Let's speak broadly for a moment. In the world of technology, new, innovative, and disruptive technologies always start at high price points due to the long development road maps and timelines that inevitably bring them to market. Think about the first personal computers that cost thousands upon thousands of dollars, and the specs of those machines probably pale in comparison to your average alarm clock today. Of course, over time these prices fall dramatically while specs and performance increase at astounding rates. These are all understood and expected trends of technology, thanks to Moore's Law.
Tesla's (NASDAQ:TSLA) overarching goal has long been to bring electric car technology to the mainstream consumer. Tesla was founded 12 years ago, it launched the $109,000 Roadster seven years ago, the $75,000 Model S three years ago, and the $80,000 Model X just a few months ago. What's taking so long?
Mores need not apply
Simply put, it's because, despite Tesla often being considered a tech company, Moore's Law does not apply here. Moore's Law, the casual observation that the number of transistors that can be put into an integrated circuit doubles approximately every two years, is the key driving force (no pun intended) that rapidly brings down costs over time in most of the technology world. In most computing devices, semiconductor components comprise most of the costs, so Moore's Law is very applicable when we're talking about PCs, smartphones, tablets, or any other gadget in terms of improving processing power, storage capacity, and the vast majority of relevant specifications.
But for electric cars, none of these are the primary way to measure performance. For electric vehicles, the most important factor by far is battery technology. This includes both the density and chemistry of the cells, as well as the price per kilowatt-hour, or kWh. The battery pack is easily the most expensive component in a Tesla Model S, costing around $30,000.
Sadly, battery technology has stagnated for years, including in the consumer electronics industry. Just this month, Walt Mossberg noted that batteries are still "the weak link in the system." Battery performance improves at a snail's pace (relative to semiconductors), with single-digit gains each year. While there's been increased interest in recent years in Silicon Valley over battery innovations, bringing those to market is much easier said than done.
Slow and steady wins the race
This is precisely why Tesla's Gigafactory is so important to its long-term vision of mainstream electric cars. Elon Musk hopes to substantially bring down battery costs through vertical integration and sheer scale, along with continual improvements in density and chemistry.
The goal of the Gigafactory is to bring costs down to $100/kWh by 2020. For context, Tesla is currently around $250/kWh, which is dramatically lower than the rest of the industry already. A couple months ago, General Motors (NYSE:GM) said it was already down to $145/kWh, although partner LG Chemical wasn't all that happy with GM disclosing that figure since now its other customers are asking for better prices.
On the last conference call, though, Tesla management and Wall Street analysts figured that GM wasn't incorporating pack costs and was only talking about cell costs. Musk added, "I mean we're constantly agonizing about cell cost and pack cost, and we don't think anyone is on a path to be even close to us. If they are, I would be the first to congratulate them." Regardless, there's no question that Tesla is catalyzing the industry into action, so any progress that GM and LG are making is largely in response to Tesla's success anyway.
The slow technological progress of batteries over the past couple of decades combined with the fact that the auto market is naturally a slow-moving one is why it's taking so long for this technology to reach mainstream consumers in a way that offers sufficient range and performance. It's taking quite a while, but don't worry. Tesla will get there.
Evan Niu, CFA owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.