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Is There An Attractive Opportunity Selling Battery Packs/Drivetrains to Other MFGs?

Discussion in 'TSLA Investor Discussions' started by SteveG3, Sep 4, 2014.

  1. SteveG3

    SteveG3 Active Member

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    #1 SteveG3, Sep 4, 2014
    Last edited: Sep 4, 2014
    I think in the coming years Tesla will have several options for continued very high growth. I think it's easiest to see visibility in their growth in making their own vehicles, but at a minimum grid storage is another very large growth opportunity, even if not as easy to project what it will offer Tesla.

    When it comes to building and selling battery packs to other manufacturers, that idea is often dismissed as a low margin business Tesla would never be involved in. I'm not creating this thread to make the case that this will be the path Tesla follows (I really don't know ten years from now what path, or combination of paths Tesla will pursue), but rather to try to understand if there is a case for a possible opportunity of something of an "Intel Inside" like business for the packs or perhaps entire drivetrains as an opening Tesla might pursue.

    I wonder if identifying Tesla's packs with the 18650 cells that were the starting point for the cells in Tesla's battery pack is the reason the idea of selling battery packs is seen as a non starter. 18650 cells are widely understood to have been a low margin (I think about 5%) commodity product for quite some time.

    I think that is a case of reasoning by analogy rather than first principles.

    Due to differences in the scale of production needed for where vehicle battery pack demand seems to be headed vs. current demand for 18650s, and Tesla's proprietary adaption of the cells and proprietary design of the pack and software that runs them, it's an analogy that I suspect misses the reality. As we've all heard, the 1st Gigafactory Tesla makes will produce more lithium ion batteries than all the existing factories made last year... and that will be enough to make EVs for 0.5% of the global automarket. So, isn't a supply/demand situation that has 18650's selling basically as a commodity basically thrown out the window when you multiply current demand by the theoretical demand in vehicles, that is 200X more? In other words, if Tesla can build a plant that makes packs at $100 kWh in the next 10 years as Elon says, wouldn't it take massive investment (each GF costing $5 billion) and the will of other manufacturers to start building GFs by the dozen years in advance before global supply of $100 kWh packs was so ample in respect to demand that these packs were a commodity? What's more, there is Tesla's proprietary development of the cell and pack... though if Tesla continues with their open source policy on IP, it's not clear how much of a factor this would be.

    Looked at another way from first principles. If battery packs for grid storage are an attractive business for Tesla, and these packs are simpler than packs that get put into vehicles that are outside in weather on roads in varied condition traveling at 70+ mph all the time, why are the they not attractive in an auto application? That is why is an even simpler form of the core battery pack product, packs designed for grid storage (or consumer home use with their solar installation) seen as an attractive opportunity, but dismissed as a commodity in the auto industry? Why is the battery business a commodity industry when it comes to vehicles but not when it comes to grid storage/home&business installations? I think Tesla has a great opportunity in both because their kWh price is way ahead of the competition and the amount of supply compared to where it looks like demand is headed, suggest tremendous room to grow in two new industries in their infancy.

    To look at first principles one last time. Imagine it is 2025. You are the head of Honda. You've blown off EVs for years while talking about fuel cell vehicles. With pack costs as low as $100 kWh there are EVs being made that offer a far better experience for the same purchase price of an ICE , followed by fuel savings going forward, so, the public widely sees EVs are the future. Your old fuel cell pal Toyota has just committed $25 billion to build 5 GFs in the next 5 years. It's over for ICE, it never was for fuel cells, but you don't have anything like Toyota's reserve of cash to build 5 GFs so soon. Tesla wants to charge you $133 kWh to buy a pack (a 25% gross margin for Tesla). You can build an 50 kWh EV with a Tesla pack for $1650 more than it costs Tesla, or a 75 kWh pack for $2500 more. Do you want to buy from Tesla today and sell EVs, or just strictly pump out ICE that are a worse experience for the consumer and cost the consumer $15K more to own over their lifetime (based on the 2014 price of gas) as you hope to stay in business long enough to find the cash to build your own GFs over decades to convert your production to EVs with packs internally sourced. It could be that a lot of companies are in this position. And if for any reason the very small amount of companies that have enough money to make a big quick move into EVs do not take up Tesla's open source offer, buying packs from Tesla is very likely to allow you to sell your cars cheaper or at a better profit than the competition (assuming Tesla's packs continue to be at least $33 kWh cheaper than what others can do without using Tesla's technology).

    One last point, I don't think Tesla wants to let go of making vehicles, but as has been said before, they may shift to an energy storage company that also makes vehicles. If their focus and competitive advantage is developing energy storage technology, and becoming adept at the intense scaling up in production growing EV and grid storage markets demand, I think the "Intel Inside" mode will have even more of a case for itself as it would be aligned with the core competency of the company if they go that route. Tesla has lots of great possible routes ahead, and I think supplying packs to other manufacturers is a viable possibility.
     
  2. Robert.Boston

    Robert.Boston Model S VIN P01536

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    In this analysis, it's important to distinguish selling cells as opposed to selling whole battery packs. The cell business is a low margin business; however the assembled automotive grade would be much more valuable.

    I agree with your conclusion overall that a company like Honda could benefit by paying Tesla to construct its battery packs. The question is whether Tesla will have the capacity to wrap up its overall pack production to meet demands from competing car companies. Secondly, there's the question of whether Tesla gains more profit by enabling competitors or shutting them down.
     
  3. adiggs

    adiggs Active Member

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    An interesting question. Part of my immediate reaction on this topic is that I can see major car makers purchasing Tesla battery packs and/or drive trains for compliance or other short term purposes, but I don't see anybody making it a long term proposition. In the scenario you've described (something that I believe to be very likely to happen to many current big auto makers, and something that I believe could be happening in as little as 12 months from now with volume Model X production), I believe that the emergency / save the company response will take 2 parallel tracks
    - buy drive trains / packs short term from Tesla so "we" can build something people will buy
    - aggressively pursue our own battery pack / drive train technology

    The reason for the dual recovery strategy (whether it works or not), has to do with how the car manufacturers define themselves today. As we've seen discussed in other threads and times, car makers today are decades into a ruthless outsourcing initiative in which everything not core to the business has been outsourced. For the most part, "core" has been defined as the engine and maybe the transmission (there's a style / brand also, but the technology is mostly engine).

    If the engine is what's core, then there is a strong cultural imperative to get good at electric motors / battery packs, as they form the engine / transmission of an EV. In the alternative, if those too are outsourced in order to produce EV's at scale, then today's car makers are re-imagining themselves as design houses and assemblers who have no particular IP of their own. I don't see this being viewed as a desirable choice.

    In the long term, I see some pack / drive train sales to other car makers as being a side business, and maybe even a nice side business. I don't see it as something that will happen though, even if Tesla was completely willing to build packs / drive trains for others to build cars around; the other half of the transaction won't be present (or only grudgingly present while seeking an alternative).


    I have other thoughts on the "Intel Inside" angle, and for the most part I don't see it happening. As I see it, the basis of what makes "Intel Inside" work isn't the expense of the factories (though that does contribute) - it's the difficulty of actually building the stuff that Intel builds, and I don't see a comparable sustained difficulty in the battery packs that Tesla builds. The end result - I do see similarities - Tesla has a battery pack that is clearly well ahead of anything that can be built at scale by anybody else in the world. Is that battery pack and associated software so very difficult to replicate or even better that it can't be done? Or is it that the wrong people have taken up the challenge, and/or, only Tesla has really tackled the problem seriously? I tend to think more of the latter. Yes the software is valuable and difficult to replicate, but it's not 'invent new material science to make it work' difficult (and keep doing it every other year). In fact, it's closer to a one-time difficult-to-replicate sort of problem.

    This suggests to me that focused effort will result in other companies eventually having something in the same ballpark (or going bankrupt because they waited too long, and they ran out of money while trying to build something competitive). Mostly, I think the wrong people have attempted to duplicate what's really valuable - the battery pack and it's software. I don't see a serious competitor coming out of the automotive industry - I think of somebody like Samsung that has both a hardware and software culture, and thinks big, and I think they have a moderately big battery business of their own already.

    Gee - I guess I have such a pessimistic view of the current auto makers, if I knew how to do it, there would be some money to be made shorting the rest of the car industry :)
     
  4. SteveG3

    SteveG3 Active Member

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    Been meaning to reply for a few days, but having seen this today,

    Tesla CEO says could sign new deal with Toyota in 2-3 years - Yahoo Finance

    I wanted to write a quick note,

    The main point I was trying to raise was, is there a possible attractive business here supplying batteries or whole drivetrains.

    It may be that my post was too long or unclear, but what Robert said here, "The cell business is a low margin business; however the assembled automotive grade would be much more valuable." is the main concept I meant to suggest with this thread. I strongly suspect this is the case, but was curious to explore how likely this is. It seems a number of people have assumed selling packs is too low margin for Tesla, and not worth considering as part of Tesla's options to potential future earnings growth.



     

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