Summary/TLDR;
- Tesla is taking a strategic approach to battery cell utilization by putting the fewest number of cells in the maximum number of vehicles.
- Other automakers are going after large-vehicle segments, which require more cells per vehicle, leading to lower volumes of vehicles sold/delivered.
- Tesla is prioritizing battery cell production more than any other automaker.
As the EV battle heats up, legacy automakers are starting to deliver their first all-electric vehicles to customers. As we have seen with Ford, many of these automakers are beginning to realize the long road ahead. To make matters worse, legacy auto may be unknowingly trapping itself while further advancing Tesla’s lead in the EV market. How so?
Batteries.
When you look at Tesla’s vehicle lineup, you’ll immediately notice something: Tesla sells cars, not trucks. While trucks, SUVs, and other large-body vehicles make up roughly 35% of vehicle market share, Tesla has avoided these segments from the start, and for good reason. With the Cybertruck still awaiting production (now slated for Summer 2023), it is clear Tesla has historically set a low priority for this vehicle segment, which begs the question, why? The answer is actually quite simple, and it underscores yet another advantage Tesla holds over its competitors.
More vehicle = More cells
The larger a vehicle is, the heavier it is, and therefore the more cells you need to reach a suitable range for consumers to buy. Studies show that most consumers want at least 300 miles of range in order to consider buying a fully electric vehicle. Ford Motor Co.’s new F-150 Lightning offers 230 miles of range for the standard range batter pack and 320 miles for the extended range pack. At 98kWh and 131kWh respectively, Ford’s long range pack for the F-150 Lighting is approximately 31% larger than the longest range Tesla vehicle, the Model S, which has a 100kWh battery and 405 miles of range¹. That is almost double the range of the standard range F-150 Lightning using almost identically sized battery packs. But none of this should come as a surprise. After all, one of these vehicles is a high-performance sports car and the other is a massive work-horse truck used for towing, hauling, etc. What is surprising, however, is how this affects each company’s ability to deliver vehicles at scale.
High demand, little production.
Because Tesla has opted to maximize vehicles produced, they must put the least number of cells into vehicles as possible. The number one constraint for producing EV’s at scale for any manufacturer, including Tesla, is battery cells.
“Certainly if you go like two, three years out, it’s all about total … how many gigawatt hours of battery are produced. That will be the limiting factor. And then going even further down, it’s the supply chain. What is the rate at which battery materials are being mined and refined?” – Elon Musk
So what does this mean in our Ford/Tesla example? It means that for every F-150 Lightning Extended Range that Ford produces, Tesla can produce ~2.62 Model 3 standard range vehicles, which have a modest 50kWh battery and a 272 mile estimated range. This gives Tesla a massive advantage over competitors like Ford and Rivian who are targeting the Truck/Van/SUV segments as well as brands like Lucid who are optimizing for range by including bigger batteries. Even if consumers prefer larger vehicles, production will remain constrained by the supply of batteries. As manufacturers struggle to match supply with demand, prices for these vehicles will likely continue to climb higher, pushing them out of reach of their intended mass-market audience.
Show me the numbers.
Yeah, yeah, yeah, so Tesla can build a few more cars than Ford, so what? Well, the real impact comes into how this will affect financials for a company. Let’s keep on with our Ford/Tesla example here. At at $47,000 starting price, Tesla is able to generate ~$123,140 ($47,000*2.62) in revenue compared to Ford’s $72,000 for their base trim (XLT) extended range F-150 Lightning. With industry leading margins of ~30%, Tesla is set to make ~$31,866 ($123,140*30%) in gross profit for every F-150 Lightning Ford is able to sell. While we don’t yet know Ford’s margins on the F-150 Lightning, we do know that their first EV offering, the much smaller Mustang Mach-E is no longer profitable as of Q2 2022.
Another blow for legacy auto.
Thanks to this ‘hidden’ advantage, it is my belief that Tesla will continue to outsell, out-deliver, and out-earn its competitors well into the future. I can’t predict the future but if I had to guess how this will impact automakers in the long run I’d say it is likely that many will pivot to smaller vehicle offerings in an effort to ration cells and keep pace with their aggressive delivery targets. Either way, this puts automakers pursing the large vehicle segment at a serious disadvantage, and will likely lead to underperformance over the near to long term.
¹EPA range estimate for Model S with 19″ wheels