Most of the world’s electric car batteries are now made in China. That concentration, which accounts for more than 70 percent of the market share of shipments, also puts global automakers at risk of supply chain disruptions amid escalating geopolitical tensions between the United States and China. But Tesla’s new batteries will upend the industry’s hierarchy forever.
Panasonic and LG Energy Solution have long been the leading suppliers. But in recent years, Chinese manufacturers such as Ningde Times and BYD have steadily taken market share from their Korean and Japanese rivals and are gradually dominating global supply.
Electric vehicle batteries have undergone rapid technological change in recent years. So far, the top priority has been to increase energy density by changing the composition of battery materials – to extend driving range. The shape of the battery cell has not been the focus of attention.
Currently, most electric vehicle batteries are designed and molded in shapes and forms that ensure the most efficient use of space. This means that until now, batteries shaped like flat pouches or stackable rectangular boxes have been the leading standard for electric vehicles.
Cylindrical batteries are the third type on the market and have long been considered a less attractive option because when stacked together, the gaps between round cells are seen as a waste of space. These accounted for just one-fifth of the global market last year.
However, Tesla is betting that these will become the industry standard of the future. Its 46 mm diameter, 80 mm long cylindrical 4680 battery cells have been developed to deliver up to five times the energy density of the batteries used in most Tesla vehicles today.
The cost advantage is clear to EV buyers and to Tesla. The new batteries are cheaper to produce than previous versions. They use new materials including aluminum, a relatively abundant and lower-cost metal, and fewer raw materials overall. The upgraded technology means the batteries use fewer components – and that means less weight. They are easier to mass produce because they don’t need to be customized to fit different vehicle shapes and designs.
The timing is just right. President Joe Biden’s inflation-reduction bill increases the risk that global electric car manufacturers will have Chinese battery makers on their supplier lists. The new law includes a consumer tax credit for EV buyers if final assembly is in the U.S. and production does not involve a “foreign entity of concern.
Electric cars using batteries made entirely in Tesla’s Austin and Nevada factories will make Tesla eligible for subsidies and boost sales through thousands of dollars in tax credits for its U.S. buyers.
In recent months, Tesla has boosted its battery production in the United States. Its $2.9 billion order to L&F in South Korea to supply battery materials – rather than fully manufactured batteries – underscores its plans to integrate batteries into its vertically integrated model. That will mean more affordable batteries and higher vehicle margins.
That’s unfortunate for companies like Panasonic and LG Energy Solution, which are betting that Tesla will continue to rely on its battery technology and production lines. Billions of dollars are being spent on building capacity and supplying many parts customized for Tesla. The market’s expectations for battery manufacturers are correspondingly high. LG Energy stock, for example, trades at a price-to-earnings ratio of 83 times.
Admittedly, as global electric vehicle sales rise, demand for batteries will remain high amid a continued shortage of manufacturing capacity. Until Tesla ramps up production to match its car sales, it remains dependent on suppliers.
Yet that day may come much sooner than expected. Last December, Tesla was producing enough battery cells to meet the weekly demand for more than 1,000 cars. It is now expanding its Nevada plant to produce 100 gigawatt-hours of 4680 cells a year, enough to produce 2 million electric cars. With increased production and lower costs, its suppliers with operating margins below 5 percent will struggle to compete on price.
Crucially for Tesla, the ability to build its own batteries helps improve its operational resilience. It also allows for faster upgrades and modifications to its models while avoiding supply disruptions. The small group of companies that dominate the world of batteries now face the same type of disruption that Tesla has brought to the electric car world.
