Tesla recently announced a new 40-GWh Megapack factory in China, pointing to a growing supply of Li-ion cells. The decision reveals interesting things about Tesla's strategy, as shown in a note to investors from Morgan Stanley's Adam Jonas.
For years, Tesla operated in a battery-constraint environment, where the lack of Li-ion cells held back production. The demand was so high that Tesla could not fulfill all the orders, which made Musk say that Tesla did not have a demand, but a production problem. Things have changed, lithium prices have gone down significantly, and Li-ion cell production yields have improved. Tesla still doesn't have a demand problem, and Musk even claims the demand is "infinite." It's just that the customers can't afford to pay for its EVs, hence the need to cut prices.
Several factors point to increased battery cell supply. After Tesla urged battery suppliers to invest in 4680 cell production, the EV maker is confident enough to officially sell the Texas-made Model Y with 4680 cells through the design studio. Until recently, Tesla only sold a limited number of cars from inventory, but did not make it available to order "a la carte." This shows that 4680 cell production is finally able to meet demand.
The second indication is Tesla expanding its energy storage business. During March 1 Investor Day, Elon Musk stated that Megapack production capacity could increase when the supply of battery cells exceeds EV demand. One month later, Tesla announced the Shanghai megafactory, where the gigantic energy storage batteries will be built. According to Morgan Stanley analyst Adam Jonas, this was possible because the supply of battery cells and upstream battery materials has become abundant.
Jonas thinks Tesla is trying to avoid the consequences of the U.S.-China rift by building two parallel supply chains. Watching the deterioration of the relations between the two superpowers, Tesla would want to "hedge" battery supply. The goal is to build fully independent battery "industrial complexes" in both regions over time. This is confirmed by Tesla's decision to use LFP cells from its Chinese partners in Megapacks produced in Shanghai.
With the battery supply secured and the raw material prices dropping like a rock in the past months, Tesla certainly affords to cut prices. Adam Jonas agrees that Tesla has scale/cost/tech advantages over its competitors and is trying to capitalize on this as rapidly as possible. Sure, there is a risk of driving excess industry price deflation and affecting margins, but this trend is inevitable in the EV market over time.
Although investors hate prioritizing sales volumes over profits, Elon Musk understands that if Tesla doesn't do it, another car company will. By acting early, Tesla wants to ensure it has as big a chunk of the market as possible when other EV makers will come and challenge its position. This all but guarantees further price cuts as Tesla tries to assert its dominant market position.
Several factors point to increased battery cell supply. After Tesla urged battery suppliers to invest in 4680 cell production, the EV maker is confident enough to officially sell the Texas-made Model Y with 4680 cells through the design studio. Until recently, Tesla only sold a limited number of cars from inventory, but did not make it available to order "a la carte." This shows that 4680 cell production is finally able to meet demand.
The second indication is Tesla expanding its energy storage business. During March 1 Investor Day, Elon Musk stated that Megapack production capacity could increase when the supply of battery cells exceeds EV demand. One month later, Tesla announced the Shanghai megafactory, where the gigantic energy storage batteries will be built. According to Morgan Stanley analyst Adam Jonas, this was possible because the supply of battery cells and upstream battery materials has become abundant.
Jonas thinks Tesla is trying to avoid the consequences of the U.S.-China rift by building two parallel supply chains. Watching the deterioration of the relations between the two superpowers, Tesla would want to "hedge" battery supply. The goal is to build fully independent battery "industrial complexes" in both regions over time. This is confirmed by Tesla's decision to use LFP cells from its Chinese partners in Megapacks produced in Shanghai.
With the battery supply secured and the raw material prices dropping like a rock in the past months, Tesla certainly affords to cut prices. Adam Jonas agrees that Tesla has scale/cost/tech advantages over its competitors and is trying to capitalize on this as rapidly as possible. Sure, there is a risk of driving excess industry price deflation and affecting margins, but this trend is inevitable in the EV market over time.
Although investors hate prioritizing sales volumes over profits, Elon Musk understands that if Tesla doesn't do it, another car company will. By acting early, Tesla wants to ensure it has as big a chunk of the market as possible when other EV makers will come and challenge its position. This all but guarantees further price cuts as Tesla tries to assert its dominant market position.
New brief $TSLA note from Morgan Stanley's Adam Jonas:
— Sawyer Merritt (@SawyerMerritt) April 10, 2023
"In our opinion, Tesla has scale/cost/tech advantages over its competitors and wishes to expand as rapidly as possible, fully understanding the risk of driving excess industry price deflation (and potentially lower margins)… pic.twitter.com/OtiYWSVWKw