Tesla: Musk Opens Up About Challenges Ahead - Seeking Alpha

Elon Musk is unusually candid about the challenges the company is encountering.

Surprisingly, Musk also started downplaying the importance of autonomous and Tesla's famous range advantage.

The goal post is moving and the company wants to be the best manufacturer.

Tesla (TSLA) just held its shareholders' meeting with its Battery Day rolled into one and the message was clear and dreadful.

I want to discuss a number of statements made by CEO Elon Musk and Andrew D.

So I think solar sometimes underweighted at Tesla, but it is a massive part of our future.

At the start of the Battery Day presentation, Musk can hardly wait to mention Tesla’s solar business and put it in the perspective of “Tesla the sustainable energy company.”.

Every time I speak to a Tesla bull in the wild he (it's invariably a he) believes Tesla derives some value from its future in the energy business.

I’m inclined to believe that is because Musk elevates this segment by highlighting it frequently and making it a part of his overall vision.

But more importantly, regarding the myth of the energy business, it's a pitiful line-item, especially since Tesla paid $2.6 billion to acquire SolarCity.

If you hear Musk talk about it.

But with the cost of revenue increasing fast and at $349 million it is entirely inconsequential to Tesla.

In some regards, this presentation was a breath of fresh air because Musk and Baglino mention several important issues that bears have been pointing out for years

For example, Musk sums up how much battery manufacturing is needed to go through the energy transition:

But let's say it's like roughly 20 to 25 terawatt hours per year sustained for 15 to 25 years to transition the oil to renewable

In a recent report, Wood Mackenzie forecasts global lithium-ion cell manufacturing could quadruple and reach 1.4 terawatt-hours (TWh) by 2030 compared to 2019

To get to this total capacity the consultancy added up 119 battery manufacturing facilities that are operational, under construction, or announced by more than 50 vendors

I get that Elon Musk is always pushing the boundaries of what’s possible, but it illustrates where we are now and how far away we are from an all-electric fleet

I’ve always been quite bearish on Tesla but it’s not that I don’t see there is an energy transition ongoing

But in my opinion, there are many more interesting angles to get involved than through obvious electric vehicle plays, Tesla, NIO (NIO), Nikola (NKLA), etc

And you can see it's -- we're talking about 100x growth in batteries for electric vehicles to achieve this mission

It's just a matter of how fast

So the duo is clearly acknowledging that we are far away from having the resources to even allow energy transition to take place within a few years or even a decade

Musk has recently been begging miners to start up some nickel projects

I like to invest in mining (nobody likes it except the precious metals, meaning you can buy excellent assets for little) but it is a brutal business

That’s when they make tons of money and everyone is throwing money around at new greenfield projects (which Musk is asking for) and a few years after they’re all regretting those investments as the higher-cost producers are once again losing money

There are no mining companies that people have thrown $7 billion at in 2020 or any other year, at virtually no cost of capital, as is the case with Tesla

If Tesla really wants to accelerate the discovery and mining of key materials, it needs to buy a miner

But the company isn’t done discussing some real problems

According to Baglino, there are like 35 fully built-out Nevada Gigafactories necessary to get to 20 terawatt-hours a year

We need a dramatic rethink of the cell manufacturing system to scale as fast as we can and should.”

I expected an event where it would reveal some revolutionary technology but instead, it is revealing there is a need to dramatically rethink the cell manufacturing system to scale as fast as it should, and that's just the start of all the problems it is putting on the table

We've got to make -- and we've got to be better at manufacturing, and we need to do something about this curve

It's been somewhat flattening out actually in the years

This means that Tesla will find it extremely challenging to increase margins on its products

Musk and Baglino have a plan:

And when we look at what -- what's happened today, at least in our products, we move from 18650 form factor to the 2170 form factor through great collaboration with our partners, Panasonic, new partners like LG and CATL and probably others in the future

But this sounds an awful lot like the innovations Panasonic (OTCPK:PCRFY) (which makes Tesla’s cells) has already announced. It is working on cobalt-free and switched Tesla to the 2170 form factor. And Baglino more or less acknowledges that it's Panasonic's innovation:

And this was a evolutionary step going from 1865 to 2170, bringing 50% more energy into the cell. But when we look to the ideal cell design, if we were to do it ourselves, we need to go beyond just what we're looking at us in front of us and study the full spectrum of options.

Next, they present a new technology to create batteries in a tabless design. This sounds pretty great, but as will become apparent throughout the presentation it's years away from production at scale. Tesla had already filed for a patent for this technology earlier this year:

A cell of an energy storage device with at least one electrode that is tabless, and methods of forming thereof, are described," the patent application states. "The cell includes a first substrate having a first coating disposed thereon, wherein a second portion of the first substrate at a proximal end along the width of the first substrate comprises a conductive material. An inner separator is disposed over the first substrate. A second substrate is disposed over the inner separator. The second substrate has a second coating disposed thereon. The first substrate, the inner separator, and the second substrate in a successive manner, the first substrate, the inner separator, and the second substrate are rolled about a central axis.

Baglino makes a point of stressing that the battery is not just a concept or rendering. “We are starting to ramp up manufacturing of these cells at our pilot 10-gigawatt-hour production facility just around the corner.” I’m not sure why they didn’t bring one.

But Musk followed this up with a few surprising and deflating comments:

Yes. So video of some of what's going on in the plant. Now I mean, to be clear, it will take about a year to reach the 10-gigawatt-hour capacity. So this is important to appreciate. Like when you build a factory, there's a certain capacity that you design to, and then it takes some period of time to actually achieve that capacity. So I would say it's probably about a year before we get to the 10-gigawatt-hour annualized rate with the pilot plant. And this is just a pilot plant, but the actual production plants will be more on the order of maybe 200-gigawatt hours, maybe more over time.

This is an unusual cautious statement by Musk. Something is different, maybe the Shanghai factory isn’t ramping as planned and he wants to prep shareholders that ramping factories takes time. One of the reasons I’m suspicious of Tesla’s perceived path to world domination is that I’ve invested in “new innovative factory concepts” in the past. It just didn’t scale. Bottlenecks kept popping up and ultimately I ate a donut of the kind no one likes to eat.

The executives talk about the ideas they have for an ideal battery factory they want to build. I actually don’t think all the vertical integration of battery production, mining, etc. is such a great idea. Except for the fact that Tesla has virtually no cost of capital while it's expensive to finance all this for actual battery manufacturers or miners. As long as people keep throwing billions at newly issued stock, I think it makes a lot of sense from Musk’s perspective to do it this way. But there’s another unusual comment by Musk:

I mean it's hard, actually, just to be clear. So if this was easy, everyone would do it. So it's not like dry coating electrode is actually easy. It's actually very hard to do what appears to be a simple thing. And it's worth noting like we did acquire Maxwell. It was like a little over a year ago, I guess, and certainly a good company and everything, but the dry coating they had was like -- it's like sort of, I would call, proof of concept. Since the acquisition, we have actually ramped the machine that does dry coating 4x, so when -- revision for post-acquisition of the machine. And there's still a lot of work to do. So I would not say this is like completely in the bag. There's still a lot of work to do.

Yes. I mean basically, Tesla is aiming to be the best at manufacturing of any company on earth. This is the thing that's actually most important in the long run. I think just from a company standpoint and from basically achieving sustainability as fast as possible, but I think also for long-term competitiveness, eventually, every car company will have long-range electric cars. Eventually, every company will have autonomy, I think, but not every company will be great at manufacturing. Tesla will be absolutely head and shoulders above anyone else in manufacturing. That is our goal.

Bulls sometimes argue Tesla is a software company. Musk is calling it a manufacturing company. And that’s what he wants to be in the long run. He also uncharacteristically acknowledges that every car company will have long-range electric cars. In this previous article I’ve discussed how you can argue they already have. He’s saying everyone will have autonomy. I’m not so sure. Musk’s uncharacteristic reservedness almost gives me the impression that either A) things aren’t going so well with autonomy or B) he’s getting regulatory heat for claims about Tesla’s advancements and now claims them for the entire industry in order not to appear comparatively weak

It seems kind of a weird shift from when Musk explained on this recent earnings call:

Yes, I mean the thing that's really going to I think probably just have a profound effect on our financials is like is high volume and high margin obviously and that high-margin part comes from autonomy

Yes, I mean we're trying to make the cars as affordable as possible, as fast as possible, while maintaining reasonable - while still being at least a little bit profitable and growing the company like crazy and having good free cash flow and accumulating our cash balance

Musk doesn’t care about profitability

He calls Tesla a manufacturing company and that’s what he wants it to be

Musk acknowledges that others will catch up in range (if they haven’t already) and everyone will have autonomy

I’m not sure about the latter but agree that Tesla is unlikely to be the leader, given it woefully underinvests in the space

I have no business relationship with any company whose stock is mentioned in this article