Elon Musk’s massive bet on batteries is riding on two big if’s

February 28, 2014
February 28, 2014

With a plan to build the world’s largest lithium-ion battery factory, Elon Musk continues his long bet against all the incumbents around him: rival car companies, battery-makers and the scientific establishment. The wager is based on two big assumptions: that no one else will make a meaningful breakthrough in battery science and render the $5 billion factory obsolete; and that sales of his Tesla autos will rise more than 22-fold by 2020.

The risks are substantial that one or both of the assumptions will prove invalid. It is especially difficult to imagine the sale of about 500,000 Teslas annually starting just six years from now; he sold just 22,000 Tesla S’s in 2013, and there are only 180,000 electric vehicles of all types on the road around the world.

But if he is right, he will again show up the auto industry, not to mention the oil majors and energy experts, most of whom forecast that a full-fledged electric car industry won’t materialize until the 2030s or even later.

A successful “giga-factory,” as Musk has christened it, would catapult US lithium-ion battery production from its current minuscule scale into a commanding global position. At once, the US would manufacture as many lithium-ion batteries as the rest of the world—current powerhouses China, Japan and South Korea—combined. “He would swallow up all of Asia in one fell swoop. He would create a new pole of lithium-ion battery manufacturing,” Kevin Gallagher, a researcher at Argonne National Laboratory, told Quartz. (Here is a pdf of Musk’s slide deck.)

Thus far, Musk has proven prescient. For about a half decade, the establishment hope for competitively priced electric cars with long-distance capability has rested on a radical improvement in battery chemistry. But, despite $2 billion in federal grants and feverish research, scientists seem no closer to a breakthrough, stymied by the stubborn physics of cramming more lithium-ion electrons into a finite space.

Musk, casting a skeptical eye on the science, decided with Tesla that the leap in electric cars would come in better engineering and management of existing battery systems—and installing these off-the-shelf batteries into a triumphantly styled vehicle.

His giga-factory is the next step. Scheduled for completion in 2017, it is meant to create economies of scale and from the start reduce the cost of the Tesla battery pack by 30%. His aim with this cheaper battery is to sell a third-generation Tesla for the masses—a sexy electric car in the $30,000-$40,000 range. He is raising up to $1.84 billion in debt to finance the development of this mass-market car and the construction of the battery factory.

Gallagher, who co-developed a widely used model for forecasting battery economics, says that Musk’s numbers align with his program. Although carmakers vigorously conceal their specific battery economics, the assumption in the field is that Musk’s use of conventional Panasonic batteries has allowed him to cut the cost of his battery packs to about $300 a kilowatt hour, compared with an industry average just below $500 per kilowatt hour. If with the factory he reduces his costs by another 30%, he would reach $200 a kilowatt hour, or the precise number that Gallagher’s forecasting model suggests is possible with economies of producing 100,000 vehicles.

Musk’s success ultimately will hinge on whether he truly can sell 500,000 vehicles a year. “That is the big if,” Gallagher said. “If he can get that volume, that would be a big deal.”

The market seems to believe. On Feb. 25, Tesla’s shares rose by 14% on news of his factory plans, the latest tranche of a 68% runup this year alone. Over the last year, Tesla’s share price has soared seven-fold. For now at least, the skeptics are outnumbered.

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