The Race to Cheaper Electric Cars Through Lithium-Ion Batteries

R2-D2 rushes ahead. The Star Wars robot is not fleeing from Stormtroopers. Or trying to deliver an urgent message to the resistance. Instead, he is carrying tools and parts from one station to another.

You see, this R2-D2 robot is one of the robots employed at Tesla [NASDAQ:TSLA]. 160 robots work in this factory in California where workers treat them as colleagues.

Some of these robots can be so impressive that they have names after X-Men characters. The giant ‘Wolverine’ can lift and move cars from one line to another.

We may soon be seeing any of these robots at Tesla’s new Gigafactory in Nevada. You see, Tesla is aiming to build half a million cars a year by 2020. And to do so, they will need today’s entire world production of lithium-ion batteries.

Elon Musk, Tesla’s CEO, believes the Gigafactory is vital for the future of Tesla. ‘It is not just gonna be the biggest lithium ion battery factory in the world, but it will actually be bigger than the sum of all lithium ion factories in the world.

They have teamed up with Panasonic to produce the batteries in-house. With this new factory, they hope to supply enough batteries to satisfy market demand for Tesla vehicles. And to make electric cars more affordable.

You see, the most expensive part of an electric car is the battery. The reason for this is that there are many intermediaries in producing a lithium-ion battery.

Lithium may be mined in Australia or Chile. Then it is sent to Asia, where most of the world’s lithium-ion battery production is. And from there, the battery goes to the electric car manufacturer.

By eliminating intermediaries and increasing battery production, they could reduce the cost by 30%, bringing down electric car prices in turn.

The truth is, batteries are becoming big business. Up until 2009, laptops were the only things using these batteries. But in 2009, two industries — automotive and energy — came into the market. Investment into batteries went up, while prices came down.

Now the price of batteries is falling quicker than predicted. Nykvist and Nilsson recently published a study in Nature Climate Change. They say if battery prices fell to less than US$150 per kWh, electric cars would be cost competitive with combustion cars.

We are approaching that number.

Cost for lithium ion battery packs

Source: Bloomberg

And Tesla is not the only one building its own factory to produce cheaper batteries.

BYD Auto [SHE:002594] is also planning to race Tesla in supplying batteries for electric cars. Warren Buffett is backing this Chinese electric auto manufacturer.

BYD produces most of its batteries in China, but are planning to open a factory in Brazil. They’re also increasing battery production to match Tesla’s Gigafactory output.

LG Chem [KRX:051910] is the third largest lithium-ion battery maker. They provide battery packs for General Motors. In 2013, they shifted production for GM from South Korea to their new manufacturing plant in Michigan.

Earlier this year, LG Chem scrapped a US$4.2 billion petrochemical deal in Kazakhstan. Instead they are investing that money on batteries. And they’re planning to build another manufacturing plant in Poland to meet demand from European automakers.

The increase in battery manufacturers will keep bringing the price of batteries down. And we could see some changes in transportation soon.


Selva Freigedo,
For Markets and Money

Markets and Money’s Vern Gowdie believes we’re already at the beginning of the next major crisis.

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Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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