Next-Gen Batteries Key To Charging Tesla’s Profits?

[7/22/2020] Lithium Iron Phosphate Batteries 

Tesla’s (NASDAQ:TSLA) first-ever Battery Day event is tentatively scheduled for September 15th, and there has been speculation that the company could discuss its progress with lithium iron phosphate (LFP) batteries – which are more economical and have a longer lifecycle compared to lithium-ion batteries that Tesla currently uses. While LFP batteries have not typically been used for electric vehicles, due to space constraints, Tesla should stand to gain significantly if makes a breakthrough, as we outline below.

Lithium iron phosphate batteries are cheaper to manufacture, largely because they do not use cobalt, the most expensive metal in electric vehicle batteries. Tesla has apparently been working with a research group at Canada’s Dalhousie University to develop this technology and these battery packs could eventually cost below $80 per kilowatt-hour (kWh). ^[1]  This is well below the roughly $130 per kilowatt-hour that we estimate that Tesla’s batteries cost in 2019. Assuming that a Tesla vehicle comes with a 70 kWh battery, by using LFP batteries, Tesla could cut costs by over $3,000 per vehicle on average. See our interactive dashboard analysis A Detailed Look At How Tesla’s Battery Costs Impact Its Gross Margins

These batteries are also safer and have a longer lifespan compared to traditional lithium-ion batteries. Tesla’s current battery degradation rate is already quite low with about 10% loss in capacity at around 200k miles on the Model X and S and the company says that its battery packs are already designed to outlast its cars. ^[2] However, if batteries had a still longer lifecycle, they would hold their value better even after cars are scrapped and could be re-used for other applications such as electricity storage or even for new electric cars. This should effectively bring down the cost of ownership for Tesla vehicles. There could be environmental benefits as well, as batteries get re-used.

Is this a good time to jump into Tesla stock? Yes – especially if you believe in this one important Tesla metric: Tesla’s Time Horizon. On the flip side, for a more balanced, risk-adjusted view see our analysis Tesla Valuation: Jump Into Tesla, Wait, Or Get Out?

[1/9/2020]  How Battery Costs Impact Tesla’s Margins

While battery costs are viewed as a key cost driver for electric vehicles, prices have been declining rapidly driven by improving technology and higher volumes. We estimate that Tesla’s (NASDAQ: TSLA) battery costs have declined from $230 per kilowatt-hour (kWh) in 2016 to $127 in 2019. As a percentage of a Tesla vehicle’s average selling price, battery costs have declined from 19.4% to 15% in the same period, per our estimates. Below, we take a closer look at how battery costs impact Tesla and its gross margins.

View our interactive analysis on A Detailed Look At How Tesla’s Battery Costs Impact Its Gross Margins. You can also modify assumptions for Tesla’s battery prices and the capacity to view the impact on its margins.

We estimate that Battery costs for Tesla vehicles have declined from around $230 per kWh in 2016 to $127 in 2019

• According to Bloomberg New Energy Finance (BNEF), the industry average battery costs (cell + packaging) have declined from $288 to $176 between 2016 and 2018.
• We estimate that Tesla’s battery costs are about 20% below the industry average, driven by the company’s higher volumes and battery chemistry.

Assuming that the average Tesla vehicle has a 70 kWh battery, this could imply that Tesla’s battery cost per vehicle has declined from $16k in 2016 to about $9k in 2019E

• Model S and X reportedly come with 100 kWh batteries, while the Model 3’s batteries vary from 54 kWh to 75 kWh.

Tesla’s Battery Costs As % of Vehicle Price has dropped from 19.4% in 2016 to 15% in 2019E.

• The average selling price for Tesla vehicles has declined from 83k in 2016 to an estimated $59k in 2019E, due to a higher mix of lower-cost Model 3 vehicles.
• Battery costs per vehicle have fallen from $16k to $9k in the same period.

Tesla’s Battery Costs As % of Cost of Goods Sold have dropped from 26% in 2016 to 15% in 2019E.

• The average COGS for Tesla vehicles has declined from $62k in 2016 to an estimated $47k in 2019E, due to a higher mix of lower-cost Model 3 vehicles.
• Battery costs per vehicle have declined from $16k to $9k in the same period.

How sensitive are Tesla’s Gross Margins to its Battery Costs

• Tesla’s Automotive Gross margins have declined from 24.5% in 2016 to 23.4% in 2018 and we expect them to decline to 20.5% in 2019, although they could improve to 23% in 2020.
• View our interactive dashboard analysis for more details on how Battery Costs impact Tesla’s Gross Margins.

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More Trefis Data

1. Tesla and the science behind the next-generation, lower-cost, ‘million-mile’ electric-car battery, CNBC, June 2020 [↩]
2. Tesla Impact Report, 2019 [↩]