Tesla’s New Batteries Mean More Control of Cell Supply Chain

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Whenever Tesla reports earnings, it's a bit of a mad scramble for me and my colleagues here at Bloomberg. But once the dust settles, I like to go back and read over the transcript of the earnings call for nuanced points that I may have not fully appreciated.

Case in point: Tesla's 4680 battery cells. As you may recall, Tesla announced at Battery Day in September 2020 that they were making new, larger 4680 battery cells. Tesla is producing these on a pilot line on Kato Road in Fremont, California, but also plans to procure them from long-time suppliers like Panasonic (the battery maker on Wednesday announced plans to start prototype production of the 4680 early this year at a facility in Japan's western Wakayama prefecture).

Making automotive-grade battery cells at consistently high volume and quality is no small feat, and Tesla's foray into battery cell production is another sign of how critical vertical integration is to its overall strategy.

In the third quarter earnings release in October, Tesla said that “the 4680 in-house cell project continues to progress. We are producing an increasing number of battery packs for testing purposes, and so far, the test results meet our current expectations.” That sounded promising, but it was clear that volume production remained a work in progress.

Then last week, Drew Baglino, Tesla's senior vice president of powertrain and energy engineering and the company's de facto chief technology officer, provided a significant update.

“So throughout 2021, we focused on growing cell supply alongside our in-house 4680 effort, to provide us flexibility and insurance as we attempt to grow as fast as possible,” Baglino said during the earnings call. “We are making meaningful progress of the ramp curve in Kato. We're building 4680 structural packs every day, which are being assembled into vehicles in Texas. I was driving one yesterday and the day before. And we believe our first 4680 vehicles will be delivered this quarter.”

The first vehicle to be made at the company's plant in Austin, Texas, will be the Model Y. And it sounds like the first Model Ys with the 4680 batteries will be delivered by the end of March. It's not clear if the first Model Y cars with 4680 cells are the ones made in Fremont, or from outside suppliers, or both. But Tesla's efforts to exert more control over its battery supply give the company a leg up over legacy automakers.

“Tesla remains the leader of the multi-decade secular transition to EVs,” said analyst Dan Levy of Credit Suisse in a note to clients Monday. “With less question around demand and much more question around supply of EVs, Tesla should be a key beneficiary — it has a product lead vs. others, and has taken the most holistic approach on EV supply.”