Tesla’s Supplier Problem: Batteries

Scott Francis
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Tesla has a really interesting supplier problem.  As their production ramps up, they will literally need to consume more batteries than the world currently manufactures.

Underlying the frantic efforts of the battery industry to ramp up capacity for Tesla are the cold, hard statistics of the Model S battery system.

Each and every 85-kWh Tesla battery pack contains more than 7,000 automotive-grade cells, all in the common ‘18650’ cylindrical format.

The entire industry produces about 660 million cylindrical cells a year; the 18650 format is by far the most popular.

By the end of June, Panasonic already delivered 100 million cells to Tesla, and the Model S production rate is rising. Plans are in place for Tesla to reach an annual pace of 40,000 cars per year by the end of 2014.

This is definitely better than selling so few cars that you aren’t using that many batteries. It reminds me a little of Apple’s problems securing NAND storage capacity back when iPod production was ramping and the iPhone was about to be released.  Apple began embarking on pre-buys of capacity.  And then with the iPhone it began buying the capital equipment that its suppliers needed to build components for Apple.  It was a reasonable compromise for Apple:

  • Apple stays focused on their core competencies (designing great products, including how to manufacture them)
  • Apple stays away from businesses it doesn’t want to focus on (means of production / factories which focus only on the execution of manufacturing, rather than the design)
  • Apple and its partners share the financial risks rather than the manufacturers taking on all the capital expenses
  • Apple retains control over the means of production (the capital equipment) making it harder for other firms to “fast follow” their designs.

Now, looking at Tesla, they face similar component shortage and scale challenges – and similar criticisms that their products are too expensive (for now).  For now, their suppliers have deeper pockets and more resources to deploy than Tesla does. But if Tesla’s stock price and cashflow continue to improve, Tesla may also be in a position to co-invest, a la Apple, in their suppliers’ expansion plans, securing first-right to future supplies, or favorable pricing.  Certainly Tesla seems to have the same kind of far-seeing leadership at the helm to make these long-term bets.

 

 

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