Tesla’s bat­tery economics get ques­tioned:

Finweek English Edition - - BUSINESS -

A core con­cept in strat­egy con­sult­ing is the ex­pe­ri­ence curve. While I’ll get to cover the full work­ings in a forth­com­ing ar­ti­cle, the core con­cept is that costs of pro­duc­ing units (or more or less any­thing) come down as the cu­mu­la­tive num­ber of units pro­duced by the in­dus­try goes up. Note: defin­ing the units against which ‘ex­pe­ri­ence’ ac­cu­mu­lates is the tricky part. In some in­dus­tries learn­ing is slow and the prices fall slowly. In other in­dus­tries the slope of the curve is steep.

Com­pe­ti­tion tends to ac­cel­er­ate the fall in costs. As long as your sell­ing price is above the cost then you’re prob­a­bly okay. With some anal­y­sis, th­ese cost curves be­come pre­dictable and this al­lows brave com­pa­nies to price now based on where costs will be in fu­ture. They do this of­ten to win mar­ket share that al­lows them to learn faster than com­peti­tors and drive their costs down faster than the in­dus­try. For ex­am­ple, when Ama­zon launched its S3 ser­vice they priced at a rate many be­lieve was be­low their ac­tual costs at the time.

Some­thing just like this is go­ing on in the elec­tric car in­dus­try, where Toy­ota, Nis­san and Tesla seem to make all the head­lines. Its im­por­tant to note that Toy­ota and Nis­san have sold far more of the Prius or the Leaf than Tesla – they are much fur­ther down the curve (and th­ese three com­pa­nies are fur­ther down the curve than the rest of the in­dus­try com­bined).

Tesla’s shares have done well lately. So it’s worth not­ing that while Tesla has a stated aim to slash the cost of its cars by half by 2016, the core cost of th­ese cars is their bat­tery. If you think about it, elec­tric cars dif­fer from petrol cars only re­ally in their mo­tor and their fuel source. Elec­tric mo­tors have been around for years and are un­likely to sud­denly get more ef­fi­cient. Bat­ter­ies are the sin­gle place where tech­nolo­gies have to ad­vance to make the cars more af­ford­able and more use­ful. The prob­lem for Tesla is that few ex­perts be­lieve the cost of the bat­tery will drop by more than 30% in this time.

So Elon Musk needs to take care that his cost curve (which falls at only 30%) doesn’t end up higher than his price curve (which he wants to fall at 50%). The bot­tom line is that savvy an­a­lysts are urg­ing cau­tion about the bet on fall­ing bat­tery prices that Tesla shares rep­re­sent.

If you have a ques­tion/is­sue you’ d like to dis­cuss with us, then send an email to f in­week@val­u­a­tionup.com.

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