Is Tesla painting itself into a corner because Gigafactory only builds Lithium-ION cells?

The SeekingAlpha website isn’t exactly known for highly accurate investing prognostication. We should therefore take the suggestion that Tesla Motors is doomed because of the Gigafactory with a suitably large chunk of salt. According to conventional thinking, the Gigafactory (Gigafactories, actually) is what will propel Tesla Motors into a huge automaker and leading clean energy systems provider. But according to a SeakingAlpha poster, the factory in Reno and the other factories Tesla plans to build will cause Tesla Motors crater into bankruptcy soon.

Any time you see an argument so flagrantly opposite the conventional wisdom, it’s important to consider the quality of the source, and the reasoning they followed. Let’s get started …

I don’t know the author but what he has to say is sound. While SeekingAlpha overall isn’t the most trustable source, individual authors on that site could well be. But as we’ll see in a minute, I disagree with his conclusions.

There is a transformation underway in the automobile and energy markets. Electric vehicles seem to finally be destined to take a significant role in the market. Prices for renewable energy systems, solar, wind, and energy storage, is falling rapidly and will shortly be economically viable without subsidies. Maybe this will all work out or maybe the canceling of government subsidies in some areas will scuttle these technologies just as they’re on the verge of greatness.

In other words, Tesla Motors and other companies are positioning themselves to be supplying the key energy system of the future. And therefore Tesla Motors investments in the several Gigafactories it must build over the next few years should pay off in a huge way. That’s why Tesla’s stock price is way above a rational valuation for the stock based on its fundamentals.

What’s the danger? The SeekingAlpha poster suggests that it’s because the Tesla Motors Gigafactory builds Lithium-ION battery cells, but there are competing battery architectures in development that will go to mass production soon. In other words the switch to a Lithium-Air or Solid State batteries will cause Lithium-ION batteries to be rendered obsolete and of course factories to build such things will have to be scrapped.

Tesla Motors in such a scenario, having spent billions of dollars to build multiple Gigafactories, will have a huge financial problem if they have to scrap those factories.

Or….? What if the idea is bonkers?

I actually answered a similar question on Quora the other day:

How can Tesla cars compete with solid state battery electric cars?

How can Tesla compete with something that doesn’t exist yet in production-ready form? What kind of silly question is this?

There are no production vehicles or battery systems using solid state batteries. Hence, they are no competition to anyone.

In some future the potential exists for solid state batteries to live up to their potential. At the moment solid state batteries are R&D projects in research laboratories, and are not being produced in any quantity.

By the time that occurs, the Li-Ion battery makers will be very entrenched, and the solid-state battery makers will have to do an uphill battle for market acceptance and driving down their cost/kWh.

The good news is that electric vehicle designs can fairly easily incorporate any energy storage system. It’s not as complex as the switch from burning liquid fuels to an electric drive train. You’re basically swapping one kind of battery pack for another kind of battery pack. The biggest design change would be in battery management systems.

Therefore it should be feasible for an electric car maker to readily switch to a newer/better battery technology when the time comes.

In other words — Solid State Batteries and other advanced battery technology is a matter of Research & Development at this writing. It seems there’s always new battery technology developments being announced. Usually those breathless announcements turn out to be a research scientist holding a button cell in a laboratory, not a technology that’s production ready with cells suitable for automotive use. In other words we’re years away from advanced battery technologies starting mass production. Years during which Lithium-ION batteries will become the predominant battery technology. The competing technologies will face an uphill battle to get itself established in the market.

It’s most likely the competing technologies have an initial high price as happens with most new technologies. By that time Lithium-ION battery prices will have fallen considerably and have a big price advantage.

We don’t know how many years Lithium-ION will have before Solid State batteries or something else comes to market. The longer it takes the more entrenched Lithium-ION will be.

It’s not that the advent of solid state batteries will immediately cause Lithium-ION batteries to become irrelevant. There would be a period of switch-over during which Lithium-ION is slowly supplanted by something else.

As I noted in my Quora answer, an electric car manufacturer can fairly easily switch from one battery technology to another. It’s not like the switch from liquid fuels in internal combustion engines to electric drive. An electric drive train can use any electricity source. Switching from one battery to another is largely a difference in battery management.

But would the Gigafactory or other Lithium-ION battery factories be rendered irrelevant? An electric car maker could switch battery technologies, but can the battery manufacturer switch their factory around?

That’s a matter of battery factory design and how much of the equipment can be reused. There’s a lot of variables to this question — how much of a Lithium-ION factory can be reused to manufacture solid-state or other kinds of batteries?

Maybe manufacturing a solid-state battery cell would reuse most of the equipment in a Lithium-ION battery factory? Or maybe the whole of the equipment must be ripped out and replaced? The more equipment must be replaced the greater the cost of switching from one battery technology to another. The switch is “just” a matter of money to rework the equipment in a factory.

Factory retooling happens routinely. New manufacturing equipment comes along and the factory owner invests in that new equipment in order to increase efficiency, or because their old equipment has worn out. That’s what switching from manufacturing Lithium-ION to another kind of battery means — retooling a factory to produce a different battery chemistry.

It hardly sounds like the End of Tesla Motors.

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About David Herron

David Herron is a writer and software engineer living in Silicon Valley. He primarily writes about electric vehicles, clean energy systems, climate change, peak oil and related issues. When not writing he indulges in software projects and is sometimes employed as a software engineer. David has written for sites like PlugInCars and TorqueNews, and worked for companies like Sun Microsystems and Yahoo.