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- Tesla wants to make lower cost electric vehicles, as a key part of its plan to fend off challenger.
- But it needs to invest in low-cost, cutting-edge battery tech to see that vision through.
- A mineral research firm says Tesla is not doing enough to control the costs of its batteries.
Elon Musk's ambition to sell 20 million Tesla vehicles per year by the end of the decade is no joke. So it was strange that its long-awaited plans for a low-cost electric vehicle was a complete no-show during the launch of Tesla's latest master plan in Texas last week.
A cheaper Tesla would be a surefire way of enticing a new crop of would-be customers. Instead, Tesla's CFO said at the event that it would focus on Silicon Valley's very much en vogue trend of "efficiency" to come up with the $175 billion that it needs to make the necessary investments to hit its 20-million-cars-per-year target.
Musk himself teased at a Morgan Stanley conference this week that there's a "clear path" to "a smaller vehicle that is half the production cost of the Model 3," Tesla's cheapest vehicle with a starting price at around $43,000.
Still, given Tesla's delivery of roughly 1.3 million vehicles last year, it clearly has a long way to go to hit Musk's goal. Where exactly should it start if it wants to get more efficient? Perhaps with the most expensive EV component of all: batteries.
"To truly build a sustainable low-cost EV, a number of cost controls need to be implemented across the supply chain," said Benchmark Mineral Intelligence CEO Simon Moores. "None more so than batteries and this wasn't showcased enough by Tesla at Investor Day."
Batteries, the rechargeable workhorses of EVs that quite literally power the whole thing, depend on a critical mix of metals, with perhaps none more critical than lithium. The trouble is, record high lithium prices and a sprawling supply chain that stretches back to China has made battery cost controls a headache for Tesla.
If Musk is serious about delivering EVs that everyone can afford, he'll need to get serious on bringing the costs of batteries down. Failure to do so risks ceding the market to hungry competitors. But if it can pull it off, Tesla has a clear path to expansion.
A big problem for Tesla is the high cost of Lithium
Though Tesla used last week's event to introduce new measures to support its bid to produce low-cost EVs last week – such as a new $5 billion Tesla gigafactory in Mexico – it didn't meaningfully discuss plans to reduce the high costs of its raw materials for batteries, namely lithium.
Moores told Insider that Tesla's next gen EV will need to make use of a particular type of lithium known as lithium iron phosphate (LFP) – a form of the metal that can be used to produce lower-cost, safer batteries.
Tesla has committed to LFP technology, confirming that almost half of its vehicles produced in the first three months of 2022 were LFP-based. There are, however, a few problems with this approach. Musk himself said at the Investor Day event that though "there's enough lithium in the United States to electrify all of Earth," the limiting factor is transforming the metal into battery-grade materials.
The US is one of five countries alongside China housing the largest reserves of lithium, but its production output is ranked extremely low. China, on the other hand, owns 99% of the LFP market, said Paul Guedes, director of capital markets at Nano One Materials, a lithium-ion battery manufacturer in Quebec.
The growing portion of Tesla's LFP vehicles have, in part, been the result of a deal it struck with Chinese battery supplier CATL in 2020. This may be part of the reason Musk spent a portion of earnings calls last year and Investor Day encouraging listeners to get into the lithium-refining business.
Its competitors are also in the same boat. General Motors is investing $650 million into lithium mining company Lithium Americas to build a factory in Nevada. Ford announced earlier this year that it's building the first LFP battery plant in Michigan for $3.5 billion.
In Canada, Nano One Materials, which works with Volkswagen and recently secured a contract with an undisclosed American car manufacturer with global distribution, bought one of the biggest LFP plants outside of China that is based in Montreal to commercialize its technology.
This is all particularly interesting given that lithium prices have been at all time highs: data from Benchmark shows an exponential increase in lithium carbonate prices, rising from $7,508 per ton in January 2020 to an all time high of $70,957 per ton in January. Musk tweeted that it is at "insane levels."
—Elon Musk (@elonmusk) April 8, 2022
Tesla and the rush for lithium
A lack of supply chain controls hinders efforts to produce low-cost EVs. Locking in "long-term raw material prices" is something Moores sees as key if Tesla is serious about controlling the cost of the battery.
The company started to take steps towards taking control of lithium supply into its own hands. In 2020, Tesla made a multi-year deal with Australian miner Piedmont Lithium, which has a site in North Carolina.
The EV maker is also counted as a customer of Albemarle, a lithium miner and processor based in Nevada, and Kansas-based Compass Minerals. During its investor day, Tesla announced that it plans to start outputting lithium from a refinery at its Texas gigafactory later this year.
However, Moores said that lithium carbonate "won't be sourced" from the Texas facility given its focus on producing lithium hydroxide, a higher-performance form of the metal that is irrelevant to its ambitions to produce low-cost EVs.
Guedes told Insider there's a security element to all of this, too. He said Tesla is trying hard to secure resources and its supply chain partners so that it has a steady stream of lithium for its batteries to produce the number of cars its promised investors.
Oliver Chapman, CEO of supply-chain specialist OCI said it could take five to ten years to develop lithium mines to meet the needs of the EV industry.
"Planned demand for lithium will increase faster than supply for a few years before supply catches up," he told Insider.