Tesla battery

In 1996 GM unveiled the EV1, the world’s first mass-produced, purpose-built electric car. With a range of 70-100 miles and the ability to do 0-60mph in eight seconds, the futuristic EV1 was the closest anyone had come to creating an electric car that could compete with petrol-powered rivals. Due to high costs, however, production of the EV1 ceased in 2001, much to the disappointment of those who hoped it would represent a turning point in mainstream attitudes towards electric vehicles.

It’s difficult to say when it happened, but there’s no doubt this turning point has now been reached. Although low petrol prices have put short-term pressure on sales, the total number of electric or hybrid cars sold in the US has gone up every month since the start of 2010. Vehicles produced by Tesla, an electric specialist aimed at the top-end of the market, have continued to sell by the tens of thousands per year, as the gap between electricity and petrol-powered closes. Tesla’s model S has a limit of up to 330 miles and can reach 0-60mph in 4.2 seconds, proving that there is no longer a compromise between performance and the desire to be green.

At the heart of the improvement of electric car performance is better battery technology. Most of the models released in recent years use lithium-ion batteries, favoured because of their high energy-density and discharge rates; qualities that are being continually enhanced through the application of nanotechnology. Car manufacturers are now investing in their battery manufacturing capabilities to keep up with the increasing technical complexity and expected demand growth. Of all the plans afoot, Tesla’s is undoubtedly the most ambitious.

"At the heart of the improvement of electric car performance is better battery technology."

In February 2014 the company announced it was to build Gigafactory 1, a gigantic $5bn battery factory at the Tahoe Reno Industrial Centre in Nevada, in partnership with co-investor Panasonic. Set for completion in late 2016-early 2017, the factory’s projected output for 2020 is 35GWh/year of cells and 50GWh/year of battery packs. The company believes that by taking control of this part of the supply chain it will allow them to shave 30% off production costs.

"With a planned production rate of 500,000 cars per year in the latter half of this decade, Tesla alone will require today’s entire worldwide production of lithium ion batteries," the company said in a press statement. "The Tesla Gigafactory was born of necessity and will supply enough batteries to support our projected vehicle demand."

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By GlobalData

A lack of raw materials

First Tesla must get it hands on reasonably priced, stable lithium supplies, a feat proving to be quite tricky. Though naturally abundant, lithium is only produced in commercial amounts in a handful of countries – predominantly Australia, Chile, China and Argentina – and by a handful of companies such as Rockwood Lithium, SQM and FMC. Unfortunately for Tesla, supply agreements with these monopolies have yet to materialise. In the opinion of Robert Bayliss, managing director and manager of minor metals research at mining industry consultants Roskill, Tesla may be struggling to navigate a very different business landscape.

"Typically in the automotive industry they are very hard on their supply chain — they will squeeze every last drop of margin out of everyone else to try and get the competitive advantage themselves," he explains. "Of course, they [Tesla] are dealing with an industry that isn’t used to those practices and incumbent miners are resistant to entering into long-term contracts at discounted rates. Tesla quite clearly has been to the existing suppliers and said ‘we are only prepared to pay X’ but those companies won’t meet the price that Tesla wants to pay."

To avoid paying a premium to the incumbent players, Tesla has been striking deals with companies that are yet to start production. In September, it was able to agree a supply contract with Nevada-based lithium miner Pure Energy Minerals and the previous month agreed a deal with Pure Energy and Bacanora Minerals to buy lithium from a proposed mine in northern Mexico.

This is a risky strategy.

"To avoid paying a premium to the incumbent players, Tesla has been striking deals with companies that are yet to start production."

There isn’t much expertise in lithium production outside the incumbent producers, and given the relatively small margins (the whole lithium production industry is only worth around $1.6bn), new market entrants tend to be small-cap companies with limited cash in the bank. Even if these companies are able to get a project off the ground, it is doubtful they can make a timely, meaningful dent in Tesla’s demand requirements.

In December, reports emerged that Tesla had taken this strategy a step further. According to local press the company was in talks with Codelco, the Chilean state mining company, to try to persuade the copper-producing giant to consider mining lithium; the miner has expressed interest in lithium before but has yet to take the plunge.

A representative of Codelco refuted the claim. "Codelco is conducting a preliminary analysis to evaluate possible lithium exploitation in its mining properties," the company said. "However, that in no way means that Codelco has been negotiating with any company." It’s one thing to bank on a proposed project, but quite another to try and strike a deal with a company for whom such a project is a pipe dream.

Grin and bear it

It appears that, for Tesla to achieve its ambitious battery production targets, it will have to pay the price of the incumbent players. Looking further ahead, if the company decides to take greater control over the supply chain in order to drive down its lithium production costs, it may consider buying a lithium mining business; however, Bayliss from Roskill believes this is unlikely.

"You don’t tend to see automotive companies getting that far down the supply chain," he says. "They might have investments in original equipment manufacturers or very close links with them, and they may look at new technologies. GM spent $500m the other day investing in Lyft. But they don’t seem that interested in wrapping up that raw material. They would probably rather enter long-term agreements. The Renault-Nissan alliance had one with SQM for material but I don’t think it was significant volumes."