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