The major gamble with battery prices presently falling on the commodity market is whether Tesla’s investment plans will pay off in the long run or whether they will struggle to command a decent return in the face of falling battery prices.
Rising capacity could mean overcapacity and lower prices
The argument in defense of the $5 billion price tag behind the Tesla Gigafactory in Nevada, is that if demand for electric vehicles and energy storage don’t manage to hit their anticipated targets, there is always a useful fallback with a ready made market for selling batteries to cell phone manufacturers.
Tesla is planning to up its production to cope with a rising demand for electric vehicles and as the Model 3 approaches the intended launch date this has allowed the Gigafactory to keep the production line for batteries ticking along nicely.
However, the dilemma is that a noticeable rise in battery capacity to meet the demands of automakers and energy storage developers is also managing to drive overcapacity. The inevitable consequence of that scenario seems to be lower battery prices.
How did it get to this?
If you want the inside track on energy related stories, Oil and Energy Investor has details on the sort of stories that are dominating investors thoughts, and there are no doubt plenty of investors who want to know if Elon Musk’s big bet on batteries is going to pay off.
To understand what the end result of Tesla’s substantial investment might be you need to take stock of what the Gigafactory is all about and how the competition responded.
The purpose of the Gigafactory was to be able to get close to doubling the world’s battery production level. The logic behind that strategy is clear to see, as Tesla have plans to produce about half a million electric vehicles every year, which requires a lot of batteries.
The obvious risk there is that sales have to be brisk and sustained for their electric vehicles if the battery production line is going to be working near to capacity. On top of that, a number of serious competitors were hardly going to take an attempted dominance of the battery market lying down, which is why the likes of BYD and AESC, who are part of the Nissan and NEC, have been working at creating their own capacity for meeting demand for batteries.
There is a fight on for market share and this is resulting in some aggressive sales strategies where some battery manufacturers willing to sell their product at price close to their cash cost, just to try and grab a further slice of market share.
The fact that Nissan recently announced its intention to sell its stake in AESC is a clear pointer to the fact that they think it is smarter to buy their batteries on the open market.
Tesla is taking an opposing view and appears committed to trying to make their battery production plans pay off by going at it full throttle, but both views can’t be right, so only time will tell whether Nissan gave up too soon or Tesla overestimated how busy the Gigafactory was going to be.
An industry that is still growing
A major point that investors may do well to remember is the fact that electric vehicles industry is still in its relative infancy and continues to grow, so you can’t predict with any specific degree of accuracy how quickly that demand and capacity will expand.
It’s not rocket science to deduce that if demand lags behind supply levels, the battery market is going to be oversupplied.
One caveat to this negative scenario is that energy storage is continuing to evolve and it is not just vehicles that will be powered in this way in the future, our homes are also under the spotlight when it comes to finding a way to reduce energy bills and carbon footprint at the same time.
The Tesla Powerwall is making an impact in Australia, where millions of households already harness the sun’s energy to power their homes.
The mission of companies like Tesla is to accelerate the transition to sustainable energy. With the Gigafactory based in Nevada, the aim is to produce more lithium ion batteries annually than there were produced worldwide just a few years ago.
That’s a big investment and a bold step and how much they sell their batteries for is another issue entirely, but energy investors will be watching closely to see how things work out.
Lola Woodward is a Wall Street watcher who loves to read everything she can get her hands on involving investing and stocks. She also enjoys helping new investors by sharing her experiences and insights on various investing and finance blogs.