Tesla eyes bigger, better EV margins in China with low-cost LFP battery

Tesla has gained approval to use a no-cobalt lithium iron phosphate (LFP) battery in its China-made Model 3, and new estimates of the battery’s cost indicate it could help cut the vehicle’s price by 15-20 per cent, delivering a profit margin on the vehicle of 40 per cent.

Tesla CEO and co-founder Elon Musk said that Tesla would drop the price of the Model 3 it makes in Shanghai during the company’s first quarter 2020 earnings call in April in order to ensure local drivers would be able to access “new energy vehicle” subsidies, saying it would “still be a vehicle that delivers a good gross margin”.

At the time, Tesla chief financial officer Zachary Kirkhorn noted that Tesla would continue to work towards localising parts, saying that the cost of vehicles produced in Shanghai was “already lower” than the cost of producing the Model 3 in Fremont. “We’ll continue to bring the price down and …. expand margin even with this reduction in price,” Kirkhorn said.

Confirmation that Tesla received approval from the Chinese ministry of industry and technology to use the LFP battery came via Reuters on Thursday, although the ministry document did not make clear which company would be supplying the batteries.

The news that Tesla had gained approval to use LFP batteries in China came after reports that CATL’s LFP technology would see the cost of making packs come well under the $US100/kWh mark that industry analysts said would be needed to bring electric vehicle prices on par with fossil-fuelled vehicles.

Currently, the China-made Model 3 Standard Range Plus (SR+) costs 271,550 yuan after subsidies ($A56,111 converted) in China.

Now, Chinese industry analysts have reportedly estimated that a 15-20 per cent drop in cost to make the LFP battery would enable Tesla to sell the China-made Model 3 (SR+) for as little as 250,000 yuan, after subsidies ($A51,720 converted).

The estimate from Ping’an Securities was shared via Twitter by self-described China web media researcher in industry and commodities @Dkurac.

Included in the tweet are cell and pack costs that @Dkurac attributes to the China Industrial Association of Power Sources (note that the second graph is shown with pack costs in correct order in our table, in US dollars, below).

China EV Battery Price – 12 June (Source: CIAPS)

@Dkurac had earlier shared other industry estimates that via cheaper batteries and localisation of the supply chain, Tesla could lower its costs in China by almost 10 per cent. We have not been able to independently confirm these reports.

If these industry analyst reports are on the money, the cost reduction would see Tesla’s margin – which is estimated at 39.37% by Anxin Securities according to @Dkurac, increase even further, assuming Tesla does not drop the selling price of the vehicle.

This matches predictions made by Cleantechnica in June 2019 that if Fremont’s margins are 25%, Chinese margins should be above 35%.

As for using LFP batteries in the China Model 3, according to Musk, they are just fine: