Tesla, EV Makers’ Battery Costs Aren’t All About Commodities. That’s Good.

[view original post]

A worker assembles a battery pack for an electric vehicle on the production line at a Mitsubishi Motors plant.

Kiyoshi Ota/Bloomberg

Battery costs are now rising, and that’s a problem for electric-vehicle makers’ profit margins. Rising prices are enough for some to take a dire view of some auto stocks. There is more, however, to cost reduction than falling commodity prices.

That’s good new for Tesla (ticker: TSLA) as well as all auto makers who are vying for a piece of Tesla’s EV market share.

EV battery costs fell roughly 90% between 2010 and 2020, according to Bloomberg New Energy Finance. They fell another 6% in 2021, hitting about $132 per kilowatt-hour, or kWh.

Performance like that has resulted in a belief that battery electric vehicles, BEVs, will eventually be lower cost and more profitable than internal combustion engine, or ICE, vehicles, says RBC analyst Joseph Spak. “Recent higher input costs have certainly thrown a wrench toward that thinking,” wrote the analyst in a Sunday report.

The cost of metals that go into EV batteries, including lithium, copper, and others, are up about 50% year to date, adding perhaps $1,500 to the cost of a typical EV.

Higher raw-material prices is one reason that Wells Fargo analyst Colin Langan downgraded shares of Ford Motor (F) and General Motors (GM) to Sell from Buy back in May. “As auto makers will likely be forced to sell money-losing compliance BEVs,” wrote the analyst.

Langan doesn’t see raw-material prices abating any time soon. Fortunately, there are other ways to reduce costs.

“You ever hear the Wright curve. It’s another way some economists talk about stuff,” says Tim Grewe, GM director of electrification strategy, tells Barron’s. Wright’s curve says that every time cumulative production of anything doubles, costs tend to fall. “The slope [of improvement] varies….there’s all this innovation going on and all these levels.”

The battery lab, which is part of GM’s Technical Center in Warren, Mich., is working on new battery cathodes and electrolytes, among other things, to improve cost, reliability, among other battery specs.

GM targets 60% reduction in battery costs from 2021 levels over the coming few years. Some of that is from science, and some from scale as well as logistics. GM is building its own battery facilities as well as building up a local supply chain so the company doesn’t have to ship materials and components to and from China.

For Wright’s curve, it’s been taking roughly two years to double the number of EV batteries ever made in recent years, and battery costs have been coming down roughly 30% over that two-year span. If everything holds up, that means that GM should hit its 60% goal around the end of 2026 or in 2027

That math would drop the current cost of an EV by roughly $5,000 or $6,000, easily erasing the raw-material penalty. That drop would also, essentially, close the gap between BEV and ICE vehicle costs.

That’s theoretical. And many other things will happen in the EV industry between now and then. EV profitability, for instance, isn’t all about battery costs. Competition matters, too.

“One of our long-held beliefs is that BEVs may change what powers the vehicle from point A to point B, but if the entire industry shifts to BEVs then because of competition, auto-making margins may not really change,” adds Spak in his report.

Spak rates Tesla stock at Hold, but his price target is $1,175. That values Tesla at about $1.2 trillion, roughly seven to eight times his estimation of the combined market value of Ford and GM.

Auto makers are trying to move beyond just auto-making margins, and sell other services to car buyers that are enabled by all the software and connectivity transforming the car.

For now, investors are focused more on the short-term problems of inflation rather than the opportunity for EVs and software. Ford, GM, and Tesla shares are down about 35% year to date, on average, worse than the 14% and 10% respective drops of the S&P 500 and Dow Jones Industrial Average.

Write to Al Root at allen.root@dowjones.com