Tesla Inc. (TSLA) has long touted its lead in battery technology as a key advantage over all other automakers seeking to enter the rapidly growing electric vehicle market. A key feature of Tesla’s claimed battery superiority manifests in the stated range of its vehicles, which appear to outclass those of most rival offerings. However, this apparent leadership has come under increasing scrutiny of late.
Making matters even worse, Tesla’s long-time battery development and manufacturing partner, Panasonic Corp. (TSE:6752), now appears to be distancing itself from the EV company.
Losing the favor of as high-profile a technology and manufacturing partner as Panasonic could prove devastating to Tesla’s carefully cultivated investment narrative. Thus, the causes and consequences of Panasonic’s recent moves should be of interest to anyone with a stake in Tesla.
Tesla battery tech blues
Tesla’s battery bonafides suffered a considerable blow in February thanks to a report published by Edmunds, an esteemed automotive research company. Having conducted rigorous independent range tests of every Tesla vehicle model currently in production, Edmunds found that not a single one could meet its rated mileage in real-world driving conditions.
Thus far, bullish analysts and commentators have largely waved off the criticisms of Tesla’s battery technology claims. Many continue to cite the imminent arrival of Tesla’s 4680 batteries, which promise greater energy density, efficiency and cost-effectiveness than any EV battery architecture currently in use. CEO Elon Musk unveiled the 4680 battery during the company’s highly publicized “Battery Day” event in September 2020. As EV industry website Electrek reported at the time, Musk’s claims about the new battery were nothing short of revolutionary:
“Production and efficiency increases was a recurring theme in the presentation, but the guiding topic was cost reduction, on every level. Tesla today laid out how they had looked to improve cell design as above, cell manufacturing, anode materials, cathode materials, and vehicle integration – Each elemental to the envisioned increase in range of up to 54% and simultaneous reductions in kWh price by 56% and the investment per GWh by 69% as mentioned above.”
New tech needed to deliver on old promises
According to Musk, the performance improvements resulting from the 4680 battery architecture would be critical to the viability of a number of its ongoing vehicle development programs. Commercial production of the Tesla Semi truck, for example, has been delayed repeatedly since its unveiling in November 2017. The same has been the case for the next-generation Roadster, which was announced at the same time as the Semi.
In order to meet their promised performance specifications, Tesla’s forthcoming vehicle models will need better batteries than are currently available. The 4680 battery could hold the key, provided Tesla is able to produce them efficiently. Unfortunately, it remains far from certain that this is actually achievable, at least in the relative short term. Indeed, while Musk claimed during his Battery Day talk that Tesla’s 4680 batteries were on the cusp of entering volume production, the timeline has since been revised substantially. In April, Musk admitted that the new battery architecture was still in development, with commercial production not likely for at least another year.
Even Tesla’s revised timeline may prove too ambitious, given the remaining hurdles facing the 4680 battery architecture. With the new battery still undergoing design revisions, the challenge of manufacturing them at scale has yet to be faced. As investor and commentator Gustavo Litovsky pointed out on June 24, the translation of a new battery from the drawing board to the factory floor can be fraught with difficulties:
“[Tesla] put together some generic ideas that should work in theory. But the “making it work” in real life manufacturing is the actual secret sauce.”
A not-so-special relationship with Panasonic
While public discussion of, and reporting on, the development of 4680 batteries can often seem to suggest that it represents a proprietary technology, this is simply not the case. Tesla does not actually have a monopoly when it comes to production of these larger, denser batteries. In fact, Panasonic is already exploring the viability of 4680 battery manufacturing independently of Tesla, as Bloomberg reported on June 24:
“Panasonic is working to set up a prototype production line to test 4680 batteries — a next-generation lithium-ion cell touted as the key to unlocking cheaper and more ubiquitous EVs. If Panasonic looks to be capable of churning out better performing cells more efficiently than rivals, it will make a ‘large investment’ in their production, according to [Panasonic CEO] Kusumi. Panasonic will seek to supply them to Tesla, as well as other automakers.”
What this means is that, even if 4680 batteries enter commercial production at scale in the near future, Tesla will likely be just one among many potential manufacturers. In other words, what was once touted as a breakthrough technical advantage for Tesla over its EV rivals may end up being just another commodity battery product.
Panasonic has made it quite clear that any 4680 battery production it undertakes will be geared to meet the demand of a multitude of automakers, not just Tesla. That makes sense in the context of Panasonic’s evolving battery production strategy, which has increasingly sought to reduce reliance on Tesla in favor of a more diverse customer base. Panasonic’s outgoing CEO Kazuhiro Tsuga highlighted this strategic shift during a March interview with the Financial Times:
“At some point, we need to graduate from our one-legged approach of relying solely on Tesla... We are entering a different phase and we need to keep an eye on supplying manufacturers other than Tesla.”
The ties that no longer bind
The Tesla-Panasonic partnership suffered another public blow on June 24. In a report published after the market close, Nikkei revealed that Panasonic had dumped all of its Tesla stock late last year, a stake it had held since 2010. The sale was undoubtedly a boon to Panasonic’s 2020 financial results, as CNBC’s Lora Kolodny reported on the heels of the initial Nikkei story:
“Panasonic bought 1.4 million Tesla shares at $21.15 each in 2010, for about 2.4 billion yen ($21.65 million). The stock is now worth $679.82 apiece. The windfall likely accounts for much of the 429.9 billion yen in ‘proceeds from sale and redemption of investments’ in Panasonic’s cash flow statement for the fiscal year that ended in March, the Nikkei said. In the prior year, that figure was 49.13 billion yen.”
The stock sale raked in billions of dollars, which Panasonic can now deploy toward other investment initiatives and objectives. While Tesla’s stratospheric share price likely had a not inconsiderable impact on the decision to sell, Panasonic told Nikkei that it did not foresee any material change to its ongoing partnership with Tesla, which includes shared operations at the EV company’s Nevada battery plant.
By divesting its Tesla stake, Panasonic has done more than rake in a windfall profit. It has also severed a material connection that had aligned its interests with Tesla’s. Specifically, as a substantial shareholder, Panasonic had an economic interest in supporting Tesla’s efforts to demonstrate profitability over the past year. Like many other Tesla suppliers, Panasonic proved remarkably willing to cut the EV maker a considerable amount of slack. This was particularly evident during the protracted rollout of the Model 3, Tesla’s first mass-market vehicle. As the Model 3 production ramp stalled out well below Tesla’s early projections, Panasonic was among the suppliers who agreed to cut prices and push out purchasing obligations in order to keep their EV manufacturing partner afloat.
In giving Tesla a break on price and volume, Panasonic was forced to eat significant costs, resulting in hefty losses for the conglomerate’s automotive division in 2019. Yet even as Tesla ramped up production in 2020, Panasonic still struggled to make its battery business profitable, which once again ended up in the red. Thus, it should perhaps not be considered strange that, despite having unloaded its Tesla position months prior, the news of the stock sale still precipitated a positive market reaction from investors. According to Brad Munchen, a hedge fund manager largely focused on the global automotive industry, the positive reaction was the result of Japanese shareholders’ growing discontent with Panasonic’s relationship with Tesla:
“Japanese investors get excited whenever Panasonic shows signs of de-attaching itself from Tesla. It's seen as a ‘blemish’ on [Panasonic’s] reputation.”
My take
Panasonic has been talking about growing its battery division beyond reliance on Tesla for a while. Now, with its financial incentive to help Tesla make its quarterly profit numbers significantly diminished, Panasonic’s willingness to make costly accommodations is likely to be reduced, in my assessment. With a rapidly growing universe of potential EV clients to choose from, I see little incentive for Panasonic to go out of its way to support its long-time partner.
If Panasonic’s stock sale portends a less charitable attitude toward Tesla, as seems likely given the former’s stated realignment on EV strategy, it could mean trouble for Tesla. After all, the EV maker has struggled to break even on an operating basis despite the accommodations made by its suppliers, especially Panasonic. If Tesla can no longer rely on key supplier rebates to keep it in the black, I see little reason for optimism in the name.
Disclosure: Author is short Tesla.
