Tesla Motors has been working on building its gigafactory for some time and expects to have it operational by next year. The automaker seeks to cut its battery costs dramatically, but exactly how much it will be able to reduce its costs by has been up for debate.
One firm has just published its own estimates and is so confident in them that it has bumped up its price target for the EV manufacturer.
Estimating Tesla’s component costs
One of the main reasons some are so bullish on Tesla is the plans to build a mass market EV, the Model 3. In order to cut the price on the automaker’s vehicles down to the $35,000 range, it must significantly reduce its battery costs. In a report dated today, Jefferies analysts Dan Dolev and Trevor Young said they see a tailwind of up to 1,000 basis points for Tesla’s gross margins. Yes, you read that right. As a result of this estimate, they increased their price target from $360 to $365 and reiterated their Buy rating on the automaker.
Currently Tesla pays about $250 per kilowatt-hour, which makes up approximately 20% of the average selling price of the Model S.
The Jefferies team believes that the company benefits significantly from several components in its batteries. Here’s a look at the key components of EV battery packs.
For example, the EV manufacturer uses an efficient nickel cobalt aluminum cathode and a silicon synthetic graphene anode with two to six times the storage capacity for lithium-ion compared to the standard graphite anode.
The company may also be using a water-based anode solvent. These components already give Tesla a leg up on the competition in terms of battery costs, so by increasing production through the gigafactory, the company should be able to get even further ahead.
Tesla on track for 50% battery cost reduction
Dolev and Young believe Tesla could cut its battery costs by as much as 50% by 2020, not only by bringing the massive gigafactory online but also by changing some of the chemistry of its battery cells. This would result in a combined gross margin tailwind of about 1,000 basis points, in their estimates.
Just changing the cell chemistry could result in an additional 30% reduction in gross margins, they believe. That would bring Tesla’s battery cost down to about $88 per kilowatt-hour.
Among the possible chemistry changes Tesla could make is using an even more efficient cathode made of lithium-rich nickel cobalt manganese. Switching to this type of cathode could double the percentage of silicon in the synthetic graphene anode and replace the liquid electrolyte with an ionic gel electrolyte. The analysts say this would mean Tesla wouldn’t need a separator. Also using a water-based electrode solvent for the cathode could also help cut costs.
Gigafactory to drive battery cost reduction
The Jefferies team sees the majority of the cost reduction in battery packs (70%) as coming from the gigafactory’s massive scale. With that scale, they see Tesla’s pack cost falling to about $38 per kilowatt-hour. In addition to economy of scale, they also see potential in optimization of the automaker’s supply chain, increases in automation and domesticating production.
With all of these factors going into cutting battery costs, the analysts believe Tesla will be able to reduce its pack cost from between 21% and 22% of its average selling price to between 12% and 13%.
This is why they raised their 2020 gross margin estimate and, as a result, slightly increased their price target. As of this writing, shares of Tesla were up 0.5% at $263.57 per share.
All charts/ graphs in this article are courtesy Jefferies.