I am a fan of Tesla (NASDAQ:TSLA). This relates above all to the aesthetics of the cars and the disruptive will of the company to change the world towards more environmentally-friendly mobility. However, I think that investors must distinguish between two perspectives. One technical orientated perspective is to compare technical figures like the performance, range of the individual vehicles, etc. Another perspective is to compare the financial figures, financial outlook and in this case assets like know-how, patents, and a competitive moat. These two perspectives can overlap sometimes. Especially a technical advantage secured by patents can give a company a certain moat. As an investor, the second perspective is crucial for me in particular. I've long argued that Tesla is losing part of its edge. In this article, I will mainly focus on the importance of battery production. These could prove to be a bottleneck in the production of EVs. And this is where Tesla is facing massive competition.
Lithium-ion battery demand will require more than 200 gigafactories
First of all, the global demand for lithium-ion batteries will increase. Especially because these batteries are not only used in EV, but the demand for such batteries is also increasing in other areas:
(Source: Annual lithium-ion battery demand)
If all the manufacturers in the world want to replace their cars with battery vehicles, a single large factory is of course far too small. Just take a look at Tesla. Together with Panasonic (OTCPK:PCRFF;OTCPK:PCRFY), Tesla manufactures batteries with over 35-gigawatt hours in its Gigafactory 1 in Nevada (however, Tesla uses battery cells from Samsung SDI and LG Chem (OTCPK:LGCLF) for its stationary energy storage products). Accordingly, increasing demand would require 40+ gigafactories with a capacity of Gigafactory 1 by 2030. And here is a problem because batteries account for 40 percent of the added value of electric vehicles. Tesla is, of course, aware of these problems. Elon Musk, for example, has already stated that battery production for the Tesla truck needs to be expanded even further.
High demand, few supplies
On the one hand, Tesla investors must, therefore, take into account that Tesla also has an increasing demand for lithium-ion batteries. There is currently a high degree of dependence on other manufacturers. This is related to the structure of car batteries. Such a battery consists basically of several cells housed in a module. These modules are then assembled into an EV in a battery pack:
(Source: Audi A3 e-tron, battery structure)
In summary, the construction can be described as follows:
So far, there has been a strong dependence on other companies about the cells. These are the key players here:
- LG Chem
Given that, Tesla is one of the largest battery manufacturers worldwide:
But Tesla is also dependent on other companies. As I said above, Tesla manufactures batteries in its Gigafactory in Nevada with Panasonic. Furthermore, Tesla uses battery cells from Samsung SDI and LG Chem for its stationary energy storage products. Additionally, it seems that at least for Tesla's Gigafactory 3, Tesla will use LG Chem and CATL batteries.
Tesla seems to have no real lead - established companies are catching up
Of course, Tesla tries to develop its cells to reduce its dependence on other companies:
Employees in Tesla’s battery R&D teams are now focused on designing and prototyping advanced lithium ion battery cells, as well as new equipment and processes that could allow Tesla to produce cells in high volumes, employees and former employees said.
So far, however, there has been no real success in this area. And investors seem to fail to realize that other big companies are also investing here and are making progress (I will come back to this later). This must of course also have an impact on the fundamental valuation of Tesla. Because it is clear that car manufacturers who reduce their dependence on cell manufacturers enjoy an advantage. This could also be clearly seen at Tesla in Gigafactory 1. Shortly after investing USD 4.5 billion in the gigafactory, Panasonic stopped further planned billion-dollar investments in Tesla's gigafactory due to a lack of demand from Tesla. Elon Musk, in turn, disagreed, claiming that Panasonic had not supplied enough cells. While the dust has settled somewhat in the meantime, this incident shows the sensitive relationship between car manufacturers and suppliers and their dependence on them.
Whoever breaks out of this dependence, therefore, has a certain advantage. Investors should monitor developments in Europe very closely here. Volkswagen is entering into an extremely important strategic alliance with Northvolt AB. In a press release published last year, Volkswagen announced that it
is investing some €900 million in joint battery activities with Northvolt AB. Part of the sum is intended for a joint venture with the Swedish battery cell producer, a further share will go directly to Northvolt AB. In return, Volkswagen will acquire about 20 percent of the shares in Northvolt AB and will have one seat on the Board of Directors, subject to approval under antitrust legislation. Furthermore, a 50/50 joint venture to build a 16 GWh battery cell factory in Europe is planned during the course of this year. It is intended to locate the factory in Lower Saxony (Salzgitter) if the preconditions for this are fulfilled. Construction of the production facility is scheduled to start, at the earliest, in 2020. Battery cell production for Volkswagen is slated to commence around the end of 2023/beginning of 2024.
This battery cell plant will be built in Salzgitter in Germany. Volkswagen announced that it wants to increase the capacity of this planned battery cell factory and gave some updates to the building process. Instead of the initially planned 16-gigawatt hours, the plant is to be designed for up to 24 gigawatt-hours per year. Work on the plant is scheduled to start at the beginning of 2021, and the target date for the start of production in Salzgitter remains the beginning of 2024:
(Source: Volkswagen plant in Salzgitter)
Volkswagen is, therefore, stepping on the gas here to free itself from the dependence of Asian companies and take cell production into its own hands. The whole thing fits in with a further development in which Tesla's competitors are marginalizing the advantages Tesla had. Volkswagen is a very good example here too. As I showed in another analysis, the company is trying to simplify the "hardware" side in general. For example, the so-called MQB (modular transverse construction kit) platform, on which essentially all cars are based, has been around for a few years. By 2022, Volkswagen plans to reduce the complexity of the platform by 40 percent. Volkswagen even plans that this should result in cost parity between EV and conventional cars in production:(Source: Volkswagen roadshow)
Know your friend, know your enemies better. That's the kind of approach Tesla investors must have. Tesla operates in an increasingly strong field full of competitors who are all serious about introducing EVs. Still in the lead is Tesla, which has made it through the oversleeping of established manufacturers. However, competition is growing more and more and I think it is likely that Tesla will notice the first effects of these developments. As far as the time frame is concerned, it is, of course, difficult to make concrete statements. Even Tesla rarely manages to meet his own time frame. That's why I am basically cautious here. But if you look at the timeline, it is obvious to assume an effect in 2020 or 2021 at the latest:
(Source: 2020 Electric Vehicle Timeline)
Volkswagen, in particular, seems to have become quite successful here quite quickly. If Volkswagen manages to free itself from its dependence on battery cell suppliers before Tesla does, this would show that Tesla is no longer the primus in the EV sector. The successes that Volkswagen has achieved here have increased the probability of such a scenario. So I maintain my assessment of Tesla: Tesla investors should ask if a horror without an end is better than a horrible end - especially after the current share price gains.
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