Alexander Lyakhovskiy/iStock Unreleased via Getty Images
In one of our recent coverages on the Tesla stock (NASDAQ:NASDAQ:TSLA), we had highlighted the electric vehicle (“EV”) titan’s competitive advantage in presciently building out its battery capacity in recent years, which would potentially help it “regain shares if others struggle for supply” over the longer-term. In the latest development, Tesla has announced plans to engage in lithium refining in Texas, a venture that will come online by late 2024.
The following analysis will explore Tesla’s ambitions in battery cell technology, charging capabilities, as well as its foray into critical raw materials to showcase its expansive reach across one of the least developed, yet highly demanded supply chains as global EV adoption accelerates. The ongoing efforts continue to demonstrate Tesla’s long-view strength as both a pioneer and industry leader in benefiting from multi-year momentum in auto’s transition to electric.
Next-Generation Battery Cell Development
It has been about two years since Tesla first touted its more powerful, less expensive 4680 battery cells that would transform the cost structure of its vehicles. The next-generation Tesla battery cell, which boasts a diameter of 46mm and height of 80mm, is capable of being 5x more powerful than its predecessors, while also enabling greater cost efficiencies due to its simplified manufacturing process. The related cost efficiencies enabled by the 4680 battery cells are primarily driven by its simplified manufacturing process and composition.
On manufacturing, the 4680 battery cells are made under an innovative process known as “dry-coating“. With dry-coating, the battery cell’s electrodes (i.e. the cathodes and anodes that “store and release charge”) are processed with binders that use significantly less liquid, which eliminates the drying process that the legacy wet-coating requires – and inadvertently, cuts the massive costs pertaining to the processing area, time, labour and energy required to facilitate the said drying process. Specifically, the simplified dry-coating process requires only a tenth of energy and factory floor area used in facilitating the legacy wet-coating process. Paired with other cost efficiencies realized through reduced time and labour requirements in the manufacturing process, the dry-coating method used to produce the 4680 cells is alone capable of reducing Tesla’s capital outlay in battery productions by at least a third.
The 4680 battery cells also enable a much more simplified and streamlined pack composition and vehicle integration process compared to its predecessor cells. The current Model Y requires more than 4,000 2170 cells in its battery pack. But with the 4680 cells being 5x more powerful, the next-generation battery packs will only require approximately 800 cells. And with the connecting “weld points” reduced from four per cell in the legacy 2170s to now two per cell in the next-generation 4680s, the pack assembly costs will also be significantly reduced with the larger, more powerful cells. In terms of vehicle integration, the 4680 battery packs are designed to be embedded in the chassis, which could “trim the volume of material needed” and reduce its overall weight, enabling cost savings of up to $600 alone.
On performance, the 4680 battery packs – capable of more than 5x the power of the current 2170 battery packs – can up the existing Model Y’s range by at least 16%, with future “improvements in battery materials and vehicle design” to unlock a further range increase of more than 50%.
Altogether, Tesla’s next-generation battery packs enabled by the innovative 4680 cells can reduce up to $5,500 – or 50% – in costs compared to the current 2170 battery packs. This would accordingly enable Tesla to trim the sticker price on the Model Y by a similar extent of about $5,300, or 8% of the vehicle’s current starting price of about $65,000. For now, the company is estimated to be realizing cost-savings in the $3,000 range per pack made with the 4680 cells, as it continues to work through manufacturing hiccups to push productions toward scale.
The cost-savings enabled by the 4680 battery packs would not only further Tesla’s industry-leading vehicle margins, but also facilitate the production of more budget-friendly cars to better compete for market share against the influx of competition from both EV pure-plays and legacy auto OEMs. The European Federation for Transport and Environment predicts more than 300 available EV models within the European automotive market by mid-decade, while the IHS Markit predicts more than 130 available EV models in the U.S. by 2026, which is equivalent to the number of ICE options available in the market today.
For now, the refreshed line-up of Model Y vehicles fitted with the 4680 battery packs, which are currently available in limited quantity from Tesla’s Texas facility, have been reported to offer a lower range capability of 279 miles on a single charge, compared to 318 miles in the 2170-equipped Long Range Model Y. The 4680-equipped Long Range Model Y manufactured in Texas, which is priced at almost $10,000 cheaper than the 2170-equipped Long Range Model Y produced in Fremont, actually offers less range due to the EV maker’s conscious decision to integrate a “smaller 50 kWh battery pack in the new vehicle”. This has deterred some from pulling the trigger on the cheaper offering right now, given range anxiety remains one of the biggest barriers to EV adoption. While on first glance this may seem counteractive to Tesla’s ambitions in unlocking greater margins towards territories never seen before by another auto manufacturer, a closer look would show the strategic decision to retrofit the 4680-equipped Model Ys with a smaller pack actually enables the company to better manage, refine and scale its technology before the product becomes a function of supply availability like the rest of its auto business today.
And over the longer term, the 4680 batteries will not only be critical to the ultimate roll-out of the long-awaited Cybertruck – which would enable Tesla to compete for a share in one of the world’s most popular vehicle segments – the achievement of scaled productions in the new technology would also be key to the company’s release of a lower-priced product to better mass market penetration in the future. The long speculated “Model 2“, a $25,000 model that Tesla CEO Elon Musk has recently said is not a near-term priority for the company, would grant the EV titan access to price-sensitive market segments where penetration remains low. It will also make a competitive offering to prevent material market share losses to other mass market legacy auto manufacturers like China’s BYD (OTCPK:BYDDF / OTCPK:BYDDY) and Hyundai / Kia (OTCPK:HYMLF / OTCPK:HYMTF / OTCPK:HYMPY), as well as EV upstarts like Fisker (FSR), which are gradually gaining traction in the nascent industry with their respective budget-friendly offerings. The ultimate introduction of a $25,000 model will also play a forefront role in Tesla’s ambitions to deliver 20 million vehicles on an annual basis by 2030.
Batteries remain the leading cost driver of EVs. Tesla’s development and roll-out of the 4680 battery packs build on its ongoing efforts in actively reducing related costs to enable better EV pricing needed to encourage further adoption. It builds on Tesla’s active decision to switch out the legacy nickel-cobalt-aluminium (“NCA”) batteries used in its standard-range EVs with the less expensive lithium-iron-phosphate (“LFP”) batteries. While the LFP batteries, currently supplied by Chinese battery-maker CATL, offer lower range, they meet the requirements of Tesla’s standard-range requirements and are cheaper to produce due to the elimination of nickel and cobalt used in the NCA-composition cells that are still being used in the long-range models. The upcoming volume production of the 4680 battery pack that will be used in its longer-range models is expected to complement Tesla’s use of LFP batteries in its standard-range vehicles, and unlock further margin expansion over the longer term. Tesla’s production of the 4680 battery packs in its Texas facility would also enable buyers of Model Y to partake in the $7,500 tax incentive that was recently introduced through the Inflation Reduction Act, furthering the EV maker’s long-term market share gain trajectory.
Expanding Charging Monetization
The White House has also recently issued a statement outlining Tesla’s impending extension of access to its Supercharges – the largest public charging network in America – to non-Tesla EV drivers in the U.S. Tesla, which currently owns and operates one of the world’s largest and most expansive public charging networks, has already initiated a “non-Tesla Supercharger pilot” across Europe in late 2021. And the expansion of this initiative later this year would allow American EV drivers to access Tesla’s network of “over 1,400 Supercharger stations and 7,000 charger parts” across the U.S.
The majority of Tesla’s network of Superchargers are direct current fast chargers (“DC chargers”). DC chargers are high-powered, and reduces standard charge time of up to 20 hours for a full charge down to minutes. Tesla’s Superchargers currently facilitating charging of up to 200 miles within 15 minutes for some of its models. DC charging requires specialized equipment that can provide up to 1,000 Volts and 500 or more Amps of current to support rapid charging times for electric passenger vehicles, light-duty vehicles, and heavy-duty vehicles. The process involves converting “alternating current” (“AC”) into “direct current” (“DC”) electricity via an AC-to-DC converter, then delivering the DC electricity via a DC-to-DC converter to the EV to charge its battery.
Today, the Supercharger network is only open to Tesla owners and requires a special Tesla plug to facilitate charging. Meanwhile, most non-Tesla EVs currently charge with either a “CHAdeMO” (Charge de Move) connector or “CCS” (Combined Charging System) connector being the “open industry standard”. Based on the memo recently issued by the White House, Tesla is currently working to “bring production of new Supercharger equipment that will enable non-Tesla EVs in North America to use Tesla Superchargers” later this year, referring to plug adapters. By opening up its Supercharger network, Tesla is also bound to benefit from the $7.5 billion in federal funding allocated towards the continued build-out of public charging infrastructure in the U.S., supporting the company’s near-term plans to “triple the size of its network over the next two years”. The undertaking will also be critical to furthering domestic EV adoption tailwinds for Tesla, mimicking the success observed across its China market in recent years.
As mentioned in the earlier section, range anxiety is currently one of the leading roadblocks to mass market EV adoption. But with the surging influx of public charging providers – spanning EVgo (EVGO), Electrify America and others – that have partnered with legacy automakers to offer EV owners with free or discounted public charging access, Tesla’s charging competitive advantage that has been a key attraction for luring customers is slowly eroding. By extending Supercharger access to non-Tesla EVs across the U.S., the EV maker is able to benefit from an additional revenue stream to compensate for impending market share loss in EV sales with growing competition. And the outlook is bright – to put into perspective, global emissions reduction goals would require more than $360 billion in charging investments by 2030 and $1+ trillion to support the required global EV fleet, underscoring the charging demand that Tesla is poised to benefit from should it further expand Supercharger access for non-Tesla owners worldwide. With Tesla’s Superchargers currently being dubbed the most reliable public charging service, scoring the “highest satisfaction rating” in the recent J.D. Power survey of EV owners, the favourable trends also underscore the EV maker’s impending success in furthering monetization of its expansive network.
Safeguarding Supply of Raw Materials
As previously discussed in detail, Tesla’s commitment towards procuring the long-term supply of key raw materials required in EV batteries, such as lithium, is a core competitive advantage that will pay generous dividends over coming years:
As mentioned in our recent 2Q22 EV preview, the industry remains a function of supply. Specifically, automakers are expecting critical chip supply to remain constrained through the near-term, while a bigger overhang remains on the almost-certain deficit of key battery materials like lithium, nickel, cobalt and manganese needed over the longer term to support continued EV adoption. Due to the projected lithium deficit in the latter parts of the decade when EV adoption ramps up, Tesla’s prescient focus on key material procurement today will potentially help it “regain share if others struggle for supply” in the long-run…This has accordingly encouraged ramped up efforts by Tesla in securing long-term contracts with raw material suppliers all over the world, including Vale SA, Talon Metals, BHP Group, and Ganfeng Lithium. The measures are expected to act as a hedge against rising costs and dwindling availability of key commodities used in batteries over the longer term and provide Tesla with both a supply and cost advantage over rivals as global EV adoption continues to accelerate.
Building on these efforts, the EV industry leader has recently announced plans to engage in lithium refining on home soil in the U.S. In the latest development, Tesla has submitted a “public application for tax breaks” for its ambitions in “constructing a battery-grade lithium hydroxide refining facility in Nueces County” later this year, with volume productions to come online in late 2024:
Tesla pitched it as the first of its kind in North America. If built, the facility would process the raw ore material into a state suitable for battery production. The resulting lithium hydroxide it creates would be packaged and shipped by truck and rail to various Tesla battery manufacturing sites for supporting the necessary supply chain for large scale and EV batteries.
Source: Bloomberg
Lithium mining and refining is currently concentrated in Australia, Chile and China, with the U.S.’ reach in related activities lagging by wide margins. Not only would the realization of Tesla’s lithium refining plans narrow the competitive gap between the U.S. and rival nations, and reduce the American EV industry’s reliance on external supply – a weak link in furthering EV adoption as observed in the ongoing semiconductor shortage that has roiled the American auto industry over the past two years – it would also open the door for Tesla to potentially partake in more than $7 billion in federal funding allocated towards “critical minerals supply chains necessary for batteries, components, materials, and recycling”. From an economic standpoint, Musk has also repeatedly advocated the profitability of lithium refining given the inevitable surge in demand over coming years as America EV adoption ramps up:
I’d like to once again urge entrepreneurs to enter the lithium refining business. The mining is relatively easy, the refining is much harder…You can’t lose, it’s a license to print money.
By procuring sufficient long-term supply of raw materials like lithium, as well as paving the way for vertically integrated internal refining capabilities, Tesla is better positioned than ever when it comes to recapturing near- to mid-term market share loss in the latter parts of the decade as rivals compete for raw material supply in an inevitable deficit environment over the longer term.
Final Thoughts
Although near- to mid-term market share loss is imminent for Tesla given the increasing volume of EV choices across all vehicle types and pricing segments coming to market, the fast-expanding EV landscape also implies inevitable supply constraints over the longer term in which Tesla will be better prepared for giving its comprehensive portfolio of prescient investments across the battery supply chain. The efforts also strategically position Tesla to partake in rivals’ growth over the longer term by enabling revenue-sharing through gradually opening up its global Supercharger network. Meanwhile, the mass production of 4680 cells will be critical to reducing input costs. Together, not only would the efforts further contribute to Tesla’s margin expansion trajectory, but also fast-track EV price parity with ICE vehicles, a critical requirement for furthering the global EV addressable market in favour of Tesla’s long-term growth narrative.
Be the first to comment