The logic chain unfolds like this, To address global warming we must transition to sustainable energy. To transition to sustainable energy we need transportation powered without fossil fuels, (and electric is the best way to go). To provide electric transportation, we need lots of batteries...as in, orders of magnitude more battery cell production than what is made today. But the battery companies are growing as fast as they can, and without a breakthrough allowing much faster throughput, there won’t be a huge jump in cell production.
Battery day will tell us Tesla’s solution to manufacturing bottlenecks, and how fast battery production can be scaled over what time horizon. This, in effect, is the timeline along which planet earth can migrate from fossil fuels to electric, powered by solar and wind, and integrated through distributed grids. Scaling up battery cell production has to come first.
Before getting into the weeds from the business rather than technical perspective, it may be helpful to know that up to this point Tesla has only been a battery customer, not manufacturer. Tesla buys cells from all the large manufacturers, and there’s a reasonable chance that Tesla is already the single largest customer of every major manufacturer of 18650 and 2170 cells, today. Today, however, Tesla announces if, when and how it is going to begin manufacturing their own battery cells, while also continuing to buy as many cells as it’s existing suppliers can produce.
1) Different cell chemistries = resilient, diversified and localized supply chains
As the pandemic has proven, even globally disruptive events can be navigated with stability if the events don’t affect all facilities at the same time. By expanding their product portfolio to include iron batteries rather than exclusively using nickel, completely new supply chains can be developed, and thereby offer redundancy. This complements Tesla’s efforts to localize their supply chains, so the China factory will be supplied from Asia, the US factories will be supplied from the Americas, and the Berlin factory will be supplied from Europe and Africa.
Doubling the cell chemistries in your product lines allows completely new supply lines to be developed, both by Tesla and their suppliers. This reduces risks to their manufacturing, because as we’ve already seen, when one area is affected other areas can help pick up the slack.
It’s important to understand that Tesla isn’t retrofitting their existing models to a new cell format, although they do adopt chemistry improvements to the existing cell. Why? Because the chokepoint is battery cell production, and older models have battery cell production sufficient to fulfil their needs. It would be counterproductive to remove existing cell production capacity while trying to grow cell production, right? The fastest path for growth is to add to existing production, not replace it.
2) Improved build process = much higher throughput per line
Rumors of a dry electrode, larger cell and tabless design are rampant. Such advancements could have a bigger impact on cell production than on cell performance, by removing chokepoints (especially drying) from the manufacturing process. By removing the slowest steps, the throughput can be accelerated...more cells per hour in less space, meaning production rate goes up at the same time unit cost goes down.
Think of the technical advancements as having three magnitudes of impact: lowest if it only improves cell performance, second tier if it also improves production rate, and highest tier if it improves production rate, cell performance AND can be applied across iron and nickel chemistries. It’s going to take magnitude three advancements to save the world.
3) The machine that builds the machine = larger factories, faster and cheaper
Great technical advancements that will take two generations to implement (looking at you, Gates), really aren’t solutions. We need change now. But as anyone who has seen headlines claiming “revolutionary battery breakthrough!!!” can attest, doing something in the lab doesn’t mean it can be scaled cost effectively. Musk, to his great credit, implements as well as he innovates. Well, now they do...the Model 3 was a rough learning curve for them, but over the past two years they’ve gone from manufacturing laggard to leader. And that has been driven by Musk’s focus on the machine that makes the machine, and his insistence that the product be changed to make manufacturing easier.
This doesn’t just apply to products and production lines, it also applies to the entire factory. And we get to see exactly how well Tesla performs relative to the competition since Tesla, Ford and Nikola all announced groundbreaking on factories to produce electric pickups within about 60 days of one another. Tesla will be using prefabbed concrete slabs (made onsite, because their new factory is being built on a former cement factory), and will hang the roof even before the floor is complete.
In China Tesla went from an empty field to pre-production units rolling off the assembly line in 11 months. Neither Berlin or Texas factories will beat that timeline, (both required much more earthwork and site improvements before foundation pilings could begin), but it will be very interesting to see when production ramps begin at each site, and how many units have rolled off each line by the end of 2022. My wild a** guess would be zero Nikola, fewer than 50,000 Ford F-E50s, and north of 200,000 Tesla’s, (Cybertruck, Model Y and Semi).
4) Drive down the cost curve = s-curve goes vertical
Price parity is the name of the game in EV adoption. When an EV costs the same up front as it’s gas equivalent, it dominates, as the Models S does compared to the Mercedes 500 series, and the Model 3 does compared to the BMW 3 series. Imagine what the Model 3 will do when it’s priced comparable to a Camry or Accord? That’s how the demand curve goes vertical, which is an increasingly definitive characteristic of disruptive technologies. Once the average car buyer test drives a premium clean-sheet EV for the first time, and can buy it for the same or less than the equivalent gas car, it’s game over for gas cars. EV owners already gush over how much better their ownership experience is over their previous gas cars, and that’s after paying a premium. As production scale continues to reduce unit cost, Tesla will continue dropping the price of its products, and more people will buy them. Rinse. Repeat.
The other piece of this is the question of whether Tesla will license it’s breakthroughs to other manufacturers. I consider that highly likely, given Tesla’s mission and technology advantages. Whether it takes the form of sharing the recipe and saying good luck, or selling them production lines and letting them manage their own logistics, or building entire production facilities for others to run, remains unclear. I suspect any licensing will be done through a combination of chemistry and manufacturing equipment.
5) Technical breakthroughs = new virtuous cycles
A tremendous accelerator to this transition would be achieved if the batteries used in electric vehicles could also be used V2G, to offer mobile VPPs (virtual power plants...it’s when a bunch of batteries are connected to the grid and use software to provide grid services...thus the moniker V2G for vehicle to grid.) In Tesla’s case, this would allow their vehicles to generate income even before achieving robotaxi nirvana, (i.e. when your car earns money instead of sitting parked while you’re not using it.) The VPP Tesla is installing in in Australia using 50,000 Powerwalls installed in low-income housing, has already progressed to phase three after proving itself with 50 and 500 units. When such services can be offered using the battery packs parked in the owner’s garage, instead of requiring supplemental stationary storage, it creates a huge incentive for people with unstable grid services to buy an EV that is V2G capable. California and Australia are obvious examples.
Now consider the possibilities that arise when you add autonomous driving to those vehicles battery-packs on wheels. Suddenly you have not just mobile VPP’s, but dynamic VPP’s which can move their power services to track storms and respond to emergencies. Such services don’t even exist right now, because there’s no way to offer them. But when cars can shuttle between functioning Superchargers and blackout-hit areas to offer hours of power...people will pay for that.
Summary
Despite all the hype that has gone into today’s presentation, closer examination suggests it isn’t nearly enough. If Tesla has figured out how to release the production constraints of batteries, then humanity has a shot of limiting global warming to two degrees or less. If they haven’t, and nobody else does very, very soon, we are screwed. So no matter how you feel about Elon, the man, we should all be holding out hope his team at Tesla has found a path forward that will unlock the rapid transition of transportation off of fossil fuels.