Why Battery Improvements Will Determine The Success of The Tesla Semi

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Last week, Tesla provided some additional information on its new Semi truck, noting that the 300 and 500-mile range version are expected to have starting prices of $150,000 and $180,000, respectively. Although the upfront prices are higher compared to diesel trucks, which have a longer range, Tesla is looking to justify its pricing by citing its lower-running and maintenance costs. That said, we believe the long-term viability of the truck from the standpoint of both Tesla and its customers could hinge on the evolution of battery technology, with improvements in battery costs and energy density determining the margins and payload (freight carrying capacity) of the truck. While Tesla has not provided information on the size of the battery the truck will carry, we can arrive at a rough estimate. Tesla says that the Semi will utilize less than 2 kWh of energy per mile. That would imply that the 500-mile version needs a battery of about 1000 kWh, while the 300-mile version could need a battery with a 600 kWh capacity.

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We have a $206 per share price estimate for Tesla, which is well below the current market price.

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Battery Prices Will Determine Tesla’s Margins

Tesla doesn’t regularly disclose the cost of its batteries, but the company claimed that its battery packs cost under $190 per kWh in early 2016 and earlier this year, Tesla claimed reductions of about 35%, implying that its battery costs could stand at levels of under $130 per KWh, considering the company’s large production volumes at its Gigafactory and its move to the new ‘2170’ battery cell on newer vehicles like the Model 3. Costs could decline further over the long run, as Tesla scales up production. For instance, studies have shown that electric vehicle battery costs have declined by about 80% in six years. If Tesla is able to bring down per kWh costs to levels of around $100 by 2020 (assuming rates of declines significantly below historical rates), as the Semi begins to scale up production, this could put prices of the battery on the 500 mile version at $100,000, which could still leave room for reasonable gross margins.

Battery Energy Density Improvement Will Determine Payload Of The Truck

Tesla has not provided any details on the payload of its new truck, but it is safe to assume that this will be a metric closely watched by the trucking industry. While Tesla says that the Semi is capable of hauling a gross weight (including vehicle weight) of about 40 tons, the size and weight of the battery could restrict overall weight carrying capacity. Batteries occupy much more space and weight for a given energy output compared to fossil fuels such as diesel and gasoline, and this could limit the payload of the all-electric truck. Taking the Model S, which has a battery weight of about 14 lbs for each kWh of capacity, as a yardstick, the battery weight of the 500-mile range semi truck (with a ~1000 kWh battery) could come in at 14,000 lbs, or 7 tons. However, Tesla will likely use the new “2170” battery cells which are designed with Panasonic, replacing the smaller “18650” cells which have been in use for decades. The new cells provide higher energy densities, as they are larger in size compared to legacy cells, allowing for better packaging. Moreover, battery chemistry and technology also tends to evolve, with constant improvements in density over time (about 5% better densities each year). This could help to further cut battery sizes and improve payload.

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