Tesla Model S three quarters

To Commemorate Tesla’s Gigafactory Announcement, We Go Back to July

Tesla Model S three quarters

This week Tesla announced they will build their Gigafactory in Nevada, thanks to $1 billion in state subsidies.  With that news, a lot of the Tesla-haters have one less hurdle to put in Tesla’s way.  They also have one more thing to subtract value from.  With the news, we decided to reprint this post from July.

Not too long ago Elon Musk and his Tesla people announced their intent to build a 50GWh battery plant.  Some of you might say, “wow that makes sense, they are an electric car company.”  Others of you might say “50GWh?  That seems like a lot, although I don’t know how much is a lot.”  A few others might see it and ask for some context “What is a GWh?”

Which would be a wise question, as 50GWh is 50 billion watt hours. It the equivalent to 150 billion or so BTU’s. On average, a 2000 sq. ft. home in the Chicagoland area uses around 80,000 BTUs for a year of heat.  So, mathematically speaking, that’s the equivalent of a whole lot of a lot of a lot of warm homes.

Or more to the point of the electric car, 50GWh is the equivalent of 98% of all EV batteries built in 2013.  I’m waiting for the realization to set in…yeah, that IS a lot.

Take a look at this chart from Tesla:

Tesla GigaFactory Estimates

By the way, the multi-colored stick represents all annual battery output from all the other battery companies since 2010.  So, this 2020 Gigafactory represents something big.

It also represents a shift in the supply chain.  All of the companies on the multi-colored stick are Asian companies.  There are no North American companies, something that will change with 2020 Gigafactory.  If all goes close to plan it will mean that in 2021 you’ll  find a “Made in America” stamp on a Tesla battery.  And stamped on the batteries of other automakers they’re sure to have deals with.  Like Mercedes.  Toyota.  BMW.

(Did you see where BMW is thinking about making their electric car patents public?  Some thought that it dumb when Tesla announced it would be the first automaker to do so.  I think it’s closer to “dumb like a fox”.)

A couple of days ago, Mira Inbar, writing at Seeking Alpha, asks a shrewd question and comes up with 3 insightful reasons why 2020 Gigafactory is brilliant.  Her question?

So, why can Tesla scale in an industry that was considered all but dead in the United States just a few years ago?

Why this question?  As she points out, over the past couple of years we lost 2 EV companies, 2 domestic battery makers, and some other minor global battery players.  In the midst of this calamity, what makes Tesla think this is the time to step up their game?  Inbar has 3 answers:

#1: Tesla knows and owns their most expensive part

According to Inbar:

Tesla made the early decision to assemble its own battery packs. It struck a deal with Panasonic (OTCPK:PCRFF) to buy small cylindrical battery cells and then assembled the cells and develop the thermal management system, software, electronics, and mechanical enclosure, on its own.

Around a quarter of the cost of a battery pack is in those non-cell components that Tesla is assembling. As volumes rise and designs mature, Tesla is able to directly benefit from any cost optimization.

Integrating a new third party battery pack into a vehicle can take at least 9 months of engineering time and resources. There are often communication hiccups between the battery management system and the vehicle system. Because Tesla designs its vehicles from the ground-up, it is able to optimize the battery pack with the vehicle design, thereby eliminating the time and resources involved in battery integration.

#2 Tesla isn’t aiming for radical technology disruption

The Panasonic 18650 cells, which Tesla purchases, are standard small cells, about the size of those used in laptop computers. They are used widely across multiple industries and are already at production capacity. Tesla therefore benefits from volume pricing and logistics security. It has not had to go through the painful process of scaling a new technology and manufacturing plant to production capacity.

Now, Tesla is reported to be working on a second-generation cell design with Panasonic, but this will hit production after the company has already established its brand and has the flexibility to test a new product. Unlike its competitors, Tesla opted for a known technology that was already produced at volume, which lowered their technology risk, allowed volume pricing early on, and reduced the risk of supply chain disruptions.

#3 Tesla is secure and patient with a long-view

The electric vehicle market is no place to make a quick buck. Although the market is growing, it takes five to eight years for most battery and vehicle platforms to see profitability. Indeed, it took Tesla ten years…Shortly after Tesla announced its plans to build a 50 GWh/yr factory, the company opened up its patents to competitors, allowing any other car company to use the Tesla technology. These patents specify Tesla’s batteries, so Tesla was in effect catalyzing more demand for their batteries. This was another smart move, which simultaneously scales the electric vehicle ecosystem alongside the company’s own topline growth. Indeed, 50 GWh/yr may just be the beginning.

Notice what I put into bold.  It is something that was never mentioned over the course of reading 15+ articles I read about Tesla’s decision to open up their patents.  So either Inbar made it up (not likely) or the leading journalistic minds of our times didn’t read or understand the key piece (significantly more likely).  Either way that sentence, along with Musk’s very well developed plan, is the key to why Tesla will be here for a very long time.

Which drives the quarter-by-quarter financial guys absolutely insane.



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Sebastian James


Accept no substitutes

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