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Tesla Motors Inc (TSLA) Drives Battery Costs Lower Than Most Optimistic Forecasts

Tesla Motors Inc (NASDAQ:TSLA)

Tesla Motors Inc needs to drive down the cost of Li-ion power packs if it wants to release a $35,000 car in 2017. Some recent research says that the firm is getting there more quickly than forecast, but it looks like it’s missing the big picture.

Tesla Motors Inc battery cost

Ars Technica reported on research from Björn Nykvist and Måns Nilsson this morning. The research, which was published last March, says that the costs of EV batteries could hit the key $150/kWh level some time in the next decade. They haven’t figured Elon Musk, or Giga Factory 1, into their math.

Tesla Motors races ahead on battery prices

Nykvist and Nilsson say that the “cost of battery packs used by market-leading BEV manufacturers are even lower, at US$300 per kWh.” That’s not true in Tesla Motor’s case and it’s the reason that the firm is so far ahead of the rest of the market.

Two years ago Tesla Motors  said that it had already beaten the $250/kWh mark. CTO JB Straubel said, in an interview with Technology Review, that battery costs were “way less than half, actually, less than a quarter in most cases.” That puts the estimated cost of the cells in a Tesla Motors 85kWh Model S at just under $240.

That piece was published back in 2013, long before the Gigafactory began its testing phase. It’s was also before Tesla Motors got in touch with key Li-ion expert Jeff Dahn and made a deal to lower the unit cost of batteries in its EVs.

Getting costs below $200/kWh

It’s likely that Tesla Motors battery costs are below $200 per kWh right now, but the firm doesn’t reveal that closely guarded secret too easily. Power cells are the area in which the firm is way ahead of other EV makers. It wants to keep that success to itself for the time being.

Navigant Research’s Sam Jaffe is certain that Tesla Motors is below that level, and he reckons the firm has been below it for quite a while. In an October 2014 UBS report on EVs, which focused on battery costs, Jaffe said that Panasonic is selling Tesla power packs at a rate of $180 per kWh.

Tesla Motors sells the Powerwall at around $350 per kWh, but that contains a margin so that the firm makes money from the project. When it makes power packs for its own cars, costs are much lower.

Tesla just became the top EV-seller in the US, beating out Nissan, and its cell-making power, among other things, are what got it there. The research from Björn Nykvist and Måns Nilsson may be giving less weight to the costs at Tesla Motors in order to focus on the wider market, but Tesla is the one driving battery costs lower right now.

Expanding the Gigafactory

Björn Nykvist and Måns Nilssonsay that $250 per kWh is the level at which EVs will truly compete with ICE cars on price. If Tesla Motors was getting power at $180 per kWh last year, the firm’s Gigafactory will get it below that level before too long.

Tesla Motors says that Gigafactory 1, which may become the biggest building in the world once it’s up and running, should drive the cost of its cells down by 30 percent. If the $180 per kWh number is right, and Tesla Motors may have improved it since Mr. Jaffe made his guess last year, a 30 percent drop would lower the cost to $126 per kWh.

Tesla has made its Gigafactory plans open to other firms to use, and it hopes that they will follow in its footsteps. The higher the supply, the lower the cost across the market and that’s good for Tesla in the long run. The firm says that its own building should make 35 GWh/year of cells for cars and 50 GWh/year of battery packs per year in 2020.

Gas costs aren’t all that concerning

The International Energy Agency says that $300 per kWh is the level needed to make EVs compete with ICE cars on an even cost basis. That forecast was made in 2013, long before US oil production dropped gas prices.

This week a deal with Iran saw oil prices hit another downtrend, a move that might make some Tesla Motors shareholders nervous. Lower gas costs means less reason to buy a Model S or Model X, despite what Elon Musk says about the $10,000 flat savings on all cars.

Gas costs have sent the “level playing field” cost of a Tesla car’s cells lower, but it may not matter too much to the firm in the short term. Elon Musk still sells every car his firm makes, and sometimes he even sells them twice.

Falling gas prices were one of the reasons given for an apparent slump in demand for the Model S last year, but the effect failed to last longer than Wall Street dreamed it up.

David Whiston, an analyst with Morningstar told Bloomberg last December that “People who are buying Tesla today don’t really care if gas is cheap or expensive. They want it because it’s a status symbol or for the performance or they are very eco-conscious and just don’t want to consume fossil fuels, regardless of what they pay for the fossil fuels.”

For the time being those that are buying the Model S and planning to buy Model X aren’t doing so to avoid high gas prices, they’re doing it so that they don’t have to visit gas stations.

The type of people paying for a Tesla might change when the Model 3 arrives, but Tesla should have achieved lower cell costs by then on the back of the Gigafactory’s volumes.

Guessing Tesla Motors costs

Tesla Motors has never offered the clearest view on its inner workings in its earnings reports, despite the transparent measures the firm has taken in other areas. It’s not really clear how much the firm is paying per kWh of power in a Li-Ion pack, but it’s likely that its costs are lower than other players in the market.

All of this is guesswork, but some of it is more informed than others. It’s unlikely that Tesla Motors is still stuck above the $250 kWh level for batteries, and it’s likely that the firm has gotten those costs down to below $200.

Until Tesla Motors starts to sell batteries en masse, we won’t have a good look at the true cost of the cells. Those sales numbers may come sooner rather than later. If the Tesla Powerwall project grows and the firm reports it by itself in yearly reports, Wall Street will be able to get a gross margin and the cost of making each cell.

Björn Nykvist and Måns Nilsson said that their March report showed that EV costs would fall faster than thought, but they didn’t factor in the sheer power of Tesla Motors. Though we don’t know what Tesla is paying, we can be pretty sure its far less than the $300 kWh that their research pegs cross-firm mean costs at.

Even hopeful research about the future of the EV hasn’t grasped the power of Tesla Motors. That’s a great sign for the firm going ahead, but we won’t know how much Tesla is paying until Elon Musk and whoever replaces Deepak Ahuja as the firm’s CFO decide to tell us. Given the secrets the firm keeps, we might be waiting a long long time.

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