Posted on July 19, 2019 by Shankar Narayanan
Tesla builds batteries...
Above: Tesla's Model 3 (Instagram: pichutesla)
...and it's building a lot of them - 95,200 (car) battery packs on the road in the most recent quarter, if we strictly go by the number of cars delivered. A small uptick from here will allow Tesla to build nearly half a million battery packs in a year. If things go according to plan and Tesla starts rolling out cars from Gigafactory 3 in Shanghai, an annual capacity of half a million battery packs will quickly transition the company to the next level.
That's a lot of batteries from a single auto manufacturer.
Tesla’s current battery manufacturing capacity has already reached critical mass as it accounts for nearly an eighth of all EVs sold in 2018. According to BloombergNEF, more than 2 million electric vehicles were sold in 2018, and sales are expected to increase to 10 million by 2025. By 2040, BloombergNEF expects 57% of all passenger vehicle sales and over 30% of the global passenger vehicle fleet to be electric.
Above: Forecasting the growth of electric vehicles (Source: BloombergNEF)
Tesla delivered nearly 250,000 electric vehicles in 2018, accounting for 12.5% of Global EV sales. Don't forget, this occurred when their cheapest model, the Model 3, was only available in North America. Tesla just started shipping the Model 3 to Europe and China in 2019.
As global EV consumption increases, there is only one automaker that stands out in terms of capacity to build batteries at scale, and that is Tesla.
Right now, is there any other automotive manufacturer in the world who can build half a million car battery packs in a year? How long will they take to get there and how much money will these legacy automakers need to invest? If it takes them two years - and if they start today - where will Tesla’s capacity be by then?
Above: Tesla's fleet is growing rapidly in China (Twitter: Jay in Shanghai)
Then again, Tesla lacks the size of legacy automakers. That could be a contributing factor hurting Tesla’s bottom line. After all, Tesla has barely been profitable since the time the company rolled out its first Roadster in 2008.
As EV adoption increases around the world, as predicted by BloombergNEF and validated by the number of automakers announcing their plans to build electric cars, size will soon begin to help Tesla while hurting its competitors.
Battery packs are the most expensive part of an electric car and they will continue to dominate the overall cost structure of any electric car maker for the foreseeable future. Tesla’s increasing scale will exert a lot of downward pressure on battery costs for the company.
Above: From Tesla's original design of its Model S battery pack, modules, and cells, the company has already shown significant improvement/changes with the Model 3; and these changes will continue (Infographic: South China Morning Post)
As Tesla’s margins improve with increasing battery production, competitors will have to accept slimmer margins as most legacy automakers are just embarking on the EV path now. Big Auto must invest billions of dollars to build EV capacity that will allow them to take on a fast-growing Tesla, and in exchange they will have to accept lower margins until their production reaches scale.
Simply put, the competition will now have to go through the same financial pain that Tesla went through if they want to stay relevant in a future where EVs are set to dominate.
Author Bio: Shankar Narayanan is the editor of 1redDrop.com. Has an MBA from Kent State University and an engineering degree from Madurai Kamaraj University. He has been an active contributor to top financial sites like SeekingAlpha and GuruFocus, and has a penchant for talking business, finance, and technology.