Who's Building the Best EV Batteries? - 7investing 7investing
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Who’s Building the Best EV Batteries?

What are the most intriguing investment opportunities in the battery space?

October 12, 2023

Unless you’ve been living under a rock, you’ve probably noticed that electric vehicles are taking the transportation market by storm. A flood of new EV models from Tesla (Nasdaq: TSLA), Ford (NYSE: F), GM (NYSE: GM), and others are really gaining traction on the world’s roads and highways. The share of electric vehicles in the overall global light vehicle market has increased from 3% share in 2020 in 10% in 2022.

Yet EVs also require a completely different supply chain. And the most expensive part of an electric vehicle is the battery itself, which can cost $10,000 or more.

Large automakers are either outsourcing their batteries to third-party suppliers or partnering directly with them. Tesla is partnering with Panasonic for the batteries produced for all of its Gigafactories. GM has a partnership to source batteries from South-Korea based LG, while Ford is getting many of its from the Chinese supplier CATL.

For medium-sized automakers, that outsourcing strategy certainly makes a lot of sense. Battery design takes a significant amount of R&D effort. And for those willing to commit to R&D, it would then cost another $50 to $100 million to get a pilot scale line up and running, and even up to $500 million of investment before getting to commercial volumes.

Unless you have the volumes to justify that amount of time and money, it might be better to team up with a battery supplier who already has the design and infrastructure in place.

So who are those best-in-class battery suppliers? Are there any that are investable — or at least worth putting on our radar?

Taking Charge of the Future

The first battery supplier of interest might actually be Tesla itself. Elon Musk has shown a willingness to sell its batteries to other automakers; even though he hasn’t followed through on this yet. Tesla’s cylindrical batteries are vastly different than the rectangular packs that are the standing of the industry. And it could be a sign that Tesla is looking to be further develop its own battery-making capabilities, rather than relying on others like Panasonic. As we already know, Tesla is unrivaled when it comes to scaling up production to meet necessary global volumes.

China-based suppliers such as BYD, CATL, and NIO (NYSE: NIO) are others to consider. It’s no secret that trade tensions are high between the US and China, and that batteries are a national interest of China’s government. These are large, publicly-traded companies who are state-funded and are turning out very large production volumes.

NIO’s batteries are mostly used for its own vehicles and are designed to follow the Goldilocks principle — small, medium, and large that are interchangeable with its vehicle models. BYD offers a variety of batteries with different chemistries, which are used in both all-electric vehicles and also hybrid vehicles. Both of those vehicle types are classified as “new electric vehicles” in China, which qualify for lucrative government subsidies.

For those interested in a pure-play, America-based battery supplier, QuantumScape (NYSE: QS) could be an intriguing option. Initially funded by legendary venture capitalist John Doerr, initially technically advised by Tesla co-founder J.B. Straubel, and now led by Infinera’s (Nasdaq: INFN) former CEO Jagdeep Singh, QuantumScape’s all-star cast led it to become a 10-bagger within its very first month in the public market!

However, questions soon arose about whether QuantumScape’s lithium-metal battery design would be economically-viable. Its proprietary electrolyte and separator are very expensive and could run into issues with scalability. Doerr and Straubel have both stepped down from the Board, though it continues to make progress on the milestones set forth by its six automaking development partners. Due to its higher costs but also its higher energy density, QuantumScape will most likely serve only the premium automakers who demand excellent performance and can afford very high price points.

There are also several privately-held companies that battery-interested investors should have on their radar. Lyten, whose Chief Technology Officer spent a decade at Tesla, is working on lithium-sulfur batteries that are ultra-lightweight and don’t require nickel and cobalt that are difficult to globally source. This makes them much more energy efficient than lithium ion, while also having a 60% smaller carbon footprint and are easily recyclable.

America is fully-committed to funding its electric vehicle revolution, and batteries play a crucial role in the movement (pun intended). Forward-thinking investors should consider this space as the picks-and-shovel providers who could benefit greatly from long-term contracts with the automakers.

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