7 ms·

How Tesla's battery costs impact its gross margins

88 points by apsec112 7y ago

zaroth 7y ago
There’s another dimension to this, which is the the “contribution margin” per kWh. As long as Tesla is battery cell constrained (e.g. next 5 years or longer) every kWh of cells they sell needs to be attached to a certain amount of profit. This is why Semi is not going to ship in volume for a while. There’s rumor Tesla will build a cheaper compact car for China and EU. If you allocate 45kWh of cells to a car which sells for $20k and earns $4k of profit, versus 75kWh of cells to a car that sells for $50k and $10k of profit, all else being equal (20% GM) you want to sell more of Option B because the battery cell is your manufacturing limit and profit per kWh is $133 vs $89. Or to put it another way, a car that clears $4k for Tesla can only have a 30kWh battery, or else selling that car drives down profit. Tesla is rumored to be planning on making their own chemistry cells at GF4. I expect we will see real volume in their next-gen chemistry by the end of 2022 or mid-2023, at which point their annual production run rate will likely be greater than 1.5m vehicles requiring 100GWh of batteries per year. Currently they are closer to 35GWh, and IMO scaling the battery production is by far the hardest part. They have started using LG Chem cells in China, whereas up until now they were only sourcing cells from Panasonic. This is because it’s simply not feasible to produce the needed cells for GF3’s 150k/year run rate at GF1 and ship them overseas. Although that’s what they did for the initial China production run.
- wiggler00m 7y ago
  "Tesla is rumored to be planning on making their own chemistry cells at GF4. I expect we will see real volume in their next-gen chemistry by the end of 2022 or mid-2023, at which point their annual production run rate will likely be greater than 1.5m vehicles requiring 100GWh of batteries per year. Currently they are closer to 35GWh, and IMO scaling the battery production is by far the hardest part." Do you have a source for this by chance?
  - torpfactory 7y ago
    Based on the companies they have been acquiring, it certainly looks like they want to start their own manufacturing. https://electrek.co/2019/10/05/tesla-quietly-acquires-battery-manufacturer https://electrek.co/2019/10/05/tesla-quietly-acquires-batter... In addition Musk seems to be saying they will need an incredible ramp in battery production (to 2-3twh/year!!!) to make an important contribution to global warming. Given his style, I wouldn’t doubt he intends to have Tesla do the manufacturing: Q2 2019 earnings call: https://youtu.be/SG-59Os2H5o https://youtu.be/SG-59Os2H5o Obviously he doesn’t want to upset Panasonic too much in the short term: they have a lot to lose if Panasonic pulls the plug early.
    - ianai 7y ago
      Figure he’d ever pivot and become a net cell producer to others?
      - omgwtfbyobbq 7y ago
        I could see them supplying cells for stationary energy storage if Tesla energy is at capacity, but I suspect they would only become a cell supplier to another auto manufacturer if that manufacturer was serious about EVs and willing to commit to a long term contract.
        ianai 7y ago
        That must be what he’s thinking. He’s said he sees a need for 100 gigafactories to get us onto sustainable energy.
      - torpfactory 7y ago
        I think he intends for Tesla to be the end use for all the cells. Unless their products start tanking, in which case he'll pivot.
    - aguyfromnb 7y ago
      >Based on the companies they have been acquiring, it certainly looks like they want to start their own manufacturing. They also bought a trucking company and said they were going to start building their own car carriers.
- woodandsteel 7y ago
  I agree with your analysis. Let me just add that Tesla keeping its profits high means it has more money to build new car factories and also expand battery production.
- Robotbeat 7y ago
  I don't think Tesla is fundamentally cell constrained on that timescale. They can expand cell production a lot faster than that. They have plenty of site space at Gigafactory 1, so can probably go from decision to expanded cell production inside of 18 or 24 months (maybe less if they find an empty factory with suitable utilities). Even faster, they can buy cells from, as you say, LGChem or others. Tesla has long bought cells from others for its stationary storage products. They could pursue a similar strategy for Semi if they wanted (in the near term). The lower range Semi does not push battery chemistry particularly hard, so a third party cell is easily feasible there. So I don't buy that they're cell constrained on such a long timescale. They're constrained by other things.
  - marvin 7y ago
    Will there be an additional 65 GWh of suitable battery cells available from third-party suppliers globally, at reasonable cost, in such a timeframe? This seems somewhat doubtful to me, given how strategically important battery cells are for EVs, and how everyone and his dog has announced that they will make an EV.
    - Robotbeat 7y ago
      Exactly 65GWh? I dunno. But a substantial number, yes. Announcement of EVs doesn't count for much. The last 5 years have seen lots of announcements and not a ton of deployment. Cylindrical cells (except for the longest range or highest performance vehicles) are nearly commodities. Tesla's early decision to go with cylindrical cells keeps being validated. It's a major risk reduction to be able to switch cell producers without redesigning the whole battery pack or car. Other car companies like Rivian are also using cylindrical cells.
  - kalleboo 7y ago
    > They can expand cell production a lot faster than that. They have plenty of site space at Gigafactory 1 There are doubts as to how willing Panasonic is to expand as rapidly as Tesla needs https://qz.com/1593009/telsa-battery-partner-panasonic-backs-out-of-gigafactory-expansion/ https://qz.com/1593009/telsa-battery-partner-panasonic-backs...
- jillesvangurp 7y ago
  They'll sell the most lucrative products first while ramping up the R&D to tap into more markets when those eventually saturate. So, 30kwh battery car doesn't make any sense for tesla because they'd eat into the sales of cars that make much more profit per unit. The model 3 has shown that they are really good at upselling software features and extra kwh (read even higher profit margins). Their strategy seems pretty clear to me as they have plenty of products in a late stage of R&D that they could sell many off if only they had the production capacity to meet demand. They are basically tackling this in order of profitability. Model Y is next. They have the Tesla semi ready to go as well in limited volumes and they've been talking about a new roadster and model s as well. That should keep them absorbing whatever amount of kwh they can squeeze out of their factories for years to come. So, I don't see what value a low capacity cheap car would add. They'd need to sell many more of those than of their other products to make the same amount of profit and they are basically bottle necked on production capacity already. It doesn't make sense for them to even consider sacrificing factory space for this until after they build a lot more production capacity and the market for higher end options is saturated (which will take quite a few years).
  - aguyfromnb 7y ago
    >They'll sell the most lucrative products first while ramping up the R&D to tap into more markets when those eventually saturate. People keep saying stuff like this, which has no basis in reality. Here is the data: https://ycharts.com/companies/TSLA/r_and_d_expense https://ycharts.com/companies/TSLA/r_and_d_expense They haven't even doubled R&D with the Model 3, from a low base, and R&D has actually DECREASED since 3 years ago. Where do you see them "ramping up the R&D"? Tesla is averaging about $1.5B annually in R&D spend. For comparison, GM spent $7.8B last year. VW spent over $13B. Tesla aren't even investing fast enough to keep up with their capital depreciation, but somehow people keep saying things like, "they're re-investing all their profits". If they are, show the data. >They have the Tesla semi ready to go as well in limited volumes Really? Where are they building it?
    - gibolt 7y ago
      R&D isn't the only place you can invest profits. Building some of the world's largest factories, filling them with equipment, and hiring employees to fill them, is not cheap upfront. It is an investment which should pay dividends. Semi is likely at least a year away from any significant scaling.
- omgwtfbyobbq 7y ago
  The only thing I can think of that could eventually offset profit per kWh is if their ADAS offerings get significantly better with a larger and more varied fleet. In that case, trading lower profit per kWh on the initial sale for more cars/situations to train their models might be worthwhile, especially if better ADAS also encourages more people to purchase it when they buy the car or after.
- mtgx 7y ago
  > Or to put it another way, a car that clears $4k for Tesla can only have a 30kWh battery, or else selling that car drives down profit. It wouldn't really drive down profit. It would drive down profit per unit, but that's not nearly as important as total profit. I think Tesla also needs to keep in mind that for every ten $20k car they sell could turn into an upgrade to a Model 3 or Model S 5 years later. So I wouldn't look at this so narrowly. I think Tesla would see a net benefit from became THE electric car brand to get for the masses (as long as important quality and performance factors aren't diluted too much compared to the competition - like I would still expect this Tesla to be the best overall EV in the 20k range).
- new_realist 7y ago
  Another take is that Panasonic’s GF1 venture isn’t very profitable, so they’re unwilling to do more with Tesla. They may expand production, but only at a moderate pace and only after seeing sustained demand. That’s why Tesla is abandoning them for China.
godelzilla 7y ago
Well they're not overthrowing Bolivian democracy for the quinoa.
ggm 7y ago
When picking gross margins it is not always desirable to pick the highest. It would be unusual, but not actually illegal or wrong to pick a mix of gross margins. It depends what your goals are. Does anyone think VW only makes and sells it's highest gross margin products? Or Heinz or anyone else? It's an interesting analysis but it doesn't define what tesla will do or why they do it. It only defines what sets the upper and lower bounds on expectations of return on investment.
- woodandsteel 7y ago
  VW sells a big mix because it already has built all the factories needed to do this. Tesla is still expanding rapidly, so makes sense to focus on the most profitable products for now.

88 points by apsec112 7y ago

There’s another dimension to this, which is the the “contribution margin” per kWh. As long as Tesla is battery cell constrained (e.g. next 5 years or longer) every kWh of cells they sell needs to be attached to a certain amount of profit. This is why Semi is not going to ship in volume for a while. There’s rumor Tesla will build a cheaper compact car for China and EU. If you allocate 45kWh of cells to a car which sells for $20k and earns $4k of profit, versus 75kWh of cells to a car that sells for $50k and $10k of profit, all else being equal (20% GM) you want to sell more of Option B because the battery cell is your manufacturing limit and profit per kWh is $133 vs $89. Or to put it another way, a car that clears $4k for Tesla can only have a 30kWh battery, or else selling that car drives down profit. Tesla is rumored to be planning on making their own chemistry cells at GF4. I expect we will see real volume in their next-gen chemistry by the end of 2022 or mid-2023, at which point their annual production run rate will likely be greater than 1.5m vehicles requiring 100GWh of batteries per year. Currently they are closer to 35GWh, and IMO scaling the battery production is by far the hardest part. They have started using LG Chem cells in China, whereas up until now they were only sourcing cells from Panasonic. This is because it’s simply not feasible to produce the needed cells for GF3’s 150k/year run rate at GF1 and ship them overseas. Although that’s what they did for the initial China production run.

wiggler00m 7y ago
"Tesla is rumored to be planning on making their own chemistry cells at GF4. I expect we will see real volume in their next-gen chemistry by the end of 2022 or mid-2023, at which point their annual production run rate will likely be greater than 1.5m vehicles requiring 100GWh of batteries per year. Currently they are closer to 35GWh, and IMO scaling the battery production is by far the hardest part." Do you have a source for this by chance?
- torpfactory 7y ago
  Based on the companies they have been acquiring, it certainly looks like they want to start their own manufacturing. https://electrek.co/2019/10/05/tesla-quietly-acquires-battery-manufacturer https://electrek.co/2019/10/05/tesla-quietly-acquires-batter... In addition Musk seems to be saying they will need an incredible ramp in battery production (to 2-3twh/year!!!) to make an important contribution to global warming. Given his style, I wouldn’t doubt he intends to have Tesla do the manufacturing: Q2 2019 earnings call: https://youtu.be/SG-59Os2H5o https://youtu.be/SG-59Os2H5o Obviously he doesn’t want to upset Panasonic too much in the short term: they have a lot to lose if Panasonic pulls the plug early.
  - ianai 7y ago
    Figure he’d ever pivot and become a net cell producer to others?
    - omgwtfbyobbq 7y ago
      I could see them supplying cells for stationary energy storage if Tesla energy is at capacity, but I suspect they would only become a cell supplier to another auto manufacturer if that manufacturer was serious about EVs and willing to commit to a long term contract.
      - ianai 7y ago
        That must be what he’s thinking. He’s said he sees a need for 100 gigafactories to get us onto sustainable energy.
    - torpfactory 7y ago
      I think he intends for Tesla to be the end use for all the cells. Unless their products start tanking, in which case he'll pivot.
  - aguyfromnb 7y ago
    >Based on the companies they have been acquiring, it certainly looks like they want to start their own manufacturing. They also bought a trucking company and said they were going to start building their own car carriers.
woodandsteel 7y ago
I agree with your analysis. Let me just add that Tesla keeping its profits high means it has more money to build new car factories and also expand battery production.
Robotbeat 7y ago
I don't think Tesla is fundamentally cell constrained on that timescale. They can expand cell production a lot faster than that. They have plenty of site space at Gigafactory 1, so can probably go from decision to expanded cell production inside of 18 or 24 months (maybe less if they find an empty factory with suitable utilities). Even faster, they can buy cells from, as you say, LGChem or others. Tesla has long bought cells from others for its stationary storage products. They could pursue a similar strategy for Semi if they wanted (in the near term). The lower range Semi does not push battery chemistry particularly hard, so a third party cell is easily feasible there. So I don't buy that they're cell constrained on such a long timescale. They're constrained by other things.
- marvin 7y ago
  Will there be an additional 65 GWh of suitable battery cells available from third-party suppliers globally, at reasonable cost, in such a timeframe? This seems somewhat doubtful to me, given how strategically important battery cells are for EVs, and how everyone and his dog has announced that they will make an EV.
  - Robotbeat 7y ago
    Exactly 65GWh? I dunno. But a substantial number, yes. Announcement of EVs doesn't count for much. The last 5 years have seen lots of announcements and not a ton of deployment. Cylindrical cells (except for the longest range or highest performance vehicles) are nearly commodities. Tesla's early decision to go with cylindrical cells keeps being validated. It's a major risk reduction to be able to switch cell producers without redesigning the whole battery pack or car. Other car companies like Rivian are also using cylindrical cells.
- kalleboo 7y ago
  > They can expand cell production a lot faster than that. They have plenty of site space at Gigafactory 1 There are doubts as to how willing Panasonic is to expand as rapidly as Tesla needs https://qz.com/1593009/telsa-battery-partner-panasonic-backs-out-of-gigafactory-expansion/ https://qz.com/1593009/telsa-battery-partner-panasonic-backs...
jillesvangurp 7y ago
They'll sell the most lucrative products first while ramping up the R&D to tap into more markets when those eventually saturate. So, 30kwh battery car doesn't make any sense for tesla because they'd eat into the sales of cars that make much more profit per unit. The model 3 has shown that they are really good at upselling software features and extra kwh (read even higher profit margins). Their strategy seems pretty clear to me as they have plenty of products in a late stage of R&D that they could sell many off if only they had the production capacity to meet demand. They are basically tackling this in order of profitability. Model Y is next. They have the Tesla semi ready to go as well in limited volumes and they've been talking about a new roadster and model s as well. That should keep them absorbing whatever amount of kwh they can squeeze out of their factories for years to come. So, I don't see what value a low capacity cheap car would add. They'd need to sell many more of those than of their other products to make the same amount of profit and they are basically bottle necked on production capacity already. It doesn't make sense for them to even consider sacrificing factory space for this until after they build a lot more production capacity and the market for higher end options is saturated (which will take quite a few years).
- aguyfromnb 7y ago
  >They'll sell the most lucrative products first while ramping up the R&D to tap into more markets when those eventually saturate. People keep saying stuff like this, which has no basis in reality. Here is the data: https://ycharts.com/companies/TSLA/r_and_d_expense https://ycharts.com/companies/TSLA/r_and_d_expense They haven't even doubled R&D with the Model 3, from a low base, and R&D has actually DECREASED since 3 years ago. Where do you see them "ramping up the R&D"? Tesla is averaging about $1.5B annually in R&D spend. For comparison, GM spent $7.8B last year. VW spent over $13B. Tesla aren't even investing fast enough to keep up with their capital depreciation, but somehow people keep saying things like, "they're re-investing all their profits". If they are, show the data. >They have the Tesla semi ready to go as well in limited volumes Really? Where are they building it?
  - gibolt 7y ago
    R&D isn't the only place you can invest profits. Building some of the world's largest factories, filling them with equipment, and hiring employees to fill them, is not cheap upfront. It is an investment which should pay dividends. Semi is likely at least a year away from any significant scaling.
omgwtfbyobbq 7y ago
The only thing I can think of that could eventually offset profit per kWh is if their ADAS offerings get significantly better with a larger and more varied fleet. In that case, trading lower profit per kWh on the initial sale for more cars/situations to train their models might be worthwhile, especially if better ADAS also encourages more people to purchase it when they buy the car or after.
mtgx 7y ago
> Or to put it another way, a car that clears $4k for Tesla can only have a 30kWh battery, or else selling that car drives down profit. It wouldn't really drive down profit. It would drive down profit per unit, but that's not nearly as important as total profit. I think Tesla also needs to keep in mind that for every ten $20k car they sell could turn into an upgrade to a Model 3 or Model S 5 years later. So I wouldn't look at this so narrowly. I think Tesla would see a net benefit from became THE electric car brand to get for the masses (as long as important quality and performance factors aren't diluted too much compared to the competition - like I would still expect this Tesla to be the best overall EV in the 20k range).
new_realist 7y ago
Another take is that Panasonic’s GF1 venture isn’t very profitable, so they’re unwilling to do more with Tesla. They may expand production, but only at a moderate pace and only after seeing sustained demand. That’s why Tesla is abandoning them for China.

godelzilla 7y ago

Well they're not overthrowing Bolivian democracy for the quinoa.

ggm 7y ago

When picking gross margins it is not always desirable to pick the highest. It would be unusual, but not actually illegal or wrong to pick a mix of gross margins. It depends what your goals are. Does anyone think VW only makes and sells it's highest gross margin products? Or Heinz or anyone else? It's an interesting analysis but it doesn't define what tesla will do or why they do it. It only defines what sets the upper and lower bounds on expectations of return on investment.

woodandsteel 7y ago
VW sells a big mix because it already has built all the factories needed to do this. Tesla is still expanding rapidly, so makes sense to focus on the most profitable products for now.