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EV Manufacturers And Batteries: Siamese Twins - Part I

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

Almost no observer talked about battery supply issues for electric vehicles (EVs) back in 2012 and 2013 - if anything, people talked about an oversupply and a slow pickup in electric cars. Now everybody wants to talk about the topic - just listen to the analyst questions in the latest TSLA conference call from Feb 19, 2014.

(Tesla is deferring all "giga factory"-related questions to a separate event in the next few days, I will cover that in a forthcoming part II of this article.)

What's becoming clear is that EV producers and battery suppliers are morphing into siamese twins long-term. Car manufacturers with no direct control over battery supply are now seeing this as a strategic disadvantage and missing core competence that can't be simply outsourced to a third-party supplier over time.

Tesla is by no means the first EV manufacturer to change course and now planning to vertically integrate its battery supply:

If a car manufacturer doesn't outright control a battery manufacturer it is at least looking for a tight ally or a joint-venture. One recent example is Mitsubishi. A recent Mitsubishi PR with battery partners reads:

Bosch, GS Yuasa, and Mitsubishi Corporation to double capacity for Electric Vehicle battery
Partners establish joint venture in Germany to focus on developing next-generation lithium ion batteries
▼ Dr. Volkmar Denner: "We aim for giant leap forward in the development of battery technology."

▼ Lithium Energy and Power GmbH & Co. KG joint venture starts operations in 2014

▼ Lithium-ion batteries are basis of the 2020 mass market

I think all the other major car companies who are serious about EV and PHEVs will (have to) follow suit over the coming months and years with similar factory plans or joint-ventures. A simple supplier agreement probably won't be enough. The next one with news is EV pioneer TSLA:

As I outlined in earlier blog entries, there is no way TSLA could introduce a mass-market car (Gen III aka "Model E") at a promised $30-35k base price without building its own battery factory - costs are just one side of the coin however. The other is pure supply shortages in EV batteries:

TSLA needs even bigger supply volumes because it specializes in long-range EVs with more powerful/expensive batteries and uses cylindrical cells (all other car manufacturers opt for larger prismatic or pouch cells at the moment). TSLA CEO Musk just reiterated this in a Bloomberg interview:

(Around the middle of the conversation at minute 5:30 and following).

To put the battery "hunger" of different vehicle classes in a rough perspective (rough estimates):

Plug-in EVs (PHEVS): 5-20 kWh

Short-range EVs: 20-35 kWh

Mid-range EVs: 35-50 kWh *

Long-range EV: 60-100 kWh

Ultra-long-range EVs: 100+ kWh *

It is quite clear that the biggest need for battery cost reduction is in the long-range and above segments, otherwise these vehicles can't be sold at mass-market prices around $35k. Tesla for example promised to reduce costs by about 30-40% with in-house battery production by the time their Gen III car is ready (it's not yet clear if this reduction refers to the single cells or the entire battery pack costs).


- Car Manufacturers who believe in/produce EVs will be more or less forced into building their own supply or at least enter a joint-venture with a battery manufacturer over the coming years, especially mass-market manufacturers who want to build more than around 100k EVs per year.

- EVs require a different skill set (not just for the cells, but also for battery management systems and electronics). This favors new entrants, especially entrants located in Asia since most battery manufacturing capability is concentrated there (namely China, South Korea and Japan). I see Asian car companies dominate the mass-market for EVs longer term.

- EVs coupled with driverless cars could also favor new entrants from the IT industry over the coming years (such as GOOG or AAPL to just mention two rumored names, see my earlier entry for more details).

- Former and current battery suppliers with consumer-facing sales (LG, Samsung, Panasonic...) may one day decide to forward-integrate and create their own EVs and car brands. Operating margins in pure battery manufacturing are low and cyclical, creating the entire car looks like an interesting strategic alternative.

- Ongoing R&D in battery technology makes early investments risky, the next big thing is always around the corner in the sector with many delays and setbacks in recent years. Improvements and cost reductions could favor "fast followers" in EV battery production, especially in the mass market. A major recall is also a looming risk, there is little room for error in EV batteries (see for example A123 and former Fisker cars in 2012 or Mitsubishi Outlander PHEV and GS Yuasa in 2013, both delayed car production for months and ended in very expensive recalls - in the case of Fisker the battery problems also contributed to its later bankruptcy).

- There could be price spikes in battery raw materials (not lithium, but mainly other battery raw materials) depending on fast ramp-up. The battery supply required for millions of EVs is gigantic (see my earlier entries with calculation examples, a rough estimate is 600 GWh for about 10 million long-range EVs).

- It is still unclear with type of EV will prevail given battery cost reductions and future gasoline prices (short-range EVs with about 100 miles of range, sometimes coupled with range extenders for longer trips or battery-only, long-range EVs with ranges above 200-300 miles); there could be a market for both approaches in different price segments. There is also ongoing research in hydrogen, but its mass-market introduction dates keeps getting pushed back by proponents such as Toyota, Hyundai and Honda. The latest date is 2015 - Infrastructure remains an issue with this technology.

- Finally, battery production and recycling and refurbishing allows car companies to create a second revenue stream for spent EV batteries. Nissan is already doing this in Japan with Sumitomo:

The spiritual among us will view Sumitomo and Nissan's installation of its first-ever used-electric-vehicle-battery storage as a bit of divine reincarnation. But the idea is quite logical and practical. The two companies formed the 4R Energy Corporation in late 2010 and have now installed what they call the world's first "large-scale power storage system" using exclusively used batteries from battery-electric vehicles in Osaka, Japan.

I see other EV companies (for example TSLA and SCTY, the two companies are already linked through personal connections at the CEO level) follow suit over time with similar EV battery re-use plans.

- Many bullish EV analysts seem to underestimate these battery supply issues and timelines (huge battery factory build-out and associated supply chains). I still don't expect "pure" EVs to sell many units (say, beyond 5% of the total market for new cars) before 2020-2025. We will learn more details in the TSLA announcement in a few days how one EV pioneer is aiming to overcome these challenges (where I will follow up with part II of this blog entry).


* Medium-range and ultra-long-range EVs: There are basically no commercial (mass-produced) vehicles in these two battery segments as of early 2014. It is expected that many current short-range Evs in the current $20-35k range will become medium-range EVs over time (as battery prices fall in the coming years). Ultra-long range EVs (500+ miles) will most probably require new battery types, research is ongoing in this field:

Disclosure: I am short TSLA.

Additional disclosure: Short TSLA at $198. I am also long AAPL at $501.