Welcome back everyone! I’m Jordan Giesige and this is The Limiting Factor.
Elon recently confirmed that North American made, standard range plus Model 3s would be
using lithium iron phosphate, or LFP, battery packs from China. As a result of that,
I’m kicking off another video series, this time on LFP. I was planning on starting an LFP series
later this year, but Tesla is incorporating LFP in their US battery packs sooner than I expected.
Today we’ll cover a brief history of LFP; the key patents, licencing costs, when the patents expire,
and why that matters; the cost difference between an LFP and Nickel battery pack; whether this
is bad news for Tesla’s 4680 ramp; and some cliff’s notes on how LFP compares to Nickel.
Note that these will just be cliff’s notes, and I’ll go much deeper and highlight specific
manufacturers in the upcoming series. Before we begin, a special thanks to my
Patreon supporters and YouTube members. This is the support that gives me the
freedom to avoid chasing the algorithm and sponsors, and I hope will eventually allow
me to do this full time. As always, the links for support are in the description.
The story of LFP is quite long and convoluted, so I’ll be giving a high level overview from
the perspective of an investor or consumer. It’s also worth noting that there are missing
pieces in the story and I’ve done my best to piece together a timeline here that has a logical flow.
LFP is a cathode material that was discovered by John Goodenough in 1996 while working at UT
Austin. Not long after, in 1999, UT Austin was granted a patent for LFP.
However, LFP had a critical flaw, which was that it had electronic conductivity low enough
to be considered an insulator. As a result, UT Austin didn’t have an interest in developing LFP
and sold the patent rights to Hydro-Quebec through an exclusive patent licence agreement.
Hydro-Quebec is a public utility in Canada with a large R&D arm. That is, they had the know-how
and funding to further develop LFP. Hydro-Quebec then began working on the conductivity problem
and by the 21st of September 2001, Michel Armand filed this patent through Hydro Quebec.
Michel solved the conductivity problem with a carbon coating, which opened the door for LFP
as a viable commercial chemistry. Note the date, the 21st of September
2001. Patents are granted from the original filing date and are valid for 20 years. There
appears to be some rules which allow extensions, but we’ll come back to this later in the video.
In the same year, 2001, A123 systems was founded. Their focus was also on developing
and commercialising LFP. In 2006, Yet-Ming Chiang, a founder of A123, patented improved
nanostructures and dopants to further improve the ionic and electronic conductivity of LFP.
Around the same time, 2005 to 2006, A123 quickly moved to sell LFP cells to Black & Decker for
DeWalt power tools and subcontracted BAK Battery in China to do the manufacturing. Unsurprisingly,
Hydro-Quebec claimed A123 infringed on their patents and a patent battle ensued that lasted
for about 5 years, until about 2011. Hydro-Quebec ended up winning the patent dispute and A123
ended up being brought under Hydro-Quebec’s patents through a sublicense agreement.
During the same time period, Hydro-Quebec developed industrial partnerships and
formed a consortium to manage the patents for LFP. The name of the consortium was LFP plus
Carbon Licensing. For me, this is where the trail ran cold, but it seemed like a huge part of the
story with China was still missing. What ended up happening in China with licencing? Why has
every major Chinese battery company developed LFP and why are LFP cells mostly sold in China?
Several weeks ago, Steve LeVine came to the rescue with a great article that, for me, brought
new information to light. If you aren’t following Steve on Twitter, I recommend it. In the article,
he states that the LFP + Carbon Consortium made a decision a decade ago to allow Chinese companies
to make LFP with no licencing fee as long they only sold the batteries domestically.
I asked Steve where he got this information and he directed me to this article by Roskill.
According to Roskill, LFP cathode producers are the source of the claim that Chinese
companies pay no licensing fee. Note that one decade ago is when the patent dispute between
A123 and Hydro-Quebec was winding up and that dispute involved a Chinese company, BAK Battery.
I couldn’t find further information on what happened here. It’s a strange decision to forego
tens of millions of dollars in potential revenue, but I’m willing to speculate. It appears that,
for one reason or another, UT Austin wasn’t granted patents under Chinese jurisdiction.
Maybe UT Austin didn’t realise in the late 90s that what they had on their hands was valuable
or didn’t realise that China would become the world’s dominate battery player.
UT Austin’s Patents are the most critical patents because they cover the LFP material itself,
which means that without China based patents, it may have weakened their patent claim in China.
That is, the Consortium may have decided against what could have been an expensive
legal battle that they had low odds of winning. If that’s correct, the decision not to charge
a licencing fee if Chinese companies stuck to their domestic market may have also been
a way to keep China out of the rest of the major world’s major battery markets with LFP.
That is, giving the Chinese LFP market to Chinese battery manufacturers may have been
a good deal for both parties. Each party avoided expensive litigation and each party
walked away with the keys to a market. If you know something about patent law or negotiations,
let me know your opinion in the comments below. So when do these patents expire and when will
China be free to export LFP battery cells and packs to the US without a licencing
fee? The information I’ve come across is conflicting, but April 2022 looks the most
likely based on information from Roskill and James Frith of Bloomberg. James Frith
is another good follow on twitter if you want to keep an eye on battery industry trends.
Again, the information for the expiry date comes from Cathode producers.
Although most of the dozens of patents governing LFP will expire in the next couple of weeks, one
of Michel Armand’s patents for the carbon coating received an adjustment, pushing its expiration
date to the 27th of April 2022, 7 months from now. James also provided information on the licencing
cost. It costs millions of dollars per year for the licence and there’s also an additional fee
that’s rumoured to be less than $1 per kilogram of LFP produced. I did some back of the napkin
cost modelling and 80 cents per kilogram is about a 3% cost premium at the cell level,
which is actually pretty hefty and doesn’t include the fixed yearly cost of the license. 3%
is roughly the profit margin that Panasonic makes off the battery cells it sells to Tesla.
With that in mind, how much will LFP cells affect the production cost of the US made
standard range Model 3? The average price of an LFP battery pack is typically 20% cheaper
than an average Nickel based battery pack, but there are other costs we need to factor in here.
First, as James Frith points out, there’s a 10% import tariff. Second, there would
be shipping costs, which as I understand it, would be negligible adding about 1% to the price. Third,
if the patents haven’t expired, there would be a licencing fee of about 3%, give or take.
After factoring all that in, the cost savings for LFP batteries shipped to the US
offers about a 6% savings instead of 20%. Tesla’s cost savings might be less because the NCA cells
that they put in their vehicles are purchased at near the manufacturing cost from Panasonic.
Furthermore, Tesla’s been refining their pack manufacturing for over 10 years.
In other words, I think the LFP cells Tesla is purchasing from China might not be generating
significant savings compared to a nickel based chemistry. Instead, the primary reason
for using LFP would be to increase production output, allowing Tesla to increase their output
of vehicles and energy storage products. Tesla’s been cell constrained for years,
and LFP cells from China give Tesla access to profit they would’ve otherwise had to
leave on the table. It also broadens Tesla’s supply chain and makes them less dependent
on Nickel to drive their growth, which will become more important in the coming years.
With all that in mind, let’s start digging into this tweet by Troy Teslike, which predicted Tesla
would soon switch the LFP battery on the 22nd of August, just a few days before it was confirmed by
Elon. This tweet sparked concern for some people that if Tesla is moving standard range vehicles to
LFP cells, it’s bad news for 4680 cell production. With regards to the first bullet, which states
that Standard Range vehicles out of Fremont will be using LFP from October 1st, Elon
already stated earlier this year that Tesla would be shifting their standard range vehicles to LFP.
In other words, the plans for a switch to LFP pre-date any indications that the ramp of the
4680 lines could be delayed. It also means that they would have had plans for what to do
with the 2170 cells the switch to LFP would free up and brings us to the next bullet.
The second bullet states that Model Y production in Texas and Berlin will start with 2170s instead
of 4680s. Again, Elon already said in the Q2 2021 earnings call that they have a back-up plan with
2170s. So, even if 4680 production is delayed, it won’t affect vehicle production in the short term.
In fact, if Fremont does switch to LFP battery cells later this month,
that probably frees up about 6-9 months’ worth of production ramp for the Model Ys from Austin
and Berlin. That, in turn, gives Tesla’s engineers quite a bit more breathing room to
work the rats and mice out of the 4680 lines. As with the Q2 quarterly earnings call,
I’m eager to hear updates from Tesla on the 4680 in the Q3 earnings call, and if there
is useful information to dissect, I’ll produce a video giving my take from a battery perspective.
In summary, there are a large number of patents that govern LFP technology,
but most of the critical patents appear to be filed on or before the 21st of September 2001.
Now, 20 years later in September of 2021, most of those patents are due to expire.
There is still one lingering patent, but that will be expiring in about 7 months. When that patent
does expire, it will potentially lower the cost floor for LFP batteries by around a few percent.
More importantly, just as Drew and Elon suggested on Battery Day, it’ll mean Tesla can produce LFP
batteries in house. It also means they’ll be able to do so without any red tape or licence fees.
Regardless, as confirmed by Elon, Tesla is now incorporating LFP battery cells
into their worldwide vehicle production for standard range plus vehicles. This
fresh supply of cheap battery cells will bolster the growth of both Tesla’s energy storage product
line and the vehicle ramps in Austin and Berlin. Of course, what we’re all waiting for is Tesla’s
4680 lines to spin up, which will allow for unbridled growth rates that far exceed 50%
per year. However, the 4680 lines appear to be coming along nicely,
with Galileo Russell of Hyperchange reporting that over the course of the last year the yield
rate at Kato Road has gone from 20% to 70-80%. 70-80% is on par with Giga Nevada as indicated
by this image from @JPR007. There is a catch here, and it’s that despite the high yield rate,
Tesla is currently unable to sustain high production rates. If you’d like to know more,
it was covered in my Q2 earnings call video. Some people were wondering whether Tesla is
importing the entire vehicle, or just the pack. @ranig on twitter did an inventory
check and there are vehicles with LFP battery packs that appear to be assembled in Fremont.
And for those concerned about LFP batteries being inferior to Nickel batteries, as Elon
has suggested in this tweet, they’re not. Like all battery chemistries, LFP does have eccentricities,
but on balance will perform as well in Model 3s as the current Nickel based chemistries.
In short, if you live in a hot climate, LFP is hands down a win. If you live in a cold climate,
there is a potential for lower performance, but there are workarounds thanks to Tesla’s
superior software and thermal management systems. If you live in any climate,
you’ll be getting a million mile battery that’s much more robust to regular 100% charges.
As a final note, this is just the first of three videos on LFP. For those keeping track,
we have one more video left in the QuantumScape series, three videos left in the Gigacasting
series, two more videos in this LFP series, and I’ll be working through these videos randomly.
If you enjoyed this video, please consider supporting me on Patreon with the link at the
end of the video. I am also active on Twitter. You can find the details in the description,
and I look forward to hearing from you. A special thanks to Sten Karlson,
Mark Russcher for your generous support of the channel, my YouTube members, and all the other
patrons listed in the credits. I appreciate all your support, and thanks for tuning in.