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TSLA And EV Range: The Curious Case Of The Mercedes Benz EV

|Includes: Tesla Motors (TSLA)

Most people following the development of electric vehicles (EVs) know that TSLA is building some components for cars manufactured by two companies with TSLA stakes (namely Toyota and Daimler):

  • Toyota RAV EV
  • Mercedes Benz B EV

The Mercedes B EV is due in showrooms later in 2014. First reviews start to appear of the near-finalized car. What piqued my interest was the possible range since Tesla's own cars are long-range EVs. The Mercedes B EV spec sheet includes:

  • Powered by Tesla
  • Fitted with a 28 kWh Tesla battery pack
  • Equipped with a 174 hp electric motor
  • Able to churn out 251 pound-feet of torque
  • Capable of doing the 0 to 60 mph dash in 7.9 second
  • Capable of hitting 100 mph
  • Not one of those vehicles with battery intrusion in the interior or cargo holds
  • Heavy at 3,858 pounds

http://insideevs.com/mercedes-benz-b-class-electric-drive-road-test-review/

As a commenter on that site noted:

I'm a bit curious about the range. If it has a 28Kwh battery pack, that's only 4kwh more than the [Nissan] Leaf. By Leaf standards that would have a range of 87 EPA miles (vs 75 currently). but this car is heavy and appears less aerodynamic. So I wouldn't be surprised if it has similar range to the Leaf after EPA testing. We'll see.

For a long time TSLA optimists have claimed that the Tesla battery configurations are much better. I maintain that while their battery density may be higher for the time being (see chart below for details, I already used this chart in earlier blog entries)..

...the battery race to bring costs down and miles up is far from over.

The current "advantage" is that both the Model S and X come with large and expensive battery packs, for example, up to 85 kWh in the Model S. These car models have ASPs around $100k (!).

Assuming that TSLA does not supply its partners with "inferior" batteries (doubtful, most likely the same cells from Panasonic are used) the difference in real vehicle range might not be that big at similar car prices - since the Mercedes B is supposed to be sold for "only" $35-55k (the exact pricing is still unknown at this time).

It was easy for TSLA to dismiss short-range EV competitors like the BMW i3 or the Nissan LEAF - but let's again not forget that a fully equipped Model S costs thrice as much as a LEAF and twice as much as an i3. Different cars for different segments - the battery pricing (and ability to add more powerful batteries) is therefore also entirely different.

Looking at the first lower-priced Mercedes B EV limousine with "TSLA battery technology" inside (which again is likely only the battery pack and the BMS, the cells are sourced from Panasonic*), these Tesla "advantages" apparently become much smaller.

The question therefore remains how TSLA can build its future, mass-market car with the following promised specs:

  • 30k-35k USD base price
  • above 200 miles of range in the real world*

(Source: Tesla IR presentations and various tweets by TSLA execs)

This question is especially important for shareholders because Tesla also promises a "Category-leading gross margin" (quote from January 2014 Tesla IR PDF presentation+) for the car.

What will happen next? I will just list a summary of likely events since I already discussed the topic in earlier blog entries:

  • TSLA does not have enough battery supply beyond the Model S, the upcoming Model X (SUV) and compliance/small series OEM contracts for partners like Toyota or Daimler. (This supply is covered by an extension between Panasonic and TSLA announced in late 2013 and should last for about four years).
  • TSLA will most likely need to (not to use word "is forced to") build a giant factory. "Giant" is quite an understatement - the factory would be roughly equal to the total capacity of the global battery output (around 20 - 30 GWh per year). On a European tour in late January 2014, TSLA execs used the 30 GWh number. (I will put a video link in the comment section).
  • The battery factory cap ex will be investments in the billions of $ range. TSLA will likely approach possible JV partners to bring its cap ex down (e.g. Panasonic, Daimler, maybe even third-parties outside the automotive space such SCTY where the TSLA CEO has a relationship and where other battery output could be used for storage/grid buffering purposes).
  • Since TSLA announced it wants to sell its mass-market Model E (formerly known as "Gen 3" car) by 2017, it will need to start building the plant in 2015 already. A plant of this size will likely require about 24 months of total build and testing time until cells can be mass-produced off the assembly lines - even if TSLA doesn't build it out to full capacity in the beginning.

I can reiterate what I wrote back in 2013 - when many TSLA bulls dismissed the need for this giant plant as a simple bluff to achieve better supplier pricing from the likes of LG/Samsung/Panasonic:

TSLA is basically forced to build this plant to be able to sell a mass-market EV given supplier risks: No third-party seems to be willing to build this capacity for a single customer given the cap ex.

Now why wouldn't any battery company jump up in joy and try to sign such a huge contract with Tesla as soon as possible?

Battery manufacturing margins have been very low or even loss-leaders traditionally - one can see this in financial statements of aforementioned companies (LG/Samsung/Panasonic...). Many of these companies are conglomerates operating in different industries and with billions in revenue, they can therefore "swallow" continued operating losses or survive cyclical downturns in battery production.

The proposed TSLA plant will create significant concentration risk given the cap ex (billions of $) in my opinion - even if Tesla builds it together with one or several JV partners. 30 GWh worth of battery per year is not another small factory. Risks include for example:

  • A possible shortfall in Model E demand
  • Technology changes (better battery technology, new chemistry or battery formats** appearing shortly after the Model E starts shipping
  • Price spikes in raw materials (such as Nickel, Cobalt, Lithium; it remains to be seen what exact chemistry Tesla will use for the Model E) needed for EV batteries.

As I wrote back in 2013 few to none of the bullish TSLA analysts seemed to factor in the need (and by extension the cap ex) for this giant factory. The first questions only started appearing by late 2013 in a Tesla conference call - long after a few critical articles on SA published in 2012/2013 discussed the absolute need for this plant given global supply shortages - only to be dismissed or even mocked.

Now the same investment plan is hailed by people bullish on the company as a wise strategic move (perhaps because TSLA execs hinted that the plant will actually be needed? Sometimes the message changes when the messenger changes...)

Let's await the detailed factory sticker price and financing details (Which partners? Which financing, for example a debt issue or secondary offering?) before making a final judgment.

In the meantime, I maintain that this concentration of risk - and not a few, isolated fire incidents involving the Model S - will heavily determine the company valuation going forward as the Model E is still years away from introduction.

As for the global competition, it's aware of the plans and not sleeping - for example, car giant VW Group recently announced it wants to be the world leader in electric vehicles (EV and PHEV) by 2018. That's only one year after the planned Model E introduction. In VW's words:

"We are starting at exactly the right time," Volkswagen AG CEO Martin Winterkorn said in a release. "We are electrifying all vehicle classes, and therefore have everything we need to make the Volkswagen Group the top automaker in all respects, including electric mobility, by 2018."

www.volkswagenag.com/content/vwcorp/info....html

Similarly, Nissan (the current market leader in global EV sales and part of the Renault-Nissan brand alliance) is rumored to be introducing an updated LEAF with a better range in the next major revision.

On the heels of Nissan are unnamed Asian car manufacturers who will introduce mass-market EVs and PHEVs with a "big bang" in 2015 and 2016.

For readers who absolutely believe in a pure EV automotive future I would at least suggest buying a stake in several companies involved in the sector - especially given TSLA's current valuation near $200 and likely upcoming stock dilution due to the discussed cap ex.

Putting a big chunk of the personal portfolio into TSLA shares is obviously not equal to a diversified and less volatile "EV sector ETF" (I don't think such an ETF exists already, but readers get the idea).

Older investors will certainly remember: Picking the few long-term winner(s) in a nascent sector (from computers over software to solar...) is very hard, even if one is convinced that the sector as a whole has a bright future.

________

* Note that earlier range targets "200 or more miles of range" are now worded by Tesla IR as

"Tesla performance & range"

in the latest Tesla IR presentations (as of January 2014). Maybe this is guiding on the safe side compared to earlier announcements using numbers.

** For example, TSLA may switch to a larger cylindrical format for the Model E. A specific example would be using 28650 cells instead of 18650 cells.

+ PDF Source:

files.shareholder.com/downloads/ABEA-4CW....pdf