As Tesla's share price comes under pressure, Part 1 of a two part series on Electric Vehicles details how manufacturers globally will see price falls for its main power source - batteries - moderate, with subsequent effects on their bottom line and broader car trends globally, including Australia. 

Demand for electric vehicles (EVs) has been rapidly growing as their prices fall and their range and quality improve. Mainstream consumers and policy makers are increasingly viewing EVs as viable green alternatives to traditional internal combustion engine (ICE) cars.

There are pros and cons of electric motors – they have the benefit of 80-90% energy efficiency compared to 30-35% for current petrol alternatives - less energy is wasted as heat, and acceleration is faster. There are also fewer subsystems in an EV that, in theory, means it requires less maintenance (battery replacement excepted, when reach end of useful life). Recharging EVs is also cheaper than refuelling gasoline, particularly in off-peak hours.

The energy density of gasoline, however, is >50x that of the lithium ion batteries available today. On a practical level this means that despite the higher energy efficiency of the electric motor, the size and weight of batteries needed to deliver sufficient range for EVs keeps the initial purchase price materially higher than similar class traditional cars.

However, the price of batteries has been falling significantly up to now (1):

This trend has fuelled the belief in the market that EVs will rapidly displace sales of internal combustion engine cars, and that traditional automakers are behind the curve in producing EVs as they attempt to protect their legacy profit pool.

We too believe average battery prices should continue to fall in the short term given recent commodity price declines of key raw materials used in battery making and as automakers, currently paying high battery prices due to low volume, receive scale benefits as they ramp up production.

However, our research leads us to believe that extrapolating this trend into the medium to long term future is likely to overestimate the prospective battery price declines. There are several key obstacles, particularly for automakers already paying prices at the low end of the range for batteries:

1. The raw material cost component now makes up 70% of the cost of battery cells, leaving less remaining room for cost reductions. New battery technology is being developed that will lessen the dependence on cobalt and lower costs further, but there are still technical challenges to overcome because the mix of raw materials cannot be easily shifted without affecting performance or stability of the batteries.

2. The vast majority of the battery cost reductions have come from producing batteries in greater volumes and achieving cost efficiencies from scale. Tesla is one of the furthest along in scaling the production of EVs (2) and is already paying battery prices reflective of efficient scale production of batteries based on public statements by Elon Musk.

3. In a bid to secure their position in a rapidly growing market, battery makers have discounted on pricing to lock in contracts with automakers in recent years. Panasonic, for example, is still losing money on its contract with Tesla and we expect the company to retain more of future production cost declines as margin to themselves to regain a more equitable split of the economics in their joint venture.

With the pace of battery price declines set to slow beyond the next year or two, this makes the industry and investment case more reliant on the tax credits and purchase subsidies as a way to bridge its purchase cost competitiveness to equivalent traditional ICE vehicles, to spur adoption.

Where subsidies have expired or been withdrawn, EV demand has fallen sharply in overseas markets such as Hong Kong and Netherlands. A major reason why we initiated a short position on Tesla via options earlier this year was because the $7,500 Federal tax credit for Tesla buyers in USA was due to expire (it halved on 1st January, and ends completely by the end of 2019). The market was expecting rapid growth and margin expansion but we concluded neither is likely. The story is playing out as we speak.

Clement Tseung

Investment Analyst

PM Capital

  2. Langan, C., & Vladimirov, G. (2018). Tesla Cells cheaper than competitors; raising EPS & Price Target

Paul Jacobs

Clearly you're in the minority regarding battery price reductions ending soon. Sounds like what the solar analysts have been saying every year for what..10 years now.

clement tseung

Hi Paul, Battery price reductions not ending soon, they will continue to go down, but at a slower pace. We will need new technology, primarily in improving energy density of batteries to lower the prices further as production scaling will reach a point of diminishing returns. I have not looked at solar as closely as batteries, but from my understanding the cost of solar modules have been going down at the same pace at about 9-10% p.a. but 10 years ago the module itself was about 80% of cost of total solar farm costs whereas now is down to about 40%. The other 60% of the cost of solar farm is made up of land, labour, cables, wires, etc where there is no decline curve. So total system cost reductions for solar have also slowed significantly because of that dynamic. Clement

Blair Perrin

The other underlying threat to falling battery prices in the near term is the metals themselves. The world may need 10~20 years of intense exploration and mine development, in addition to new mining techniques to keep up with potential demand. And that would indicate higher prices to incentivise miners to gather the necessary resources; including Millennial' s who don't see mining as a viable career, and go find the new mines to replace some tired old ladies, like Bingham Canyon