The Tesla Gigafactory as first imagined.
A while ago, I acknowledged that if Randy Carlson was right in his article titled, "Tesla's GigaFactory: A Christmas In July?", then Tesla (NASDAQ:TSLA) could indeed realize some significant savings in producing and processing battery cells at its Gigafactory.
What was at stake in that article? Well, Randy Carlson put forward the thesis that Tesla could be about to use In-Module Cell Processing to eliminate a significant step in manufacturing and processing battery cells, leading to a large decrease in needed capex both for cell processing equipment and cell storage during processing. This thesis, among several other steps, posited that battery cells could go straight from being produced to being placed in battery modules, where further cell processing would take place.
The thesis was rationally sound. While there were technical arguments from other commenters saying it would be technically hard or next to impossible to pull off, there wasn't any structural impediment to it. Moreover, if the thesis was sound, Tesla/Panasonic could indeed reap capex and opex gains from implementing it, which would lead to lower overall battery costs.
Well, this past week, Tesla gave us something which definitely puts that thesis to bed. On January 4th, Tesla walked a posse of analysts through its Gigafactory. During this visit, it also handed out materials depicting the battery cell production steps, as follows:
Therein lies the problem for this bullish thesis. Notice the following:
This is the final step in the battery cell production. What would happen here in Randy Carlson's thesis? These cells would be put into modules before being charged/processed. Clearly, they aren't. They are processed and stored. So this processing step was not eliminated, and the current thesis is dead. So the capex and cost savings from that thesis won't happen.
Other Battery Cell Considerations
The death of this In-Module Cell Processing bullish thesis is not the only problem with the Gigafactory. Other factors should also be considered, such as:
- The size of the Panasonic battery cell line within the Gigafactory is not materially different from the size it dedicates to battery cell in Japan. Thus, no economies of scale beyond those enjoyed in Japan are likely in the Gigafactory (when it comes to battery cells).
- Most of the value chain for producing battery cells is in Asia, so producing in Nevada isn't likely to be any more competitive for it. The same applies to labor costs, which ought to be lower in most of Asia (but not necessarily in Japan or Korea).
- LG Chem is being chosen by every other automaker when building EVs. This means LG Chem is presently cheaper than Panasonic, even though Panasonic doesn't have much in the way of economies of scale to be enjoyed at the Gigafactory. Also, recently General Motors (NYSE:GM) claimed it had a $145/kWh cost for the cells it's using in the GM Bolt, but the fun part is that Nissan has just said that "GM 'probably has some safety margin' on that figure as well.".
- At the same time, Jaguar is now promising the tremendously appealing I-Pace for early 2018 and with a 90kWh battery at prices lower than the Model X. This can only be achieved with cheap batteries as well.
- More dangerous still, while LG Chem already seems to be more competitive than Panasonic at the cost level, Tesla is now tied into a long-term supply contract with Panasonic, ensuring Panasonic a profit on its own costs and investments. This has the potential to be a life-threatening contractual condition for Tesla if it ends up ensuring Tesla will have to operate at sustainably higher battery cell supply costs. This is also not much different from what stands to happen with Panasonic's contract for the Buffalo solar panel factory - where Panasonic is known to be a high-cost supplier in a low-cost (and crashing price) solar panel market. Tesla's competitors can now buy solar panels at below-cost prices, while Tesla will be stuck with ensuring a high-cost supplier (Panasonic) a profit.
Overall, what these developments tell us is that when serious competition arrives at the EV marketplace, in early 2018, Tesla is likely to hit the rocks. At that point:
- Tesla will be a higher-cost operator competing against more efficient car producers. This is a near-certainty because Tesla employs many more workers per vehicle sold and has less purchasing power for all materials and supplies going into the cars produced. Tesla produces around six cars per worker, whereas at large established automakers this statistic is something like 20-50 cars per worker.
- Tesla will be stuck into battery cell contracts with Panasonic whose prices have been pre-determined before a battery cell price crash. These contracts ensure Panasonic a profit.
- Tesla will be stuck into solar cell contracts with Panasonic whose prices have been pre-determined before a solar cell price crash. These contracts ensure Panasonic a profit.
- Tesla will be in a market where most of its competitors won't need to show a profit in that particular segment for a while. Consider the implication: Tesla will be competing with lower cost competitors who don't need to price for a profit for a while. Now consider that happening at the same time Tesla continues to require equity infusions. The result isn't likely to be pretty.
Another dream of Tesla cutting costs over and beyond what competitors can do just fell by the wayside. Developments continue to reinforce the basic thesis that Tesla is headed toward a scenario where it will likely have bankruptcy risk. This will be particularly evident starting in 2018 when it will be facing direct competition in the EV market.
Arguably, this scenario has already started, with GM proving that it can sell a 238-mile Bolt for $37,500. If GM can do that, anyone can. You think the outside of the GM Bolt isn't pretty? Doesn't much matter, as what was needed was to prove such a powertrain could be fielded at a reasonable price. Other cars will have similarly capable powertrains and different designs.
Disclosure: I am/we are short TSLA.
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.