by Li Yifei Ph. D., Electrification & Battery System Engineer, Former Research Assistant from the University of Houston.
On July 1st, the three major US stock indexes rose, and technology stocks collectively gained. Tesla alone rose nearly 7%, and its market value closed above $200 billion. In doing so, Tesla has overtaken Toyota as the industry’s most valuable company. Tesla’s stock has risen 4,000% in a decade since it went public on June 29, 2010.
According to a recent industry report, in May 2020, global new energy vehicle sales totaled 145,000 (top 20 models), of which Tesla Model 3 once again won the sales crown with 20,847 units, nearly double the 11,761 units in April. The cumulative sales of Model 3 worldwide from January to May exceeded 100,000 units, reaching 106,374. According to Credit Suisse’s analysis, about 31,000 of them come from the Shanghai plant.
I believe these are the key success factors contributing to Tesla’s excellent results:
1. Early entrance to the market: As the first, Tesla occupies the top of the electric vehicle market and has a high degree of market recognition.
2. Strong Branding: The high-end model X was mainly promoted to cultivate a luxury image. Later, the model 3, a more affordable version, was released to drive revenue.
3. Leadership: CEO Elon Musk has strong leadership skills and a history of continuous entrepreneurship. The management team is highly competent.
4. Continuing cultivation of technology: Tesla cooperated with Panasonic to deploy NCA battery technology and makes continuous progress in battery technology, cooling, and cruising range.
5. Profitability: Tesla has implemented cost controls and maintains a gross profit margin of 16% and higher the last 6 fiscal years. Cobalt-free batteries will soon be introduced to further reduce costs.
6. Capacity: Establishing a new factory in China will solve the problem of production capacity.
Now, let’s talk about it in detail.
1. HISTORICAL BACKGROUND AND MARKET POSITION
Tesla is not the first company to produce electric vehicles, but its strategy is reasonable — launch the right product at the right time. In 2008, the Tesla Roadster was launched. In 2012, the Model S was launched and immediately won Motor Trend’s car of the year. During this period, traditional car companies were not paying attention to electric vehicles, because gasoline powered vehicles were still very profitable, so the direction of strategic development was not toward battery-powered cars. With no other new energy vehicle companies on the market, Tesla quietly accumulated its own technology and built its own products. It can be said that such opportunities and acquired market positions are difficult to replicate. The tragic experience of successors Weilai, Byton and other new car-building forces is obvious to all.
2. STRATEGIC PLANNING: HIGH-END PRODUCTS TO SHAPE THE BRAND, AFFORDABLE PRODUCTS TO GAIN MARKET SHARE
Following the great success of the Model S, Tesla introduced the luxury SUV version Model X, and the relatively affordable model Model 3. Tesla created a high-end brand image through the Model S and Model X, making its electric cars full of “technology, environmental protection and luxury”. However, it is the Model 3 that makes Tesla money.
Looking at the auto industry, there is no shortage of high-end brands, but how many of them really make money? Rolls-Royce was acquired, and Volvo was also under the command of Geely. The most profitable brands are the affordable Toyota and Honda models, which are sold unimpeded all over the world.
Therefore, regardless of the obstacles, Tesla was required to build the factory in Shanghai in order to vigorously promote the Model 3 and further reduce its cost. This will bring huge returns to Tesla in the future, and it will also deal a fatal blow to competitors.
Tesla’s Shanghai plant is progressing smoothly. In less than a year, the factory has been built and the trial production of the first car was rolled off the assembly line. Its second pure electric SUV, the Model Y, will be rolled off the assembly line at the Shanghai plant in the first quarter of 2021.
Meanwhile, Tesla’s multiple factories in the United States, China and Germany are in production or are under construction, which guarantees Tesla’s future production capacity and continued profitability.
3. GOOD GROSS MARGIN
Although Tesla has been investing endlessly to build its own high-end product Model X/S, Model 3s can bring in a gross profit of over 35%. This is hard to imagine for some of the traditional fuel vehicle manufacturers. Moreover, the cost of manufacturing cars can be reduced by 65% through the newly built Shanghai plant.
Tesla can bring the Model 3 to market at a price close to $46,000. Among fuel vehicles priced in the $46,000 range, it will be difficult for a car to achieve this gross profit and compete with Tesla. Industrial Securities estimates that after the localization of Tesla’s supply chain system, the domestic Model 3 will have a 27%-34% price reduction space, and the minimum price can be as low as $35,000. It is foreseeable that when the domestic Model 3 is mass-produced, Tesla’s financial report will be very impressive.
4. INVEST HEAVILY IN TECHNOLOGY, RESEARCH AND DEVELOPMENT
While building its own high-end brand, Tesla has invested heavily in research and development. Because of his technical background, Musk knows that the automotive and battery industries require experience and time to develop.
- NCA cylindrical battery
In cooperation with Panasonic, Tesla introduced Panasonic’s 18650 cylindrical battery, with the energy density of the single cylindrical battery reaching 240Wh/kg. Tesla and Panasonic have since jointly developed a larger 21700 cylindrical battery based on NCA material, which further increased the energy density of the single cell to 260Wh/kg. This material and the new size design ensure the cruising range of the Tesla car will range from 400km to 600km.
- Package design based on cylindrical battery
Because the cylindrical battery has a natural round shape, it cannot fill a square battery pack, and its space utilization is very low. The serpentine cooling belt is cleverly designed to wind around in the battery gap, close to the side of the 18650 or 21700 cylindrical battery, ensuring that the side of each battery is in contact with the cooling belt, dissipating the heat, and keeping the temperature from getting too high, thereby ensuring the safety of the whole vehicle.
- Collaborate with CATL and LG, use CTP technology to promote cobalt-free batteries
With the cost of power batteries accounting for one-third or even more than half of the cost of electric vehicles, Tesla is determined to eliminate its excessive dependence on Panasonic through collaboration with CATL and LG.
It just so happens that in February of this year, CATL launched CTP (cell to pack without module) technology. By removing the module, the mechanical parts of the module link are saved, the space utilization rate is improved, and the weight is reduced. The energy density of the iron phosphate battery at the whole package level can be increased by more than 40%, reaching 145Wh/kg. In the future, for the Chinese version of Model 3, it may be entirely possible for Tesla to use CTP+ lithium iron phosphate from CATL to control costs, reduce prices, and increase sales.
However, for Musk, a technology geek, the pursuit of cobalt-free is still his goal. At the beginning of this year, Tesla announced that it aims to use cobalt-free batteries. Yet because there are still many problems in the current laboratory program that have not been completely resolved, until then, a low-cobalt solution will be the alternative for Tesla, and the cobalt density will continue to decrease.
- Deploy dry electrode technology and develop “million-mile” battery technology
Tesla acquired battery start-up Maxwell Technologies in 2019. The company’s core technology is dry electrode coating. Unlike a typical wet electrode process, which requires the positive and negative electrode materials to be added to the solvent and stirred, the dry electrode doesn’t require a solvent, is cheap and environmentally friendly, allows for an increase in energy density. Moreover, the efficiency is improved because steps such as solvent drying are not required.
In 2019, Tesla’s partner Professor Jeff Dahn claimed to have developed a battery technology that can cycle 1 million miles. Tesla has great ambitions to create its own battery that can accompany a car for life. According to a Reuters report, CATL is also involved in battery creation. CATL recently announced that it will have a battery with a service life of 16 years and a total mileage of 2 million kilometers. Considering that Tesla has already begun to cooperate with CATL, it could be that both parties are jointly developing this technology.
5. PERFORMANCE AND USER EXPERIENCE
For most drivers, one of the most important things about driving is about experiencing the car itself. Of course, price is also an important factor to consider. For the Model 3, we can see that all aspects of its performance data are satisfactory. The long-range version of the Model 3 has a range of up to 668 km (415 miles) and the standard version has a range of about 450 km (279 miles). This performance matches most high-end electric cars and even gasoline powered cars. Considering its current price and the possibility it could be further reduced in the future, it is very attractive.
6. FUTURE RISK WARNING
Having listed so many advantages, we must also consider the shortcomings and think about future risks.
- Tesla is still a young company and will face competition from traditional auto giants in the future. Traditional auto manufacturers have realized the importance of electric. Various European countries have introduced a timetable for banning the sale of gasoline powered vehicles. GM, Volkswagen-Audi, Daimler, BMW, Nissan, etc. are all launching their own PHEV and BEV models. Volkswagen’s MEB and PPE platforms, Audi e-tron, BMW i3, ix3, etc., may regain market share in the future.
- The evolution of battery technology brings uncertainty. Although the change in battery technology is not comparable to semiconductors and Moore’s Law, it is still much faster than the engine technology of traditional gasoline powered vehicles. Three years ago, we were still discussing NCM333, and today NCM523 is outdated. Everyone is discussing NCM811, low-cobalt or even cobalt-free ternary. Maybe tomorrow, NCM ternary and NCA materials will be completely replaced by new materials. Lithium batteries may even be replaced by new battery technologies. While Tesla is deploying NCA and cobalt-free ternary technology, it must also continue to explore new technology.
- Other new car manufacturers might not have an impact on Tesla for the time being. But the trends in China’s domestic market are worth noticing. NIO may soon be capable of challenging the status quo by moving its headquarters to Hefei. It also received nearly tens of billions in funding. Similar to Tesla’s early days, NIO has established its own brand image through high-end models such as the ES6 and ES8. With the support of the Hefei government, it may launch a truly profitable model competing with Tesla’s affordable models.
Nevertheless, the key success factors and more than 10 years of technology accumulation have contributed to Tesla’s success today. It’s no surprise that its market value has surpassed Toyota. I look forward to seeing its performance in the Chinese market with the introduction of its Model 3, Model Y and other new models.
Please note: This article contains the sole views and opinions of Li Yifei and does not reflect the views or opinions of Guidepoint Global, LLC (“Guidepoint”). Guidepoint is not a registered investment adviser and cannot transact business as an investment adviser or give investment advice. The information provided in this article is not intended to constitute investment advice, nor is it intended as an offer or solicitation of an offer or a recommendation to buy, hold or sell any security. Any use of this article without the express written consent of Guidepoint and Li Yifei is prohibited.