The US is seeing electric vehicle manufacturer ramp up production and challenging the Asian battery manufacturers.Most of the world’s electric car batteries are now made in China. Accounting for more than 70 per cent of market share by shipments, that concentration also puts global automakers at risk of supply chain disruptions amid escalating geopolitical tensions between the US and China. But Tesla’s new batteries are set to upend the hierarchy of the industry for good.
Since long, Panasonic and LG Energy Solution have been the top suppliers. In recent years, however, Chinese manufacturers such as CATL or BYD have gradually displaced Japanese and Korean rivals and have grown to be the global supply leader.
In recent years, electric car batteries have seen rapid technological advancements. Prior to now, the focus was on increasing energy density for longer driving range. This can be achieved by changing the compositions of the battery materials. It has not been as important to focus on the shape of the battery cell.
Most electric car batteries are currently designed in a way that maximizes space. This has led to batteries that look like rectangular boxes or flat pouches being the most popular for electric cars.
The third type of battery on the market is the cylindrical cylinder batteries. This was because the empty spaces between round cells when they were stacked together were considered to be wasted space. They accounted for only a fifth last year of the global market.
But Tesla is confident that they will be the industry standard. The cylindrical 4680 batteries, which have a diameter 46mm and a length 80mm respectively, are named for their energy density. They can be used to power up to five times the number of Tesla’s current battery packs.
Both electric car buyers as well as Tesla customers, the cost advantage is obvious. New cells are easier to make than the previous versions. The new cells use aluminium as a material, which is a more abundant and cheaper metal than the previous versions. They also require less raw materials. The batteries made with upgraded technology have fewer components, which means they are lighter. Because they don’t have to be modified to fit different car models and shapes, they are easy to mass-produce.
It is the right time. The Inflation Reduction Act, signed by Joe Biden, the US president has raised stakes for global electric car makers who have Chinese battery manufacturers on their supplier list. If the final assembly site was in the USA and the production did not involve “foreign entities or concern”, the new law provides a consumer credit.
Tesla would be able to claim subsidies for an electric car that uses a fully-made battery from its Austin and Nevada plants. This would also allow it to benefit from tax credits of thousands of dollars for US buyers.
In the last few months, Tesla has increased its US battery production. The $2.9bn order that Tesla made to South Korea’s L&F for battery materials, rather than fully-made batteries, demonstrates its intention to include batteries into its vertical integration model. This will result in more affordable batteries as well as higher margins for cars that are sold.
This is a shame for companies like Panasonic and LG Energy Solution, who have placed a large bet that Tesla would continue to rely upon their technology and production lines. Many billions have been spent on building and supplying parts customized for Tesla. Battery makers are expected to meet high market expectations. LG Energy shares are, for instance, valued at an impressive 83 times forward earnings.
While electric car sales are increasing globally, the demand for batteries will continue to rise despite a shortage of manufacturing capacity. Tesla will still be dependent on suppliers until it ramps up production to match its sales.
But that day may come sooner than we expected. In December, Tesla produced enough battery cells to power more than 1000 cars per week. The company is currently expanding its Nevada plant to produce 100 gigawatt-hours (4680 cells) per year. This will allow it to make enough electric cars for 2 million. It will be difficult for its suppliers to price-competite as output rises and costs fall.
Importantly, Tesla’s ability to produce its own batteries is critical to its operational resilience. This allows Tesla to make its own batteries faster and can be modified quickly without causing supply disruptions. Tesla’s disruption of the world’s battery industry has also affected a small number of businesses.