How Fast Must Lithium Ion Batteries Fall For Tesla’s Model 3 To Be Viable?
According to Trefis estimates, nearly half of Tesla Motors (NASDAQ: TSLA) valuation rests upon the success of the Model 3 sedan. The company showcased the vehicle on March 31st earlier this year and has already booked close to half a million unit orders. The Silicon Valley based auto maker is expected to launch the vehicle towards the end of 2017 and expects to meet the order demand it has already received in the twelve month period following the vehicle’s launch.
One of the key questions surrounding the success of this vehicle is whether Tesla can bring down the cost of its lithium ion batteries fast enough to make the car financially viable and make it a mass market success at the same time. The table below estimates how fast the cost of lithium ion batteries must fall in order for Tesla’s plans to be successful. In the calculations we make two assumptions: 1) Tesla will be willing to take a gross margin of half its usual gross margin on the vehicle and 2) the cost of a battery will be around 30% of the cost of manufacturing a vehicle, even in three years. According to our calculations, the cost of Lithium-ion batteries must fall over 30% each year over the next three years for Tesla’s new car to achieve its goal. This is arguably a tough goal to achieve, despite its economic necessity. As a result, the answer to this key questions remain uncertain, something we will surely have to write on again.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Tesla Motors
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