Batteries are one of the most expensive components of electric vehicles (EVs). To bring the cost of EVs down, improving battery technology and reducing the expense of their manufacturing will be key.
Tesla (TSLA -3.55%) is trying to do just that, according to experts interviewed for an article published by Reuters this week -- but it hasn't been easy. The company's improved manufacturing process could eventually cut the cost of its Model Y battery in half -- by $5,000 or more -- if the company can bring it together.
Image source: Tesla.
Tesla's bet on better battery manufacturing
You may recall that the EV maker purchased Maxwell Technologies in 2019 with the goal of improving its in-house battery tech.
Maxwell developed what's called a dry-coat process for manufacturing battery electrodes that could help Tesla eliminate several steps that its current wet-coat process requires. The result would be battery manufacturing that's cheaper, faster, and has less of a negative environmental impact, explained the Reuters article.
Between the dry-coat process and increasing the size of its battery cells, Tesla believes it can reduce the cost of a Model Y battery pack to between $5,000 to $5,500 -- nearly half of the cost of the prior version of the Model Y battery pack.
Tesla is no stranger to using new tech to improve its batteries. The company has already started using larger cells for its 4680 battery pack. Those batteries have more capacity and higher efficiency than the ones in its 2170 battery pack.
The dry-coat process appears to only be applicable for the 4680 packs. And while the Model Y is the only Tesla model that's currently using the larger battery packs, they could eventually be used in other Tesla vehicles as well.
Using the large cells has already helped Tesla cut its Model Y battery costs by up to $3,000, but the company believes it can go even further by bringing the dry-coat process to the 4680 batteries. But according to the Reuters article, it has run into difficulties trying to scale up the dry-coat process to mass-production rates.
Why cheaper batteries matter to Tesla
Tesla already earns significantly higher profit margins than traditional automakers. For example, its profit margin in the most recent quarter was 14.1%, compared to Ford's 7.8% and GM's 6.6%.
Source: YCharts.
But in order to stay ahead in an increasingly competitive EV market, Tesla will have to keep outselling its peers while maintaining those higher margins. And to do that, it'll likely need cheaper batteries.
The experts interviewed for the Reuters article said that Tesla could figure out how to scale up its dry-coat manufacturing process by the end of this year, or perhaps in 2023. Investors should keep a close eye on whether or not the company is able to achieve this goal, and how quickly.
Ford and GM have both committed to making electric vehicles account for 40% to 50% of their U.S. vehicle sales by 2030. And Ford has also said that it wants to boost its pre-tax profit margin to 10% by 2026.
These U.S. automakers have seen Tesla's EV success and its higher profit margins, and they want in on the action. Additionally, start-ups such as Rivian and Lucid Group could eventually eat into Tesla's EV market share once they ramp up their vehicle production in the coming years.
Lower-cost batteries could help Tesla produce more vehicles at cheaper prices and help it stay ahead of the EV pack -- but it has to get the battery tech right first.
The good news is that Tesla owns its battery production, whereas most of its competitors don't. That could make it easier for the company to reduce costs compared to its rivals.
