More pain ahead for legacy auto as Tesla slashes battery investment costs in half

Tesla’s recent $US3.6 billion investment into its Nevada Gigafactory is pointing to some very exciting news about Tesla’s battery production cost trajectory, and the implications for the car industry and consumers are enormous.

The Nevada factory expansion will include high-volume production lines for Tesla’s new Semi electric truck, as well as a new 4680 battery cell production facility that will produce up 100 GWh per year.

That is enough batteries for the production of 1.5 million light vehicles annually. But it won’t stop there. During the announcement, Tesla CEO Elon Musk said long term goal for the Nevada factory was for 500 GWh of annual production.

Tesla Giga Nevada Battery and Semi Manufacturing Update.

The headlines and media reporting have focused on the size of the investment, and the battery output, but leading analyst Adam Jonas from Morgan Stanley points to even more significant aspect – the steep fall in battery prices.

According to his estimate the semi truck production lines will cost around $US0.5-0.6 billion, meaning the 100 GWh annual battery production facility will cost around $US3 billion. And he says this implies an investment per GWh which is about one-third that of Tesla’s competition.

Battery production investment costs cut in half since 2020

In 2020 Mogan Stanley’s Korea chemicals and battery analyst, Young Suk Shin estimated that the going rate for 10 GWh of battery capacity was approximately $US600 million for Asian battery manufacturers.

Jonas points out that during Tesla’s “Battery Day” in 2020, Tesla laid out its plans to reduce investment per GWh cost by 69%.

Based on the $US600 million per 10 GWh investment cost in 2020, Tesla’s long term goal of a 69% reduction equates to $174 million per 10 GWh.

The Nevada factory expansion numbers point to the fact that in just two years Tesla appears to have slashed battery investment costs in half from $US600 million to just $US300 million per 10 GWh, and is well on it’s way to the stated goal it set in 2020.

The bottom line

Jonas says at $300 million per 10 GWh, Tesla’s battery capex is 60-70% lower than its Chinese and Korean counterparts.

This dramatic reduction in battery production investment costs is likely to be what’s behind recent news that Tesla will announce detailed plans for its third generation vehicle platform which could enable the production of a sub $US25,000 ($A35,000) model.

During Tesla’s recent Q4 earnings call CFO Zach Kirkhorn told investors that Tesla would announce details of the next generation platform in during its investor day, which is scheduled for March 1.

Massive cost reduction spells more pain for Tesla’s competitors

The news comes just as legacy automotive manufacturers are grappling with Tesla’s recent price cuts which have sparked an electric vehicle price war.

The recent price cuts include a $US13,000 drop in Tesla’s best selling long range Model Y.

The cuts have forced many of Tesla’s competitors to sell their own EVs below cost to try to remain competitive while Tesla’s industry leading margins have enabled it to remain profitable even with the new pricing.

What should have Tesla’s competition trembling, is that the current electric vehicle price war is being waged using Tesla’s second generation platform (Model 3 and Model Y).

If legacy auto is struggling sell EVs at a profit competing with Tesla’s second-generation platform, it’s going to find it near impossible once Tesla’s third-generation platform vehicles start rolling off the production line.

Legacy auto giants Ford and Volkswagen have at least made a start on EV manufacturing however they face huge challenges to bridge the cost gap before the global market is flooded with cheap EVs.

However the writing may already be on the wall for Toyota who is still stuck at the starting line and is yet to produce EVs at any significant volume.