How much could Tesla save by switching to LFP batteries?

Reducing the cost of batteries has been a major focus of Tesla Inc. (NASDAQ:TSLA) over the years, and it continues to be important as the company increases production. Last week Reuters reported that Tesla was in talks with CATL to use its lithium ferro phosphate (LFP) batteries in vehicles manufactured in its Shanghai factory. UBS analysts looked at this possibility to determine about how much money Tesla might be able to save by switching to those batteries for its China-made vehicles.

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It's not about the cobalt

UBS analyst Paul Gong pointed out that most electric car makers use cobalt in their batteries. However, Tesla's use of the material is much less than amounts used by other automakers for their batteries.

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Tesla's standard batteries are nickel-cobalt-manganese (NCA) and nickel-cobalt-aluminum (NCA). Given that cobalt is an expensive material, it seems like that would be where Tesla could save the most money on its batteries.

However, UBS estimates that the automaker's NCA batteries contain only about 40 grams of cobalt per kilowatt-hour. Other batteries contain as much as 210 or 2150 grams of cobalt per kilowatt-hour.

Additionally, the price of cobalt has come down a lot over the last two years as supply has increased and the industry moves toward high-nickel, low-cobalt batteries. In early 2018, cobalt was $80,000 to $90,000 per ton, although more recently, it has been closer to $33,000 per ton.

A Model 3 with standard range built in China can have either a 53kWh NCA battery or 52kWh NCM battery, according to China's Ministry of Industry and Information Technology. Thus, UBS estimates the amount of cobalt content at $70 for those with an NCA battery and $140 to $170 for those with an NCM battery. For long-range Model 3 cars, the amount would be $100 or $200 to $250.

tesla batteries

Gong notes that cobalt amounts to no more than 0.5% of the car's sticker price, so eliminating cobalt from the battery won't save nearly as much as Reuters reported would be saved.

Here's how much Tesla can save on LFP batteries

Reuters reported that the LFP batteries would be "double-digit percentage cheaper" than the NCM or NCA batteries. According to Gong, if the LFP batteries are 20% cheaper than the NCM or NCA batteries, the savings could amount to Rmb150 per kilowatt-hour.

The cobalt would be Rmb9 per kilowatt-hour for the NCA batteries and Rmb18-23 per kilowatt-hour for NCM batteries. Thus, most of the savings is not from the cobalt, but from other parts of the battery.

Citing data from Real Lithium, Gong said LFP cathode material was just Rmb42,000 per ton, but for NCM batteries, cathode material mounts to Rmb166,000 per ton. On a kilowatt-hour basis, cathode material for NCM batteries costs Rmb210 per kilowatt-hour, while for LFP batteries, it amounts to only Rmb80 per kilowatt-hour.

One other area Tesla can save money on LFP batteries is in the nickel content. UBS found 740 grams of nickel per kilowatt-hour in the NCA batteries. That amounts to Rmb67 per kilowatt-hour for the material.

Gong said LFP batteries are made from materials with "much more controllable commodity prices," which is one advantage of using them. He also said the industry supply chain in China is more mature, and it has long been supplying such material for commercial vehicles like electric buses. Demand for LFP batteries for electric buses has been declining since the subsidy on them was cut four years ago, so prices of these batteries have also been declining, and there is plenty of capacity in the industry.

Based on the mix of materials, he estimates the cost of LFP batteries for Tesla at Rmb60,000 to Rmb65,000 per kilowatt-hour, compared to Rmb75,000 to Rmb80,000 for the NCM battery packs, excluding the VAT.

Is it feasible for Tesla to use LFP batteries?

Tesla never officially confirmed Reuters' report about the LFP batteries, so Gong considered whether it is feasible for the automaker to use such batteries. He said the Model 3 and Model Y were designed to use NCA cylindrical batteries, so it isn't difficult to switch to NCM cylindrical batteries because they are the same shape and size, although the voltage is a bit different. On the other hand, switching to a prismatic battery requires the battery pack to be redesigned.

Gong ran the numbers and does believe it is feasible to get a similar energy density in LFP batteries. CATL hasn't released many details about its batteries, however.

What will customers think if Tesla switches to LFP batteries?

He also noted that there could be some changes in customer perception if Tesla switches to LFP batteries.  He said the industry has mostly changed from LFP to NCM batteries for passenger cars in recent years. Thus, many consumers may see LFP batteries as technologically inferior to NCM batteries. He noted that some "relatively low-end" electric cars in China still have LFP batteries, which might make consumers think Tesla is moving away from its high level of quality.

He noted that in the past, there has been some pushback from consumers on technology evolutions due to stereotypes, like the downsizing of engines. If switching to LFP batteries saves Tesla Rmb8,000 on a Model 3 with standard range, but customers are willing to pay a premium for a model with an NCA or NCM battery, it might not make sense for the automaker to make the switch.

Tesla stock tumbled 7% during regular trading hours today.