Tesla Takes It to the Next Level

This will be a week for watching Tesla, not only because the company’s stock had soared to new heights but because Elon Musk seems poised to take it to the next level – manufacturing batteries.

Musk has scheduled a conference call this week and gives every indication is he will be announcing plans for a new “Giga factory” where the Silicon Valley auto company will manufacture its own batteries. “Very shortly, we will be ready to share more information about the Tesla Giga-factory,” Musk told shareholders in his 4th quarter letter last week. This will allow us to achieve a major reduction in the cost of our battery packs and accelerate the pace of battery innovation.”

In a way the company has little choice. If Tesla is to move down-market from its current luxury niche – which has always been the plan – it is will need to buy the equivalent of the world’s entire current output of lithium-ion. The easiest thing to do is to go into manufacturing itself.

As usual, Musk will be doing things with a flair. Rumor is that he will be combining with SolarCity, which is run by his cousin Lyndon Rive, to produce a facility running largely on solar power. This will take us way beyond fossil fuels into the kind of world environmentalists imagine, where intermittent solar and wind power are stored to provide the kind of “high-9’s” reliability required by an industrial, digital society. And the key to that will be the same thing that Musk is working on now – batteries.

This kind of convergence is the reason for the number-two rumor of the week – that Tesla and Apple have engaged for a possible collaboration, even a merger. Last week San Francisco Chronicle reporters Thomas Lee and David Baker revealed that Apple’s M&A specialist Adrian Perica met with Musk last spring. What did they talk about?  Obviously a joint venture is in the air. Remarkably, only last October German stock analyst Adnaan Ahmad wrote an open letter to Apple saying it should consider entering the auto business by buying Tesla. The reasoning is as follows:

• Despite its reputation for cutting-edge products, Apple’s traditional market for personalized devices seems to be reaching its limits. Sales of smart phones and tablets are maturing. Apple’s Next Big Thing is supposed to be a smart watch. A watch?  Is that an appropriate ambition for the world’s most innovative company?  As Steve Jobs did so many times, Apple need to enter an entirely new business and turn it upside down.
• Apple is sitting on $160 billion in cash. It could literally buy almost any company in the world. Even with a market capitalization that is inflated by high expectations, Tesla is only worth $24 billion. The whole thing is doable.
• Tesla needs an infusion of cash if it is to break out of its luxury niche and provide a car for the masses. The company’s proposed Gen III would sell for $35,000 and compete with the Chevy Volt and the Ford Focus. But more than half of that cost is in the battery. If Tesla can achieve vertical integration and come up with some new innovations, it may be able to turn a profit. But Apple is in the battery business as well, since most of what’s under the hood in an iPad or iPhone is lithium-ion. There is a convergence taking shape.

Of course there are many things working against this vision. Both Tesla and Apple may deal in lithium-ion batteries but designs aren’t the same and the chemistry is different. Also, when it comes to storing huge amounts of electricity at the factory, lead-acid remains the preferred technology. It’s cheaper in a way that lithium-ion will find if very difficult to duplicate.

Still, there seem to be breakthroughs coming in battery research almost every week. Only two weeks ago, researchers at Harvard announced the invention of a “flow battery” that stores a charge in organic liquids rather than metals. At the University of Limerick, researchers announced the development of a new germanium nanowire-based anode that greatly expands the capacity and lifetime of lithium-ion batteries. And researchers at Stanford said they had developed a silicon anode based on the design of a pomegranate seed that improves lithium-ion storage capacity by a factor of 10. All this is within the space of the last two weeks.

Batteries are hot and Elon Musk will be walking right into the middle of it. He has proved Tesla’s charging system has legs. The first Model S just made the 3,464-mile journey from Los Angeles to New York in 76 hours using Tesla’s new network of supercharger stations. Recharging has been reduced to just over an hour. Model S sales hit 22,500 for 2013, exceeding expectations. With all this success under its belt, the company is preparing to move down-market, where it can really have an impact on our fossil fuel dependence.

Like many Silicon Valley entrepreneurs, Musk is obsessed with space travel. He says he wants to be buried on Mars – “and not on impact.” With Steve Jobs gone, Musk may be the man to take Silicon Valley’s venture into alternative automobile propulsion to the next level.