Recently, I wrote an article about the advances in battery and other green technology that could be a risk factor for Tesla Motors (NASDAQ: TSLA). A question that was raised was why Tesla couldn't just switch to another battery technology. That's a very good question. Here's why it's not as easy as it sounds, and how it could affect Tesla's stock.
Is it easy to switch between batteries?
In a Congressional Research Service for Congress, Bill Canis wrote regarding the development of lithium-ion batteries, "the automaker's decision as to which battery to procure will be in effect for a prolonged period, perhaps the life of the vehicle model, as a battery designed for one vehicle may not function optimally in another."
He also points out that even when an automaker enters into an agreement with a battery manufacturer -- as Tesla, Nissan (NASDAQOTH: NSANY) and Toyota (NYSE: TM) have done with Panasonic (NASDAQOTH: PCRFY) -- the automaker is "integrally involved" in the design and production of the battery.
The reason is straightforward: Each automaker has proprietary technology that reacts in a specific way with the battery's output and overall vehicle operations. As General Motors (NYSE: GM) put it, "The Volt's battery pack design is directly coupled with the vehicle design to assure complete integration between the battery pack and the vehicle."
In other words, each battery is designed specifically for the car it's going to be used in -- a battery made for a Tesla Model S is optimally designed for that car; a battery made for a Nissan Leaf is optimally designed for i car. More pointedly, the battery itself influences the car's design.
So is Tesla tied to its current battery? Absolutely not. Tesla uses a modular battery design, and as technology advances in li-ion batteries, it can swap out the cells. But that's swapping li-ion for li-ion. As technology changes, Tesla could switch to a different battery type, but it's not as simple as swapping one battery for another; the battery itself has to be specifically designed to integrate with Tesla's vehicles.
Consider: When Tesla designed its battery pack and electric powertrain system, it did so to meet the requirements of a li-ion battery. Tesla states: "Designing an electric powertrain and a vehicle to exploit [li-ion battery] energy efficiency has required extensive safety testing and innovation in battery packs, motors, powertrain systems and vehicle engineering. Our proprietary technology includes cooling systems, safety systems, charge balancing systems, battery engineering for vibration and environmental durability, customized motor design, and the software and electronics management systems necessary to manage battery and vehicle performance under demanding real-life driving conditions."
Different types of batteries behave differently. More importantly, li-air batteries are still being developed, so things like specific energy, energy density, specific power, charge/discharge efficiency, self-discharge rate, and cycle durability are all theoretical. However, two known differences are size and weight -- li-air batteries are smaller and lighter. Consequently, you can't simply exchange a li-ion battery for a li-air battery.
So what does this mean for Tesla?
There are a number of ways Tesla could incorporate new technology:
1. It could completely redesign its vehicles around the specifications of new battery technology -- the most expensive option, and unlikely.
2. It could combine its li-ion battery with a new type of battery, as is believed to be the case with its patent for metal-air batteries -- unfortunately, this still uses expensive li-ion technology.
3. It could leave the car design unchanged and retrofit a completely new battery with the same form, fit, and function of li-ion-- however, depending on the makeup of the battery, that could negatively affect optimum performance.
But no matter how you break it down, there has to be a redesign somewhere, and that spells cost.
For a large company like Toyota or GM, that cost is something they can afford. However, Tesla is not on the scale of Toyota or GM. In fact, until recently, Tesla had a net loss every quarter since the company's inception, which through last Dec. 31 accumulated to a total net loss of $1,065.6 million. Furthermore, Tesla's recent profits are largely due to the Model S. That's one car. Yes, it's an absolutely beautiful car, and a technological masterpiece, but Tesla's business model is dependent on widespread acceptance of the Model S, as it intends to use those profits to develop the Model X. What this basically boils down to is that Tesla may not have the necessary resources for a new battery.
Can't Tesla get new battery cells from Panasonic? The short answer is yes. But that doesn't negate the need for research and development. Panasonic and Tesla have a history of partnering in battery design, But that's exactly what it is -- a partnership. It's not all Panasonic footing the bill. Further, a partnership would rely on Panasonic's desire to make a li-air battery for Tesla. Although I think it's highly likely it would, how much that'd cost Tesla is uncertain.
A look into the future
Future technological advances in batteries is a risk to Tesla because of the cost involved. Could Tesla switch to a new battery? Of course. Did I say it couldn't? No. But given Tesla's recent profitability after 10 years of net losses, the cost that battery could require would probably hurt Tesla's bottom line -- whether it's a little or a lot. Therefore, it could also hurt Tesla's stock price. Finally, batteries themselves may not be the future for green cars. As I've written before, cryogen (liquid) air powered engines are re-emerging as a possible alternative energy. They use existing infrastructures, and the technology is such that energy stored as liquid air would allow "wrong time" energy produced by wind farms, and other sources, to be stored for later use.
This is a big deal. Consequently, this is something investors would do well to monitor.
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