Microsoft got into the computing business so early that they were able to establish their operating system as the de facto OS for all PC’s. As a result, they command very large profits to this day. Tesla has a similar opportunity with battery electric vehicles. Their drivetrain is so far ahead of everyone else’s. I think it’s possible that they will maintain their technological lead in batteries for a very long time. If so, it’s conceivable that the other automakers will have to license Tesla’s technology for their own cars in order to compete. Also, Tesla’s supercharging network has a chance to become the de facto fast-charge network for long distance travel. Setting the standard by which others may need to adopt their technology.
Let’s start by agreeing that a BEV drivetrain is the best drivetrain design available for a car. The skateboard design by Tesla yields so many advantages over ICE platforms and even more so over hybrid drivetrains. The drivetrain makes the Model S:
- The safest car on the road – front crumple zone, solid battery pack chassis does not crumple on side-impact crashes
- Lowest maintenance needs of any car – 1,000 fewer moving parts = no oil changes, filters or belts to replace. Brake pads last twice as long due to regenerative braking
- Cheapest to operate – electricity is far cheaper than gasoline
- Most spacious sedan money can buy – front and rear trunks, 7 passengers
- Most aerodynamic car in production – no front grill, smooth underbody
- Superior handling characteristics – low center of gravity, torsional rigidity
- Better driving experience - instant torque, no shifting and quieter ride. Battery pack is a shield under the cabin deflecting road noise
Eventually the world will wake up and realize these advantages and thus consumers will demand skateboard BEV drivetrains. The other automakers will be able to put a battery in the chassis and emulate most of these characteristics in their cars. However, I would argue that they may not be able to match Tesla’s range and cost for the batteries and possibly not the efficiencies of the electric motor/AC inductor.
Battery pack cost is measured as cost per kilo-watt hour or $/kWh. Tesla executives and Tesla’s investor presentation state that their $/kWh is about 1/3 of their competitors. That is a major difference. Given how slow battery advancement happens it would take the rest of the industry a very long time to catch Tesla. The reason for this is that their competitors use purpose-built lithium ion batteries that are built from scratch at very expensive costs. Tesla instead uses a commodity battery. It’s the 18650 lithium ion battery that is used mainly for laptop computers. Billions of these batteries are made every year. They are very cheap. Tesla uses up to 7,000 of them in each Model S battery pack. Further, Tesla has spent over 10 years refining the 18650 battery to make it more efficient and cheaper for use in a battery pack for an electric vehicle. And Tesla has patented the changes they have made to the 18650. They have also taken out defensive patents on designs that were good but not quite as good as their final solutions. So Tesla’s competitors are years behind in $/kWh. Tesla is likely to keep its battery technology lead because it’s the main focus of the company. Additionally, Tesla is collecting data from all of its cars on the road to enhance their performance and this data is proprietary.
This leads to the main point of my argument: The other automakers can copy the 18650 skateboard design but they won’t be nearly as efficient as the Tesla. It’s my belief that they will likely be forced to license Tesla’s designs for use in their own cars in order to match Tesla’s performance. This will happen because consumers will not buy their cars if they can’t match Tesla’s range and cost. The scenario could play out as follows:
Currently both Mercedes Benz and Toyota buy battery packs and electric motors from Tesla to put into their own electric cars. However, this is done in small production numbers. The success of the Tesla Gen III car dubbed the Model E will drive someone to sell a car that can compete with Tesla. The Model E should be in production in 2017. It will have a range of over 200 miles and will start in the $35,000 range. It will have all of the superior attributes of the skateboard chassis. My guess is Mercedes, who owns 5% of Tesla’s outstanding shares, will be the first automaker to design a mass market car using Tesla’s 18650 battery packs. BMW will be forced to offer a competing product but due to their higher $/kWh their car will have less range or cost more than the Mercedes/Tesla. The BMW will fail miserably. If the Mercedes/Tesla vehicle can go 250 miles for $35k and the BMW can only go 150 miles (just a random guess) for $35k then who is going to buy the BMW? They will eventually have to emulate Mercedes and purchase Tesla’s battery designs for use in their own BEV’s. These cars will prove to be wildly successful and eventually they will have to use Tesla’s drivetrain for their entire line-up of cars. This process will occur with the Japanese and U.S. automakers as well. 1 manufacturer will start with 1 car while their competitors scoff and then offer an inferior product. They will eventually come around and expand the Tesla drivetrain to their entire lineup. This could possibly happen within 5 years of the Model E introduction.
Another supporting point is the Tesla Supercharger network. In 2018 if someone wants to sell a car to compete with Tesla they will need a Supercharger network. Will they have the technology for Supercharging? Will they create their own network? I don’t believe that is likely. First of all it will take them a few years to actually build it out. Secondly the best locations will already be taken by Tesla. So it’s likely they pay Tesla so that their customers can charge at the Tesla station.
What about battery supply? Let’s say a carmaker figures out how to match Tesla’s $/kWh using 18650 batteries. In 2018 they decide to start selling a Tesla competitor. Where are they going to get the batteries? Elon Musk has already stated that the number of batteries needed to supply the Model E far exceeds the current global production of 18650 batteries. So they will need to build a giga-factory like Tesla to supply their own production. Yet another barrier to entry.
So how big is the auto market? In 2012 80 million new cars were sold worldwide. Let’s imagine that Tesla could get Microsoft-like market share of 90% of all new autos sold. I’m pulling a number out of the air but let’s say average sales price for a Tesla drivetrain is $10,000 and let’s say it has 20% margin. That equates to $720 billion in revenue and $144 billion in profit. Wow! That doesn’t include Supercharger revenue or revenue from selling their own cars. Even if Tesla only gets 50% market share the numbers are still out of this world.
For those of you who believe the other auto makers can match Tesla’s battery prowess, consider where they are now. Mercedes has been working on BEV’s for quite a while. This year they begin selling the SLS EV. It’s a BEV version of their top-of-the-line SLS super car. It only has a range of 120 miles and it will cost $550,000. The regular gas powered SLS sells for $200,000! That’s right, the BEV version of the same car is $350,000 more expensive and will only go 120 miles on a full charge. This is the state of Mercedes’ current battery technology. BMW has spent a billion dollars developing their new electric cars and all they could come up with is the i3 and the i8. These cars have very limited range of about 100 miles. The rest of the world is so far behind Tesla and Tesla is making improvements every year. I believe they will keep their lead for 10 years or more. If so, almost every car sold will have Tesla inside.