I think Tesla and CATL have a very solid deal. They are two very complimentary businesses for one
another in the EV game. I thought I would explore what deal CATL and Tesla may have in China,
and how I would expect it might work, based on economics, business and politics.
Therefore I will attempt to see what I think will happen in China
for the foreseeable future, go through all the elements of the deal
I can think of and I will explain the advantages and disadvantages.
So this somewhat stems from the new CATL battery fab that has recently started to
supply batteries up the road from Tesla's Shanghai Gigafactory. Firstly the fact we are witnessing
run rates of the Model Y factory in Shanghai, hitting annual run rates of nearly 1 million,
added to that whatever the Model 3 factory is capable of. Then the fact the CATL
Factory will be making enough batteries for around 1.3 million vehicles a year,
around the potential Tesla China run rate. Well in my opinion, this is no coincidence.
Tesla have been testing their potential Model Y run rate lately,
and supposedly a new Model Y is coming out of the factory at rates of
every 33 seconds. Tesla are making sure, their production can hit a high enough
rate to match the CATL factory. As Tesla, are still very much battery constrained.
Now the largest battery manufacturer on the planet builds a big new battery factory,
near the EV factory that receives the most value from batteries, compared to any other EV company
on the planet. And this company also consumes the most batteries on the planet. I mean really,
how obvious is this. This CATL factory was built solely for Tesla's Shanghai vehicles,
I mean how could it not be? We are seeing that Tesla can reach run rates higher than
CATL's capacity. Batteries are the main constraint. CATL has the most batteries.
No other EV manufacturer, aside from Tesla, can order anything close to 80 GWh a year of batteries
extra to what they currently have. Yes Tesla may use some for energy,
but I don't think so. I think the energy batteries will come from another CATL factory,
that still serves California, and those batteries will be sent to Fremont.
This new CATL factory is not small, with an 80 GWh a year capacity, its actually huge. And
enough batteries for over a million EVs a year, is a big deal, given that no manufacturer has yet to
even make a million EVs in one year yet. This new battery capacity alone, is enough batteries for
more vehicles than Tesla produced just last year. This entire factory alone could just about result
in doubling Tesla's production for 2022, without the new factories even producing anything.
All of last year I was focused on what was happening on China,
whilst the media followed FUD with the new factory delays. I couldn't believe the run rates we were
witnessing. It changed everything. It meant that Tesla were able to produce a lot more cars,
a lot faster, and in a smaller space than we previously thought.
And then at the end of the year, this caught everyone by surprise.
Well don't be caught by surprise again, China is still now showing signs of slowing down. In fact
Giga Shanghai will possibly do 3 to 4 times as many vehicles this year as it did last.
That's how many extra batteries Tesla will have due to this new CATL factory. This is
huge. Tesla can just pump out these standard range LFP vehicles, with huge margins and lower prices.
Ok, so what about the deal between the two companies. This is a huge commitment for CATL to
build a new factory solely for Tesla. CATL would want some assurances. Therefore there has to be
some sort of purchase agreement, perhaps Tesla has to order a minimum of batteries from CATL every
year, for the next 5 years or something. Therefore CATL can commit and invest more into the deal.
In addition to that, I believe that CATL may not allow Tesla to manufacturer any in-house
batteries in China. This will make CATL feel a lot more comfortable with the arrangement,
as CATL will somewhat be a monopoly to Tesla, at least for LFP batteries in China.
The issue I see here is that perhaps it might make it harder for Tesla to sell the compact
with CATL's LFP batteries. And when the compact Tesla is ready for volume production then it
may require Tesla's own batteries. I am not sure about what will happen there. Possible Tesla will
help CATL get their batteries efficient enough. However, they are still going to be prismatic,
which means they wont be able to make enough batteries fast enough.
The compact Tesla will require a lot of batteries. But maybe CATL can supply
enough for the China market. So there is a chance there
will be a lower standard of compact in China, using CATL's batteries.
Anyway, it's good for the Chinese government too, they like the fact that Tesla are using Chinese
battery companies. So Tesla basically make their Chinese vehicles in China,
supplied by Chinese components, and then sell these Teslas in China or Asia. CATL are happy,
and the CCP are happy. Also a lot more electric vehicles get made,
and a lot more Teslas. I think this will be a good diplomatic relationship, where each party gains.
Also Tesla would not have to worry so much about the Chinese trying to
copy their battery technology, or 4680 line, if they weren't produced in China.
We know EVs are a big market in China, so Tesla can serve that market, with local
battery suppliers. Meaning Tesla are free to allocate their resources to other markets,
where Tesla need to make their own batteries. It's not that CATL are taking some of Tesla's
vertical integration here. CATL are supplementing Tesla's battery supply.
Yes, Tesla may be able to make 4680 batteries cheaper than they can buy CATL LFP batteries,
but Tesla don't have enough 4680 batteries. All of CATL's batteries will simply further add to
more Tesla sales, as they have created cars, that would not have existed without CATL batteries.
This new CATL factory is rumored to have 80 GWh capacity of batteries. But this is just the start,
this factory could also be expanded in a very short period of time too.
In other words CATL now have a money machine, as they injected into Tesla. CATL can keep making
more and more batteries, and Tesla can ramp up more and more production. We have seen how fast
Tesla can manage to expand that Shanghai site already, and they haven't stopped yet either.
Tesla's China operation is going to start looking more and more like a monopsony of
CATL's batteries. Which if Tesla is also consuming so much of, then that leaves fewer
batteries available to the competition, aka domestic Chinese EV market. Tesla can afford
to pay that much more per battery. Imagine if you make a car that makes lots of profit,
and your competitors make cars, that make losses. It's very easy to outbid them for batteries.
I think that Shanghai will become this hub for CATL standard range vehicles.
These will be cheapest Tesla's you can buy. I am not sure they will be available
to all markets, or even if some markets. But Asia will be the biggest market for
them anyway. Tesla has got their cost down for that market, by offering these lower range LFP
vehicles. The market is probably large enough. I am not sure though, how much larger the Asia
Tesla LFP market could get before Tesla have to launch the compact to increase further demand.
So China can supply its own batteries to it's domestic Tesla sales.
Tesla can supply the largest EV market with a huge abundance of batteries,
that no other EV company has ever seen before. These CATL LFP batteries will be low enough cost
to keep prices down in the Asian markets, to counter for the additional supply, whilst also
giving Tesla a reasonable profit. These CATL battery prices will likely
come down a lot from this new factory, and we might hope to expect that these batteries
may even be more energy dense. If Tesla can get the price of these new CATL batteries
down a further $2,000 per battery pack, then that could increase 5% gross margin. Including all the
cost savings of delivering these batteries, which are now so much closer, saving money in transport.
This is absolutely incredible for Tesla. Especially the fact that the Asian market
are more accepting of lower range EVs, meaning that the Model Y standard range is able to
made with LFP batteries. Which makes it very competitive against any other SUV.
The range should increase hopefully somewhat though, as CATL improve their batteries,
and Tesla improve their efficiencies. But basically China can build Tesla's
China/Asia business. And will mainly focus on these CATL LFP standard versions. There
will also be some performance versions with the LG 2170 batteries. But I think the vast
majority being made in Shanghai will end up all being standard CATL LFP vehicles.
Which is amazing, as Tesla can simply focus on other markets, and battery supply for those.
This is how Tesla will grow in China. It means that CATL do not need to worry about competition,
and can thus invest heavily in serving Tesla. Whilst Tesla
is able to venture out and source raw materials for their own batteries, that now do not need
to be used in the China market. Tesla don't need to make their own batteries for China.
CATL has the ability to expand a lot more still. If CATL does that, it will no way affect Tesla's
4680 battery supply, and likely not even Tesla's own in-house LFP battery supply. It will only
mean there are more batteries available. One way to look at the Shanghai factory,
is basically a factory that has the ability to turn out cars of as many batteries CATL
can deliver to Tesla. I am just unsure as to whether Tesla would use CATL's batteries for
their compact version or not. I think they will need longer range, more energy dense batteries
if they were to be Robotaxis, which would likely require Tesla's own in-house LFP.
It will be interesting to keep an eye on what CATL's new battery factory is up to,
and whether they have plans for more expansion,
it would be a good indicator on how large Tesla are planning on becoming in China.