Tesla (TSLA) is appearing to lean further toward solving its Panasonic (PCRFY) problem by vertically integrating the project through its recent Maxwell Technologies acquisition.
During its annual shareholder meeting Tuesday evening, CEO Elon Musk hinted at the probability that it could even get into the mining business for battery cell production, at least a bit, following its Maxwell deal.
"As we scale battery production to very high levels, we have to look further down the supply chain and we might get into the mining business... I don't know. A little bit at least," Musk said. "We do whatever we have to [in order] to ensure we can scale at the fastest rate possible."
Much of Tesla's production depends on its ability to access batteries that rely on a supply of minerals such as lithium, nickel and copper. Much of these substances are expected to be in even shorter supply in coming years, possibly giving Tesla the kick it needs to assess the feasibility of directly sourcing materials.
Panasonic, the current key supplier of batteries to Musk's company, noted that it might not be able to even supply the much-needed batteries at Musk's ambitious production rate.
"Batteries will run out if Tesla starts to sell the Model Y and expands its business next year," Panasonic CEO Kazuhiro Tsuga said on May 9. "What will we do then? It's one of a few topics to discuss with Tesla, including battery [production] in China."
As Panasonic runs the production lines at the gigafactories in the U.S., this is a headline issue.
However, aside from production problems, the relationship has been a tenuous one of late, per reports from Japan and could be causing the companies to fray apart.
There is 35 GWh/yr "theoretical capacity", but actual max output is ~2/3. It was physically impossible to make more Model 3's in Q1 due to cell constraints.
— Elon Musk (@elonmusk) April 14, 2019
Amid some of Musk's more audacious remarks against the partner company, the Japanese giant has reportedly scaled back plans to invest further in Tesla's Gigafactory 1 in Nevada, and stated it would not act as a source for lithium-ion batteries for Tesla's new Shanghai factory.
While the relationship may indeed be souring, necessitating a move toward vertical integration, the Panasonic problem is not easily solved.
For one, Panasonic is owed a great deal of money by Tesla.
"[Contractual obligations] represent purchase orders of $15.69 billion in other estimable purchase obligations pursuant to such agreements, primarily relating to the purchase of lithium-ion cells produced by Panasonic at Gigafactory 1, including any additional amounts we may have to pay vendors if we do not meet certain minimum purchase obligations," the most recent 10-K filing explains.
At Tesla's current market cap, the obligations represent over 40% of equity value.
Panasonic is also the key partner for the Solar City-focused Gigafactory 2 in Buffalo, New York that leaves it tied up in much of the legal protections for the plant.
"We have signed long-term agreements with Panasonic to be our manufacturing partner and supplier for lithium-ion cells at Gigafactory 1 in Nevada and PV cells and panels at Gigafactory 2 in Buffalo, New York," the filing states. "If we encounter unexpected difficulties with key suppliers such as Panasonic, and if we are unable to fill these needs from other suppliers, we could experience production delays and potential loss of access to important technology and parts for producing, servicing and supporting our products."
As a result, an integrated solution would stand to reason.
"We need a large scale solution for battery cell production," Tesla CTO JB Straubel commented.
The issue is that cutting Panasonic out of the picture comes with a mountain of issues in its own right. There is no such thing as a clean break in this case.
The Japanese company has been at the forefront of financing for the gigafactories, and still has a dominant market share, encompassing about one-third based on the debt obligations and Panasonic's leadership role in batteries globally, representing about 20% of global market share for lithium ion batteries, nearly twice that of Samsung (SSNLF) for example.
If Tesla cuts out Panasonic, it can readily lend its dominant position to Tesla competitors eager to move in on the EV trade.
Overall, whether or not this possibility adds an unneeded burden to a company that is saddled with debt, unlike Panasonic, and lagging portfolio performers like SolarCity, or if it simplifies supply chains and offers attractive vertical integration will remain up for debate among fervent investors on both ends of the trade.
The problem for the latter is that starting up a segment to compete with the established Panasonic is not a "no brainer" in any sense.
The progress of the expected integration, either in cell production or all the way to mining operations, will be a key factor to monitor moving forward as it could tip the scales toward either side of this battleground stock.
Given Tesla's myriad of unfulfilled promises still outstanding, investors probably shouldn't hold their breath.
