2012 Tesla Model S
Tesla is on a roll right now, with 14,000 of its all-electric Model S luxury sedan on the road and its stock at record highs.
If it achieves its planned production levels--21,000 cars this year, perhaps 40,000 by 2015--its voracious appetite for lithium-ion battery cells will only increase.
The massive scale of cell purchases by Tesla Motors [NSDQ:TSLA] has already boosted global production levels.
It may soon use as many '18650' lithium-ion cells itself as the entire industry produced before the Model S went into production a year ago.
But ensuring adequate battery supplies in sufficient time to expand car production is absolutely key to continuing Tesla's growth.
1914 Ford Model T
Scale is crucial
From the time of Henry Ford, a key attribute that has characterized the auto industry is scale. Each car contains thousands of parts, most requiring their own assembly lines, all of which come together in massive factories that assemble the finished vehicle.
When you build thousands of cars a day, the sheer industrial might and logistical prowess can be mind-boggling.
CEO Elon Musk has noted that some suppliers tooled up based on projections that Tesla would build no more than 3,000 Model Ses over the car's lifetime. Instead, that's now only six weeks' production.
In the previously non-automotive lithium-ion battery industry, Tesla may be having its single greatest impact.
Tesla's big battery
The Nissan Leaf is the best-selling electric car in history: From December 2010 through mid-July 2013, Nissan sold more than 71,000 of them globally. With a 24-kilowatt-hour battery, that works out to a total of about 1.7 million kWh over 32 months of production.
In contrast, Tesla is on pace to sell 21,000 Model S sedans this year.
Tesla Motors - Model S lithium-ion battery pack
Based on user data from the Tesla Motors Club forum showing that less than 30 percent of buyers opt for the entry-level 60-kWh battery, we can conclude that in just 12 months of production, Tesla will have deployed more than 1.6 million kWh worth of batteries.
In other words, Tesla has soaked up almost as much battery capacity in a year as Nissan has in almost three.
This underscores a fundamental truth: Tesla's batteries are a lot bigger than the Leaf's, or those of any other electric car.
As a result, Tesla is about to have an outsized impact on the battery industry as it scales up its car production over the next few years.
Tesla is the only carmaker to use small "commodity" 18650 cells for plug-in vehicles; Nissan, General Motors, BMW, and others use larger-format cells, which contain up to 10 times the energy in each cell.
(Tesla also assembles battery packs in low volumes for other makers, including Toyota and Daimler, that use the 18650 cells.)
Already a major player
This reality has already shaken up the consumer battery industry.
Panasonic, Tesla's primary battery supplier (and investor), went from a loss of 2 billion yen in the second quarter of 2012 to a profit of 4 billion yen in the most recent quarter--largely on the strength of the voracious increase in demand from the Model S.
Tesla Model S
In addition, Tesla is close to signing production deals with Samsung SDI and other major players to secure even more future production capacity.
7,000 cells x 21,000 cars
Underlying the frantic efforts of the battery industry to ramp up capacity for Tesla are the cold, hard statistics of the Model S battery system.
Each and every 85-kWh Tesla battery pack contains more than 7,000 automotive-grade cells, all in the common '18650' cylindrical format.
The entire industry produces about 660 million cylindrical cells a year; the 18650 format is by far the most popular.
By the end of June, Panasonic had already delivered 100 million cells to Tesla, and the Model S production rate is rising. Plans are in place for Tesla to reach an annual pace of 40,000 cars per year by the end of 2014.
1,000th body for 2012 Tesla Model S on display at Tesla Motors factory, Fremont, CA, Oct 28, 2012
40 percent of global capacity
If the company hits those numbers, and if the 85-kWh battery proves as popular overseas as it has in the U.S., by next year the Model S alone will soak up almost 40 percent of global cylindrical battery production.
But the planned short term increases in the production rate for the Model S in 2014 are hardly the end of the story.
By the beginning of 2015 Tesla will have started production of the Model X, which could add another 20,000 cars to the total--or more.
Credible estimates already exist that point to a need for double or triple the global battery production over the next few years, solely to satisfy Tesla's growing appetite for lithium-ion cells.
The reasoning behind this is obvious, once you make some simple assumptions about the potential market for the Model S and Model X.
Numbers don't lie
Elon Musk has repeatedly pointed out that the North American market represents about one-third of the global market for luxury cars. With Tesla selling around 20,000 cars a year in North America, global demand for the Model S could be closer to 60,000 per year.
Factor in the Model X, starting in 2015, and you can quickly reach a scenario in which Tesla sells up to 100,000 cars a year by 2017.
Tesla Model X
That could require something like 640 million cells per year, meaning that Tesla would need to engineer almost a doubling of global cell-fabrication capacity over the next few years.
That's not something that can be done in six months. It took Nissan three years to build its latest lithium-ion cell production plant in Smyrna, Tennessee; funds were committed in June 2009, and the plant went into production late in 2012.
Even if the final sales figures for the Model S and Model X come in substantially below these projections, Tesla needs to get started sooner rather than later.
Thus far, the Model S has been a remarkable success, and is outselling its large luxury rivals.
But regardless of final sales totals for the Model S and Model X, Tesla is moving forward with plans to build an electric car that will compete head to head with the BMW 3 Series and Mercedes-Benz C Class.
Red 2013 Tesla Model S cars roll down the production line (Photo: @elonmusk on Twitter)
It is expected to be a mid-sized sedan 20 percent smaller than the Model S, offering at least 200 miles of electric range, for a list price starting around $35,000.
Total global output for 165,000 cars
Assuming each car requires 4,000 cells, Tesla will need additional battery production capacity equal to the entire current global output of these cells for every 165,000 of these cars.
If the third-generation car reaches production of 100,000 a year or more, the batteries it requires will run well into the billions--dwarfing the capacity of the entire current battery industry.
Tesla and Panasonic partnership, from Tesla Motors 8-K, filed December 2010
Suppliers or in-house production?
This is why Elon Musk has already discussed the need to build "truly gargantuan" battery factories to supply Tesla's future needs.
It's not yet clear whether Tesla will rely on the existing industry to do so, or choose to take the reins itself--perhaps by buying an existing supplier.
Already, it's clear that Tesla has had an outsized impact on the global battery business. With 2013 only two-thirds over, Tesla Motors Corporation is now applying market forces that have started to pull the biggest battery makers on the planet into its orbit.
As Tesla begins to gear up for the mass production of its next-generation vehicle, it must already plan for a massive expansion of the battery industry independent of any consumer-electronics needs.
If Tesla's numbers hold, that expansion could double or even triple global cell production in only three to five years.
Henry Ford would likely respect the magnitude of that task.