Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[MarcusMaximus]

Doesn’t change Apple ended up for the day. Let me put it differently. Ending higher than its opening means it did not drop today. At the time I wrote that indices were higher. My prediction was that they would drop for the day I.e. close lower than they opened. If that’s not clear to you I will not answer further. Would rather talk to a wall. My first person to be put on ignore. Congrats

Nitpick, but while AAPL closed above where it closed yesterday, it actually closed below where it opened today(213.04 vs 216.42).

Also, not sure why the attitude. Your original statement was ambiguous as to whether you meant AAPL wouldn’t drop from where it was at that time or wouldn’t drop for the day overall(I.e. close green). Stealth clearly just thought you meant the former, while you actually meant the latter.

 

[Fact Checking]

On the whole I think a cash raise to fund this hypothetical acquisition would be unlikely - the raise this year may well have been in preparation for this. I'll put $1.5bn Tesla stock and $1.25bn cash as a base case acquisition price (but it could easily be much higher than this with more Tesla stock offered). Another cash raise to fund acceleration of its massive cell expansion plans after the battery day next year seems more likely.

Also note that if they do this, under GAAP accounting rules it appears they don't have to count the CoGs of the acquired business as an expense for a whole year. This would be a substantial increase of margins and GAAP profitability.

 

[printf42]

Maxwell tech is for manufacturing cathodes and anodes - these are cell components not the cells themselves (Panasonic also makes cathodes at GF1 but many cell makers import them). I'm sure Tesla has developed processes in-house to make cells too, but i'm also sure there are parts of Panasonic's process they would like to incorporate - Panasonic are currently the best cell manufacturers in the world after all.
More importantly, no employees in the US know how to manufacturer battery cells at scale apart from the thousands of Panasonic employees already working in Tesla's own factory. These are obviously the best people to use to ensure a smooth ramp up of Tesla's own cell lines in the same building for Model Y next year.

Remember Tesla plans to build 2TWh of cells per year - $200bn annual revenue/cost for cells alone at current pricing. A few $bn now is nothing if it helps Tesla increase the odds of reaching this goal. And owning Panasonic also reduces the risk of future lawsuits that Tesla stole their tech/staff.

From what I read, cathodes and anodes are the key components of making a cell, with the chemicals involved in the whole oven process as the key IP.
These are also the parts Maxwell dry tech would be replacing.

Beside these, other materials are mostly off the shelf commodity, and there are vendors who sell rolling machine you can use to package cylindrical cells.(In fact Tesla already bought some of those last year from a Chinese vendor)

So, to me it doesn’t make much sense to buy Panasonic cell lines then immediately retiring the key components of them.

Unless there are some IP that Tesla want to acquire to avoid paying Panasonic too much in patent royalties down the road.

Either way, we would know the plan at battery investor day next spring.

 

[ReflexFunds]

Also note that if they do this, under GAAP accounting rules it appears they don't have to count the CoGs of the acquired business as an expense for a whole year. This would be a substantial increase of margins and GAAP profitability.

I know M&A accounting can be weird for software businesses with lots of deferred revenue where annual payments have already been received upfront etc, but I don't know of anything that would cause a significant short term M&A accounting benefit for the battery business. Tesla gross margin should increase slightly (depending how much gross profit Panasonic make on the batteries), but combined EBIT could actually be lower in the short term until Tesla achieve SG&A synergies/operating leverage.

 

[ReflexFunds]

From what I read, cathodes and anodes are the key components of making a cell, with the chemicals involved in the whole oven process as the key IP.
These are also the parts Maxwell dry tech would be replacing.

Beside these, other materials are mostly off the shelf commodity, and there are vendors who sell rolling marches you can use to package cylindrical cells.(In fact Tesla already bought some of those last year from a Chinese vendor)

So, to me it doesn’t make much sense to buy Panasonic cell lines then immediately retiring the key components of them.

Unless there are some IP that Tesla want to acquire to avoid paying Panasonic too much in patent royalties down the road.

Either way, we would know the plan at battery investor day next spring.

Cell manufacturing/assembly is the core of a cell manufacturers' business - this is their IP. Most do not make the components themselves (but they would often own the cathode/anode chemistry IP). Cell assembly lines which can make millions of cells at rapid speed, at high quality, with few staff and low cost is not a simple task.

 

[Don TLR]

Point taken.

However, a friend who is an off-road driving instructor and Jeep expert extraordinaire would say that driving over large boulders should be limited to very slow speeds, probably less than that 11mph you calculated. If you are rolling along at 25mph and suddenly run over a large boulder, you may need a new pair of eyeglasses. The rule of thumb is something like “if it is larger than a basketball, put a tire on it”.

A Jeep scraping the undercarriage with a pointy boulder at 25mph is likely to sustain a lot of damage, including mine with the lift kit and extra armoring. A stock 4x4 pickup may do worse.

Actually I like 10 to 15 PSI for smoothing out dirt roads.
I don't know market strategies but I do know about rockets and driving over big rocks
This is also why the Model P needs range, my backyard had a lot of dirt roads to camp and travel on.

 

[VValleyEV]

Actually I like 10 to 15 PSI for smoothing out dirt roads.
I don't know market strategies but I do know about rockets and driving over big rocks
This is also why the Model P needs range, my backyard had a lot of dirt roads to camp and travel on.

Yup we are drifting OT a bit, but there is relevance to EV Pickup Trucks and Tesla in particular:

EVs will make terrific off-road vehicles, and to focus on that market including boulder bouncing:

• The vehicle will want some sort of on-board compressor option so you can easily raise/lower your tire pressures accurately.
• AWD with separate electric motors front and back should be superior to 4wd with single ICE motor, but an model with 4 electric motors, one per wheel like the Rivian, might be worth some serious extra $$$

All this off-road stuff may not be necessary at all for the primary US pickup market, at least at first. But having gotten used to a Jeep doing some amazing boulder climbing ...

 

[KarenRei]

I can’t seem to find the source now, but I read an interview with Rivian CEO saying they have done a drop test of the Rivian BEV pickup from four feet onto a pointy boulder, and it survived without damage. So it seems doable, and this level of durability seems to exceed that of ICE pickups that have lots of exposed stuff. I have a Jeep that has aftermarket underbody armoring, seems like a BEV skateboard would be easier to armor up.

The problem is how Tesla deals with rocks / debris at present - it's very much an "urban solution". The pack itself isn't that strong - instead, they have (at least in S/X) a titanium bar that sticks down further than the pack, with the idea that the bar will either deflect or crush anything in the path. Which is fine for when you're driving on a road (even a gravel road) that's relatively flat and dealing with relatively small pieces of debris. But if you're crawling over rocks, and you come down on a rock, that bar isn't going to do anything for the pack. The pack itself has to be armoured.

But like you said re: Rivian, it's perfectly possible to do. I was just pointing out that Tesla does not do it at present, and it will be important to do for the pickup. An "urban pickup", style and form over function, would be a massive disappointment.

 

[KarenRei]

I wish insurance companies and the legal system would penalize people more for driving vehicles that are more dangerous to other drivers/pedestrians.

Start with the fact that semi trailers in the US for some completely inexplicable reason are not required to have side crash guards.

 

[Dwdnjck]

You can pretty much guarantee that Anton’s buddies at Fast Lane Cars will break the model Y they just bought and intend to take off-road. And it will probably be totaled.

 

[printf42]

Cell manufacturing/assembly is the core of a cell manufacturers' business - this is their IP. Most do not make the components themselves (but they would often own the cathode/anode chemistry IP). Cell assembly lines which can make millions of cells at rapid speed, at high quality, with few staff and low cost is not a simple task.

From what I saw, cathode/anode can easily cost 50% of the final cell, of which about 2/3 is raw material, rest 1/3 is processing cost(for NCA), so about 15% cost of the cell is cathode/anode processing.
While cell assembly costs sit at about 4% of a cell.

These numbers could be off in case of GF1 at 35GWh scale, but I imagine not by much relatively.

So, I disagree the core competencies of a cell manufacturer is in assembling cells.

 

[Fact Checking]

You can pretty much guarantee that Anton’s buddies at Fast Lane Cars will break the model Y they just bought and intend to take off-road. And it will probably be totaled.

Something something insurance fraud?

 

[JRP3]

But if you're crawling over rocks, and you come down on a rock, that bar isn't going to do anything for the pack. The pack itself has to be armoured.

Since most stock trucks aren't really setup for serious rock crawling I'm not sure why Tesla's would need to be.

 

[brian45011]

The more I think about this, the more I'm convincing myself this acquisition is very likely to happen, at least for the GF1 US business (the Japan S/X factory maybe unlikely).

Panasonic has invested $1.6bn in GF1 capex. I guess it also has cumulative cash operating losses at GF1 of around $0.5bn? It may have invested some working capital too, let's say $0.2bn? (Tesla payables to Panasonic will be higher, but Panasonic has its own payables to suppliers). Then the remaining value in this business is the staff experience and manufacturing IP. The value of this part is very different for Tesla vs Panasonic. Assuming Panasonic knows Tesla plans to make cells for Model Y and future expansion in-house, it knows it is never going to get the scale to make its GF1 business significantly profitable - so discounted cash flow value of this IP is actually very low to Panasonic (unless they think they can sue Tesla for IP theft). For Tesla however, Panasonic's GF1 staff experience and parts of their manufacturing IP are likely very valuable (though parts of the IP will probably be substituted out with products from Tesla's R&D lab), particularly given the scale of its future ambitions and how much this acquisition could lower execution risk with cell ramp for Model Y.
Tesla looks in the stronger negotiating position here to me. Tesla will likely just go it alone with cell production if Panasonic don't sell up (possibly at risk of some lawsuits). If Tesla offers $2.5-3bn for Panasonic's GF1 business I can see Panasonic accepting (around 15% of Panasonic's market cap for a business with annualised EBIT at more than negative $200m with no obvious prospects for significant future cash generation).

If this is part of Tesla's plan, then they want to get the acquisition closed before they start to ramp their own new cell capacity for Model Y and before their March battery investor day. Given M&A can take time to close, then a deal announcement could be due very soon. Of course only if i'm not just going crazy with meritless speculation!

The Panasonic-Tesla agreements at GF-1 are a complex structure that is as much about Panasonic financing Tesla's acquisition of the production equipment as it is about a supplier-purchaser relationship. Also, Panasonic has the supply chain agreements to source the raw materials. Where does Tesla get the "$2.5-3bn"?

 

[jerry33]

Start with the fact that semi trailers in the US for some completely inexplicable reason are not required to have side crash guards.

It's not inexplicable. It's just that no sufficiently powerful politician has lost family members to this, and the trucking industry lobbies against any safety measure that might cost them money.

 

[sparcs]

The Panasonic-Tesla agreements at GF-1 are a complex structure that is as much about Panasonic financing Tesla's acquisition of the production equipment as it is about a supplier-purchaser relationship. Also, Panasonic has the supply chain agreements to source the raw materials. Where does Tesla get the "$2.5-3bn"?

isn't Tesla also involved in sourcing raw materials like lithium?

I have seen a few articles over the last couple years with these agreements and none of them mention Panasonic. Here are some examples from Electrek:

Outline - Read & annotate without distractions

Outline - Read & annotate without distractions

 

[ReflexFunds]

From what I saw, cathode/anode can easily cost 50% of the final cell, of which about 2/3 is raw material, rest 1/3 is processing cost(for NCA), so about 15% cost of the cell is cathode/anode processing.
While cell assembly costs sit at about 4% of a cell.

These numbers could be off in case of GF1 at 35GWh scale, but I imagine not by much relatively.

So, I disagree the core competencies of a cell manufacturer is in assembling cells.

Cathode and anode cost has become a higher and higher % as cell manufacturers have made huge breakthroughs (through R&D and experience) in the manufacturing process, but manufacturing & quality testing is still a huge part of the cost.

A lot of R&D and testing is needed to optimise the cell design, component chemistry, combination of components etc - and this is generally done by the cell manufacturer. But the cell company often doesn't manufacture the sub components themselves. Often it would be contracted to third parties to manufacture to a prescribed design and specifications. This is why there are huge cathode manufacturers like Umicore supplying cathodes to the cell industry.

Those cell cost breakdowns are never accurate, or sometimes ignore scrap or depreciation etc which makes no sense when it is machines doing much of the work. For illustration, here is a very different cost breakdown which is also likely very inaccurate.

 

[Prunesquallor]

Jesus that might be ugliest front I’ve ever seen on a production car.

 

[ReflexFunds]

The Panasonic-Tesla agreements at GF-1 are a complex structure that is as much about Panasonic financing Tesla's acquisition of the production equipment as it is about a supplier-purchaser relationship. Also, Panasonic has the supply chain agreements to source the raw materials. Where does Tesla get the "$2.5-3bn"?

Tesla have $6bn liquidity on balance sheet, strong free cash flow, a huge market cap and easy access to capital. As i said though, i'd expect any acquisition to be a mix of cash and equity.

Tesla has started to put its own raw material agreements in place with some deals even public already (Ganfeng for lithium etc), but obviously it needs to scale this further anyway for its own in-house cell manufacturing whether or not they buy Panasonic out at GF1.

The agreement was never about Panasonic financing Tesla's equipment. Tesla would have gone to a bank or a capital lease company for that. It was about Panasonic's cell expertise and Panasonic installing its own cell equipment in Tesla's factory. The agreements are just the complicated legal framework they decided was best to describe the supply relationship and to allow Panasonic to essentially rent space in Tesla's factory. The legal details of what's rented/owned and accounting treatment etc is not really relevant to this basic goal.

 

[dww12]

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BCGs in the front, mom jeans in the back.