Tesla Gigafactory Protects Aging Model S

By Richard Menta 4/20/14

I find it interesting that the pundits who spend lots of time obsessing over Tesla's proposed Gigafactory have yet to mention what I think is the key reason the Tesla Gigafactory is vital to the ongoing health of the company. I have not found one expert who has brought it up. No one from the automotive press. No one from the financial or technology press. No one from the general press. I'll admit it's possible that I may have missed somebody, but with all of the articles I have read so far on Tesla you would think others writing about the company would have quickly picked it up?

It seems pretty obvious to me. Am I the one missing something or are they? Here's what I think regarding the need for Tesla to invest in its own battery factory.

Several year's from now there will be on the road a good number of eight-year old Tesla Model S vehicles with well over 100,000 miles on them. Many will be running perfectly, but for most their aging batteries will have lost at least some efficiency. As the cars get a little older they will lose significant efficiency and at some point those batteries will be due for replacement.

If it costs $25,000 to replace those batteries it will crush the resale of older Tesla cars. It would also kill the residual value of those cars, critical when you lease a new Tesla.

I'm not saying that $25K is the present price for a new Tesla battery pack. I don't know what it costs and since all Teslas Model S cars are still under warranty the company has no reason to reveal that cost, at least not yet. I just know that if it is too expensive few will want to pour that much money into an old car. We do know that the battery pack on the Tesla Roadster is $40K, but it is not a fair comparison as the Roadster was not a mass produced car so efficiencies of scale did not apply to it.

Companies like Panasonic, who supply Tesla batteries today, produce according to short term need and mid-term projections. If Tesla continues to outsource battery production they have to be spot on with those projections or else they will be left with either an over-supply of batteries or, worse, a critical shortage. Furthermore, third party companies may have reason to keep battery prices higher for a longer period, because it serves their financial self-interest. Conservative forcasting that reduces risk for the supplier could easily increase the risk for Tesla.

It's All About Risk Control

I think Tesla is building the Gigafactory, because it decided it needs to reduce a significant cost/price risk. More important, they need to take control as opposed to chancing it to the whims of the battery makers. Battery replacement for older Teslas could be a lucrative side business if the retail price is relatively reasonable for a car that, on average, is coming off the production line around the $90K range. But if the cost of battery production is so high that the retail price offers little incentive to replace them....

Tesla wants to avoid battery replacement sticker shock when the eight year, 125,000 mile warranties on the original batteries start to expire. Building a battery factory from the ground up takes years. But, Tesla has to build more than just a battery factory.

Tesla has to reduce battery costs dramatically over a relatively short period of time. The Gigafactory must also be a research facility; a well endowed one that will not only come up with breakthroughs in technology, but then move those breakthroughs swiftly into Tesla automobiles. Panasonic is a partner in this endeavor as much for its expertise than its cash. Tesla has already put over 25,000 Model S sedans on the road. A decade from now there will be a lot of cars that will need a battery refresh. The lower the production costs for replacement batteries, the bigger the potential payday for both Panasonic and Tesla.

The question going forward is this: what will the market bear to replace the batteries on a aging electric luxury car? What will a nine-year old Tesla Model S with 110,000 miles on it be worth with perfectly functioning batteries? What will it be worth if the batteries need replacement?

I would like to point out here that even if old Tesla batteries lose half of their original 245 mile range, as a used vehicle it will still function fine as a commuter car for someone who travels 30 miles to work each way. As long as they remember to charge the vehicle every night (and have another car in the household for those long trips) they will stay well below the reduced 120 mile range. Still, good ol' chemistry and the breakdown of compounds will necessitate a replacement at some point. What is the used Tesla car buyer willing to pay for a battery replacement?

This is why Tesla is in a race to reduce battery costs. They need to keep their cars on the road as long as possible so resale values stay high and lease prices stay within reason. With only one moving part in the electric motor and no need for an exhaust system, lubrication system, fuel system, or cooling system there is a lot less to go wrong with a Tesla when compared to conventional automobiles. Theoretically, this aluminum clad, non-rusting vehicle can remain on the road for a very long time.

One last note. If Tesla succeeds with its Gigafactory it will most likely have the battery replacement market for its cars all to itself. That's because any non-OEM battery suppliers would need to have a Gigafactory of their own to competitively price.

Richard Menta