After listening to the Q3 Tesla earnings call, there was one thing I noticed that Elon repeated 3 times, and it was the first time I’ve heard him say it. It is that Tesla plans to make a 1,000 GWh of batteries a year, vertically integrated, domestically. Let’s break down what that means:
- Tesla just started making battery cells recently and it already plans to make more than the rest of the manufacturers in the industry combined. Some have been doing this for 30 years, some are new to the game like Tesla.
- Vertically integrated means that Tesla will:
- They were confident that they will be able to capture all of the incentives in the IRA for building batteries, including:
- The most well known and discussed $7,500 per car available for consumers — which, if Tesla sold 5 million cars a year domestically, would be $37.5 billion a year to consumers.
- $35 a kWh for cell manufacturing — times a billion kWh could be another $35 billion a year.
- $10 a kWh for pack manufacturing — times a half billion kWh (assuming half batteries go to energy storage and half to vehicles) is another $5 billion a year.
- 30% to 50% energy storage tax credit for 10 years — almost guarantees large growth in this market.
Elon Musk also mentioned that they think they are still on the path outlined at Battery Day to achieve a battery cell cost of $70 per kWh without any of the above subsidies.
Furthermore, President Biden’s Bipartisan Infrastructure Law has direct grants for interstate charging which Tesla will likely bid for.
What Does This All Mean?
Let’s start with the fact that Tesla’s cost to produce a Model 3 or Y was around $36,000 last year and has been falling because of innovation but rising due to material cost increases, so maybe flat overall. On the investor conference call, they were optimistic that overall costs will fall next year. If Tesla is going to grow sales dramatically in 2023 (as Austin ramps up production), they need to get the cost to the consumer down. Before the Inflation Reduction Act of 2022 was passed, and even after it was passed but before Tesla announced today that they are confident they will be able to qualify for the provisions, I thought Tesla would need to introduce the Model Y Standard Range and reduce the price of the Model 3 a little to grow sales. They are making good enough margins that they could afford to do this to stimulate demand and then use innovation to reduce costs to recover the lost margin over time.
Now, I think the effect of the $7,500 credit will make it unnecessary to reduce the price of the Model 3 this year. I do think they will want to once again release the standard range Model Y in the US, as soon as they ramp Austin to the point that they have reduced the waiting time to just a few weeks.
Elon said two-thirds of the batteries will use iron rather than nickel in the cathode, with magnesium as a wildcard. This also suggests Tesla will reintroduce the standard range Model Y, since, to date, only standard range vehicles use iron-based batteries (although, that could change).
The “Model 2” (“Model C?”) Returns
Tesla is much smarter these days about not Osborning existing sales by announcing the coming availability of a better car when nobody can buy it anyway and it could cause demand for Tesla’s existing cars to weaken. That being said, they did say that they have a design for a smaller Tesla that costs half as much to build (~$18,000) that they aren’t announcing today. I think that announcement could be in 2023 or 2024. Had the IRA not been passed, they might have needed that car by 2024 to continue to drive demand (assuming regulators haven’t approved the RoboTaxi by then).
All of this suggests to me that with the sudden effect of the $7,500 tax credit hitting in less than 3 months, sales in the US will skyrocket. As Tesla increases supply to meet demand, it will eventually lower the prices of its cars as their costs drop. After a year or two and assuming increased competition from other manufactures (always a threat, but so far, it has been more bark than bite), they will announce the next-generation platform, estimated to be priced at ~$30,000, which I call the Model 2 (but Elon has said will not be named the Model 2).
I last wrote about this car almost 3 years ago. Would it look like a shrunken Model Y hatchback/crossover? Or more like a Cybertruck? Or will it be a new design, unlike anything every produced by Tesla? Before the Cybertruck announcement, most people (including me) thought all Teslas would look about the same. The Model S, 3, X, and Y all resemble each other so much that many people can’t tell them apart. But now we should have learned our lesson and realized that every vehicle will be designed to meet its goals, and if that mandates it look different than Tesla’s existing cars, then so be it.
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV], and Hertz [HTZ]. But I offer no investment advice of any sort here.
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Source: Clean Technica