Tesla’s battery economics get questioned:
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.
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