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Tales From The Future. I picked my nickname because many advisors and investors claim they can predict the future of the (stock) markets and somehow pick the winners. I don't. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at the big... More
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  • TSLA And Electric Cars: The 600 GWh Elephant In The Room That Will Not Go Away 14 comments
    Nov 27, 2013 3:11 PM | about stocks: TSLA, NSANY, TOYOF, F, GM, 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)

    (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.

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Comments (14)
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  • dinan
    , contributor
    Comment (1) | Send Message
     
    I didn't see any disclosure (unless I missed it?). Are you long/short the stock?
    27 Nov 2013, 09:29 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » No position at the moment as I pointed out in last TSLA article:

     

    "PS: I recently closed my TSLA short position and no longer hold a position at the time of writing (nor do I intend to open one again until Q4 2013 numbers are announced)."

     

    http://bit.ly/IdxNAM

     

    This article here is just supposed to be a shorter version/summary.

     

    I'm still bearish long-term (as any reader can guess) but think the stock might have found some short-term bottom at the moment around $120.

     

    It could fall further into 2014 because:

     

    The overblown situation around the fires (what if there is a Model S fire 4 and 5 treated in the same way in mass media...?), margins without ZEV credits and costly expansion in Europa/Asia plus follow-on offerings in 2014 and 2015 are open questions - my main thesis is the huge amount of capital needed for expansion, especially on the battery side.

     

    There is also the question of Model S car and battery residual value once the Gen III car with cheaper batteries (assumed at $35k base price) is announced.

     

    This is all long-term however. Wall Street is myopic, hence I closed my short for now.

     

    One day however, the battery plant topic will become relevant. In my opinion, it is the most important question facing TSLA (together with the strategic decision to enter the mass market with Gen III and Gen IV).

     

    I also think the ICE competition for the Model X is more intense than for Model S and the X price (a little higher than S) also concern me.

     

    I think the Model S sales might surprise on upside and X on the downside, especially outside the U.S.
    Progressive drivers looking for an eco-bling EV might like the S, but not an SUV like the X.

     

    Positions earlier:

     

    I was short before with entry points around $125, $171 and $183 and covering around $110 in summer of 2013 and last week around $121 - and before that I was long when TSLA traded below $30 (autum 2012) and sold out after it had doubled earlier in 2013.

     

    If TSLA falls back to around $50 I might also consider going along again.
    27 Nov 2013, 09:36 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » I wrote in the article:

     

    "It's not possible to supply other EV car companies in the coming years."

     

    Now before somebody jumps in and tells me I'm wrong on this:

     

    I'm aware the TSLA supplies battery packs for the Toyota RAV EV and possibly (by late 2014 or 2015) the Mercedes B EV.

     

    However, neither of these two cars will probably be big sellers, especially the RAV looks like a compliance car - Toyota does not believe in pure BEVs at the moment.

     

    My quote means that TSLA can't supply other car makers with >50k more vehicles per year, let alone 100k. Otherwise, all of its current cell supply would be GONE.
    The updated supply contract with Panasonic from late October 2013 is "only" for 2 billion cells over 4 years:

     

    "With this agreement, the two companies update and expand their 2011 arrangement to now supply nearly 2 billion cells over the course of four years.

     

    The lithium-ion battery cells purchased from Panasonic will be used to power the award winning Model S as well as Model X, a performance utility vehicle that is scheduled to go into production by the end of 2014."

     

    http://bit.ly/IhkoaZ

     

    That's 500 million cells/year. For 5,000 to 7,000 cells per vehicle, that's 70,000 to 100,000 vehicles per year on average over four years.

     

    This is mainy for Model S and X car supply ONLY, it clearly says so in the PR and the numbers match what TSLA hopes to optimistically sell over the coming 4+ years.

     

    This again shows the battery supply constraints being present, despite a new agreement with Panasonic.
    28 Nov 2013, 03:04 AM Reply Like
  • memshu
    , contributor
    Comments (584) | Send Message
     
    tftf
    do you follow this work and are you inclined to believe the implication that TSLA weekly sales might be down to sub 450 (from 700+ right before the first fire)?
    http://bit.ly/IbOLQP
    28 Nov 2013, 04:18 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » Memshu,

     

    I did follow it earlier and read a recent article from Paulo Santos discussing it:

     

    http://bit.ly/1a7TsB8

     

    You may have seen it already, it tested the VIN viability as an indicator ahead of earnings.

     

    I'm less of a short-term trader and I heard there were some issues (not enough people participating lately -> sample small, less accurate, many cars in transit...).

     

    I would not to draw conclusions myself, but one simple explanation for drops (fires and reporting in mass media...) would be obvious.
    28 Nov 2013, 05:44 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » One addition: As TSLA sales numbers grow, I do not understand why they play still this "hide and seek" game and only report sales every Q. It made sense with the Roadster selling very few units (and before they were a PUBLIC company).

     

    Most other manufacturers, including those with EVs only selling in small numbers, disclose their sales month by month. A good site for U.S. statistics:

     

    http://bit.ly/TjXhje

     

    The aggregate numbers also make clear which car makers are only selling EVs to be compliant/get credits (Honda Fit, Fiat 500...) and do not really believe in selling pure EVs.

     

    I hope TSLA switches to a more transparent monthly reporting in the future, it would also be in the interest of lowering TSLA stock volatility every Q.
    28 Nov 2013, 03:33 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » As mentioned in the blog entry, TSLA competitors entering the EV sector later (say by 2020) could take advantage of falling battery costs and manufacturing improvements.

     

    This could also hurt TSLA Model S and X resale values - and possibly disrupt the Gen III car introduction timing.

     

    One example of car company late-mover advantage is a recent Sekisui announcement:

     

    "Sekisui Chemical of Japan has taken the wraps off a new battery it has developed, a very thin lithium-ion offering described as being film-like and with a high capacity. The battery has been put through a variety of tests, and once brought to market could be used in a variety of different applications, among them being electric and hybrid cars and solar-powered homes.

     

    In comparison to the company’s other batteries, this latest development is said to have triple the capacity and better safety, and to have a production speed that is ten times faster than typical. This is accomplished by using a specific coating process rather than a typical vacuum infusion, with Sekisui using a high-performance “gel-type” electrolyte substance."

     

    http://bit.ly/1bh1N5z

     

    I'm usually wary of such announcements, but Sekisui has the capital and brains to bring this to market.

     

    It will be interesting to see which company they partner with in 2015+ to market this for EVs - and hopefully Sekisui can keep the timeline:

     

    " Sekisui Chemical plans to begin sample shipments to domestic and overseas battery manufacturers as early as next summer, with mass production to kick off in 2015. It is targeting annual sales of 20 billion yen by fully entering the business of automotive battery materials.

     

    Electric cars have failed to make the inroads that hybrids have, in part because they have a range of only about 200km and their batteries cost a hefty 2 million yen or so to produce. Sekisui Chemical's new materials could give electric cars a much-needed boost."

     

    http://bit.ly/18ChGto

     

    PS: Other Japanese companies like Shin-Etsu Chemical are also working on battery improvements:

     

    http://cnet.co/18Cicr5

     

    The problem in the past was timing, it usually takes longer than anticipated to take these improvements to market...
    4 Dec 2013, 08:02 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » Here's the original PR from Sekisui:

     

    http://bit.ly/18Ck6bo
    4 Dec 2013, 08:30 AM Reply Like
  • rockinghorse
    , contributor
    Comments (286) | Send Message
     
    Here Elon comments that Tesla's projected production capacity was around 400 per week, but actual production capacity today is 600 cars per week. Panasonic however could ramp production up only about 50 % so Tesla can make only 500 cars per week despite 600 car capacity. However Panasonic can catch up Tesla's production capacity around Q2 2014. Therefore Tesla and Elon Musk has never said that they have long term battery supply problems, but only that their ramp up of production was faster than anticipated and this caused a short term problem for Panasonic.

     

    Here is the video. Panasonic battery discussion starts around 54:30.
    http://bit.ly/18YKQmB
    13 Dec 2013, 05:41 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » I'm aware of this recent video interview.

     

    This is only about current production - TSLA will produce about 25k cars in 2013 and maybe 40-50k in 2014, these are very small numbers compared to global auto output.

     

    In all of my articles and comments I NEVER wrote that TSLA has an issue supplying a fair amount of high-end S and X cars (500 million cells/year) using Panasonic battery cells - this supply may also include smaller contract for third parties such as Daimler or Toyota (namely Merc B and RAV EV).

     

    The problem lies with a mass-market Gen III car in quantities at additional 100-250k Gen III cars/year or well above that in optimistic scenarios.

     

    In my view, TSLA needs a giant battery factory for the Gen III mass-production.

     

    See my article again with the GWh capacities needed for TSLA and other EV makers in case 1 or even 10 million long-range EVs cars will be built one day:

     

    That would be 60 GWh or 600 GWh of battery capacity respectively.

     

    In summary: TSLA's current share price already builds in a mass-market Gen III car production when the supply path (not even talking about demand and competition) is not clear.

     

    This represents a major supply and financial challenge for TSLA and the entire EV sector.
    13 Dec 2013, 09:37 AM Reply Like
  • rockinghorse
    , contributor
    Comments (286) | Send Message
     
    The point was that Tesla or Elon Musk or Panasonic has never adressed a worry that Tesla has a long term battery supply problem. The idea of battery supply constraints comes from your own imagination. And what we know from the real world, it does not support your idea.

     

    E.g. see as refence solar panel manufacturing. Solar panel production is in a state of chronic overcapacity. And battery production is no more capital intensive than solar panel production. When battery industry starts to anticipate rapid growth on EV sales, it will respond very quickly. It takes just months to establish new battery production lines.

     

    Therefore it should not be a problem to Tesla to maintain about 60 % annual growth rates for the next six years. After that it is impossible to predict, because we do not know the state of markets and competition beyond 2020. I think that EV markets are not saturated before 2025–2030, so therefore Tesla should be able to sell every EV that it can manufacture without competition at least for the next 12 years.

     

    600 GWh may sound a lot, but compare it to that how much it costs to set up production lines for 10 million electric cars, you may notice that 600 GWh elephant is minuscule compared to the dinosaur of auto industry. Volkswagen just invested over 100 billion on car production and this only investments by one company. Car industry in total has cash more than a teradollar, so 600 GWh batteries is really not a big deal.
    13 Dec 2013, 08:27 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » "The idea of battery supply constraints comes from your own imagination"

     

    Have you watched the linked YT video featuring the CTO of TSLA?

     

    http://bit.ly/1e7nUzQ

     

    See minute 21:00 and following of that video, this is a giant supply challenge for the EV industry, not just for TSLA - and problematic raw material supply needing replacement (Nickel, Cobalt...) in the future.

     

    The rest of my answer follows below.
    22 Dec 2013, 03:53 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » Solar panels/modules can be easier switched between suppliers, I wouldn't compare the two markets directly. TSLA has a need for cylindrical cells of very high quality - every other EV manufacturer uses a different form, the market is still in flux and pricing reductions yoy are less clear compared to the more mature solar market.

     

    Quote: "Tesla should be able to sell every EV that it can manufacture without competition at least for the next 12 years."

     

    I was only looking at the supply side in the article. Even if TSLA and competitors can produce 10 million long-range (again a huge difference in short-range and long-range battery needs) EVs one day, it still needs to sell them.

     

    TSLA sells to a tiny niche today, selling every car is not hard in the coming years with production rates below 100k/year, TSLA also doesn't need to advertise. We will only find out by 2016-2017 if TSLA can make the jump into the mass-market.

     

    If EVs over time command

     

    1. higher margins
    2. gain marketshare in the mass-market (well above >100k/year)

     

    all major car makers (including the VW Group you mentioned with its huge R&D budget) will produce more EVs.

     

    But the timeframes are so far out in the future that any perceived advantage TSLA has in EVs will be gone in my opinion.

     

    In the end, 600GWh is possible one day. The question is again timing and marketshare. I wouldn't be writing these warning articles if TSLA would (still) be trading well below $100.

     

    A TSLA share price $45-75 still looks reasonable to me today, in an euphoria/momentum market TSLA can go to $200 again short-term.
    16 Dec 2013, 08:17 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (5031) | Send Message
     
    Author’s reply » As for battery raw material battery input, Lithium is now very concentrated supplier-wise.

     

    Basically four companies (see last sentence below) control 90% of commercial lithium supply:

     

    "The race is on to control the world’s biggest source of lithium, the lightweight metal used in everything from lubricants and medicines to rechargeable batteries for iPads and electric cars.

     

    Albemarle Corp. (NYSE:ALB) agreed today to pay $6.2 billion in cash and stock for Princeton, New Jersey-based Rockwood Holdings Inc. (NYSE:http://bit.ly/v23WDw), the largest lithium producer, the industry’s biggest deal to date.

     

    Rockwood is the leader among four companies that control about 90 percent of the market for lithium. Consumption of the metal doubled in the decade through 2012, driven by wider use of batteries in electronics and power tools. Baton Rouge, Louisiana-based Albemarle said demand is now increasing as much as three times faster than the overall economy.

     

    ...

     

    The deal is the latest example of consolidation in the highly concentrated lithium industry. It outpaces Chengdu Tianqi Industry Group Co.’s C$673 million ($626 million) purchase last year of Australia’s Talison, owner of the world’s largest open-pit lithium mine.

     

    After Chengdu Tianqi outbid Rockwood to buy Talison, it agreed to sell a stake in the mine to Rockwood.

     

    Talison, Rockwood, Philadelphia-based FMC Corp. and SQM control about 90 percent of worldwide lithium production, according to Jefferies & Co."

     

    http://bloom.bg/1osXn2e
    7 Aug, 03:20 AM Reply Like
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