China Has the Secret to Fulfilling Elon Musk’s Affordable EV Pledge

Tesla could spearhead mass adoption of its vehicles by turning to cheaper cobalt-free batteries. Will Elon Musk’s firm make the transition?
Elon Musk, Tesla
Elon Musk has promised to make electric vehicles more affordable. With the help of a Chinese company, he may just do that. | Image: REUTERS/Aly Song/File Photo
  • Tesla could reduce costs significantly by using cobalt-free batteries.
  • Cobalt batteries are one of the most expensive components in electric vehicles.
  • Elon Musk envisioned the Model 3 as a mass market car but it currently competes with luxury vehicles.

One of the biggest factors preventing the mass adoption of electric vehicles (EVs) has been their price. Even after incentives, EVs are relatively more expensive than internal combustion engines. Tesla (NASDAQ:TSLA) could be on the verge of solving this by turning to the much cheaper cobalt-free batteries.

According to Reuters, Tesla is negotiating with Chinese battery manufacturer Contemporary Amperex Technology (CATL) on the possibility of using cobalt-free batteries in cars made at Giga Shanghai. Currently, cobalt is one of the most expensive components in EV batteries.

Major cost advantages

Instead of nickel-manganese-cobalt (NMC) or nickel-cobalt-aluminum (NCA) batteries, CATL’s solution is lithium-iron-phosphate (LFP) batteries. A source told Reuters that using the latter could reduce battery costs by double-digit figures.

Last year, Tesla CEO Elon Musk revealed that the cost of replacing battery modules in a Model 3 was between $5,000 and $7,000. That would suggest the battery modules by themselves are up to 20% the cost of a standard-range Model 3.

Tesla
Source: Twitter

Cobalt-based batteries are preferred due to their higher energy density. The higher the density, the longer the range they can offer.

So how will CATL ensure the density of the LFP batteries is as good as the cobalt-based ones? Per Reuters, the company has invented a cell-to-pack technology that boosts the density of these alternative batteries.

Model 3 still not a mass-market car

Tesla introduced the Model 3 with a view of taking electric cars to the mass market. With the lowest price of the Model 3 in the U.S. being $40,000, the electric car belongs in the luxury category.

Elon Musk
A lower-range Model costs nearly $40,000. | Source: Tesla

Even at the luxury car price, the Model 3 now outsells the more expensive Model S and the Model X by a wide margin, demonstrating the market’s hunger for more affordable EVs. Last year the Model 3 accounted for slightly over 80% of Tesla’s sales.

This is despite the Model 3 only having been launched in 2017. The Model S was launched in 2012 while deliveries for the Model X started in 2015.

Bullish news for Tesla stock

A cheaper electric car would not only boost Tesla’s sales, but help the company justify its lofty stock value.

Tesla
TSLA shares have rocketed higher this year. | Source: TradingView

Per Roth Capital Partners, Tesla needs to sell up to 660,000 cars to justify a market cap of over $100 billion:

With the $100bn mkt cap, we estimate this implies expectations of a 550k-600k 2020 deliveries guide, vs our current 460k estimate.

With the consensus estimate being 465,000 deliveries in 2020, Tesla would need to offer highly attractive prices to beat that figure and maintain the stock’s upward trajectory. This is especially the case in the promising Chinese market where incomes are lower than in North America and Europe. Getting and using CATL’s technology could allow Tesla to achieve that.

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Sam Bourgi edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.