Tesla's Battery Strategy Is Spot On, But Improvements Could Delay The Model 3

| About: Tesla Motors (TSLA)

Summary

Tesla has recognized that modifications need to be made to its existing battery design to meet the Model 3 specifications of size and price.

Panasonic will make batteries for the Model 3, and its (at least) $1.6 billion commitment to the Gigafactory will be an inducement to push the envelope.

Nevertheless, the changes needed in the existing battery technology are formidable and will take time, which could explain the conflicting statements by Tesla on Model 3 orders and production.

I had the great privilege of having John B. Goodenough, inventor of the Lithium Ion Battery, as my supervisor in the Inorganic Chemistry Department at Oxford University, when I was working on my doctorate during the time of his discovery. A fascinating (and reminiscent on my part) article on professor Goodenough, detailing his discovery and current work, can be found here.

One of my takeaways from four years of research under him: It's all about the chemistry.

Tesla (NASDAQ:TSLA) and Panasonic (OTCPK:PCRFY) have embarked on a program to manufacture lithium batteries for Tesla's Model 3, and a critical factor is developing a high-capacity/low-cost battery that will enable the company to make a profit on a $35,000 electric vehicle.

In our Oxford days, the discovery that revolutionized the battery world was a lithium-cobalt-oxide cathode. Today, this lithium-based cathode is still used in mobile phones and notebooks, but the materials comprising it have grown increasingly complex, as manufacturers seek to optimize performance by increasing battery capacity and extending cycle life for use in electric vehicles.

This rigorous and daunting task, which I will discuss below, would have been completed years earlier by Panasonic if it wasn't so complex. Now, the company will spend at least $1.6 billion on its Gigafactory, and although this investment will serve as a catalyst to expedite the process, time is running out.

The time frame discussed by Tesla for the Model 3 production is too short for the rigorous testing, life-time aging and evaluation of cycle life needed on a modified battery. While there is speculation that merely increasing volume of the battery will result in a 30% improvement in performance, that is just speculation. As I will show below, Tesla has already realized this will not do the trick.

Battery Technology

As a backgrounder to the task facing Tesla and Panasonic, the operation of a lithium ion battery is illustrated in the graphic below for LiCoO2. When a battery is first constructed, the lithium compound, such as LiCoO2, makes up the cathode. During the initial charge, lithium ions intercalated in the cathode are dissolved in the electrolyte and travel to the anode, which is typically made of graphite, and are intercalated within the structure of the graphite. Electrons also move from the cathode to the anode, tying the positively charged ions to the anode.

During discharge, i.e., when the battery is working, lithium ions are de-intercalated from the anode, along with the electrons. It is the movement of the electrons that generates the electric current.

Click to enlargeSource: University of Texas at Austin.

An incredible amount of research and development of lithium ion batteries has been ongoing for the past 20 years on improving the performance of the cathode, the anode, the separator and the electrolyte - key components of a lithium ion battery. A thorough description on the basics, progress and challenges of lithium ion batteries can be found here.

Cost versus Performance

Much of Tesla's success is its performance, which requires a high-capacity battery. Yet annual costs are not much more than a Nissan Leaf with a 30kWh engine. Shown below are performances of leading electric vehicles utilizing lithium ion batteries:

Model

Motor

(NYSE:KW)

Economy

(kWh/100 mi)

Driving Range (miles)

Annual Fuel

Cost ($) (15,000mi per year)

VW e-Golf

85

29

83

550

Ford Focus

107

32

76

600

Chevrolet Spark

105

28

82

550

Mercedes B250e

132

40

87

800

Nissan Leaf 30 kW-hr

80

30

107

600

Tesla S 90 kW-hr

285

89

265

750

Source: EPA

Click to enlarge

To illustrate the advancements made in the lithium ion battery market, the first commercialized battery developed by Sony (NYSE:SNE) in 1991 had an energy density of 90Wh/kg, whereas Tesla's battery in the S70 has an energy density of 150Wh/kg. Along with increases in power have come decreases in cost. The Sony battery initially cost $2,000/kWh, while the Tesla battery cost $250/kWh.

A cost of $250/kWh for a $70,000 S70 is one thing, but cost needs to be lowered for the $35,000 Model 3. And this is where "it's all about the chemistry." Tesla's success in reducing cost and current losses per vehicle critically depend on the battery.

Doing the math, the battery pack of a Tesla S comprised

  • 16 modules
  • 432 individual cylindrical cells per module
  • 6,912 total cells
  • 85 kWh total storage
  • 12.3 Wh/cell
  • 5,312 Wh/module
  • 45 gm/cell
  • 318 kg per battery pack
  • $0.25 per Wh
  • $3.00 per cell

There are several components to the cost of a lithium ion battery, and I will discuss some of them in the section below. In general, components make up 60% of the cost of a battery while manufacturing and profits make up 40%, according to the graphic below from battery charging company Qnova.

Tesla's Dilemma

Tesla has started development of the battery for the Model 3 based on tradeoffs and new technology. Tesla CTO JB Straubel stated:

We've spent a lot of time on this actually. It's kind of interesting. There are a bunch of tradeoffs. There are some things that get better when you make the cell size bigger, and some things that get worse. 18650 was sort of an accident of history. That was what was standardized for early products. So we revisited all of those trade offs and came to this size, which is quite a bit bigger. If you have them next to each other, the actual volume of materials inside is substantially more.

The cathode and anode materials themselves are next generation. We're seeing improvements in the maybe 10% to 15% range on the chemistry itself…we're also customizing the cell shape and size to further improve the cost efficiency of the cell and our packaging efficiency.

CEO Elon Musk noted:

"There are improvements to the chemistry, as well as improvements to the geometry of the cell. So we would expect to see an energy density improvement and of course a significant cost improvement."

Changing the cell shape

Smaller amount of casing material

Existing Tesla batteries for the Model S and Model X use an 18650 format, which stands for 18 millimeters in diameter and 65 millimeters in length, which CTO Straubel called "sort of an accident of history."

For the Model 3, batteries manufactured at Tesla's Gigafactory by Panasonic by the end of 2016 will be called the 2170 - 21 millimeters in diameter and 70 mm in length.

Using standard math equations for volume = π x r2 x h:

18650 format = 16540.5 mm3 of electrodes and electrolyte

2170 format = 24245.3 mm3 of electrodes and electrolyte

ratio - 1.466 times greater volume for the 2170

Therefore, Tesla needs to make 1.466 time less batteries for the same output. With the initial ramp-up expected to result in lower yields, Tesla can complete more cars using the fewer good batteries that result. Obviously, as production ramps and yield increases further savings will be obtained.

The actual cost of the components will not change in going to the 2170, as it is a volume basis of materials. However, what does change is the amount of material used for the battery housing.

Using the standard math equation for the area of the battery housing A=2πrh+2πr2

18650 format = 4,184.6 mm2 of housing

2170 format = 5,310.9 mm2 of housing

ratio - 1.271 times greater surface area of housing

Thus, using the 2170 format results in a savings of 13.3% for the amount of metal used to house the electrodes and electrolyte.

Optimized thermal management

Battery temperature plays an important part in battery aging and capacity loss in lithium ion batteries. Thermal effects take place because the actual charging/discharging process is, in reality, a chemical process and generates heat if exothermic. These exothermic reactions are responsible for a significant number of airline incidents and can no longer be shipped as cargo on passenger planes.

I am sure that Tesla utilized finite element analysis modeling approaches to determine the optimum size with the focus on thermal management. They didn't pull the 2170 dimensions out of a hat and making thousands batteries to test with minor iterations in width and height would have taken years. It would be another way for them to reduce costs. With parameters calculated by a computer rather than trial and error, the conversion time to the final battery size was minimized.

Reduced interconnections

Individual batteries are wired together in parallel. By making fewer cells, fewer connections are needed, reducing costs. Fewer connections could also reduce thermal losses at the interconnections.

Improving the Chemistry

As noted above, CEO Musk indicated that not only will the shape of the batteries for the Model 3 change, improvements in the chemistry result in energy density improvements and significant cost improvement.

There are several formulations used in EV batteries and these are further expanded by adding or substituting components. For example, Lithium Manganese Oxide (LiMn2O4) offers high discharge and recharge rates (also due to the spinel structure of the cathode), but it has a lower capacity and shorter lifetime. Adding nickel (NI) and cobalt (CO) to the mix to form Li1-x(NiMnCo)O2 (referred to as NCA) results in a battery with low internal resistance, high charging rate, good stability and safety. The ratio of Ni and Co also change the properties.

Three major materials used in batteries include:

  • Lithium Nickel Cobalt Aluminum (Li1-xNiCoAlO2) used by Tesla and Panasonic on Model S
  • Lithium Nickel Manganese Cobalt (Li1-x(NiMnCo)O2) used by nearly all Korean and Japanese manufacturers
  • Lithium Iron Phosphate (Li1-xFePO4) being promoted by the Chinese government

The price of raw cobalt is a major component of the Tesla/Panasonic NCA battery and is presently priced at $26.26 per kg. As noted above, the weight of the cells is 318 kg. In the compound, Co weighs 32% of the total mass from the stoichiometry of the compound. That translates to $3.30/Wh just for the cost of Co for the cathode. However, some compositions have as little as 10% Co, which reduces the price to $1.00/Wh for Co.

NCA is used by Panasonic for Tesla's Model S. Although there are a large number of battery types and manufacturers, Tesla chose Panasonic. If it wanted other formulations, such as the ones described in the bullets above, Tesla would have picked LG Chem or Samsung Electronics (OTC:SSNLF), which makes and sells Lithium Nickel Manganese Cobalt (referred to as NMC) or Lithium Iron Phosphate (referred to as LFP) and used by China's BYD (OTCPK:BYDDF), which was just acquired by Samsung.

So, to reduce cost and reduce expensive cobalt from the material, Panasonic faces the daunting task of eliminating or reducing the amount of Co in the composition. Price volatility of Co is also an issue, but I suspect it was not much of a factor in Tesla choosing NCA. In July 1, 2015, Co was priced 23% higher than on August 6, 2016.

But it's not only the cathode material that can be changed or modified. The electrolyte, for example, is usually a solution of lithium salts in a mixture of solvents (like dimethyl carbonate or diethyl carbonate). If we replace the liquid electrolyte with a solid electrolyte it results in a lighter battery with improved safety.

The anode is another source of improvements, but as with other components, there are complications and tradeoffs. Current batteries have anodes made of graphite. Replacing graphic with silicon gives a battery that can store 10 times more lithium atoms when the move through the electrolyte from the cathode. However, during battery charging it swells and grows to more than three times its volume when fully charged. The swelling breaks the electrical contacts in the anode.

Despite speculation, any anode containing silicon will not be a fix within the time constraints imposed by Tesla in getting the Model 3 in production. Significant product optimization needs to be done.

One solution is keeping the existing graphite electrode but in a modified form. Simply by optimizing the graphite anode - or negative electrode - on a conventional Li-ion battery, researchers have been able to boost battery performance by as much as 30 - 50 percent.

Its undoubtedly true that both Tesla and Panasonic have the brain power to improve the battery technology. But why not go directly to the source? If anyone would like professor Goodenough's contact information, please ask.

Disclaimer: I do not own Tesla stock, although I have test-driven the car twice. My son is on the Lehigh University team taking part in the finals of the Hyperloop pod competition in January 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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