As more and more companies bring new electric vehicles to market, investors are wondering if Tesla Inc.’s (TSLA, Financial) growth will be negatively impacted by the increased competition.
As Russia continues its invasion of Ukraine, another stumbling block has appeared for the EV industry as a whole, not just Tesla – oil and nickel prices are skyrocketing.
Global supply chains are still heavily dependent on oil, and yes, that includes the supply chains of EV companies. Meanwhile, nickel is a key component of long-range EV batteries. While some lower-end EV models use lithium iron phosphate (LFP) batteries, no nickel needed, these batteries have much lower energy density than their nickel counterparts, resulting in larger batteries and limited performance.
Russia is the world’s third-largest supplier of both oil and nickel, and with economic sanctions on Russia cutting off these supplies from the Western world, they have both become much more difficult and expensive for manufacturers to get their hands on.
This situation has put the spotlight on supply chain strength as a key component of the success of any EV company. The companies that can secure the necessary raw materials at the best prices are the ones that have the best chance of growing their EV sales despite the challenges.
Perhaps it’s not too surprising that Tesla, one of the first-movers in the consumer EV space, seems to be taking proactive steps to secure the strength of its supply chain and stay ahead of the curve in terms of EV production. In fact, you could almost say this is what Tesla does best; its success so far has largely depended on its ability to scale up rapidly and efficiently.
Tesla’s proactive approach
Tesla has a focus on securing advantageous deals for materials and making key production shifts, preferably well in advance of competitors. This approach helps the company grow faster as it minimizes supply chain delays.
This was on full display in 2020 and 2021, when Tesla operated in a different reality from other automakers like Ford (F, Financial) and General Motors (GM, Financial). While other automakers were forced to close down plants due to semiconductor shortages, Tesla kept chugging along, posting record sales quarter after quarter due to its ability to secure all of the critical components for its vehicles.
While Tesla and its CEO, Elon Musk, have been quiet about the specifics of how their supply chain is running circles around other automakers, the results speak for themselves; it’s clear that the company has achieved a greater ability to procure parts and materials. This is likely due to a combination of negotiating better deals with suppliers and having an accurate grasp of demand.
Moreover, Tesla’s efforts to keep as much of its production process within the company as possible, which were criticized several years ago, seem to be paying off now. When Tesla couldn’t get as many new chips as it needed, it was able to rewrite the software on the ones it had available, which it wouldn’t have been able to do if it was outsourcing software and computing processes.
The need for nickel
The war in Ukraine may have brought the EV industry’s need for more nickel to front-page headlines, but industry analysts have known for quite a while that the world’s production of nickel will need to increase dramatically in order to support an all-electric future.
Right now, EVs only account for 5% of the world’s demand for nickel. However, by the end of the decade, they could account for as much as 59% of the total nickel demand. Meeting that kind of demand isn’t even possible without opening many more nickel mines around the globe.
This is where another two examples of Tesla’s proactive efforts to secure future supply chain strength are coming into play. Tesla is backing nickel mining starts and transitioning some cheaper models to LFP batteries.
As early as Tesla’s second-quarter earnings for 2020, Musk was calling on mining companies to produce more nickel, concerned that miners would limit production to keep prices high and end up creating a critical shortage when demand soared in the future:
“Well, I’d just like to re-emphasize, any mining companies out there, please mine more nickel. OK. Wherever you are in the world, please mine more nickel and don’t wait for nickel to go back to some long — some high point that you experienced some five years ago, whatever. Go for efficiency, obviously environmentally friendly nickel mining at high volume. Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally sensitive way. So hopefully this message goes out to all mining companies. Please get nickel.”
Fast-forward to the present day and Tesla is still working on signing new nickel deals where it can. Its main supplier of the metal is Brazilian mining giant Vale SA (VALE, Financial), and it has even signed a deal with Talon Metals (TSX:TLO, Financial) to get nickel sourced in North America (specifically, from the Tamarack Project in Minnesota).
As demand for EVs soars, it’s possible that nickel production simply won’t be able to keep up, in which case EV makers may have no choice but to utilize more LFP batteries in their cheaper models. Tesla is already doing this with some of its Model 3 vehicles.
Additionally, despite the lower energy density, there are some advantages to LFP batteries, such as longer lifespans, cheaper replacement prices and the ability to charge to 100% without degrading the battery capacity.
Orders spike despite price hikes
Even though Tesla is constantly making efforts to strengthen its supply chain, that doesn’t change the rising price of materials, especially nickel. The company has already begun increasing its prices this year after pausing price hikes for the last few months of 2021. Will demand suffer due to rising costs?
Not necessarily. As oil prices rise, the incentive for consumers to purchase EVs is also rising. While it’s possible that some EV makers may hit a wall with supply chain issues, for those that can continue rolling cars off the line, demand will likely remain strong.
Indeed, EV registration data from Experian (via Automotive News) shows that the number of Tesla vehicles registered in the first month of this year was up 49% year over year.
Takeaway
Investors may be worried about the prospects of the EV industry in light of how quickly oil and nickel prices are increasing. While analysts are anticipating strong growth in demand for EVs and other clean energy solutions, the truth is the world will need to hugely scale up production of several key materials in order to meet that demand.
Success will depend not only on having an attractive product to sell, but also on the company’s ability to keep up a strong supply chain and advantageous materials deals. This has been a focus of Tesla for many years, which bodes well for the future.
