Tesla: The Empty Threat Of Solid State Batteries

| About: Tesla, Inc. (TSLA)
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Summary

Solid state batteries have been cited as a possible replacement for current lithium ion batteries.

Solid state batteries for automotive applications are not currently feasible.

Development of solid state batteries is a high risk effort that may never pay off.

As such, they pose no threat to Tesla or the Gigafactory.

A recent Seeking Alpha article by Paolo Santos, The Tesla Gigathreat, proposed that the greatest threat to Tesla Motors (NASDAQ:TSLA) could come from its misplaced investment in the Gigafactory. Santos argued that Tesla could be investing in a soon-to-be obsolete battery technology. Santos cites solid state batteries currently under development as an example of a battery technology that might supersede the conventional lithium ion battery. In fact, solid state batteries are no threat to current lithium ion battery technology for automotive applications, and may never be.

Elon's Cell

We don't really know what type of battery Tesla intends to build at the Gigafactory. On the company's last conference call, analysts plied Elon Musk with questions about battery technology and received non-specific answers. Yes, innovative battery technologies would be incorporated into Tesla's production plans, but Musk refused to be specific about which technologies, or what the timeline was for their incorporation.

Musk did offer this rule of thumb for gauging the maturity of a potential battery technology. He said, and I paraphrase, "Just bring me a cell." Not research papers, not laboratory prototypes, not view graph presentations, but a working cell, presumably with better performance than the Panasonic 18650 cell Tesla currently uses.

This turns out to be a fairly high standard that competing battery technologies have a difficult time meeting. The solid state lithium ion battery technology Santos refers to in his article is a case in point. It fails spectacularly to be competitive with the humble 18650.

Applying Musk's test provides a good indication of how far solid state batteries still have to go. ST Microelectronics makes a solid state lithium ion battery, the EFL700A39. The cells are about one inch square and paper thin. To obtain the equivalent energy storage of just one Panasonic 18650 cell, you would have to stack over 3,900 of the STM solid state cells. The stack would be over 800 mm tall compared to the 65 mm length of the Panasonic cell.

This underscores the basic problem of solid state cells: even though they're very thin, they don't store much energy for their volume compared to the Panasonic cell or most other lithium ion cells. If the reader would like a good, not too technical, reference on solid state batteries, MIT Technology Review has an article on the subject.

And yes, as Santo points out, automobile companies are investing relatively modest sums (tens of millions of dollars) for stakes in startups in the field. The reports that Santos references are Popular Science level treatments of the subject with little clue as to how immature the technology really is.

Improving the energy capacity of solid state cells is an extremely active area of research, and there are some promising approaches, which is where all these startups come into play. This is the beginning of the normal process of moving academic research into the commercial sector. It doesn't mean the technology will be ready for mass production next year, or even that one of the companies could produce Elon's cell before Tesla has to commit to a particular battery technology for the Gigafactory. My personal take on the maturity of solid state batteries is that it will take about 10 years to produce Elon's cell.

Even if research in the field eventually yields a battery with equivalent energy storage to the current Panasonic cell, I doubt solid state batteries will ever be cost competitive. This is because of two factors:

1) Considerable research is being done to further improve the conventional lithium ion battery, which will probably keep it ahead of solid state in terms of energy storage capacity.

2) The approach that current research in solid state batteries is taking indicates that the fabrication process will be very expensive. Fabrication of these new solid state batteries will be about as challenging as microprocessor fabrication, and will use many of the same processes. In contrast, building lithium ion batteries is an exercise in relatively old-fashioned chemistry.

Planned Obsolescence

Santos' article betrays a lack of industrial experience. The automobile industry is inherently technically conservative because of the difficulty scaling up production to the quantities customary in the industry. There are always new technologies on the horizon, but the gap between what is possible and what is in production is usually 10 years or more. In this industry, you get used to this, so the fact that there might be a battery technology that would eventually render the Panasonic cell obsolete is hardly shocking. In fact, it's inevitable. This is why manufacturers spend so much on capex and why there's so much depreciation.

But Santos does raise a good point about how well Tesla could respond to a future technology shift once the Gigafactory is completed. Whether Tesla will have adequate capital available to fund ongoing equipment replacement and upgrades depends very much on the initial success of the Gigafactory in enlarging the market for battery electric vehicles.

But I'm reasonably confident that there is little near-term (as in next 10 years) threat from solid state batteries and that improvements in battery technology will keep the conventional lithium ion cell at the forefront of cost-effective energy storage. These improvements will come in the form of changes in battery chemistry and electrode composition, which will require relatively modest changes to the basic manufacturing approach of the Gigafactory.

I expect the Gigafactory to create a window of opportunity for Tesla starting in 2017 when production begins to ramp up, extending to about 2025. In that window of opportunity, no other manufacturer will be able to offer a mid-priced battery electric vehicle comparable to Tesla, unless they buy batteries from the Gigafactory.

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.