Heads, Tesla Wins

Summary

• German carmakers and the German government are concerned, as electric car battery production shifts to Asia and/or Asian suppliers.
• Home-grown battery cell development is underway in Germany.
• One prominent voice in the German auto industry is calling for companies to begin talks with Tesla about batteries.
• It is at best a coin toss whether Mercedes and BMW will embrace a Tesla battery solution. Heads and Tesla might sell a Gigafactory or two.
• And, if the coin comes up tails, Tesla's competitors might lose on batteries, again.

There is opportunity for Tesla (NASDAQ:TSLA) that has seemed remote, but that may be getting a bit more likely as German carmakers continue scrambling for electric car battery supplies.

German carmakers, and even the German government, are coming to realize that as the industry transitions to electric cars, a large part of the vehicle value-add, and lots of industry manufacturing jobs, will move from ICE drivetrain manufacturing to battery making. Germany can't seem to make its own battery cells, and even Chancellor Angela Merkel is urging Germany's carmakers to work on the battery problem.

If Germany outsources battery cell manufacturing to Asia, industry profits and many industry jobs will be lost. The alternative of course is for German carmakers either individually or through a consortium to begin making their own battery cells. One way to do this would be to develop cell manufacturing technology in-house, from scratch.

BMW (OTCPK:BMWYY) is working in this direction, and the company's battery development lab can be seen in the following video. It is worth watching to see how BMW engineers design and go about making a battery cell.

This BMW battery lab is clearly that - a lab project. It is a very long way from making battery cells at rates comparable to Tesla's Gigafactory. Even so, it is interesting to see what is going into BMW's prismatic battery cells. Cell technology and the processes and methods for cell making will underlie the success or failure of carmakers as they transition from ICE to electric vehicles. A German carmaker or the German car industry making their own cells in their own cell factories will only succeed if the cells they make are technically and economically competitive.

Round Pegs and Square Holes

Tesla is one carmaker that, with its partner Panasonic (OTCPK:PCRFF), makes its own battery cells in its own cell factory. Tesla and Panasonic have chosen to make cylindrical rather than prismatic battery cells. The difference in thinking between BMW (and many other carmakers) and Tesla as it relates to this cylindrical vs. prismatic form factor choice is interesting in the context of German carmakers' plans to take up cell manufacturing.

The argument for using prismatic form factor cells is that such cells can be packaged without wasted space between cells. This is something naturally attractive if one looks at the problem as a carmaker needing to put battery cells into a car design. Just buy the prismatic cells, they will fit better into the "battery box". But this isn't the whole story. The real packaging problem is to put the needed, very large area of very thin lithium battery electrodes into the car. How efficiently the electrodes fit into each cell is as important as how the cells fit into the battery.

This image (from the video above) shows how the wound-up electrodes ("jelly roll") of the BMW cell are "squished" to fit into the prismatic cell case. The wound-up electrode layers are inherently a round thing, and even when squished, there will be wasted volume when this is stuffed into a prismatic case.

Contrast BMW's cell with Tesla's 2170 cylindrical cell. The following image is from this video of a 2170 cell disassembly. In the Tesla cell, a cylindrical jelly roll of electrodes fits precisely into the cylindrical can with no wasted space. And, the extras steps BMW uses to flatten its jelly roll to make it fit a prismatic can are not required.

A lot of the volume the Tesla battery loses, because cylindrical cells don't pack tightly together, is offset because battery electrodes fit very efficiently into cylindrical cells.

The point I would make is that Tesla thinks about electric cars differently. Tesla's battery cells are different as we have just seen. So is the Tesla battery cooling scheme. So is Tesla's NCA battery chemistry that uses less cobalt than the NCM chemistry used by others. And so is Tesla's approach to building its SuperCharger road-trip charging infrastructure.

Tesla, Not Now, Not Ever, No Way!

All of the German carmakers, and indeed virtually all carmakers, have eschewed Tesla's approaches to electric car design, electric car batteries, and electric car recharging infrastructure. Both Daimler (DDAIF) and Toyota (TM) tried using Tesla batteries and Tesla electric drivetrains on some of their vehicles, and both left Tesla for other suppliers.

The notion of Tesla supplying components, doing joint development or selling battery Gigafactories to other carmakers has been an "In Your Dreams" thing for Tesla bulls ("In Your Worst Nightmares" thing for Tesla bears). So remote are the chances of Tesla selling Gigafactories to German carmakers that people suggesting that possibility have routinely been laughed at. I know.

And then, Maybe

As pointed out at the beginning of this piece, the German carmakers, spurred on by the German government, are looking in earnest at making electric car batteries in Germany. If the German carmakers are going to be successful making electric cars, they will need to learn to make the technologically and economically best battery cells. Perhaps the time is right for the Germans to take another look at Tesla, its technology and its batteries. Manfred Schoch, deputy chairman of the supervisory board at BMW, recently suggests that BMW board members should start talking with Elon Musk. But will they?

There is still a lot of disdain among carmakers for Tesla, the Silicon Valley upstart presuming to enter upon their turf. It is not a sure thing that board members from German carmakers will be talking with Elon Musk anytime soon. Whether Tesla might sell BMW or Daimler a Gigafactory in the end looks like a coin toss at best.

Of course, if the coin comes up heads and Tesla sells the Germans a Gigafactory, not only will I be vindicated in my earlier predictions, but also Tesla shareholders will have cause to celebrate.

If the coin comes up tails, Tesla will be stuck looking at just its own Gigafactories, making its (and Panasonic's) little cylindrical battery cells, and I will no doubt be laughed at. But that will also mean that Tesla's competitors will be stuck with second-rate batteries, losing out once again.

Disclaimer

These writings about the technical aspects of Tesla, electric cars, components, supply chain and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other competent technical advice on the subject issues before making investment decisions.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.