Analysts at Wedbush Equity Research believe that the production cost targets of Tesla Motors, Inc, (NASDA:TSLA) for its Gen III vehicle are likely achievable given the fact that the electric car manufacturer showed its ability to properly manage the escalating costs of the Tesla Roadster.
Wedbush analysts Craig Irwin and Min Xu said Tesla Motors, Inc (NASDAQ:TSLA) experienced initial problems related to the launch of the Tesla Roadster because its original sales price of $92,000 ($65 estimated production cost) in 2008 escalated to $109,000 ($100,000 production cost per vehicle) in January of 2009. The problems in production costing led the company to remove its co-founder Martin Eberhard from his position as CEO.
However, the analysts noted that Tesla Motors, Inc (NASDAQ:TSLA) demonstrated its ability to meet its objective. For example, Irwin and Xu cited that the DOE ATVM loan application of the company in November 2008 indicated that the projected price for the Model S base was $57,000. In 2010, the company introduced the vehicle with an initial price of $59,900 for the 40kWh version, and a similar range was quoted in its application.
Tesla Batteries May Be Key To Cost Control
The analysts emphasized that Tesla Motors, Inc’s (NASDAQ:TSLA) battery strategy provides a strong and credible path to longer-term battery cost reduction for the company to achieve its target costs for the Gen III model.
Irwin & Xu believe that Tesla is "betting on a continuation of the cost and performance progress from their supply partner, Panasonic" due to its experience with the Roadster and replacement pack pricing for the Model S. They cited that the costing for the Gen III battery system is based on the preliminary specification for an expected Panasonic cell.
The analysts assumed that the Gen III vehicle with Panasonic cell will use high density new nickel type cathode (HD-NNP) and the Silicon Anode will be priced at $3.00 per unit. According to them, their assumption is reasonable based on materials content and Panasonic's pricing strategy.
Tesla Batteries Also Outpace Competitors
In a note to investors, Irwin & Xu wrote, “We believe, Tesla’s radically different battery strategy affords the company a large advantage as an all-electric vehicle, and the battery pack design itself allows simplification versus PHEV or EV peers that use new purpose built automotive cells. Tesla’s approach allows the company to deliver packs at less than the cost of competing solutions, and to provide commercial vehicles with greater overall driving range.”
Tesla Motors, Inc’s (NASDAQ:TSLA) battery strategy is focused on assembling thousands of small lithium 18650s into larger battery packs. The 18650s battery is commonly used in consumer products and has been heavily commoditized to ultra-high volume manufacturing and meticulous supply chain management to maintain quality and cost over the past 20 years.
The analysts emphasized that during the first ten years of the 18650s battery, its average cell costs dropped by 90 percent while the average energy doubled, and the trajectory for further performance gains remain promising.
Irwin & Xu estimated that the lower battery strategy cost of Tesla Motors, Inc (NASDAQ:TSLA) enables the company to assemble battery packs at less than half the cost of the most visible competitors using larger packs. According to the analysts, PHEVs like the Toyota Prius, Chevy Volt, and Fisker Karma with a limited all-electric range of 11 miles, 32 miles, and 32 miles respectively, and their combustion engines extend total range to 540 miles, 380 miles, and 230 miles. In comparison, the Tesla Model S has an EPA-certified all-electric range of 265 miles for the 85kWh version and 208 miles for the 60hWh. The analysts cited that the closest EV all electric range was the Toyota RAV4 EV with 103 miles, which uses a Tesla drivetrain.
In addition, the analysts emphasized that Tesla Motors, Inc has a strong claim as an emerging premium brand vehicle in the United States. They projected that the company will deliver 21,200 Model S vehicles this year.
Furthermore, in the analysts view, the pricing strategy of Tesla Motors, Inc (NASDAQ:TSLA) is a significant part of its sales success, which suggests the argument that it saves customers money compared with its competitors such as the BMW 535i and the Actively Hybrid 5. Tesla’s Model S offers a higher mileage per gallon for consumers looking for a green alternative.
The analysts emphasized, “We believe the largest driver of Tesla’s superior cost ownership versus the hybrids and plug-in available in the market is the company’s battery strategy, affording Tesla a much lower cost.”