All This Battery Hype Should Make Tesla Investors Nervous

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Elon Musk is a genius marketer. The hype and buzz that he and Tesla have created around their new Powerwall battery system is remarkable. Tesla batteries have been hailed as groundbreaking and game changing. The company is touting 38,000 battery pre-orders. Never mind that interested customers don’t put any money down and have no obligation to buy. Some have suggested that Tesla has already won the home battery competition. And all this before they’ve even gone on sale — let alone generated a profit. Considering all the hubbub, and Tesla’s insane $30 billion market capitalization, you’d be excused for thinking that the company had invented the lithium ion battery.

“There’s no way that we can possibly satisfy the demand this year,” Musk told analysts last week. “It’s crazy off the hook.” An analyst asked Musk if maybe Tesla would shift from being a car company to a battery maker?

“It’s possible,” he replied. “All we know right now is we have demand well in excess of our production ramp.”

It may be possible, but given the rising wave of battery competition, it’s not likely. In fact it wouldn’t even be smart. And hearing Musk opine about shifting Tesla’s focus toward batteries should make investors nervous.

Tesla devotees try to make the case that their company is different than all those competitors because the products it makes are as beautiful and well engineered as those made by Apple AAPL -0.36%. Beautiful engineering and perfect human interaction certainly matters when it comes to a car. User interface matters in a host of devices and appliances like your smartphone, computer, TV, refrigerator, microwave oven. You willingly pay more for something that is a joy to use.

But a backup battery system? That should be something that sits in the closet and works seamlessly with the rest of your household power system. Like a water heater. There should be no reason to look at it, let alone interact with it. A battery system may be expensive today, but (despite Musk’s flashy presentation) it is not a premium consumer product on par with an iPhone or a Tesla car. Instead, given all the competition, battery systems will quickly become commoditized, and manufacturers will have to settle for commodity margins.

Truth is, Tesla doesn’t “make” all the batteries itself. The job starts with Panasonic , the world leader in electric vehicle battery manufacture. At the Nevada Gigafactory, Panasonic will occupy about half the space there to make the individual cells, then hand them over to Tesla which will then package them into finished batteries — either for installation in cars or into pretty boxes for Powerwall.

Again, you’d think from all the hype that no one else in the world did this kind of thing. But Panasonic has plenty of competition from the likes of AESC, LG Chem , BYD , Samsung and others.

The Gigafactory will not be unique. China’s electric vehicle maker BYD (which stands for Build Your Dreams) is building its own battery factory, which is set to rival the Gigafactory. BYD enjoys backing from an even more successful billionaire than Elon Musk: Warren Buffett and his Berkshire Hathaway , which owns about 9% of BYD shares.

Then there’s Samsung SDI , which makes batteries for BMW and Chrysler and Audi (including its planned 300-mile range SUV) and is said to be constructingits own giant factory. Samsung has also been working with Ford Motor F -0.58% to develop a new hybrid battery combining lithium-ion and lead-acid technologies. And in February, Samsung acquired the battery pack business of Magna Steyr.

Does anyone really believe that these global battery giants won’t be able to make batteries and battery packs just as efficiently as Tesla and Panasonic can in Nevada?

And what if Panasonic/Tesla can’t keep up with innovation? In recent months Nissan has announcedplans to cut battery production at its joint venture AESC after sales of the all-electric Leaf didn’t live up to expectation.

As for the stationary energy storage business — Tesla didn’t invent that either. Power plant giant AES AES +0.22%is already providing battery-based energy storage projects, like the 100 mw plant it’s building for Southern California Edison . For its systems, AES says it uses the best and most cost-effective technology it can find, which so far has been batteries made by LG Chem as well as Samsung. LG Chem also provided 32 mwh worth of batteries for a Southern California Edison project. Panasonic/Tesla batteries might fit the bill as well, but they’ll obviously have to compete on price.

There’s competition for devices like the Powerwall, too. It didn’t get much attention, but a few weeks ago LG Chem also announced its entry into the home battery market, through a JV with Eguana Technologies. LG says it has sold 4,000 grid-tied battery systems into the European market over the past 18 months.

And several years ago German appliances giant Bosch started offering homeowners an integrated solar storage device combining lithium-ion batteries and a DC-AC inverter. It’s an attractive looking box the size of a refrigerator. As best as I can tell it costs upwards of $20,000 for a roughly 7 kwh system — before tax incentives.

That’s about three times what SolarCity SCTY +0.67% says it would cost to install a comparably sized Tesla Powerwall. But it’s in line with what SolarCityreportedly told California regulators last year it would cost to install a 5 kw home battery system.

The masses were shocked that the Powerwall was so “cheap” — even though $3,500 for a 10 kw system has turned out to be just the wholesale cost, with SolarCity saying you’ll be able to buy one for $7,000 installed, though the average solar-powered house will probably need two to have enough juice to disconnect from the grid entirely.

Will Tesla be able to turn a profit selling Powerwalls for $3,500? Probably not. But they’re used to that. Divide Tesla’s $150 million loss in the first quarter by the 10,000 cars they sold and the company is losing $15,000 per car.

Sure, sure, Tesla is growing fast and ramping up production, so losses are expected for now. But at least with its vehicles Tesla should someday be able to turn high-quality and high-performance into solid margins.

Musk sure tried to make the Powerwall sexy, but in the end it will rightly be seen as no more sexy than a water heater or an air conditioner — and generate the same kind of commodity pricing and commodity margins

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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