Battery costs are rising now, and that’s a problem for electric-vehicle makers’ profit margins. Rising prices are enough to keep a close eye on some auto stocks. However, there is more to cost reduction than a drop in commodity prices.
This bodes well for Tesla (ticker: TSLA), as well as all the auto makers vying for a piece of Tesla’s EV market share.
EV battery costs fell nearly 90% between 2010 and 2020, according to Bloomberg New Energy Finance, They fell another 6% in 2021, reaching around $132 per kilowatt-hour, or kWh.
Such performance has led to the belief that battery electric vehicles, BEVs, will eventually cost less and be more profitable than internal combustion engine, or ICE, vehicles, says RBC analyst Joseph Spaak. “Recently higher input costs have certainly thrown a wrench toward that thinking,” the analyst wrote in a Sunday report.
The metals that go into EV batteries, including lithium, copper and others, cost about 50% a year, adding perhaps $1,500 to the cost of a typical EV.
Higher raw material prices are one reason Wells Fargo analyst Colin Langan downgraded shares of Ford Motor (F) and General Motors (GM) to sell-backs in May. “As auto makers may be forced to sell money-losing compliant BEVs,” the analyst wrote.
Langen doesn’t think raw material prices will drop any time soon. Fortunately, there are other ways to reduce costs.
“You ever hear the right curve. This is just another way some economists talk about stuff,” says Tim Gravey, GM director of electrification strategy baron’s, Wright’s curve states that every time the cumulative output of something doubles, costs fall. “shield [of improvement] keeps changing….All these innovations are ongoing and these are all levels.”
The Battery Lab, which is part of GM’s Technical Center in Warren, Michigan, is working on new battery cathodes and electrolytes, among other things, to improve cost, reliability, among other battery specs.
GM is targeting a 60% reduction in battery costs from 2021 levels in the coming few years. Some of that is from science, and some is from scale as well as logistics. GM is building out its battery facilities as well as the local supply chain so that the company doesn’t have to ship materials and components to and from China.
As for Wright’s curve, it’s taken nearly two years for the number of EV batteries to double in recent years, and battery costs down about 30% over that two-year period. If all goes well, that means GM should reach its 60% target by the end of 2026 or 2027
That math would reduce the EV’s current cost by about $5,000, or $6,000, easily wiping out the raw material penalty. This drop will also essentially close the gap between BEV and ICE vehicle cost.
He is theoretical. And many other things will happen in the EV industry between now and then. EV profitability, for example, isn’t all about the cost of the battery. Competition also matters.
“One of our long-standing beliefs is that BEVs can convert vehicles from point A to point B, but if the entire industry switches to BEVs, because of competition, auto-making margins really don’t. That could change,” Spuck says. his report.
Spak rates Tesla’s stock on hold, but has a price target of $1,175. This values Tesla at about $1.2 trillion, which is about seven to eight times more than their estimate of the combined market value of Ford and GM.
Auto makers are trying to move beyond just auto-making margins, and trying to sell other services to car buyers that are enabled by all the software and connectivity that replace the car.
For now, investors are focusing more on the short-term problems of inflation rather than the opportunity of EVs and software. Shares of Ford, GM and Tesla are down about 35% to date, on average, worse than the S&P 500 and Dow Jones Industrial Average’s 14% and 10% respective drops.,
Write to Al Root at [email protected]
Credit: www.marketwatch.com /