- “Spin”is a form of propaganda that relies on a biased interpretation of fact to influence opinion.
- “Fake News” is a more dishonest form of propaganda that relies on a combination of fact and falsehood to influence opinion.
- “Deception” is an even more dishonest form of propaganda that principally relies on falsehood to influence opinion.
- Depending on the reader’s sophistication, the battery technology discussions in Tesla’s Q1-18 earnings letter could be fairly characterized as spin or fake news, or even deception.
- None of the possible characterizations speak well of public company that has a legal duty to provide full and fair disclosure of all material facts.
In its 2018 First Quarter Update, Tesla (TSLA) said:
“Cells used in Model 3 are the highest energy density cells used in any electric vehicle. We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability. The cobalt content of our Nickel-Cobalt-Aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a Nickel-Manganese-Cobalt ratio of 8:1:1.”
While I initially viewed the claims a creative revision of battery technology history, I had major surgery the next day and didn’t feel up to preparing a written analysis until recently. So, while this article not as timely as I’d like, I think it offers a fascinating glimpse into the mind of the world’s greatest stock promoter.
Tesla Does Not Make Lithium-ion Cells
Tesla does not make lithium-ion cells or own significant cell manufacturing technology. Instead, it buys finished cells from Panasonic (PCRFF), which developed its high-energy lithium-nickel-cobalt-aluminum, or NCA, chemistry in partnership with Sumitomo Metal Mining (SMMYY). When Panasonic delivers finished NCA cells to Tesla, the finished cells are assembled into battery packs by Tesla employees.
When Tesla makes claims relating to the energy density of cells, the materials used in cells and the performance characteristics of cells, it is taking unmerited credit for development work that Panasonic and Sumitomo finished while Tesla was building Roadster prototypes.
Tesla’s Battery Technology History
Prototypes of Tesla’s Roadster EV were revealed to the public in July 2006, four years prior to its IPO in July 2010. The first 109 Roadsters were delivered to customers in 2008. The two-seater weighed 1,305 kg, was powered by a 53-kWh lithium-ion battery pack and had an EPA estimated range of 244-miles. According to Tesla’s Emergency Responder Guide, the battery pack was built using Lithium Cobalt Oxide, or “LCO,” cells.
LCO cells have a specific energy of ~200 wh/kg, so one kilowatt hour, or kWh, of cells weighs about 5 kg. The LiCoO2 cathode powder used to manufacture LCO cells is roughly 60% cobalt by weight. Since cathode powder weight typically represents 40% of cell weight, the Roadster used roughly 2.0 kg of cathode powder and 1.2 kg of cobalt per kWh of battery capacity.
When Tesla was designing the Model S, it upgraded the cell specifications to Panasonic’s NCA chemistry which offered higher energy density and greater thermal stability than Panasonic’s LCO cells. That change also gave Tesla the ability to pack 85-kWh into the Model S floorboard and offer the world’s first 300-mile range EV.
NCA cells have a specific energy of ~250 wh/kg, which is ~25% higher than LCO. So, one kWh of NCA cells weighs about 4 kg. Panasonic’s original Ni0.85Co0.15Al0.05 cathode powder formulation is about 9.2% cobalt by weight. Since cathode powder weight typically represents 40% of cell weight, the Model S used roughly 1.6 kg of cathode powder, 782 grams of nickel and 147 grams of cobalt per kWh of battery capacity.
Based on average LME prices of $21.84 kg for Nickel and $45.50 kg for cobalt in 2010, the metal cost savings from choosing NCA over LCO were roughly $31 per kWh of cell capacity. Two-thirds of the savings, or roughly $20 per kWh came from substituting nickel for cobalt and the balance came from the higher energy density of NCA chemistry.
To the best of my knowledge, Panasonic still uses its original NCA-80,15,5 cathode powder to make 18650 cells for Tesla’s Model S and Model X battery packs in Japan. According to Total Battery Consulting, Panasonic uses a second generation NCA-84,12,4 cathode powder to make 2170 cells for Model 3 battery packs in Nevada. At current prices, Panasonic’s Gen2 NCA cathode powder enjoys a metal cost advantage of $2 per kWh over its Gen1 powder.
Parsing Tesla’s Written Representations
I initially viewed the cobalt discussion in Tesla’s Q1-18 earnings letter as a creative revision of battery technology history. Since I think the quoted paragraph bears only a passing resemblance to demonstrable truth, the following sections will parse the paragraph one sentence at a time and highlight the factual claims that trouble me.
Tesla quote: “Cells used in Model 3 are the highest energy density cells used in any electric vehicle.”
My notes: Tesla selected Panasonic’s NCA chemistry for the Model S because it had the highest available energy density, a technical characteristic that (a) directly translates into a lower cost per kWh, and (b) is essential if your goal is to maximize travel range. While Model 2 is the only car that uses Panasonic’s 2170 NCA cells, the Workhorse Group (WKHS) uses Panasonic’s 18650 NCA cells in its medium-duty electric trucks.
While makes sense to assume that 2170 cells from the Gigafactory might have a slightly higher energy density than 18650 cells from Japan because their larger volume reduces the can to contents ratio, I haven’t been able to find any documentation that supports or refutes an assumption that the NCA-84,12,4 cathode powder used in the Gigafactory has the same performance characteristics as the NCA-80,15,5 cathode powder used in Japan.
I do, however, find it curious that the Model 3 has a pack level energy density of 150 wh/kg while the Model S has a pack level energy density of 170 wh/kg.
Tesla quote: We have achieved this by significantly reducing cobalt content per battery pack while increasing nickel content and still maintaining superior thermal stability.
My notes: Panasonic and Sumitomo achieved a substantial reduction in the cobalt content of lithium-ion cells in 2006 when they introduced their NCA cells to the electronics industry. Tesla capitalized on their accomplishment in 2010 or 2011 when it chose NCA chemistry for the Model S over the LCO chemistry it used for the Roadster. Since 2006, the only advance in NCA chemistry has been a second generation NCA-84,12,4 cathode powder that reduces cobalt in the cathode powder by about 2% and cuts metal costs by about $2 per kWh.
While NCA has better thermal stability than LCO, the chemistry Tesla used for its Roadster, NCA has far less thermal stability than the NCM, LMO and LFP cathode powder formulations used by established automakers.
Tesla quote: The cobalt content of our Nickel-Cobalt-Aluminum cathode chemistry is already lower than next-generation cathodes that will be made by other cell producers with a Nickel-Manganese-Cobalt ratio of 8:1:1.”
My notes: The statement is simply not true. Panasonic’s NCA-84,12,4 cathode powder is 7.3% cobalt by weight while NCM 811 formulations will be 6.1% cobalt by weight if the technology can be commercialized. It also creates an inaccurate impression that Tesla is a cell producer rather than a cell purchaser.
Parsing Management’s Color Commentary
Since earnings releases are usually prelude to a conference call with analysts and shareholders, I think earnings release disclosures should be analyzed in light of color commentary from management during the conference call. Once again, I view management’s color commentary as a creative revision of Tesla’s battery technology history that bears only a passing resemblance to objective truth. The following sections parse management’s conference call discussions and highlight the factual assertions that trouble me.
JB Straubel in Tesla’s Q1-18 Conference Call: “Being on a path to reduce cobalt usage, for instance, has been something we’ve been working on for literally several years now, and this has been extremely helpful in the overall cost per kilowatt hour, especially with recent commodity price movements.”
My notes: Tesla does not manufacture NCA cells. When it makes claims relating to the materials used in cells, it is taking unmerited credit for development work that Panasonic and Sumitomo finished while Tesla was building Roadster prototypes.
Panasonic and Sumitomo achieved a substantial reduction in the cobalt content of lithium-ion cells in 2006 when they offered their first NCA cells to the electronics industry. Tesla capitalized on the accomplishment in 2010 or 2011 when it chose NCA chemistry for the Model S over the LCO chemistry it used for the Roadster. Since 2006, the only advance in NCA chemistry has been a second generation NCA-84,12,4 cathode powder that reduces the cobalt content of the cathode powder by about 2% and reduces metal costs by about $2 per kWh.
Elon Musk in Tesla’s Q1-18 Conference Call: “Yeah, we think we can get the cobalt to almost nothing
My notes: Since a similar sentiment was expressed in a recent Tweet from Mr. Musk, “We use less than 3% cobalt in our batteries & will use none in next gen,” I’ll include the tweet as part and parcel of this section.
The cobalt content in Panasonic’s NCA 80,15,5 cells has been roughly 3.68% of cell weight since 2006. Panasonic’s recent introduction of an NCA 84,12,4 cathode powder reduced cobalt content to 2.93%. While Panasonic is working on an R&D stage cathode powder that could reduce cobalt content by up to 50%, it plans to use 8,000 tonnes of cobalt this year and up to 25,000 tonnes per year by the early 2020s.
My Overall Impression
They say beauty is in the eye of the beholder. I think the same dynamic prevails when one tries to classify representations in an earnings report as spin, fake news or deception. I don’t see anything that remotely resembles unvarnished truth when I parse Tesla’s representations. To the contrary, the lily gilding strikes me as extreme and wholly unjustified.
The Verge recently observed, “Musk’s “next-gen” claim is a vague phrase that doesn’t set out a definite timeline, so it’s impossible to know when he’ll deliver — but don’t expect it to be in the next couple of years.” I’d include “almost nothing” in the same class of meaningless fluff.
I believe Tesla is very concerned that cobalt will become an insurmountable barrier to its growth strategy. More importantly, I think institutional investors are becoming increasingly reluctant to feed Tesla’s insatiable appetite for capital because enormous risks in the cobalt market can’t be quantified with a reasonable degree of confidence. Without rock-solid supply chains, Tesla’s gigafactory is a $5 billion boondoggle and its exponential step-change growth story an illusion.
Later this week I’ll publish a second installment of this series that analyzes the rapidly evolving geopolitical risks in the cobalt market that could easily explain Tesla’s newfound fondness for the term force majeure.
I continue to believe Tesla’s stock is worthless and bankruptcy is inevitable.