Electric vehicle (EV) maker Tesla (NASDAQ:TSLA) plans to use iron-based batteries in its semi light (short range heavy trucks) electric trucks and an affordable EV model, as indicated by the company in its Master Plan Part 3 paper. The use of lithium iron phosphate (LFP) batteries, which are generally cheaper than nickel and cobalt-based lithium-ion batteries, will help the company reduce its manufacturing costs.
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Transition to LFP Batteries in EVs
The use of LFP batteries will also help Tesla address supply concerns related to nickel and cobalt, as iron ore is relatively abundant and costs less to extract and refine. Also, LFP batteries are generally considered to be more stable and safer because they are less likely to catch fire compared to batteries with nickel and cobalt. However, iron-based batteries are larger and heavier. Moreover, they have a shorter range as they generally hold less energy than nickel-based batteries.
Tesla intends to use LFP batteries in its Model Y and Model 3 vehicles as well, though it did not provide a timeline. The company plans to use LFP batteries with capacity of 53 kilowatt-hours (kWh) in its planned small affordable electric vehicles, compared to 75 kWh for Model Y and Model 3. As of now, Tesla uses nickel-based batteries in most of its Model 3 and Model Y vehicles in the U.S.
The leading EV maker, which is led by CEO Elon Musk, currently sources its LFP batteries from China-based Contemporary Amperex Technology Co. Ltd (CATL). Most of the LFP battery production is concentrated in China, which could pose risks due to the ongoing U.S.-China tensions. Further, automakers need to use battery components produced in North America to take advantage of the federal tax credits for EVs.
Recently, Bloomberg reported that Tesla is looking to build a battery plant in the U.S. and spoke with White House officials about the same. Sources told Bloomberg that the plan involves CATL. Tesla apparently wants to strike a deal similar to the one announced by Ford (NYSE:F) in February.
Ford is collaborating with CATL on building a new $3.5 billion battery plant for EVs in Michigan. However, the company will own the new facility through a wholly owned subsidiary instead of operating it as a joint venture with CATL. Production at this plant is expected to commence in 2026. Meanwhile, Ford plans to introduce LFP batteries in its Mustang Mach-E SUV this year and F-150 Lightning electric truck in 2024.
Aside from Tesla and Ford, Mercedes-Benz Group AG (MBGAF), Volkswagen AG (VWAGY), and Rivian Automotive (RIVN) have also announced plans to use LFP batteries in some of their vehicles.
Is Tesla a Buy, Sell, or Hold?
Reducing EV production costs through the use of LFP batteries and other initiatives is very crucial for Tesla, given the rising competition in the EV space. Meanwhile, Tesla continues to slash its prices to spur demand, including the price cuts implemented this week.
Wall Street is cautiously optimistic about Tesla, with a Moderate Buy consensus rating based on 19 Buys, 10 Holds, and three Sells. The average TSLA stock price target of $219.57 implies nearly 19% upside potential, even after the significant year-to-date rally.
