air-cooled battery module, groups of parallel connected cells are lined-up single file with air passages between cell groups. Buss-bars connecting cells in parallel are then placed above or below the air passages. - Author

By taking advantage of the wide air cooling passages to locate the buss-bars, two important advantages are gained. First, because the bus-bars can run between rows of cells the buss-bars can be in the same plane as the cell ends. With Tesla's dense, liquid cooling scheme, cells are so close together that the buss-bars must be positioned above/below the cells, with small 'access holes' through which the cell connecting wires run. This allows the overall height of the air-cooled modules to be slightly less, or the cells to be slightly longer. (Tesla, with the nominal 20700 cells replacing 18650 cells, appears to have taken the latter approach.)

There is a second, more significant advantage that comes with placing buss-bars beside rather than above/below the cells. It is that with buss-bars beside rather than above the cells, a single cell within the pack can be removed and replaced without having to break the wiring to all the other cells connected to a buss-bar.

This image clearly shows how individual cell wires pass through the buss-bar plates in the current Tesla battery, making it impossible to remove the buss-bar and gain access to a single cell without breaking wiring to all the cells under the buss-bar. Having to re-wire every cell connected to a buss-bar to access a single cell makes changing individual cells impractical with a dense, liquid-cooled module.

Air vs. liquid cooled battery modules Click to enlarge

The air-cooled battery module is less dense, but can be made thinner for a given cell length. Importantly, because the interconnecting buss-bars can be placed beside rather than on top of the cells, the air-cooled battery module makes it practical to remove and replace single battery cells. - Author

Change one cell, so what?

Tesla battery packs are not normally serviced at all, let alone for changing out individual cells. Only one Tesla competitor (SNL video 2 min.) offers an electric car with small, cylindrical format battery cells in a pack that allows individual cell replacement. It is not immediately apparent why the ability to change-out individual cells in the battery module is important, or even interesting.

To appreciate why the ability to replace individual cells in the air-cooled pack matters, we have to look at how lithium cells work; how batteries made from these cells are managed; how the cells are manufactured and tested; a recent wrinkle in battery control technology; and how all of this fits into the GigaFactory. Yes, it's complicated and a bit geeky, but don't be scared. It will be fun.

Dos and Don'ts of Lithium Cells

Lithium batteries are great, especially the kinds with really high energy chemistry that can give an electric car lots of range. But they aren't idiot proof. Get a lithium cell too hot or too cold; charge it up too much or discharge it down too far, and bad things happen.

Lithium cell safe operating limits Click to enlarge

Lithium cells: Not too hot or too cold. Don't charge them up too high or draw them down too low. Adapted from CIC energiGUNE.

With a temperature controlled battery, the too hot/too cold part of the problem will be dealt with. That leaves the limits on charging and discharging. The SOC (State Of Charge) of a lithium cell is a function of the cell voltage. Above some maximum voltage (~4 Volts) a cell is overcharged and below some smaller voltage (~2 Volts) a cell is over-discharged. Between those voltages, the SOC varies with the voltage. If two lithium cells are at the same voltage, then each is charged to the same percentage of the maximum charge that it can store. This is true even if one cell can store more total charge than the other.

It follows that if a group of cells are connected in parallel (all "+" terminals tied together and all "-" terminals tied together) then all cells in the "parallel group" will be at the same voltage and be at the same SOC.

The "Capacity" of a cell or parallel connected group of cells is simply the amount of Charge (charging current X charging time) needed to increase the voltage from the minimum cell voltage (discharged) to the maximum cell voltage (charged).


If we connect a fully charged cell group in series with a fully discharged cell group, what we get is a half-charged battery that can not be used. Attempting to discharge the series combination will immediately over-discharge the already discharged cell group. If we try charging, the fully charged cell group becomes over-charged. The solution is to discharge the fully charged cell group, throwing away the energy, until both cell groups are fully discharged. Then we can charge the whole battery.

Selectively discharging cell groups within a battery so that the usable range of SOC overlaps is called "Balancing". There are several strategies. We can balance the groups when fully discharged. We can balance cell groups when they are fully charged. Or we can balance cell groups when they are part way charged.

Conventional Cell Balancing Strategies Click to enlarge

Conventional cell balancing bleeds charge from individual cell groups in a battery until the SOC range of all groups overlap. - Author

However we choose to balance the battery, the maximum amount of capacity available for discharging or charging is that of the cell group with the least capacity. Attempting to use the capacity of cell groups having greater capacity than the group with the least capacity will cause overcharging and/or over-discharging of the weakest cell group and ultimately failure of the battery.

Matching Cell Groups

If all cell groups have the same capacity, unavailable capacity is minimized - and one gets the most 'battery' for the weight and cost of the cells used. To match cell group capacity, each cell is measured by cycling it from fully discharged to fully charged on a testing machine. Then cells are sorted into groups of equal capacity. This capacity matching procedure allows the battery to store nearly as much energy as can possibly be stored in the combined cells it contains.

Sorting cells according to capacity and arranging them into cell groups of equal total capacity is not trivial. Model S/X electric cars each contain 7,104 cells arranged into 96 cell groups of 74 cells each. That's a lot of picking-out and gathering together to match things up. But it's the measuring of individual cell capacity that's really fun, and to appreciate how 'fun', we need to look at how lithium cells are made.

Cell Manufacturing and Testing

Lithium cells contain two electrodes - anode and cathode - that consist of thin layers of active material spread over both sides of current carrying metal foil, aluminum foil for the cathode and copper foil for the anode. These electrodes are wound together with porous plastic separator film to form a "jelly roll". Foil tabs extending in opposite directions along the axis of the jelly roll are attached to the anode and cathode. These tabs will be welded to the can and lid of the cell to connect the electrodes.

The finished jelly roll, together with insulating plastic disks at each end is inserted into the cell can, the tabs welded, the cell filled with electrolyte and the lid secured in place, sealing the cell.

Once electrolyte is added to the cell, it is important that the cell, which is assembled in an "over discharged" chemical state, be charged. The electrolyte is corrosive, particularly of the anode, and it is important to charge the cell very soon after the electrolyte is added because during initial charging, some of the electrolytes decompose to form a protective covering on the anode. This SEI (Solid Electrolyte Interphase) allows lithium ions to pass between the electrolyte and the anode while preventing the electrolyte from reacting directly with the anode material.

Initial charging is performed at a low rate (the literature suggests C/10 - ten hours charging time) to achieve a thin, uniform SEI layer. Additional SEI film is deposited with every charging cycle, but the amount decreases with each cycling of the cell such that after three or four charge - discharge cycles the amount of new SEI formed and electrolyte decomposed is negligible.

lithium cell process flow Click to enlarge

The cell electrical processing step requires days to complete and as a result large, expensive cell forming - aging - testing equipment is required. Only after cell electrical processing is complete can cells be stored (for "safety stock") or shipped. - Author

As electrolyte is decomposed over the first few charging cycles, some of the lithium in the cell is bound into the SEI film and the cell capacity decreases. Cells are "aged" by slowly cycling between charged and discharged several times to create a robust SEI layer and stabilize cell capacity. Only after forming and aging are complete can a reliable measurement of cell capacity be made. If a "safety stock" of cells is kept to maintain smooth vehicle manufacturing rate in case of a "hiccup" in the cell line, that stock must be of cells that have finished the electrical processing steps.

It is important to understand just how large and complex is the cell electrical processing equipment. Each cell must have a "socket" connected to a dedicated, current and voltage controlled charge - discharge circuit. If each Model 3 car has 2,880 cells in the battery, Tesla makes 400,000 of these cars a year, and electrical processing takes 3.5 days, eleven million cells will be undergoing electrical processing at any one time. An electrical processing 'machine' with 11 million cell sockets and 11 million charging/discharging circuits is required! At a realistic cost of $50 per 'processing station' this 'machine' will cost over half a billion dollars!

Electrical processing and testing represent 20% or more of the cost of a lithium cell. The capital cost of the electrical processing equipment can amount to 25% of total cell manufacturing capex.

If something can be done to simplify, quicken or eliminate the cell forming - aging - testing steps both the cost of the cells and the capex for the cell factory can be greatly reduced. To understand how this might be possible, we need to next look at a recent development in lithium battery control technology.

Advanced, Dynamic Battery Balancing

We looked at how balancing cell groups in a battery by selectively discharging some cell groups could align the SOC ranges of cell groups and allow as much as possible of the total battery capacity to be used. We also noted that if cell groups had significantly different capacity, that there would be a lot of unusable capacity in the battery, no matter how we tried to balance the cell groups.

By matching the capacity of cell groups, and then balancing, a nearly ideal battery is obtained wherein all of the cell groups are cycled between fully charged and fully discharged, with little if any cell group capacity going unused. But this requires the capacity of each cell be measured and cells sorted into groups of nearly identical capacity - a difficult and ultimately costly business.

There is another way to balance cell groups within a lithium battery, that with advances in power electronics is now practical. If excess capacity in higher capacity cell groups is not simply bled away, but rather transferred to cell groups of lesser capacity, the SOC of cell groups can be maintained in balance continuously as the entire battery is charged and discharged. This works even if cell group capacity is not tightly matched because energy is shuttled between higher and lower capacity cell groups such that the capacity of each cell group - whatever it may be - is fully utilized. A battery module with this kind of balancing scheme might be arranged as in the following figure.

Diagram of battery module with power efficient dynamic balancing system. Click to enlarge

Fitting each parallel cell group with an efficient, bi-directional power converter, allows energy to be efficiently shuttled between cell groups. In this way, all cell groups can be continuously matched to the same voltage, and SOC even if they differ in capacity. - Author

Conventional balancing only allows battery capacity of the cell group having the smallest capacity to be utilized. Cell groups with more capacity can never be fully charged and discharged without over charging/discharging the weakest cell group.

Dynamic balancing, on the other hand, shuttles energy between cell groups as the battery is charged and discharged so that all the capacity of all cell groups is effectively useable. If power converter efficiency is sufficiently high and the differences in capacity between cell groups is not too large, dynamic balancing can eliminate the need to match the capacity of cell groups, thus simplifying battery module manufacturing and reducing cost. But the really big cost savings require one final step.

Comparison of pack storage capacity with Dynamic vs. Conventional ceel group balancing Click to enlarge

Dynamic balancing shuttles energy between cell groups, keeping all cells at the same SOC. This allows all the capacity of the battery to be used. - Author

A New Process Flow for Cells and Modules

Here is where everything comes together - and where we find out why the ability change single cells is important.

At the GigaFactory, cell manufacturing and battery module (and pack) manufacturing are done side by side. Not only are we spared the cost and trouble of shipping cells from the cell factory in Japan to the module/pack factory in Nevada, the time to travel half way around the world is eliminated. This means it is practical to take 'raw' cells, freshly filled with electrolyte and sealed, from the end of the cell manufacturing line and immediately install them into battery modules.

Battery modules equipped with dynamic balancing power converters for each cell group and fitted with raw cells right off the production line are now connected to external power. With suitable software for the module balancing computer, the module becomes the electrical processing 'machine'. Tesla and Panasonic just saved a half billion dollars of capex at the Nevada GigaFactory.

Battery Module configured to autonomously perform cell electrical processing steps. Click to enlarge

But there is one final catch. Occasionally, a cell will fail and short circuit during electrical processing. The Tesla module construction, with individual, fusible wires to each cell will, of course, disconnect such faulty cells. But replacing these occasional faulty cells is only practical because the air-cooled module places buss-bars beside rather than on top of the cells, enabling practical single cell replacement.

Because individual cells made with this process flow are not measured for capacity, or sorted into capacity-matched groups, the dynamic balancing circuitry will be needed for balancing the battery as it is cycled for its entire useful life. There are also some subtle statistical issues associated with random cell-to-cell variability that are critical to the viability of this approach. We will look at these shortly. But first, let's look at what makes this different cell manufacturing process flow possible.

GigaFactory: Required for In-Module Cell Processing

The first thing to appreciate about In-Module Cell Processing is that without a GigaFactory it would not be possible. Unless cell manufacture is co-located with module manufacture, the electrolyte filling to initial charging time would be too long if cell electrical processing is done "in the module". But co-location of cell and module manufacture isn't the only requirement.

Other Enabling Factors

Higher energy battery chemistry is another enabling factor. Tesla and Panasonic could not implement In-Module electrical processing until the number of cells in the battery was reduced, making it practical to use air-cooled modules that allow single cell replacements, necessitated by occasional cell failures during electrical processing.

High-efficiency active cell balancing electronics are required to accommodate groups of unmatched cells and varying capacity while fully utilizing all cell capacity in the battery. (And, these same dynamic balancing circuits perform the cell electrical processing functions, too.) While battery balancing has been around for a long time, and there are many balancing circuits available, only recently (2013) have high efficiency balancing circuits with the capability and flexibility needed for In-Module Processing become available.

Tesla's 'little round cells' battery architecture turns out to be a critical enabler of In-Module Processing. While the concept of In-Module electrical processing can be applied with cells of any size, there are two considerations that favor practical implementation with lots of small cells in each cell group, and make implementation problematic when groups contain only a few large cells.

When a few large cells form each cell group - the Bolt, for instance, uses 3 cells in each cell group - disconnection of a cell that short circuits during electrical processing by blowing its connecting fuse can be problematic because only a few cells are left to deliver the fuse blowing current. With the Tesla battery architecture, several tens of parallel cells are available to deliver the fuse blowing current pulse - a more robust and reliable arrangement.

The other consideration favoring the Tesla 'little round cells' approach is statistical. Before a manufacturer commits their process flow to In-Module electrical processing there must be assurance that things will continue to 'work' even if cell manufacturing falls off the optimum operating point. Ideally, the capacity of cells will fall within a narrow distribution close to the maximum theoretical capacity that can be put into the cell can (or pouch). But sometimes the process can drift - think for instance of there being 'lumps' in a batch of cathode material that don't get fully mixed in such that a few cells have a cathode mix that's a 'bit off' and slightly low capacity as a result. If such deviations cause unusable finished modules/batteries, then In-Module processing becomes an unacceptable risk in spite of the great savings it can provide when everything works.

To understand how an 'off optimum' cell manufacturing process affects batteries made with In-Module processing, I built a Monte Carlo model that assigns individual cells a random capacity, builds groups of these cells and battery packs of the groups. The capacity of the resulting batteries when conventionally balanced and when dynamically balanced is then determined and plotted.

For the Tesla, small cell case, I modeled a battery with 80 series connected groups, each group containing 36 cells, intended for a 320 mile range Tesla Model 3 with 65.7kWh battery requirement. To model the 'large cell' case, I chose a battery, again with 80 series connected cell groups, but with each cell group comprised of just 3 large cells, with the same 65.7kWh design objective.

MonteCarlo Result - small cell and cell group distribution. Click to enlarge

Cell capacity distribution with long 'downside' tail to simulate cell manufacturing at 'off optimum' conditions. Notice that the distribution of cell group capacity is much 'tighter' than distribution of cell capacity owing to combining capacity of the large number of cells (36) in each parallel cell group. - Author

MonteCarlo result for 20 battery packs made from small cells showing conventionally balanced capacity and dynamically balanced capacity Click to enlarge

Random variation in cell capacity results in smaller but significant random variation in cell group capacity. The conventionally balanced pack capacity is limited by the capacity of the cell group having least capacity and the design battery capacity is not obtainable. Dynamic balancing that shuttles energy between low capacity and high capacity cell groups effectively uses the capacity of all the cells in the pack and consistently achieves the design battery capacity. There is no need to match cell or group capacity during battery assembly. - Author

Works Nicely, Doesn't it?

This is a quite remarkable result. When the Tesla 'little round cells' architecture is applied, consistent, in-specification batteries are produced without any cell matching, even when the cell manufacturing process is working poorly. This suggests that In-Module cell electrical processing is feasible with air-cooled modules, efficient dynamic balancing circuitry, and Tesla's small cell architecture.

When only a few large cells are used in each cell group things don't work quite so well. Building the 'same' battery with groups of just 3 large cells - the arrangement in the Chevy Bolt - this is what the statistics look like.

Monte Carlo distribution cells and groups using large format cells Click to enlarge

When large format cells are used there will be fewer cells in each cell group and the distribution of cell group capacity is wider because fewer cells are being combined. - Author

Monte Carlo distribution packs, using large format cells Click to enlarge

With large format cells, the spreads in group capacity and in pack capacity are much greater, and pack design capacity is no longer reliably obtained when the cell process falters. In this case, not only do many packs fall short of the requirement even with dynamic balancing, almost none of the packs will dynamically rebalance between discharged and full charged states within 30 minutes, making it impossible to reliably achieve fast road-trip recharging. - Author

In-Module Processing Risky with Large Format Cells

This Monte Carlo analysis shows that, when the cell manufacturing process moves off 'optimum', battery packs using In-Module cell electrical processing and made with large format cells can fail to meet requirements. Similar packs made with more, smaller cells continue to meet requirements with the same degree of 'off optimum' cell production.

Of course, if cell manufacturing is working perfectly In-Module processing works well with large or small cell battery designs. It is the higher risk of producing a lot of 'scrap' batteries if cell processing departs from optimum that makes In-Module processing less attractive when using large format cells.

This is one more case in which the Tesla team, by choosing small format cells have proven to be cleverer, to lead purer lives, or encounter more 'dumb luck' than teams at the legacy ICE carmakers that have chosen large format cells. Oh well...

Cost Savings: Lower CAPEX, Lower Cell Cost, Better Batteries

Cost savings available to Tesla and Panasonic with In-Module cell electrical processing are huge. As described, there is a half billion dollars of capex on the table just from omitting dedicated cell level forming - aging - testing equipment. There is also the labor cost saving from not having to load/unload cells from this equipment, operate the equipment and maintain the equipment.

The need to generate, maintain and use information about individual cell capacity is eliminated, as is the labor and machinery to sort and collate cells into groups of matching capacity - all of which is obviated by the dynamic balancing hardware built into the modules.

There is another economic advantage here that is quite subtle. Combining dynamic balancing and using many small, parallel connected cells makes for an exceptionally robust battery design. Occasional random cell failures in such a battery will have negligible effect on capacity because the dynamic balancing will continue to use all available capacity of the remaining cells. This is, of course, great for Tesla customers who will experience reliable batteries that suffer but minor deterioration with time and use. It's good for Tesla who will see few warranty costs on such batteries.

The big cost savings however, comes from the small cell-based battery being tolerant of lower cell reliability and greater non-uniformity in cell capacity. As the Monte Carlo analysis clearly shows, the Tesla design approach is very tolerant of some cells that are way off design capacity while large cell battery designs are not. Because the Tesla small cell approach tolerates higher cell failure rates and greater cell non-uniformity, Tesla and Panasonic are free to use much more aggressive cell designs and more volatile, higher energy density cell chemistry. They can get away with using much 'hotter' cell designs that are lighter (higher Whr/kg), have lower internal resistance, etc.

More aggressive, higher Whr/kg cells by definition contain fewer kilograms of material in relation to the energy stored. And material that isn't in the cells doesn't cost Tesla - Panasonic anything. This is the underlying reason Tesla has always had a cost per kWh advantage over other carmakers.

But the economic advantage doesn't stop with lower cost per kWh. Higher Whr/kg batteries weigh less, so a car using such batteries weighs less and needs fewer kWh of battery capacity to achieve a given range, allowing the battery to be smaller, the car to weigh less again, and so on. This means Tesla will need fewer kWh of battery for every car and they will pay less per kilowatt hour on top of that.

There is also economic advantage for Tesla in the ability of more aggressive cell designs to achieve lower cell internal resistance. Lower cell resistance allows great acceleration, and it allows higher rates of SuperCharging, which in turn reduces the number of SuperChargers needed to serve the fleet of Tesla cars.

Tesla - Panasonic Relationship Changes

With In-Module cell electrical processing, the Panasonic - Tesla relation becomes much more intimate. Tesla must become privy to the fine details of Panasonic's manufacturing statistics to even consider In-Module processing - surely they will have done statistical analysis far more sophisticated and detailed than the Monte Carlo analysis above, for instance. Panasonic must also share with Tesla complete details of how cell electrical processing is done because Tesla modules, Tesla electronics and Tesla software will be performing these critical cell manufacturing steps.

On the financial side, In-Module processing modifies the relationship significantly. Very large capex savings, as well as labor savings, are achieved by eliminating dedicated cell electrical processing equipment and by not measuring, sorting and matching cell capacity. At the same time, battery module and pack costs increase with inclusion of the dynamic balancing circuitry. The absolute amounts involved turn out to be staggering.

For starters, the reduction in capex for cell electrical processing equipment will amount to a half billion dollars or more that Panasonic will no longer need to invest in the Nevada operation. The cost of cell electrical processing (including labor and depreciation of equipment, etc.) amounts to 20% or so of cell manufacturing cost.

The marginal cost of the dynamic balancing electronics included in each module can be estimated based on the power handling capability needed from these circuits. Sizing the dynamic balancing circuitry to provide C/10 charging/discharging for cell electrical processing, and taking cost at 10 cents/Watt for power switching electronics implies ~$660 additional cost for a 66kWh battery pack. This cost will of course fall over time as semiconductors improve, and represents less than 7% of the cost estimated earlier for the Model 3 large (65.7kWh) battery pack.

At a manufacturing rate of 400,000 Model 3 cars per year, Tesla will be spending an additional $264 million for dynamic balancing electronics in every battery pack. If Tesla's cell cost falls in proportion with a 20% cell manufacturing cost reduction, cell costs will be lower by $463 million per year (based on $88/kWh cell cost estimated by Dan Dolev of Jefferies).

Safety Stock - Not the Same

A recent article by secretive Seeking Alpha author Montana Skeptic belabors a recent disclosure that Tesla and not Panasonic will hold the cell supply chain 'safety stock' when integrated cell-through-pack manufacturing begins at the GagaFactory. Great contortionist effort is expended attempting to link this change in the Tesla-Panasonic relationship to falling demand for Tesla cars, disintegrating trust on the part of Panasonic and general moral turpitude on the part of Tesla's CEO.

Surprisingly, reality is a bit different. With In-Module processing, it is no longer practical to hold cell supply chain safety stock in the form of finished cells because cells are neither 'finished' or chemically stable until they are installed in and electrically processed by Tesla battery modules. The 'safety stock' must consist of finished battery modules, which are of course Tesla, not Panasonic parts.

GigaFactory Process Flow Click to enlarge

GigaFactory process flow incorporating In-Module Electrical Processing prevents holding cells as safety stock because cell electrical processing steps do not occur until cells are already installed in the battery module. Safety stock to buffer hiccups in cell manufacturing must be held in the form of completed battery modules - which are Tesla, and not Panasonic parts. - Author

The change in ownership of cell safety stock disclosed and so thoroughly examined by Montana Skeptic is additional confirmation Tesla and Panasonic will use In-Module cell electrical processing.

What this Means for Investors

With In-Module cell electrical processing Tesla and Panasonic are about to make a quantum leap to lower battery costs, a leap that competing carmakers married to large format cells will have difficulty emulating. The financial advantage to Tesla of this battery innovation is obvious and, whether or not Tesla discloses details about it next month, this battery manufacturing innovation and the technical moat it gives Tesla is surely, for investors, a Christmas in July.

There is something else here that should matter to Tesla investors as much, or perhaps more than the specifics of this one innovation. The shift to In-Module cell processing is an example of how Tesla, from their CEO on down, look at the problem if making electric cars differently.

Tesla was the first to design the car around the battery to take full advantage of electric propulsion. The result is Tesla electric cars that successfully compete against the best ICE cars made - something that no other carmaker has come close to achieving. Some other carmakers have begun to think about cars built around the battery like Tesla. But it is clear that Tesla has already moved far beyond the simple union of car design with the battery pack.

What we see with In-Module testing is unification of the car design with the battery pack design, with the battery electronic controls, with the cell manufacturing, with the entire cell and battery supply chain, even with the cell chemistry. Just look at how all this fits into the Model 3 design.

The innovative glass roof of Model 3 increases rear headroom. This, in turn, allows the use of larger battery modules in a smaller car. Because battery modules can be larger, they can be air rather than liquid cooled. Air-cooled battery modules enable single cell replacement. Single cell replacement, combined with advanced battery balancing, GigaFactory co-location of cell and module manufacturing, and Tesla's small cell architecture enable In-Module electrical processing. And a quantum leap in lowering battery cost results.

Tesla-Panasonic are also free to design aggressive, high energy and power density cells using high-energy cell chemistry because the resulting battery design is fault tolerant and robust against cell-to-cell capacity variations. This will further lower the cost of batteries and the cost and weight of Tesla cars while improving performance and reducing SuperCharger charging times. And, that will reduce the cost of road-trip charging infrastructure for Tesla cars.

Tesla's competitors just do not think this way. The legacy carmakers continue to view batteries, electric drivetrains and charging infrastructure as commodity components to be outsourced and cost controlled by beating up the supply chain. Legacy business methods may work fine in a legacy ICE world, but these methods are all wrong when the car industry faces disruptive change, as it does with the switch to electric propulsion.

Tesla is worth more in comparison to the number of cars they make because Tesla has a future beyond the scope and scale of their competitors. It isn't just that the Tesla team are smarter, that they lead purer lives, or that they are blessed with more dumb luck than their competitors. Tesla thinks about electric cars differently - and that makes all the difference.

Disclosure: I am/we are 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.

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