Saturday, March 29, 2014

Tesla's Giga-Plan Looks Too Ambitious -- Barron's

By Bill Alpert
       (FROM BARRON'S 3/31/14)
      Electric-car maker Tesla Motors has grabbed the attention of the auto
industry, the electronics industry, and of course, the stock market, where the
company's shares reached $265 a month ago, as Tesla's chief, Elon Musk,
outlined his daring plan to build the world's biggest lithium-ion battery
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      Even after falling back almost 20% since then, the stock values the
company at more than $30 billion (counting shares issuable for options and
convertible debt). That's more than 100% over the level at which this tabloid
pronounced Musk's car company overpriced ("Recharge Now!" June 10, 2013). Our
cover story doubted that battery costs would fall enough to let Tesla sell a car
below $ 35,000 -- half the base price of its highly-rated luxury sedan, the
Model S.
      On Friday, the shares (ticker: TSLA) were $212, after federal regulators
ended their probe into several battery-pack fires associated with collisions.
Musk said Tesla will install titanium shields to bolster battery safety.
      Tesla doubters have been wrong on more than the stock. The Palo Alto,
Calif., auto maker delivered almost 22,500 Model S sedans in 2013, more than $2
billion worth, to surpass North American sales of comparably priced Audis and
Porsches. So when Musk says that he'll lop 30% off battery costs with a
"Gigafactory," the world pays heed. Four states are bidding for the plant, which
by 2020 would exceed the lithium-battery production of all the world's current
factories combined. "The scale of what he's talking about is outside of what's
been discussed by anybody in my 20 years in the business," says Menahem
Anderman, whose Oregon House, Calif., firm, Total Battery Consulting, runs
international conferences on battery technology. "But maybe that's what it takes
to start up an electric-vehicle business."
      Could the Gigafactory bend the lithium battery's stiff cost curve? Tesla
hasn't responded to Barron's queries since Musk hung up on us in an interview
last spring. However, battery veterans agree that such a factory might achieve
the promised economies -- but only if Tesla can sell the half-million cars per
year that would keep the plant running at capacity. Tesla's stock price seems to
take 500,000 sales for granted. Sales of battery-powered cars will hopefully
increase in coming years -- last year they totaled about 100,000 worldwide. And,
by the time Tesla delivers the thrifty Gen III car in three or four
years,competitive products will appear from worthy rivals like BMW
(BMW.Germany), with lithium batteries from Samsung SDI (006400.Korea) and LG
Chem (051910.Korea).
      Investors needn't wait until 2020 to handicap Musk's chances. In the next
few months, we'll know whether Tesla finds partners for the $4 billion to $5
billion project. Questions about the Gigafactory figured prominently at a
Thursday news conference in Tokyo by Tesla battery supplier Panasonic
(6752.Japan). Although it is expanding production in Japan to meet Tesla's
rising orders, while shedding some consumer businesses, the electronics giant
only just returned to profitability. Panasonic tells Barron's that it hasn't
decided whether to invest in the costly Gigafactory.
      Wall Street and Telsa's auto-industry rivals will watch to see how strong
sales are this year for the Model S, and next year for the Model X, a crossover
that may be a bit pricier. Tesla expects to deliver more than 35,000 cars this
year, as it tests new markets in Europe and Asia. North America took almost
19,000 of the sporty sedans last year. Although Tesla doesn't report monthly
sales, the market researchers at Malvern, Pa.-based Auto Outlook count new Tesla
registrations. In 2013's second half, the monthly tally showed Tesla sales to be
flat at best in key markets like California. In its year-end conference call,
Tesla said that it is delaying North American deliveries to supply cars to
Europe -- leading some observers to expect noticeably longer waiting times in
North America. But a team of buy-side researchers tells Barron's that its survey
of Tesla sales locations finds wait times unchanged from last year -- puzzling
if demand is unabated.
      Tesla shares spiked from $217 to $265 in late February, after Morgan
Stanley analyst Adam Jonas wrote that the Gigafactory plan increased his
valuation from $153 to $320. Two days later, with the shares at $252, his
investment-banking colleagues helped Tesla sell $2 billion in convertible
debt. The Morgan Stanley report was light on economic details. But Wolfgang
Bernhart, an electric-car expert at the Stuttgart, Germany, office of Roland
Berger Strategy Consultants, believes that Tesla's current deal with Panasonic
could provide lithium cells for about $185 per kilowatt-hour at volumes of
50,000 cars a year. Technology improvements and the Gigafactory's scale might
cut that to $130. Other industry experts guess that battery packaging and
electronics would add another $45 per kilowatt hour -- for a total Gigafactory
cost of about $10,000 for Tesla's base 60-kilowatt-hour battery, versus a
possible $16,000 in today's plants.
      Rivals could also attain a $10,000 price, according to Prabhaker Patil,
who runs the Troy, Mich., factory where LG Chem supplies lithium batteries to
General Motors (GM), Ford Motor (F), and others. A BMW spokesman says its
suppliers at Samsung SDI will also keep pace. Yet LG and Samsung have had losses
or razor-thin profits at their underutilized factories; a $5 billion
investment in a Gigafactory could yield similarly lousy returns unless Musk
sells 500,000 cars annually. "What happens if the market is only a half or a
quarter the size he thinks it is?" says Anderman. "Then he has a big factory
running at only half or a quarter utilization, and his costs are not better than
they are today."
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