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Is Tesla Motors, Inc. Risking Too Much With Its Gigafactory?

Tesla Motors (NASDAQ: TSLA  ) and Panasonic have been partnered up for a number of years now. In January 2010, the two companies began to collaborate on the development of next-gen battery cells based on the 18650 form factor (meaning that they are 18mm in diameter by 65mm in length), and nickel-based lithium-ion chemistry. In October 2011, a supply agreement between the companies was finalized. The agreement supplied Tesla with battery cells to build more than 80,000 vehicles.

Source: Tesla

From 2011 until the Gigafactory
In October 2013 Tesla and Panasonic amended their supply agreement to provide the electric car company with preferential prices and a minimum of 1.8 billion lithium-ion battery cells between 2014 and 2017, when the Gigafactory is to come on-line.

In general, car manufacturers don't build batteries in-house for their plug-in fleets. Instead, they opt to buy from, and cooperate with, well-established battery producers. Obviously, Tesla has followed this standard practice for a number of years with Panasonic, but it's changing the manufacturing game by internalizing this vital component. So, what will Tesla's Gigafactory mean for the concentrated battery market?

Market share
There are three manufacturers that dominate 80% of the battery market: AESC, LG, and Panasonic. AESC provides batteries for the Nissan Leaf and Renault's electric vehicles, thus the company accounted for 33% of the EV market in 2013. LG works with GM, Ford, and Renault, which allowed the company to grab about 25% of the 2013 battery market. Panasonic provides batteries to both Toyota and Tesla, giving the manufacturer about 22% of the market.

Source: Panasonic

Tesla predicts that its Gigafactory battery production will exceed global 2013 production, which should bode well for Panasonic's market share.

Risky business
What does this mean for shareholders? Earning market share in a growing industry (lithium-ion batteries are used in everything from smart phones and tablets to cars and external power storage) presents Tesla with a great deal of revenue opportunity from development services. But it's not all great news, because this endeavor is environmentally risky, to say the least.

Lithium-ion batteries have a huge environmental footprint that Tesla must address if it is going to negate the risks intrinsic to producing as many batteries as its Gigafactory is expected to. Tesla's new endeavor could double graphite demand, thus requiring the opening of six new mines in order to keep up with projected development.

Study up
Tesla's CTO JB Straubel has confirmed that the company has done it's own internal study in order to determine the environmental impact of its manufacturing processes. He went on to say that the company would likely release a white paper to address this topic sometime soon. Unless Tesla did a full life-cycle cost analysis on the effect of graphite mining in its production, not just on the energy used to manufacture its fleet, the electric-car company will have a lot to environmental concerns to address.

The inherent risk in using a material such as graphite will prove to be a hurdle that Tesla will have to navigate with finesse. Shareholders should be on the look out for the company's white paper on this volatile supply chain concern.

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Read/Post Comments (7) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2014, at 1:05 PM, michael63636 wrote:

    Please forward to Elon Musk:

    The Ninth Amendment of the US Constitution states:

    "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people."

    TSLA must state that it retains the right to sell cars directly to the customer, under the Ninth Amendment of the US Constitution. Those that deny or disparage this right are domestic enemies of the US Constitution.

    The Brady Act violated the Tenth Amendment. Several Sheriffs filed law suits against the U.S. There were cases in several Federal Court Districts. Most of the corrupt Federal Judges ruled against the Sheriffs. Some of the Sheriffs appealed the lower court rulings. Most lost on appeal. But in two of them the Sheriffs won. Since there were some winners and some losers at the Appellate Court level, this forced the case to the Supreme Court. Mack and Printz v. United States, 521 U.S. 898 (1997),[1] was a United States Supreme Court ruling that established the unconstitutionality of certain interim provisions of the Brady Handgun Violence Prevention Act. It was a 5–4 decision victory. Most of the corrupt Federal Judges are domestic enemies of the U.S. Constitution, so beware of these.

    In order to win it is imperative to file law suits in all Federal District Courts simultaneously so that TSLA might win in one. All the cases must be appealed, so that TSLA might win in one of the Federal District Appellate Courts. This will force the case before the U.S. Supreme Court.

    TSLA must file the law suits under Title 42, Section 1983 of the U.S.C. This is denial of Constitutional rights under color of authority. The suits must name specific persons as defendants, for example, Chris Christie of New Jersey.

    Title 42, Section 1983 of the U.S. Code states:

    "Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects, or causes to be subjected, any citizen of the United States or other person within the jurisdiction thereof to the deprivation of any rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured in an action at law, suit in equity, or other proper proceeding for redress, except that in any action brought against a judicial officer for an act or omission taken in such officer’s judicial capacity, injunctive relief shall not be granted unless a declaratory decree was violated or declaratory relief was unavailable. For the purposes of this section, any Act of Congress applicable exclusively to the District of Columbia shall be considered to be a statute of the District of Columbia."

    All States agreed as a condition of their admission to the Union of the United States that the U.S. Constitution is the Supreme Law of the Land. All laws that conflict with the U.S. Constitution must be rescinded.

    The American Civil War proved that no State may secceed from the Union. No confederation of States may secceed from the Union unless it can win the civil war that follows.

    According to the U.S. Army Military History Institute, the military war deaths in the U.S. Civil war were 625,000, those of WW 1 were 116,516 and WW 2 were 405,399.

    Texas, Arizona, Virginia, Maryland, Delaware, New Jersey, New York, Ohio, Georgia, and Colorado are controlled by domestic enemies of the U.S. Constitution, because they deny or disparage TSLA's right to sell cars directly to the consumer. If they are serious about continuing to do so, they must secceed from the USA and win the resulting civil war.

    How badly do these domestic enemies of the U.S. Constitution want to take away the Constitutional rights of the citizens and persons within their jurisdictions?

    TSLA customers must state that they retain the right to buy cars directly from TSLA, under the Ninth Amendment of the US Constitution. Then they must file class action law suits in Federal District Courts using the same methodology and strategy herein above outlined for TSLA.

  • Report this Comment On March 20, 2014, at 1:25 PM, dlwatib wrote:

    Graphite has many uses. I don't believe that its supply is of unusual concern in the making of batteries. Musk did work from first principles in determining that lithium ion battery technology did not depend upon unsustainably scarce minerals.

  • Report this Comment On March 20, 2014, at 1:30 PM, SteveTG3 wrote:

    looks like you saw Bloomberg's story writing about graphite last week, but missed Elon Musk's tweet in response, here it is from March 14th:

    "Working on a Model S environmental impact blog this weekend to counteract BS like the @Bloomberg graphite story. Beyond ridiculous..."

  • Report this Comment On March 20, 2014, at 2:30 PM, deeageaux wrote:

    Graphite can also be manufactured.

    Hitachi and ConocoPhillips are just two of the firms that manufacture high quality graphite.

    China is the dirtiest source for graphite.

    Tesla does not have to nor do they have the worst practices in the industry.

  • Report this Comment On March 20, 2014, at 2:48 PM, michael63636 wrote:

    Graphite is manufactured on a large scale. A synthetic graphite can be developed to replace the mined graphite.

  • Report this Comment On March 20, 2014, at 3:54 PM, jbob1 wrote:

    I believe ConocoPhillips still manufacturers CPREME graphite, but have shut-down their NA plant, when Fisker went bankrupt. ConocoPhillips was supplying A123 Systems with the graphite powder to create the lithium-ion batteries. The father of CPREME, Dr Bharat Chahar, has recently started working for Zenyatta Ventures, as has his ConocoPhillips colleague, Tadashi Yamashita.

    Zenyatta has found a very rare hydrothermal vein graphite deposit. The graphite is found in a breccia pipe, and is essentially, graphite, quartz and feldspar. Little to no other impurities. To get high-purity natural graphite, requires a simple crushing, floating, and caustic bake (use of NaOH..which can be reclaimed, unlike acid leaching). A professor at Lakehead University, Dr. Conly, has received a Canadian Government grant to study this deposit, in addition the Canadian National Research Council has funded a $350K grant to study the metallurgy process.

    The problem with synthetic graphite is that it is very environmentally unfriendly. Mining in itself is environmentally unfriendly, however with synthetic graphite, the most damaging aspect is the processing of flake and amphorous graphite to make synthetic graphite. Using very high temperatures (+3500 C) and washing with acid (acid leaching) is very harmful to the environment. Which is the primary reason Bloomberg has written the "Dirty Rain" article.

    This is not a reccomendation to buy Zenyatta. I find the science and geology behind lithium-ion batteries, and Tesla to be very exciting and interesting. Researching the challenges with lithium-ion batteries, i stumbled across Zenyatta, which they may have something that can help clean up lithium-ion batteries.

    Hope Elon can "save the world"! :)

  • Report this Comment On March 20, 2014, at 9:12 PM, CarFanatic wrote:

    Graphite mining/production is a non issue. Elons plan is to clean up the environment. Not make it dirtier.

    He really cares about the environment and would not let one of his factories pollute.

    Based on his track record, my bet is he will develop a way to make these batteries with minimal environmental impact that will be a model for other battery producers.

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Leah Niu

Leah is a freelance writer for The Motley Fool. She is interested in socially responsible investing, conscious capitalism, and Tesla.

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