Shorting Tesla's Batteries

 | Jul 21, 2014 | 3:30 PM EDT  | Comments
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Corporate managers have an obligation to deploy appropriate technologies. They should avoid falling in love with a particular technology simply because it is interesting, convenient or serves a public interest.

While mature companies such as General Electric (GE), Siemens (SI), Honeywell (HON) and others mastered technology management, others, such as Tesla Motors (TSLA) and SolarCity (SCTY), may be in danger.

The issue is energy storage and batteries. Last February, Tesla announced plans to build the world's largest lithium-ion battery factory. Upon hearing the news, investors flocked to the stock and the company's stock jumped more than 50 points.

Tesla's announcement is a massive bet on a single technology. Worse, its $5 billion wager appears to be based on the assumption that no one can make a meaningful breakthrough in energy storage sciences. It seems like a bad bet.

It turns out that there is a lot of money piling up on the other side of Tesla's bet. Leading research intuitions are investing heavily in new energy storage technologies. In a direct threat to Tesla's battery idea, breakthroughs have already been announced.

Tesla's battery idea centers on lithium-ion technology. The technology stores energy by using chemical reactions to trap ions that move from one electrode to the other. Lithium-ion batteries have huge storage capacities. However, because of the chemistry involved, electricity can go in and out only so fast, and some stored energy is lost in the process.

Lithium-ion batteries have a limited battery life. Their life expectancy is approximately 1,200 cycles at 80% discharge (if batteries are discharged less than 80%, they will last longer). Competing technologies can achieve 8,000 to 10,000 cycles. While lithium-ion prices are expected to decline by 50%, the capital costs are spread over 1,200 cycles.

In addition to deploying batteries in their all-electric automobiles, Tesla plans to use similar batteries in its sister company's (SolarCity) distributed utility systems. Tesla needs the extra business to scale up its manufacturing. Unfortunately, this one-size-fits-all strategy seems double down on Tesla's bet-your-company strategy. However, it is more than betting Tesla's future; it is also betting SolarCity's future.

It is a scary bet. Top tier research intuitions, including the Massachusetts Institute of Technology (MIT), Stanford, Argonne and others, are jumping in. They see the prize. It is the same prize that Tesla bets can never exist. However, it does exist. While Tesla announces its commitment to lithium-ion batteries, research institutes are announcing new technologies that are entering development stages.

One example is from MIT. Professor Joel Schindall and the MIT Energy Research Council's website are saying goodbye to batteries altogether. They recently announced that their research team has developed a new energy storage device. It "has the potential to hold as much energy as a conventional battery but could be recharged in seconds rather than hours, would last almost indefinitely, and won't mind the cold. The device could prove the first economically viable alternative to today's battery. It could one day yield a practical all-electric car and provide electricity storage critical to using intermittent energy sources such as solar and wind."

On the other coast, Stanford has assembled another impressive team. They established a new battery and energy storage hub they call the Joint Center for Energy Storage Research (JCESR). The hub will combine the research-and-development (R&D) firepower of five Department of Energy (DOE) national laboratories, five universities and four private firms in an effort aimed at achieving revolutionary advances in battery technologies.

The partnership includes Argonne, Lawrence Berkeley, Pacific Northwest, Sandia and SLAC national laboratories. It includes Stanford University, the University of Chicago, Northwestern University, the University of Michigan, the University of Illinois at Chicago and the University of Illinois at Urbana-Champaign. It also includes Johnson Controls (JCI), Applied Materials (AMAT), Dow Chemical (DOW) and the Clean Energy Trust.  

There are other teams, like the City University of New York (CUNY), Energy Institute, Rensselaer Polytechnic Institute, Georgia Tech's Center for Innovative Fuel Cell and Battery Technologies and Germany's Münster Electrochemical Energy Technology.

It is a bold move for Tesla to bet against these institutions. It is even bolder when you consider the likelihood that a wave of new technologies will soon emerge.

Of course, Tesla and SolarCity could adopt these new technologies as they become available. But it will cost them. In addition, portions of Tesla's initial $5 billion could be lost, as the new technologies require replacement tools, equipment and feedstock.

For investors, Tesla's bet does not appear to be worth the risks. The upside seems limited. The downside seems limitless. Tesla's risk-reward ratio seems out of balance.

SolarCity has fewer risks but, if it is locked into Tesla's battery deal, its rewards do not appear to be any better.

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