Are Battery Cost Improvements Still A Big Driver Of Tesla’s Margins?

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The cost of batteries, which are a key building block of electric vehicles, has declined considerably in recent years. Per Bloomberg New Energy Finance, EV industry average battery prices have declined from an average of around $384 per kilowatt-hour (kWh) in 2015 to about $137 per kWh in 2020, marking an average decline of about 19% each year, with average prices likely to approach the $100 mark by 2023. [1] So how are battery prices benefiting EV bellwether Tesla?

Tesla remains the cost leader in the EV industry, given its higher volumes, better bargaining power with suppliers, and its differentiated battery cells and architecture, and it’s probably safe to assume that the company’s battery costs are about 20% lower than the market average. This would translate into prices of about $110 per kWh of capacity. Assuming the average Tesla has a battery capacity of about 70 kWh, this would mean that battery costs per vehicle stand at around $7,700, down from around $21,000 in 2015. This has been partly responsible for taking Tesla’s gross margins up to levels of around 26% in 2020.

See our interactive analysis A Closer Look At Tesla’s Battery Costs for a detailed look at how Tesla’s battery costs impact its overall cost base.

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So will battery cost improvement still be a major driver for Tesla’s improving profitability? It surely will, given Tesla’s ambitions of bolstering its own battery production capacity and even backward integrating into areas such as lithium mining. That said, the impact of battery price reductions is likely to be less pronounced. For example, we estimate that batteries accounted for about 14% of the average selling price of a Tesla vehicle in 2020, down from about 29% in 2015, giving the company a little less room for cost reductions. It’s more likely that things such as self-driving software upgrades, the sales of renewable energy credits, and greater scale via new vehicle manufacturing plants will be bigger drivers of Tesla’s margins.

[9/23/2020]  Tesla’s Battery Day Updates 

During its Battery Day event held on Tuesday, Tesla (NASDAQ:TSLA) outlined a host of improvements to its battery technology including the way batteries are designed, manufactured, and integrated into its vehicles. While these enhancements could take about three years to fully materialize, Tesla expects them to help cut the cost per kilowatt-hour of batteries by about 56% per kilowatt-hour.

See our interactive analysis How Tesla’s Battery Costs Impact Its Gross Margins for a detailed look at how Tesla’s battery costs impact its overall cost base and margins.

In many ways, batteries form the foundation of EVs and we estimate that battery costs account for close to 15% of the average selling price of a Tesla vehicle. By cutting costs, Tesla could reduce the starting price of its vehicles and potentially bolster margins on its mid-range and high-end models. Leveraging these improvements, Tesla is targeting the launch of an EV with a $25,000 price tag. As Tesla makes its vehicles more accessible, it could drive volumes and upsell its lucrative autonomous-driving software upgrades.

Tesla is also betting big on manufacturing its own batteries to meet the growing requirements of its automotive and energy storage businesses. The company is targeting 100-gigawatt hours (1 gigawatt-hour is 1 million kilowatt-hours) of internally produced battery capacity by 2022. For perspective, that’s about 3x the battery production capacity that it has at Gigafactory 1, in collaboration with Panasonic. That capacity is likely enough to power over 1.5 million Model 3 vehicles. Tesla wants to scale up to produce a whopping 3,000-gigawatt-hours by 2030. Tesla is also looking at backward integrating its battery operations, with plans to mine for lithium on its own as it secured rights to a 10,000-acre lithium clay deposit in Nevada.

[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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 Returns Nov 2021
MTD [1]
2021
YTD [1]
2017-21
Total [2]
 TSLA Return 6% 61% 2560%
 S&P 500 Return 1% 24% 108%
 Trefis MS Portfolio Return -2% 48% 302%

[1] Month-to-date and year-to-date as of 11/30/2021
[2] Cumulative total returns since 2017

See all Trefis Price Estimates and Download Trefis Data here

Notes:
  1. Bloomberg New Energy Finance []