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The Battery quite literally powers the entire vehicle, it is thus not strange that for the average Electric Vehicle the battery accounts for 50% of the production costs! Despite the market not knowing how to react to Tesla’s 4Q earnings call, there was some hidden gem hidden in the recent news that most people simply aren’t understanding. It is something that is going to be a key factor in determining which companies survive the future in the Automotive industry, and Tesla has already secured their place. Let me tell you….

Why are batteries so expensive and important?

The future of Electric Vehicles will be constrained by the amount of available high-quality batteries, Elon musk himself even said in a 2018 tweet that:

This is still true in 2022 and will continue to be the case for the foreseeable future, until battery production meets the demand for Electric Vehicles. Batteries are so important because they account for such a large portion of the vehicles cost, but why are they so expensive? This is mainly due to the materials that make up the battery, due to the fact that the batteries need to be rechargeable the batteries use lithium-ion or sometimes also Nickel batteries.

The components that make the cathode (such as nickel, lithium or even cobalt) are the most expensive. This is because they need to be mined, processed into high-purity chemical compounds and THEN they’re set-up to be used in the battery. Although over the last few years battery prices have dropped 81% since 2013, their scarcity remains an issue

The demand for electric vehicles is simply out-pacing battery production. So you better hope your favourite car manufacturer has enough batteries to supply their vehicles. Unfortunately, this isn’t the case. Yet Tesla has positioned themselves not only to have the best performing batteries with the new 4680 batteries, they’re also continuously securing contracts for long-term supply of raw materials and batteries to power their 50% YoY volume growth for the fore-see able future.

Tesla has ensured that they are limiting the battery constraints for volume production whilst competitors are stumbling around the in the dark. Just look at the Fourth Quarter comments (below) made by “major-competitor“ Ford compared to Tesla’s comments regarding their battery capacity.

Now let me talk about those 4680’s I mentioned and recent developments that have made Tesla’s battery supply even more robust.

4680’s & New Contracts - Tesla’s Battery advantage

Tesla announced on September 2020 in their Battery Day conference that they where making the new and improved 4680 battery cells. These are currently being built in California but soon will also be built in Texas and are being supplied by Panasonic to help scale Tesla production. What is the importance of the 4680 cells for Tesla vehicles?

• Changing from the currently used 2170 cells to the 4680s will increase range by 24% *

• 5 X reduction in electrical path means you will be able to super charge faster

• The thermal management of the entire battery pack is improved so the cell cooling will be much more efficient

• The dollar costs per kilowatt hour should be reduced by 50%. That is an estimated decreased cost of production of about $7,000!

Below you can see an image from Battery day regarding the total benefits graphically:

Ok so now you understand how important the 4680 battery cells are and that battery cells will be the main constraint for the production of future electric vehicles, let’s have a look at how Tesla is securing their battery supply.

Securing these batteries, and specifically the 4680’s is a crucial step that Tesla wants to complete to ensure they maintain the biggest market share of the entire Electric Vehicle industry. Elon Musk said in 2021:

So Tesla needs to be able to supply their cars using the 4680s really quickly and at a pace such that the batteries aren’t a bottleneck for production. The 4680 is also incredibly important for 2022 and 2023 when production of the Cybertruck will start.

The 4680 cells will provide the Cybertruck with the needed strength and power to move the huge truck around. Just recently Tesla purchased a large order with Panasonic to increase their supply of 4680 cells, Panasonic CFO Hirokazu Umeda said:

Meanwhile competing auto manufacturers are struggling to provide any significant amount of Electric Vehicles and will continue to struggle and face the brink of bankruptcy whilst Tesla continues to grow volume production just as fast, or faster than the EV adoption grows at.

This partnership and many similar to it will allow Tesla to pay the lowest amount per kwH for their battery cells because they have generated long-term relationships with their providers and continuously focus on reducing the cost of the battery.

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TLDR Key-Take-Aways

🔋 “Tesla vehicle production is limited by total battery output.”“

💰 Introduction of the 4680 cells could decrease cost of production by about $7,000

📏 4680 cells could increase range by 24%

✍ Partnership with Panasonic could secure batteries for an additional 400,000 vehicles