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Why Elon Musk And BYD Need To Have A Chat

|Includes: BYDDF, TSLA, Tesla, Inc. (TSLA)

The problem:

If Tesla is ever to produce its Gen III vehicle in the hundreds of thousands per year (as is claimed they wish to do in 3-4 years) they will require billions of battery cells every year to do so. Just to satisfy Tesla alone worldwide lithium ion battery production needs to double or triple within these 3-4 years.

Thus far Tesla has enjoyed remaining independent from the battery making business, simply choosing the best supplier that fits their needs. This allows them the freedom to change suppliers should a superior battery technology emerge in future.

However it is unlikely that any battery maker will commit to spending many billions of dollars on a lithium ion "giga factory" without a very long term supply contract with Tesla.

Thus the current dilemma and Tesla's most recent moves to build their own battery giga factory with a few select partners.

However momentum has since slowed since this announcement which leads me to my suggestion for Mr. Musk to sit down and have a chat with the CEO of BYD, Mr. Wang Chuanfu.

China's BYD Corp stands for "Build Your Dreams"

Upon further analysis it is clear that the two charismatic leaders of Tesla and BYD do share the same dream...but will they work together to achieve it?

Meet the Chinese Elon Musk - enter BYD's CEO: Wang Chuanfu

I doubt you could find two better people to work together on their shared vision for the future of our planet.

Like Elon Musk, Mr. Chuanfu believes in the following:

1. That EV's are the future without question (he is still struggling to make a truly affordable one right now but is confident that we are not far off). BYD builds batteries and automobiles, both EV and ICE.

2. That rooftop solar combined with battery storage technology will eventually provide the majority of power for the planet, as does Musk, as the largest shareholder and chairman of SolarCity. BYD builds PV solar panels and large energy storage battery units to complement renewable energy production such as solar and wind.

Mr. Chuanfu also shares some other common traits with Mr. Musk:

1. Chuanfu eats and sleeps in the company staff quarters on site in his factory. Mr. Musk also has his desk on the production line floor at Tesla.

2. Chuanfu like Musk is an engineer. While Musk majored in physics Chuanfu majored in chemistry. Batteries, as I have been told many times by a certain Mr.Petersen, are primarily a chemistry problem. Mr. Chuanfu patented a method of making cell phone batteries at room temperature (instead of expensive heated dry rooms). Therefore I would say Mr. Chuanfu knows a thing or two about battery chemistry. BYD is the largest rechargeable battery maker in China (4th largest in the world) and number one in mobile phone battery supply.

3. Chuanfu is a self made billionaire. He borrowed money from friends to start BYD in 1995 and in just ten years was supplying more than 50% of entire worldwide cell phone battery market. BYD Auto was founded in 2003 and went from making just 16,000 cars in 2005 to 1.2 million in 2012 (with hopes to soon be number 1 in China). In 2009 Chaunfu became the richest man in China when BYD stock hit a high after Warren Buffett took a 10% stake. Chuanfu knows how to scale up production rapidly in the auto industry...something Musk could use a hand in.

i.e. these aren't your typical Ivory tower beancounting CEO's. They are engineers, mostly self taught geniuses, right in the thick of their companies product design and manufacturing techniques. They are both confessed workaholics routinely putting in 100+ hour weeks all in the name of "Building Your Dreams" which is what BYD stands for after all.

Most of you reading this will know Mr. Musk's ambitions in regards to electric vehicles and solar energy. To see just how closely BYD's goals align take a look at this short video about BYD's 3 green dreams:


However there are some key differences between the two which bear mentioning:

Chaunfu took advantage of China's low wages to remove expensive automation and machinery from the battery building process.

Musk has built the Tesla factory with as much state of the art automation as possible. Using human labour only where more efficient to do so.

Chaunfu belives in his own Fe (lithium iron phosphate) battery chemistry as safer, cheaper, with longer life, better performance in extreme temperatures (not requiring a thermal management system), and being easier to recycle. Fe batteries also do not mind being stored at 100% charge whereas Tesla's LCA (Lithium Nickel Cobalt Aluminum) batteries do not like being stored at full charge, therefore Tesla restricts charging to 80% max unless a "range charge" is manually selected by the driver. This means that more of the pack can be utilized efficiently with BYD's Fe batteries.

Musk believes in the LCA chemistry from Panasonic as offering the highest energy density per kg per $ of all mass produced lithium ion batteries. Thermal management is built in at the pack level by Tesla.

Chaunfu believes in driving down costs at all levels. BYD has had some quality issues in the past but has improved remarkably in this area over the past few years, with its F5 "Suri" most recently named the "safest car in China" beating out other international brands such as Ford and VW in this category.

Musk believes in the highest quality, safety, and performance at all levels, despite the cost. He seems to have a zero tolerance in this regard and could cause friction with the cost "frugal" Chaunfu.

BYD whilst having a 100 kWh fast charging "cabinet" capable of recharging their 62 kWh battery in the E6 in 40 minutes (approx 140 EPA miles of range), Chaunfu has not yet taken on Musk's vision of a supercharging network nor seems to want to offer any charging for free at this point. Of course he isn't selling $75,000+ EV's either. Based on Chinese pricing the BYD e6 currently would sell for around $52,500 USD after incentives (but I have seen numbers as low as $35,000 stated in the US media). However the e6 has never been mass produced (sold less than 2,000 total in 2012). Chaunfu believes costs would be reduced dramatically with mass production.

So it appears that for both Mr. Musk's and Mr. Chaunfu's dreams to come true they both require a battery giga factory just to get started.

The collaborations here could be truly awe inspiring if the two could work out their differences.

Musk has had no problem raising money so far and Chaunfu has already gained the respect of Warren Buffet (who owns a 10% stake in BYD) calling Chaunfu "a combination of Thomas Edison and Jack Welch".

Therefore raising the money for a giga factory needed to supply Tesla and BYD might not be so hard. BYD certainly has the cell building expertise to do it. Perhaps Tesla could help on the best pack design?

Problem is what chemistry is likely to be used?

Looking at the Lithium Iron Phosphate of BYD it certainly has a long list of advantages. Only problem it seems is that the Tesla Model S 60 kW is able to travel just over 200 miles EPA. The 62 kW BYD e6 on the other hand can only manage 140 miles EPA. But how much of this is really down to the batteries? Perhaps we should take a look at the design and materials used to build the two cars:

1. The Tesla is all aluminium (weighing in at 4,647 pounds), has the best coefficient of drag in the auto world today (0.23), has the motor mounted between the rear wheels and battery pack at the lowest point on the car (the floorpan), it has an automatic suspension that lowers itself at higher speeds, and has a thermal and active battery management system allowing for even better aerodynamics and optimal range at all temperatures, Tesla builds their motors in house specifically for EV requirements and by all accounts is state of the art in terms of efficiency (Tesla couldn't find any other motor manufacturer in the world that satisfied their needs so they built their own!). Tesla's regenerative braking is said to be extremely aggressive compared to other EV's...all of this allowing for the 200 EPA range but almost all at additional cost.

2. The BYD e6 is steel based (weighing in at 5,247 pounds), a rumoured Cd of 0.30 (but looks worse than that), motor mounted in the front above front axle, no special suspension, and no thermal management system. Due to the low volumes BYD may not make the e6 motor in house, even if they do it is unlikely to be as efficient as the Tesla drivetrain and motor. For all these reasons it may not be the batteries at fault when it comes to the e6's perceived lack of range. To me it appears that the difference in energy density may not be all that great between BYD's iron phosphate battery and Tesla's nickel-cobalt one.

It might be interesting to see if BYD's Iron Phosphate batteries were installed in a Model S (minus the weight of the thermal management system and coolant required for LCA batteries) just how far it would go?

Obviously Tesla would have looked closely at Iron Phosphate as a chemistry and chose to not use it for a reason. Perhaps because BYD doesn't make this chemistry in a commodity 18650 format or in large enough volumes to bring costs down to the LCA level? If these were the reasons a giga factory putting out BYD iron phosphate batteries could possibly remedy that problem. The fact that they seem to have superior cycle life, can handle supercharging, and do not require thermal management looks pretty good to me.

The following article shows that indeed NCA batteries are cheaper than Iron Phosphate so perhaps that was the reason for Tesla's choice?

Regardless it seems clear that Mr. Musk and Mr. Chaunfu share the same dream but have envisioned slightly different paths to get to the end goal.

If they could somehow both compromise slightly and align their paths I think we would have a formidable powerhouse in a Tesla/BYD alliance.

Certainly having a Chinese partner would open Asia up for Tesla much more quickly than going it alone.

We shall see what happens but if Tesla is serious about the Gen III happening in just 3 years then work on the Giga factory needs to start right away.

Whilst BYD and Tesla may appear to be competitors on the surface their only way forward may be to work together on a common battery platform for the world's first gigafactory...that is if either CEO is serious about "solving the whole problem" when it comes to renewable energy, EV's, and grid energy storage.

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