Tesla mission: accelerate the transition to sustainable energy
But how can Tesla successfully lead this transition if it must simultaneously transform the transportation and energy industries? Tesla will soon communicate its third Master Plan on how it will execute its mission over the next decade, but I thought it would help to consider potential objectives to this mission over just the next 3 years.
These are core objectives representing what will have the most immediate impact on a transition to sustainable energy. But what is the current baseline towards this transition? The global fleet of internal combustion engine (ICE) vehicles is estimated at about 1.5 billion units excluding off-road vehicles and heavy construction equipment. The petrochemical industry exists to service this fleet. Demand drives supply. Cut demand and you limit production and consumption of fossil fuels.
And to be clear, we still need fossil fuels during the transition to sustainable energy. And we also need to transition to all sustainable energy sources including hydropower, geothermal, nuclear, wind, solar and other sustainable sources. But the goal is to take the use of fossil fuels towards zero for transportation and energy generation. And the sooner the better. Tesla is a catalyst other companies can leverage to further accelerate the transition to sustainable energy.
So what are potential Core Objectives for Tesla over the next 3 years? I have identified three.
Slash demand for miles driven with an internal combustion engine.
Scale electric vehicle fleet with 6.5 million Tesla vehicles produced in 2025.
Enhance Customer Experience for Tesla to become the #1 global Brand.
These core objectives inform more granular objectives to drive a 3-year corporate strategy. I will cover those separately and associate each to a core objective using the numbering scheme above. 2023 will be a critical year for Tesla. With 4 gigafactories now operating on 3 continents and scaling production, the choke point for scaling Tesla EV deliveries will shift from global logistics of finished vehicles to the global supply chain for raw materials and components to ramp EV production. Battery cell production and then the raw materials to produce those cells will become critical to continue scaling EV production exponentially.
1a. Release supervised Full-Self Driving(FSD) to all Tesla vehicles that have a purchase or subscription to this service.
The most recent statement by Tesla puts the U.S. fleet of Tesla vehicles participating in the FSD beta program at 160,000 vehicles with 35 million cumulative miles driven using FSD (July 2022) and scaling exponentially with more vehicles are added to the program and users engage the latest FSD beta version more often as performance improves. Elon Musk has stated the general release of FSD will happen before the end of 2022, but that may slip if development does not reach technical requirements and quality assurance targets in that time-frame.
However, FSD progress is accelerating, so the general release should happen over the next 12-18 months if delayed beyond 2022. The general release of FSD is really just a milestone towards unsupervised fully autonomous navigation (level 4 and level 5). Supervised FSD miles driven helps train the neural network when human drivers disengage the FSD service. Tesla vehicle video prior to the disengagement is uploaded to Tesla to help identify what conditions contributed to the disengagement.
True positive disengagements contribute edge cases that identify limitations in the neural network version used during that edge case. Labelling key features in these edge cases helps train future versions of the neural network. When disengagements of supervised FSD approach zero or the ratio of false positives to true positives continuously increases, you can argue human supervision is either redundant or adds risk to unsupervised autonomous navigation.
1b. Launch Tesla full autonomy in 3 key U.S. markets where regulators are early adopters.
Wide adoption of full autonomy without a human operator is a requirement for the robotaxi concept to have a significant impact on ride-sharing and commercial use cases like delivery. But early adoption in key markets will help verify safety for regulators and validate the business case for different services. Florida has already approved level-4 and level-5 autonomy. Manufacturers just need to demonstrate that a vehicle model passes verification and validation testing to meet the requirements for unsupervised full self-driving in the state.
Nevada is another state providing early adoption of at least level-4 autonomy with state laws and regulations governing self-driving vehicles. Nevada Revised Statutes NRS-482A provides a framework for vehicle manufactures to apply for testing and commercial deployments of self-driving vehicles. California and Arizona have also taken actions to help foster innovation towards self-driving vehicles. A total of 29 U.S. States plus Washington D.C. have included legislation on self-driving vehicles.
But initial deployments for at least level-4 autonomy on public roads in and around Las Vegas, Orlando and Fort Lauderdale would help build momentum and awareness of this technology. Regulations, insurance, liability, and technology would need to enable initial use and then adapt as learning evolves to help define success criteria. Early adoption in these 3 key markets will foster wider adoption across other markets. Australia is another market that could serve as an early adopter due to the high number of vehicle accidents related to drowsy driving across long distances between cities.
1c. Launch robotaxi services in the markets where fully autonomous Tesla vehicles without a human operator are deployed.
Slashing demand for miles driven in ICE vehicles requires a superior use case with EVs. Substantially lowering the cost per mile by 50-80% for ride-sharing will drive preference for consumers already using ride-sharing services like Uber and Lyft. But as the cost per mile continues to drop, consumers who commute and park an ICE vehicle will start opting for the cost savings of ride-sharing in a Tesla EV.
Tesla proposes robotaxi capacity will scale if Tesla EV owners (with FSD enabled) allocate their vehicle to the Tesla robotaxi pool for a portion of the day to generate income or offset the cost of ownership. This would be done through the Tesla mobile app. Key contributors for robotaxi demand will be the cost per mile and wait time for consumers. Adoption will wane if the average wait is more than 10-15 minutes. Scheduling a pick-up time may help allocate vehicles more efficiently. Tesla EV owners could be notified near a pick-up site to help recruit vehicles into the robotaxi pool to help meet local demand with adequate supply.
1d. Update Tesla FSD technology stack to accelerate the pace of self-driving innovation
Tesla FSD is only possible with a comprehensive technology stack that enables the Tesla team to advance its capabilities. This includes Tesla’s FSD semiconductor chip, FSD computer, FSD neural network(s), Tesla cloud and cloud services, Dojo Supercomputer to train new versions of the FSD neural network and trained Tesla Data Scientists and Engineers who design, build, test and iterate these systems.
The FSD neural network continues to evolve as new versions are trained, pass verification and alpha testing and are released for beta testing with a new version like FSD beta v10.69.2. These new versions are released every 2 to 4 weeks for about 10 to 20 new releases annually. Active beta testers who own a Tesla EV with FSD track progress against issues they identify and will test new versions against these issues. The beta testers will often film video to document their assessments and comment on improvements or resolution of the issue. Because Tesla is developing FSD for general use and not a specific location, issues may require multiple releases for resolution.
Edge computing improvements with new chips and computers in Tesla EVs take more time to design and release new hardware, but provide significant step change improvements in performance. The Dojo Supercomputer is a new introduction and was designed to automate the labor intensive task of labelling video to train the neural networks. Dojo is also designed to train complex neural networks with an increasing database of training videos. This is not incremental training. Training starts all over again with a blank model to update the entire neural network. But this innovation impacts the scale of improvements with each release.
1e. Tesla EV total cost of ownership 20-50% of comparable ICE vehicles.
Many vehicles are used for business as either fleets operated out of a hub or by an individual out of their residence. Both options offer the opportunity to recharge at a site the owner/driver controls to help manage the energy cost. Commercial fleets (e.g. rental cars: Hertz; couriers: Quest Labs; services: GeekSquad; taxicabs) offer the opportunity for Tesla or a third party to bundle solar, battery-storage, Superchargers, EVs, Insurance and other services into a fleet package. This is also done for ICE vehicle fleets, but Tesla offers some opportunities to leverage the overall platform to drive down cost at scale.
Hertz is already about one year into a 100,000 Tesla fleet purchase (full price) and claims maintenance is 50% less on these EVs than comparable ICE vehicles. Airport rental car lots can accommodate solar panel installations at scale to help generate energy for these EVs to deploy to customers. Tesla has the data to learn about the range of rental driver behaviors to help price and update risk for Insurance products. Uber has partnered with Hertz to offer 50% of these Tesla vehicles to their drivers and Carvana has partnered with Hertz to purchase Tesla vehicles for resale at the end of their rental service.
Consumer business vehicle use cases (e.g. delivery: DoorDash; ride share: Uber; real estate: independent agents) can also benefit from lower total cost of ownership when considering home solar, battery-storage, insurance, maintenance, etc. The Model Y and Model 3 would be the likely model candidates of interest, but the CyberTruck will also be popular when released for construction and transporting goods.
Robotaxi use cases will further reduce the total cost to not only own, but operate fleets. New business models will emerge for Hertz, Uber, DoorDash and others to offer or use fleets for gig-economy use cases provided today by consumers using their own vehicles. Without the cost of a human driver, these services will take market share from services that still use human drivers. A robotaxi that operates at 20-50% of the total cost of an ICE vehicle will drive adoption of Tesla EVs even if you own ICE vehicles.
As the pace of EV innovation accelerates, ICE vehicles will increasingly be abandoned as the market for these vehicles collapses. This innovation includes a service life for EVs approaching 1 million miles and commercial EVs operating 20 hours a day with idle time just to recharge batteries and clean the vehicle. This is truly disruptive innovation because 1 such Tesla EV used commercially can do the work of 5 ICE vehicles that sit parked most of the time for a human operator to use. Robotaxis become the lowest cost, just-in-time resource for hire to transport people and goods.
2a. Scale Lithium-Ion Battery Production
The rate-limiting factor to scale EV unit production will be the availability of lithium-ion battery cells for most vehicle manufacturers. And this will be primarily driven by the availability of raw materials like nickel for high energy density battery cells. Existing mines to extract these raw materials do not have the scale to meet future demand. And new mines often take 5-8 years to establish permits and scale production. Miners do not build extra capacity years in advance ahead of demand. They let commodity prices drive mine development to increase production into demand. Tesla can partner with the largest global miners like Glencore, BHP, Rio Tinto and Vale and national governments in Indonesia, Canada and Australia to accelerate the investment and development of new mines to meet the demand for target raw materials for batteries.
Just as important, facilities will be needed to process and purify raw materials with sustainable methods close to where they are mined. Lithium is abundant around the world, but mining lithium from spodumene, clay and brine deposits requires purification to meet the requirements for use in batteries. The scale required to meet demand will drive even more innovation into processes to mine, extract and purify these raw materials. These scaled processes will also need to make sure we limit the impact on the environment. Recycling raw materials from used lithium-ion batteries will be important to further reduce the impact on the environment through sustainable processes.
Countries like Indonesia don’t want to just mine and export raw materials. They want to build factories to process & purify these raw materials into components like cathodes with mined nickel. This also adds efficiency to the supply chain. Tesla can partner or even vertically integrate into building these factories as the front-end for battery cell manufacturing. If land, labor, and the cost of business favor doing so, Tesla could partner to mine nickel in Indonesia and then use their own factories to export cathodes, battery cells, battery packs and/or finished EVs depending on the degree of vertical integration that makes sense.
Tesla announced its new 4680 structural battery cell design and production process 2 years ago at its Battery Day event. This design has many advantages like reduced cell production time, scalability, faster charging and underbody frame integration as a structural component to streamline vehicle production, improve safety and reduce curb weight. Tesla continuously improved the 4680 design, tooling and processes in an alpha 4680 production line in Fremont, CA. It is now integrating 4680 cell production into its gigafactories. The Inflation Reduction Act of 2022 provides significant financial incentives for EV batteries to be manufactured and packaged domestically in the US. Tesla appears to be doubling down on setting up more battery cell and pack production at Giga Texas in response to this new law.
Tesla is also partnering with battery cell manufacturers CATL, Panasonic, LG, Samsung and BYD on lithium-ion battery cell production for multiple cell formats and cell chemistries. Giga Shanghai is producing more EVs with lithium iron phosphate since these materials are readily available. Tesla has committed it will purchase as many battery cells that these companies can produce at fair price.
Tesla also seems to be sharing its 4680 cell technology with these companies to increase access to these cells. Panasonic, LG and likely other battery cell manufacturers have already committed to build new battery production facilities to meet this expected demand. This validates Tesla’s role as a technology leader to advance the entire EV ecosystem. As battery cell production scales to meet and exceed EV unit production requirements, Tesla will be able to direct more batteries to meet the demand for battery-storage in its residential and commercial Energy division.
2b. Optimize and Scale EV production processes
Tesla states it will continue scaling EV unit production 50% annually. Elon Musk states target unit volume production is 20 million units for 2030 with 10 to 12 gigafactories. To hit this target, I think until production in 2025 needs to reach 6.5 million units. Tesla performs better with stretch goals. This focuses teams to make the most of what is already developed and then innovate for incremental breakthroughs. By the end of 2022, Tesla will have 4 gigafactories scaling production with the Fremont, CA factory supported by Giga Nevada for battery production.
Giga Shanghai, Giga Berlin and Giga Texas are newer designs that vertically integrate more component production onsite along with final assembly. One key innovation that is already proven and deployed is Giga casting large parts with equipment designed for Tesla. This is used to manufacture Model Y underbody segments with 1 part vs. spot-welding 70 parts together with robots. This process alone saves time, cost and space and improves safety. Tesla can expand this process to the Model 3 and potentially new parts.
New Tesla 4680 structural batteries are assembled into a structural battery pack that is part of the underbody frame. This pack allows the carpet, center console and seats to be installed on top of the structural battery pack outside of the vehicle body for installation later into the frame and vehicle body. This eliminates steps that require robots and human operators to install separate components into the vehicle body. Therefore, Tesla needs to standardize 4680 structural batteries across all of its high volume models like the Model Y, Model 3 and upcoming CyberTruck with scaled production.
Tesla gigafactory automation uses advanced robotics and human operators for 4680 battery cell production, stamping aluminum panels, handling casted parts and moving the vehicle body through final assembly. These processes and equipment can also continuously improve. Any verified improvements should be communicated throughout the network to advance the processes as a Tesla ecosystem vs. individual gigafactories. Tesla should also consider open-sourcing innovation for specific automation challenges.
2c. Expand the global Tesla gigafactory footprint
Tesla launched 2 new gigafactories in 2022 to build on the success with Giga Shanghai over the last few years. Giga Berlin and Giga Texas are really focused on scaling Model Y production. Giga Texas will also be the site to launch and scale CyberTruck production starting in 2023. The largest truck market is the US, so CyberTruck production will likely stay in the US while new manufacturing processes improve to scale and commercial use cases develop for this radical new design. The CyberTruck following this year’s launch of the Ford F-150 Lightning EV will also help drive the electrification of trucks with 2 leading EV models.
Tesla appears to be modeling average unit production at each gigafactory of about 2 million units per year at scale. But some sites like Giga Texas and Giga Shanghai may expand with multiple facilities on the campus for additional production capacity. Tesla’s Fremont factory will likely reach maximum capacity about 1 million units per year due to constraints on expansion at that location. So if Tesla, can reach 0.8 million units in Fremont by 2025 that would leave 5.7 million or 1.9 million per site for the current 3 primary gigafactories. But ramping 10 to 12 gigafactories by 2030 would require 8 gigafactories under construction, launched or scaling by the end of 2025.
Since battery production will be a limiting factor on how fast EV production can scale, co-locating gigafactories near these facilities will help diversify the supply chain for a critical component. Japan and South Korea are 2 such markets. Indonesia and Canada are candidates for what Tesla can with partnerships on raw materials. So far, Tesla has picked key innovation hubs to located gigafactories with access to engineering talent. I think the next 4 Tesla gigafactories will be located in Canada, Japan, South Korea and Indonesia. Brazil and India will eventually be contenders. Australia has lots of raw materials and could be an important market for robotaxis and sustainable energy initiatives.
I would expect one new gigafactory location is announced before the end of 2022 with construction starting in 2023. Two additional gigafactories would be announced in 2023 and another one in 2024 to start construction in 2025. These gigafactories are critical to hit the 2030 production target, but I am not including them in my 2025 EV unit production model.
3a. Enhance the Customer Experience
It is important for Tesla to convert customers into advocates and champions for the Brand to help radiate interest in Tesla’s mission, products and services. If Tesla exceeds expectations when a customer needs roadside repair or scheduled maintenance, then this is an opportunity to build the Brand and dismiss concerns around its limited dealer network.
Along these lines, although Tesla doesn’t use dealers to sell & repair it’s vehicles in most states, Tesla does provide Service Centers in key markets to deliver new vehicles to customers and service vehicles. These Service Centers are an opportunity to provide showroom experiences and in-person interactions with all Tesla products from Solar to Battery-Storage to EVs. Overtime these can evolve into a unique extension of the Brand with abundant Tesla Superchargers on-site for repeat encounters with customers. Tesla can test various Service Center concepts in different markets to iterate what works best across the network.
Tesla already provides a unique and streamlined customer journey to order, purchase and take delivery of a new vehicle using the Tesla mobile app and/or website. But this is another opportunity to wow prospects and new customers with continuous improvements and innovation. I thought a valuable part of the process to prep for delivery was a weekly Zoom call for customers who are about to take delivery of their vehicle in the next few weeks.
One of Tesla’s greatest assets is its global and expanding Supercharger network.
A Tesla employee reviewed key info for about 10 minutes and then opened the call up for questions. This could expand with a chatbot to answer key questions with text or video. This could also be of value to new customers even after they take delivery. Features like Dog Mode are a game changer once you discover them.
Tesla Insurance is a great opportunity to improve driving behavior, reduce accidents and pass savings onto customers as a vertically integrated solution with the growing Tesla fleet of EVs. This product is already available in multiple states including Texas and uses a Tesla Safety Score based on driving behavior measured with sensors used for full self-driving to set dynamic pricing to insure a specific vehicle. If you are a safe driver, you pay less for insurance and the Score provides feedback on progress to both the driver and Tesla. These algorithms will continue to evolve over time with more data on what driving behavior predicts an accident.
Telsa’s “demand flywheel” drives the transition to sustainable energy when you first ride in a Tesla through Uber or drive one as a Hertz rental. Eventually you might purchase your own Tesla vehicle. Next, you add Tesla Solar to generate energy and a Tesla Powerwall to store energy at your home. These products allow you to power your vehicles and home with sustainable energy and even sell energy to the grid as a virtual power plant with a spike in demand. As this journey from prospect to virtual power plant is replicated and more vehicles transition to EVs, we collectively accelerate the transition to sustainable energy. Tesla is the catalyst. But we must each take action towards this transition with Tesla or other companies.
Commercial use of Tesla EV fleets, Tesla Solar and grid-scale MegaPacks magnifies the impact of transitions to sustainable energy. But these transitions should not be made only due to ESG mandates. They should be made based on superior economics. And with adequate battery storage on a grid, peak demand can be met with excess stored energy sold to the grid. This concept is called a virtual power plant. Tesla also sells software services to utility companies to help manage virtual power plants.
3b. Continue expanding Supercharging network and residential charging product options
One of Tesla’s greatest assets is its global Supercharger network of over 35,000 units. Most of these are co-located with common destinations like restaurants and retail stores. On the east coast, Wawa and Target stores are common. These options allow existing parking space to be retrofitted with Superchargers and the necessary electrical equipment. But Tesla can also create unique experiences on Interstates where more space is available. Tesla can create and test their own quick-serve restaurant experiences using local produce and add Tesla Solar to help charge vehicles with sustainable energy.
Tesla drivers and passengers often frequent surrounding stores while they charge their vehicle. ICE vehicle drivers observe this behavior and reduce concerns about converting to an EV with a dense network of Superchargers. And as Tesla opens its Supercharger network to other EVs, it expands use of the Tesla mobile app to even more users. This helps manage the cost to acquire a customer when consumers are already a part of an ecosystem and then switch to a Tesla EV.
A broad portfolio of residential options to charge EVs is also import to support scaling EV adoption. Residential parking for single-family homes with garages and multi-family homes with parking within the building are generally covered well with existing solutions from Tesla and third parties. But one current gap affects vehicles that park in assigned, detached parking spots. These include perpendicular, angle and parallel parking spots away from a building. In many cases these are assigned parking spots deeded to a specific residential unit in urban areas. If residential charging options are not available and easily installed for every situation, this slows down adoption of electric vehicles. Utility companies can also play a role to help facilitate access to various solutions and integration with existing residential energy services.
3c. Launch new EV models to enhance product positioning across popular vehicle formats
Consumers will get 3 new Tesla vehicle formats. The long awaited CyberTruck will launch in 2023 from Giga Texas. This radical design already has a wait list with preorders for over 1 million units. Pickup trucks may lead the transition to sustainable energy with the Ford F-150 Lightning, GMC Hummer EV and Tesla CyberTruck.
The updated Roadster will launch with scaled 4680 nickel cathode production to improve performance beyond the Model S Plaid. The Tesla Roadster will likely become the flagship EV for Tesla to push the limits of EV performance beyond that of any stock internal combustion engine vehicle. Tesla will use a $250k Founders Series Roadster model to limit initial production to 1,000 units since other models will be competing for the same high energy density battery cells. But performance records with this Founders Series will help build the Brand.
Tesla is also expected to introduce a lower priced vehicle platform by 2025. This will initially give more consumers access to a Tesla EV than the current Model 3 and Model Y options. This platform will also provide a vehicle format for fully autonomous robotaxis. The starting price for this vehicle platform is targeted at $30k.
Commercial buyers in trucking will get the Tesla Semi truck and Semi chargers to charge the batteries in these vehicles. The lower total cost of ownership will be the key driver for the fleet adoption of Tesla Semi trucks from companies like PepsiCo, Walmart and UPS. Commercial pickup truck fleets will also be a key adopter of the CyberTruck due to its lower total cost of ownership, durability and features. Construction and service companies will be key adopters.
But another way for Tesla to accelerate its mission would be to map vehicle product positioning for the primary commercial use cases. Tesla vehicles can meet most of these use cases except for commercial vans and high-density urban deliveries. Tesla can actually modify the CyberTruck or design a new vehicle on that frame for commercial vans.
But some Urban delivery use cases need a more compact EV format. These vehicles are lighter and need less range on a charge to reduce battery capacity requirements. Tesla could partner with a company like Arcimoto to offer corporate fleets a full range of EV options from Tesla Semi truck, CyberTruck, Model Y and 4-wheel robotaxi to Arcimoto’s 3-wheel reverse eTrike Deliverator. The breadth of this EV portfolio would service most commercial needs and allow smaller form factors to reduce urban congestion when possible.
Risks to achieving these Objectives
Giga Berlin operations are negatively impacted by German energy crisis
Giga Shanghai operations are negatively impacted by unfavorable domestic conditions
Robotaxis are delayed due to FSD regulatory and legal challenges
Raw Material mining is negatively impacted by permitting and other delays
Macroeconomics with runaway inflation and/or severe global recession delay gigafactory expansion to scale unit vehicle production
Conclusion
Tesla has made substantial progress towards its mission by ramping cumulative EV production from about 3,000 vehicles a decade ago to 3 million vehicles reported in August 2022. Tesla launched 2 new Giga factories in 2022 to expand vehicle production with 4 gigafactories across 3 continents (Asia, North America and Europe).
Tesla Energy commercializes solar and stationary battery-storage products. These products enable sustainable energy generation and virtual power plants with adequate energy storage capacity to meet the need for energy when demand spikes. The alternatives are rolling blackouts and turning on gas-fired peak-energy plants.
But to really accelerate the transition to sustainable energy over the next 3 years, Tesla and other companies will need to slash our demand to use internal combustion engines. We need to keep our ICE vehicles we own parked more because it costs 50-80% less to use EVs with ride-sharing, rental vehicles and robotaxis.
Carbon emissions are our modern day horse manure crisis that helped drive the transition to internal combustion engine vehicles.
And to scale EV production towards 20 million vehicles annually in 2030, Tesla and other battery manufacturers will need to invest and partner more to mine and purify adequate raw materials to produce enough battery cells to counter the demand to drill for more fossil fuels.
And as Tesla continues to enhance the EV customer experience and its Brand, more people will adopt the transition to sustainable energy. Purchasing ICE vehicles will stall as more people weigh converting to EVs. When demand wanes enough, the industry supporting internal combustion engines starts to collapse.
Horse manure was a crisis in New York City in 1900 with over 1,000 tons of manure produced every day by 100,000 horses powering carriages. By 1913, these horses were almost totally replaced by motorized vehicles. If Tesla makes progress executing its mission over the next 3 years, the conversion to sustainable energy will accelerate substantially to make EVs the norm over the next decade. Carbon emissions are our modern day horse manure crisis.
Best,
Stephen
I’m long FUV and TSLA mentioned in this post. Nothing in this post is intended to serve as financial advice. Do your own research. The opinions and views expressed in this newsletter are those of the author. They do not purport to reflect the opinions, views or policies of any other organization, company or employer.