So much for the cost advantage, Daimler (XTER:DAI, Financial) is joining Tesla Motors (TSLA, Financial) in the race to scale energy storage. German Chancellor Angela Merkel is set to join a ceremony to open a 49.4-acre battery factory in Kamenz, Dresden.
Markus Schaeffer, Daimler's head of production, said by 2020 the company would have one of the largest battery plants in the world. The company might have a competitive edge here as the factory is situated in Saxony. The German state has Europe’s largest deposits of lithium, a key ingredient for making litium-ion batteries. As big players scale up their manufacturing capacities, costs are set to go down, leading to commoditization of batteries. It will be improbable to find a competitive advantage in battery costs. This does not bode well for Tesla. Battery cost advantage will soon be lost as other manufacturers scale up. Daimler is inaugurating its new factory to supply batteries for Mercedes’ electric car ambitions. Mercedes plans to bring 10 new models to the market over the next nine years. BMW Group (XTER:BMW, Financial) is already producing its i3 and i8 models in Leipzig.
Most corporations were not invested in electric cars in the past as it did not make economic sense. Tesla has been in the red for the past decade. As there is now more visibility regarding the future of electric cars supported by increasing demand and declining cost factors, manufacturers are investing for the future. Daimler’s factory ambition is just one example, others will follow suit.
Europe’s battery ramp means lower costs
Planned development of battery factories is expected to increase across Europe. LG Chem Ltd. (XKRX:051910, Financial) is building a factory in Poland, with a production capacity of 229,000 electric vehicle batteries a year. Northvolt is ambitious to build a 32 gigawatt hours, as compared to Tesla’s 50 gigawatt hours, factory in Sweden; Samsung SDI (XKRX:006400, Financial) is also building a factory in Hungary that is expected to start production during the second half of 2018. With such a ramp-up across Europe, battery costs will come down 43%, notes Bloomberg, making electric cars cost competitive with internal combustion engine (ICE) vehicles.
Germany holds national competitive advantageÂ
Statistically, Germany holds the national competitive advantage in the automotive industry. Factor conditions and supporting industries are well integrated. That is why we see some of the largest auto manufacturers are based in Germany. As German manufacturers are getting serious about electrification of vehicles, this poses a significant threat to Tesla’s market. Volkswagen AG (XTER:VOW) is set to invest more than 9 billion euros ($10.1 billion) in different driving technologies. The thesis of strong competitive pressure holds true for Tesla motors. It is just a matter of time before big manufactures catch up.
Cost reduction time frame?
Battery costs are not expected to come down in a day.
“As battery costs fall and their energy density increases, we could see cheaper battery-electric cars than their fuel-burning equivalents by 2030,” said Nikolas Soulopoulos, an analyst with the London-based research arm of Bloomberg LP.
According to ADL Analysis, the total cost of ownership (TCO) differential between battery electric vehicles (BEVs) and internal combustion engine vehicles (ICEVs) will narrow for new vehicles in 2025. Note the cost differential will narrow; BEVs will not surpass ICEVs in terms of cost reduction by 2025. Unless EVs go mainstream, Tesla will find it difficult to generate cash from operations. Additionally, going mainstream is around 10 years away, as forecasted by Bloomberg and ADL.
Surplus supply will hurt vertically integrated EV manufactures
An exponential increase in the number of factories is not good for the industry; the scenario can mimic what solar panel manufacturers have faced for years. An increase in the number of factories can result in a supply surplus, leading to a price decline not offset by cost savings from operating at full capacities. As a result, prices will go down faster than cost savings from ramping up. From an EV adoption perspective, this can help. But from a supplier’s perspective, it means eroding margins. An increase in the number of factories with nominal capacities is not good for battery suppliers. On the other hand, the increase can benefit EV manufactures relying on outsourcing. They can simply shift the margin pressure on to the supplier. In contrast, vertically integrated businesses like Tesla are exposed to the margin pressure.
Final thoughts
Tesla’s “economic moat” of having a competitive advantage in terms of scale and IP will not hold much longer. Daimler will be using own batteries, produced at scale. Other carmakers, given their resources, will come at parity with Tesla in terms of battery costs going forward.
Increasing interest in battery production bodes well for the adoption of electric vehicles (EVs). Battery prices are set to go down going forward, enabling mainstream adoption of EVs. Battery costs might not come down as fast as price decline amid exponential growth in the number of factories, however. This will hurt battery manufacturers and vertically integrated battery EV manufactures.
Increasing the number of factories poses a significant threat to Tesla amid pricing pressure. Germany’s interest in EVs means quality competition amid the country’s national competitive advantage. Given the current price, persisting losses will take a toll on the stock price sooner or later. Tesla is a sell with the absence of a strong economic moat, history of losses and strong competition ahead.
Disclosure:Ă‚ I have no material positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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