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TSLA And Electric Cars: The 600 GWh Elephant In The Room That Will Not Go Away

|Includes:F, GM, NSANY, TOYOF, Tesla Motors (TSLA), VLKAF

A reader wrote in to tell me that while my last article (covering the enormous battery supply challenges the EV industry is facing) was really interesting, it was also too long and quite difficult to follow.

I therefore try to write a simpler 1-2-3 summary below about the giant battery elephant facing TSLA and other EV and EV battery producers:

1. If 10% of all newly produced cars are long-range EVs in 2020, we will need 600 GWh of battery capacity for the 10 million cars.*

2. The current global battery manufacturing capability is only 25-30 GWh. This includes all Li-Ion batteries of this configuration, not just for EV or hybrid car batteries. It took the world about two decades to build up the current Li-Ion capacity from zero.

3. We would need to add about 570 GWh of battery capacity in six years in newly built (TSLA likes to use the word) "giga factories" just to cover the demand for EV batteries by 2020.

Now TSLA bulls may object and cry wolf: "Wait, Tesla only expects a car market share of 0.7% or less by 2020! Why did you use 10%?"

Correct, these are the smaller numbers I used in my previous articles:

20 to 40 GWh needed for TSLA cars by 2020 (mainly for the upcoming TSLA Gen III car aimed at the mass-market segment)

(Note: I'm assuming TSLA can sell every car it makes immediately, I'm only looking at the supply side for the sake of this entire article.)

Even TSLA double-digit GWh capacity is a gigantic challenge (see the 25-30 GWh in 2., at present the total global GWh capacity limits).

But since some TSLA bulls are assuming a TSLA share price of $1000 in 2020+ or even before then, the 1-2-3 summary was hopefully useful to demonstrate the supply side challenges beyond TSLA's own cars. Why?

Some TSLA bulls argue that TSLA will soon morph from "just" a EV car company into a technology company deserving a higher P/E and PEG ratio in the stock market. TSLA will in their views (for example):

- re-cycle/re-sell old EV batteries for local energy storage and "buffering", maybe in conjunction with solar energy installations

- license/rent its global charging networks/stations to third parties

- design/build EV battery packs and drivetrains and license/sell these technologies or products to other car manufacturers

in addition to "just" manufacturing and selling long-range EVs.

Now the 600 GWh elephant becomes relevant for these 10 million cars:

20-40 GWh would be needed for TSLA cars (for up to 0.7% of all cars sold in 2020)

560+ GWh would be needed for cars "powered by Tesla", "Tesla inside" or similar labels for cars sold by other car companies (9.3% of all cars in 2020) with a TSLA drivetrain and/or battery pack.

Why did I use 10% again? Because it happens to equal 10 million cars.

After all, Toyota and other auto giants with the largest market caps in the car sector currently sell about 10 million cars/year - the same number of cars as in the "TSLA is a tech company" scenario above.

Using a higher margin for its own cars and a lower margin on licensed cars in absolute numbers, TSLA could in theory become the "largest and most profitable car company" (this is again a quote from TSLA bulls) one day - if there is going to be a battery supply of 600 GWh.

At this point, I will stop and advise you to check reality with battery and plant/supply manufacturing experts of your choice and ask them:

"Please tell me how we can build/get to 20-40 GWh or 600 GWh in EV battery supply capacity per year in 6 years from now"

They will probably tell you (after checking you really meant GWh and not MWh and made a mistake) to start building plants in parallel and 24/7 to ever reach these capacities, especially for the 600 GWh figure.

So, whenever someone asks you if you have "experienced the (emotional) TSLA grin" and then tells you that TSLA tech will one day dominate the car industry and that the share price will go to $1000+ in a few years - I have a simple and rational question to ask back first:

"Have you ever heard about the 600 GWh Elephant in the EV Room?"

TSLA-specific Summary

- Even if TSLA builds these giant factories as JVs with partners (such as Daimler or a large battery supplier**) the 40+ GWh ramp takes time.

- TSLA will have a hard time getting enough cells for its own cars. It's not possible to supply other EV car companies in the coming years.

- Pioneers often are not the future marketshare leaders once the sector matures: Falling $/kWh could advantage battery late-movers. This especially concerns TSLA since it's the only car company favoring 18650-type cells (or similar cylindrical formats for the new Gen III car).

- TSLA will have to decide whether it sticks to cylindrical cells or moves to configurations favored by the other car makers in the future:

(click to enlarge)Click to enlarge

(Source: AAB 2014, via: www.greencarcongress.com/2013/11/2013112... )

While the current solution has its advantages (see density), the global capacity currently is not available for mass-market adoption in cars.

The absurdity of this is that other Li-Ion suppliers and vertically integrated car companies (Nissan-AESC) currently have overcapacity, but of course TSLA can't mix or switch chemistry and configurations.

General EV Summary

If we are ever supposed to produce mass-market EVs sold by the millions every year on this planet (using Nickel and Cobalt etc.***), we will have to stop ignoring the elephant. My simple, rough estimate:

It will take decades, not a few years to deal with the EV elephant.

The "EV revolution" (a car market disruption over a few years) could likely turn into a slow "EV evolution" instead (taking 1-2 decades for EVs to achieve a high marketshare), even in a best-case EV scenario.

Many bullish EV analysts could underestimate supply issues/timelines.

That said, using 100 million barrels of oil/day (and using more energy to get "newer" oil out of the ground) is also not the answer longer-term.

Personal mobility needs, emission numbers and resource constraints are hard nuts to crack with a few billion people living this planet - many of those are dreaming to be finally able to afford their very first car!

There are no simple answers. Maybe less cars owned is one idea****.

I doubt rental is bullish for car makers. 100 million cars can become 10.

____________________

* This assumes 60 GWh is needed for 1% of all new cars, or more precisely: 60 GWh is needed for 1 million of these cars/year by 2020.

A long-range EV is hereto defined as a car running 200+ miles on a single battery charge. Such a car is supposed to be a full alternative for current ICE cars, i.e. not just a short-range EV as a "second car".

TSLA CTO JB Straubel used 40 GWh for 700k future TSLA cars so I just adapted his numbers for a total number of 10 million long-range EVs:

www.youtube.com/watch?v=ShJuKTmtHjY

(see minute 21:00 and following of the video. Published Sept 26, 2013)

He is also using the same "100 million new cars/year in 2020" estimate.

(Note: I used lower figures for new cars/year and average cells/car in my previous articles so as to err on the conservative side of demand)

** Even though Toyota is also a TSLA investor, the current Toyota leadership doesn't seem to believe in a "pure" EV future at the moment. It took Panasonic about 1.5 years to create a new 18650-type cell manufacturing line and it took Nissan-AESC 2.5 years for their larger cell planet. I'm therefore assuming 24 months needed for a new "giga factory" by TSLA (given the capacity and possible cell size changes).

*** While expensive and/or supply-critical elements such as Nickel and Cobalt could be replaced in the distant future thanks to R&D, the price volatility in the supply chain (because other users outside of the EV industry demand similar raw materials) will be there for many years.

**** Better public/mass transport and driverless "robot cars" that you can rent 24/7. Click to order, car arrives at your home and you hop in.

Stocks: TSLA, NSANY, TOYOF, F, GM, VLKAF