Genius Of The Tesla 70D: Sell More Cars, Use Fewer Batteries

| About: Tesla Motors (TSLA)

Summary

Tesla recently announced the 70D.

This will help Tesla meet demand with lower battery usage.

That means more batteries for storage and I will look at how big storage can potentially be.

This may also provide a test bed for the Model X battery.

Tesla (NASDAQ:TSLA) recently announced the 70D. This was massively panned by bears as a way to boost falling demand and they called the price rise of the base model a price drop. But what everyone missed is the most important piece of information between the lines. I agree with the price drop part, but this is not a way to boost demand as much as a way to meet demand with fewer batteries.

The base model is now a very compelling offering. It could potentially cause future customers to opt for the 70D over the 85D. This will have a two-fold effect. First, it might put some on the fence buyers over the edge to buy the 70D. Second, it might cause some 85D buyers to opt for the 70D.

Let's say everyone switched to the 70D. At 50,000 Model S sales per year, Tesla would have 750MWh of extra batteries. That's an extra 10,700 cars worth of batteries. At an ASP well north of $100,000 it is easy to see that the adoption of the 60kWh model was very low. Assuming 10%, Tesla would need 4.1GWh of batteries for 50,000 cars.

How much more money can Tesla make with those extra cars? What if those batteries were used for storage? SolarCity (SCTY) sells a 10kWh battery as an addition to their solar install for $13,000. If Tesla gets 10,000 for that at a gross margin of 50%, that's $5,000/battery. And I'm being generous here. It probably costs Tesla less than $250/kWh to make batteries.

Here's the battery usage for different product mix assumptions:

70kWh % 85kWhn % Extra Batteries Available (MWh) No of extra cars at same ratio %extra cars Extra Revenue M (100k ASP - 90k ASP) Extra Gross Profit (at 25%) No. of additional 10kWh home storage units Revenue at 10000 each (NYSE:M) Extra Gross Profit (at 50%)
20 80 25 305 0.61 31 7.75 2500 25 12.5
30 70 100 1242 2.48 122 30.5 10000 100 50
40 60 175 2215 4.43 214 53.5 17500 175 87.5
50 50 250 3226 6.45 306 76.5 25000 250 125
60 40 325 4276 8.55 399 99.75 32500 325 162.5
70 30 400 5369 10.74 492 123 40000 400 200
80 20 475 6507 13.01 586 146.5 47500 475 237.5

So these extra batteries put Tesla in a much better position to make more money, especially as the demand proportion of the lower end model rises with the P85D pent up demand going away.

In addition, Tesla has drawn a 200-mile minimum range line in the sand. The upcoming Model X is a larger car and will need a larger than 60kWh battery to go 200 miles. Putting the lower end Model X battery in a Model S lets Tesla not only test it out but also prepare for production because both cars can use an identical battery.

Let's move on to storage. SolarCity recently crossed a 5GWh daily power generation peak. To store just 10% of this power is 500MWh of batteries. At the rate SolarCity is expanding, this will double by next year. So 1GWh of storage. Add to this storage mandates in California, SolarCity's microgrid and DemandLogic products and potential direct sales to utilities and large industrial customers, the demand for affordable storage batteries is limitless.

Also margins on storage batteries can be higher than margins on cars. They need not have the high density of automotive batteries, they can be automotive manufacturing rejects and/or refurbished and recycled automotive packs. As Tesla moves into the CPO business, it can upgrade the packs on CPO cars for a fee and use those for storage. This is just the beginning.

There are some people who keep pointing out that competition is coming. However:

BMW Delayed the i5 and i7

Mercedes has no plans to compete with Tesla

Audi's R8 e-tron (not really in the same segment as Tesla) is a limited edition car built upon request and nowhere to be found on their R8 website.

Also competing with Tesla is no longer about making an EV or a plugin. It is about constantly updating the car. It is about software methodology applied to a car. OTA updates, new features, easy upgrades, free charging, great customer experience. Just building a better mouse trap will not do. The competition needs to upgrade the entire experience.

Tesla invites comparisons to Apple (NASDAQ:AAPL) vs. the incumbent phone makers. Here is a blast from the past:

Where are those guys now? Current Market Share Leaders:

Period Samsung Apple Lenovo* Huawei Xiaomi Others
Q4 2014 19.9% 19.7% 6.5% 6.3% 4.4% 45.7%
Q4 2013 28.9% 17.5% 6.4% 5.7% 2.0% 39.5%

Tesla vs. the incumbent automakers is a slow motion version of Apple's rise to smartphone dominance. The only reason you see Samsung in the lead there is the availability of Android from Google (NASDAQ:GOOG) (NASDAQ:GOOGL). But there is no equivalent in the auto world.

I leave you with the words of the Porsche CEO about Tesla:

"They have ... set the standard, where we have to follow up now."

Disclosure: The author is long TSLA, SCTY, AAPL, GOOG.

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.

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