Dear Readers,
In this Update for Product | Strategy | Innovation I will review the latest version of what Tesla calls a Master Plan. This is Part 3 of the original plan released in 2006 with a follow-up Part 2 in 2016. Prior plans focused more on product roadmaps for Tesla’s electric vehicles with a few mentions of solar energy generation and battery storage for the home.
Master Plan 3 details the rationale, estimated cost and means for a complete conversion to a sustainable energy economy by eliminating the need for fossil fuels.
Tesla is a technology company that views energy and transportation as one global market. Master Plan 3 is more comprehensive than prior plans with a bigger scope than what Tesla will contribute alone as one multi-national corporation.
Master Plan 3 is a blueprint for other organizations and governments to leverage for their own plans. Tesla is marketing a Vision for the future with significant economic upside that also tackles concerns regarding the environment.
Tesla leverages the research of many scientists, government agencies, and organizations to base its recommendations, but then aggregates all this research into one Master Plan. Tesla cites its resources. Other organizations, scientists and informed stakeholders should challenge and verify each of the plan’s findings.
I encourage you to read Master Plan 3 available at tesla.com/blog, or using this link.
I find 3 outcomes in the plan particularly encouraging.
We can do this.
There are no insurmountable resource challenges preventing the conversion to a sustainable energy economy.
We can afford this.
The manufacturing cost to convert to a sustainable energy economy is estimated at 10% of the 2022 World GDP. These costs can be spread out over multiple years to manage annual spending. We could invest 1% of World GDP each year to reach the objective over time.
We can sustain this.
A sustainable energy economy requires a significant ramping up for mining and refining primary materials beyond the current production of these materials. But recycling and refining become the primary source of these materials long-term with mining only helping to maintain adequate material capacity. The recycling yield for primary materials from lithium-ion batteries is about 95%, but could improve as processes evolve with scale.
This Update on Tesla Master Plan 3 covers:
Background,
Jobs-to-be-Done to Eliminate Fossil Fuels,
Limitations of Master Plan 3,
Tesla’s Vision, and
Conclusion.
Background
Tesla introduced key concepts in Master Plan 3 at its March 1st Investor Day 2023. This is where Tesla also provided key updates on Tesla’s electric vehicle (EV) product strategy, roadmap and new Giga Mexico factory for its next generation EV platform.
The negative impact of fossil fuels on the environment has been discussed through many channels. But the economic business case to transition away from fossil fuels does not get as much attention.
Are there key economic reasons to reduce fossil fuel use?
Fossil fuels are wasteful. At least 37% of the energy produced is lost extracting, refining and transforming fossil fuels into usable energy. Another 27% of this energy is lost due to inefficient end-uses like internal combustion engines and gas furnaces. Therefore, 64% of fossil fuel energy is lost to waste.
Sustaining the fossil fuel energy economy over the next 20 years is 40% more expensive than the total estimated investment to convert to a sustainable energy economy over the same 20 year time period.
What are some key economic outcomes if the variable cost of energy approaches zero?
Complete conversion to sustainable energy requires over-building capacity to satisfy requirements at peak demand.
Over-building capacity is feasible due to the higher efficiency of sustainable energy.
The outcome is an energy surplus and curtailment outside of peak demand.
This makes the variable cost of sustainable energy as it scales approach zero outside of peak demand resulting in economic opportunity.
Innovation will seize new opportunities where energy is basically free.
Desalination of seawater into potable water
Synthetic jet fuel
Hydrogen energy storage
“Behind-the-Meter” projects like Bitcoin mining and high-performance computing that can shut down during periods of peak energy demand across the local utility grid. These projects can help accelerate the adoption of sustainable energy within a local utility company using flexible loads.
Energy-intensive industrial processes benefit with this lower input cost.
Output increases with price elasticity. This requires increasing demand if the price for goods and/or services drops with the lower input cost for energy.
Manufacturing examples: nitrogen fertilizer, semiconductors, steel, vertical farming
Other input costs such as primary materials and labor become the barrier to output growth with lower energy costs.
Transportation becomes more accessible if reduced energy costs are passed on with reduced prices to end-users.
Private alternatives to public transportation become more price competitive.
Delivery and eCommerce become more efficient.
Transportation infrastructure may be inadequate to handle increased demand for transportation services.
High-performance computing and cloud-computing become more accessible if reduced energy costs are passed on with reduced prices to end-users.
Computing clusters (cloud and edge) are price competitive in a wider range of geographic locations to become more distributed.
Demand for more advanced semiconductors and software increase with higher throughput.
What was covered in past Master Plans and what developed with these plans?
Looking back at the original Tesla Roadster and Tesla’s growth over the next decade and a half into a multinational corporation, the Master Plan has also evolved. The first two plans were simple frameworks to communicate priorities with more granular details behind them and leadership to execute them. Less is More for Master Plans.
Master Plan 1 - August 2, 2006 (Tesla is a private company)
Build sports car —> original Tesla Roadster;
Use that money to build an affordable car —> Tesla Model S & X;
Use that money to build an even more affordable car —> Tesla Model 3 & Y; and
While doing above, also provide zero emission electric power generation options. —> Tesla Solar Panels
Tesla goes public on June 29, 2010 at $17 per share (split adjusted $1.13 per share). Commercial sales, production and deliveriers for the original Roadster are active.
The Model S sedan was is in active development at the time of the IPO with several working prototypes to inform the design for commercial sales starting mid-2012. Model S produced in the NUMMI plant in Fremont, California. This plant was previously a joint venture between Toyota and General Motors.
Model X crossover leverages the Model S platform architecture. Commercial sales of the Model X were planned for late 2013.
Model S launches on June 22, 2012 with limited production. Model S production reaches 1,000 vehicles per week in 2015.
Model X deliveries start on September 29, 2015.
Master Plan 2 - July 20, 2016 (Tesla is a public company)
Create stunning solar roofs with seamlessly integrated battery storage —> Tesla Solar Roof & Powerwall;
Expand the electric vehicle product line to address all major segments —> Tesla Cybertruck & Semi;
Develop a self-driving capability that is 10X safer than manual via massive fleet learning —> Tesla FSD beta operating with 1 million miles driven daily Q1 FY23; and
Enable your car to make money for you when you aren't using it. —> robotaxi concept
Tesla is profitable with $2.5 billion in net profits on $23.3 billion in revenue for Q1 FY23 and should have enough capital to weather reasonable economic uncertainty while it scales EV production capacity to meet future demand.
Jobs-to-be-Done to Eliminate Fossil Fuels
Over 80% of our current global energy is derived from fossil fuels. Efficiency is the key driver to convert to a sustainable energy economy.
Master Plan 3 lays out the requirements based on current global energy needs to convert to sustainable energy:
battery storage (240 TWh, or Terawatt-hours, 1 TWh is 10^12 watt-hours),
renewable power (30 TW, or Terawatt),
manufacturing investment (US$10 trillion),
energy required (50% compared to fossil fuels),
land area required (<0.2%),
proportion of world 2022 GDP (10%), and
insurmountable resource challenges (zero).
What are the core Jobs-to-be-Done presented in Master Plan 3 and the proportion of fossil fuels each “job” will eliminate?
35% - Repower the existing utility grid with sustainable energy
21% - Switch to electric vehicles
22% - Switch to heat pumps in residential, business and industry
17% - Electrify high temperature heat delivery & hydrogen
5% - Switch to sustainable fuel planes & boats
Manufacture the Sustainable Energy Economy
The time required to complete these jobs is a function of the rate of investment. This could happen by the mid-2040s to 2050 driven primarily by cost savings with sustainable energy over fossil fuels. Lower costs are key to the conversion.
Jobs 2 & 3 require consumers to convert to electric vehicles and residential heat pumps. Jobs 1, 4 & 5 require businesses, public utilities and governments to build business cases to fund these conversions. The savings will accelerate the transition for at least Job 1 where the impact will also be the greatest.
Limitations of Master Plan 3
Hydrogen is highlighted as a key part of stationary energy storage over longer time frames than battery energy storage. But this topic is not covered in much detail in the plan. Hydrogen energy storage should be a future detailed supplement to the plan.
Mining adequate volumes of primary materials like nickel will require substantial up-front investments and time to scale production. Stationary battery storage that can use iron-based technology can scale faster with more capacity to provide iron ore. Phasing different parts of the plan will help clarify priorities. This should be a future supplement to the plan.
Recycling primary materials from scrapped batteries is a major contributor to the sustainability of electric vehicles and battery storage. Solar panels and wind turbines have a finite service life and also need to be recycled to manage waste. Redwood Materials was created by Tesla co-founder and ex-CTO JB Straubel to address this issue of recycling batteries. More details on the roadmap for recycling beyond just batteries and yields at scale should be a future supplement to the plan.
This plan focuses on converting regional utility providers to sustainable energy. It skips the benefits of a more decentralized approach where homes generate and store their own energy and can sell surplus to the grid. Maybe this will be covered in the next plan as an additional accelerant to drive efficiency.
Governments at the national, state and local level can leverage Master Plan 3 to develop their own energy plans with cost-effective incentives to accelerate the transition away from fossil fuels to sustainable energy. Federal agencies can also work to test assumptions and finding in the plan. These can be communicated as supplements to this plan.
Tesla’s Vision
Tesla’s Vision over the next 10 years is informed by its master plan. This updated Vision is focused on 75% of the market opportunity to convert to the sustainable energy economy covered in Master Plan 3.
Tesla is defining a Total Addressable Market (TAM) covering 75% of the $14 trillion fossil fuel economy, or just over $10 trillion, with the planned Tesla product and service portfolio for the global market.
The current Tesla product portfolio allows it to service a subset of this TAM, or Serviceable Addressable Market (SAM). Tesla will expand its SAM significantly with a broader product & service portfolio.
Tesla has a more limited Serviceable Operating Market (SOM) without a local presence in key markets like India, Brazil, Japan, South Korea and Indonesia. This will evolve over time as Tesla expands it gigafactory locations into more of these key markets.
Tesla will scale Megapack production so Tesla Energy can play a major role to accelerate the transition to sustainable energy.
This will happen with large grid-scale battery energy storage deployments through utility companies. These deployments have attractive returns on investment, so demand will continue to support scaled production. Tesla Energy will become a key driver for top line revenue growth and bottom line net profits over the next decade for Tesla.
Tesla is scaling EV production locally in key EV markets including China, North America and Europe to simplify vehicle delivery logistics. This requires scaling the supply chain, too. The outcome of volume production is lower unit costs following Wright’s Law.
The strategy to scale EV production beyond Giga Shanghai materialized in November 2019 when Tesla announced Giga Berlin.
And even with the pandemic shutting down production in 2020, Tesla announced further expansion of EV production with Giga Texas in July 2020. Tesla raised prices for EVs as the backlog for filling orders continuously increased. But this was likely of an artifact of supply chain constraints and pricing power.
As Tesla scales EV production and affordability becomes more of an issue to scale demand, Tesla will introduce lower-priced models and will lower prices across key models to maintain its pace to scale EV production.
Gross margins are under pressure in the short-term without a Tesla EV for the mass market, but is really just a continuation of what Tesla committed to in 2016 with Master Plan 2 for an EV in every major segment and then in late 2019 to scale EV production with the announcement of Giga Berlin. Tesla is not focused on Porsche, BMW or Mercedes. Tesla is aiming for volume EV production against Toyota, VW Group and BYD.
Tesla’s Vision is to leverage services to capture more margin on top of a growing fleet of Tesla EVs and battery storage deployments.
These profits will accelerate Tesla’s investment back into growth. A proxy for Tesla’s Vision is Apple using its global fleet of iPhones and other hardware to generate substantial profits though its App Store, Apple Pay, Apple Music and Apple TV.
Tesla Energy: grid-scale & residential energy storage, solar, and virtual-power plants with auto-bidder software
Megapack:
grid-scale energy storage for utility companies; commercial energy storage; software services
Powerwall:
residential energy storage; software services
Solar Roof and Solar Panels:
residential & commercial energy generation; software services
Megafactories:
Lathrop, CA and Shanghai, China will each produce 10,000 Megapacks, or 40 gigawatt hours of energy storage, per year. Each Megafactory costs $1 billion to build and at scale should generate $20 billion in annual revenue for a gross profit of $8 billion per Megafactory with an estimated 40% gross margin. [Note: $20 billion in annual revenue x 4 Megafactories would almost match the Q1 2023 revenue generated by all of Tesla.]
Supercharger Factory:
Shanghai, China produces Superchargers for the global market with 45,000 stalls and growing around the world.
Tesla Auto: 10 EV models, 10 Giga factories, 20 million annual EV unit production by 2030; robo-taxis to help accelerate the impact of the Tesla EV fleet
Commercial EV fleets:
Semi Heavy (long-range)
Semi Light (short-range)
Bus
Commercial Van
Cybertruck
Model X (large SUV)
Model S (large sedan)
Model Y (midsize SUV)
Model 3 (midsize sedan)
Compact robotaxi
EVs for families and individual consumers:
Passenger Van
Cybertruck
Model X (large SUV)
Model S (large sedan)
Model Y (midsize SUV)
Model 3 (midsize sedan)
Compact EVs
EV Manufacturing:
Tesla gigafactories
Current: Giga Nevada, Giga Shanghai, Giga Berlin, Giga Texas; Future: Giga Mexico and an estimated 5-7 other locations
Scaled production of 4680 dry-electrode batteries and structural battery packs
Electric motors
Vehicle seats
Expanded use of Megacastings
Advanced robotics & automation
Full-self driving (FSD)
FSD microprocessor chip
FSD vehicle computer and sensors
FSD neural network model for computer vision
Dojo supercomputer to automate training FSD neural network models
Cybertruck
Giga Texas
Stainless steel exoskeleton
48-volt electronics
Next Generation Platform
Giga Mexico to launch Compact EVs
Parallel workflow to enhance manufacturing efficiency
48-volt electronics
Tesla battery cathode factories
first cathode factory located near Giga Texas
Tesla lithium refining factories
first lithium refinery located in Corpus Christi, Texas
model Tesla can license to other companies to scale
EV Services:
Tesla Supercharger network (expanding to non-Tesla EVs)
Tesla App: access to services; connected wallet to pay for services like Supercharging
Tesla Premium Connectivity
Tesla Insurance
Tesla FSD for purchase or as a monthly subscription for supervised autonomous navigation
Tesla HVAC: high-efficiency heat pump systems
Tesla engineered advances to its heat pump technology with the Model Y to improve driving range by an estimated 10% with more efficiency using an “octovalve” for the heating, ventilation, and air-conditioning (HVAC) system. The “octovalve” design will need to evolve as systems scale in size, but the first principles should still apply.
Residential:
This is a key market to leverage existing heat pump technology developed for the Model Y. Any changes required for this market could inform requirements for even larger scales in the Commercial market. The Residential market will benefit the most from high-volume production to manage costs.
Tesla employees could be early adopters for discounted alpha deployments of residential heat pumps. These alpha deployments could iterate the technology quickly based on use and feedback. These could lead to discounted beta deployments marketed to Tesla customers who value being early adopters.
Commercial:
Small-scale Commercial deployments could adopt early versions of the technology with attractive returns on investment, but at higher price points than the Residential market can absorb with early-stage products with low-volume production.
Smaller Tesla facilities could be early adopters of alpha deployments for the Commercial market to test assumptions on product requirements and technical specifications.
Industrial:
Limitations on first principles will determine applications where advanced heat pump technology is in scope for the Industrial market. Tesla industrial processes could adopt alpha deployments of the heat pump technology for the Industrial market.
Three key business & product segments emerge from the updated Tesla Vision. These include Auto, Energy and Services. These product segments would match up with Tesla businesses in major geographic Markets to help define specific market needs, pricing and offerings.
Conclusion
Master Plan 3 is a departure from Tesla’s prior versions of the plan. The length is a detailed 41-page document with figures and sources cited. The scope is more comprehensive and covers the core Jobs-to-be-Done for conversion of the global economy from fossil fuels to sustainable energy. Tesla is a key contributor for an open-source plan, but the conversion is accelerated with more contributors and adopters.
The timing of this new plan is also relevant. Tesla had already launched and de-risked scaled production in its new Megafactory located in Lathrop, CA to manufacture Megapack grid-scale battery energy storage before Master Plan 3 was released. It also announced a second Megafactory in Shanghai to manufacture Megapacks in China.
Master Plan 3 marks an inflection point for Tesla Energy transitioning into a major player for sustainable energy with scaled production and deployments of Tesla Megapacks.
Grid-scale battery energy storage directly offsets the need for gas-fired power plants with peak energy demand and augments grid-scale solar and wind energy generation. Tesla has already helped Australia accelerate it transition away from coal-fired power plants to sustainable energy using large Megapack deployments with wind and solar energy generation. China is the largest user of coal to power energy generation. This positions the Megafactory in Shanghai for key impact.
Master Plan 3 also introduces the next growth horizon for Tesla Auto to scale EV demand and production with more affordable vehicles for the mass market and future robo-taxi fleets.
Tesla also announced Giga Mexico with Master Plan 3 to produce its next generation vehicle platform for Tesla’s first compact EV. This next generation vehicle platform reimagines not only the vehicle design, but also its electrical system and how the vehicle is manufactured with more parallel process paths feeding into final assembly. Manufacturing efficiencies will be key contributors to help lower costs with scaled production. This next generation vehicle platform will also enable fleet strategies to deploy autonomous robo-taxis.
Tesla and other companies will constantly expand their TAM, SAM and SOM towards displacing the $14 trillion fossil fuel economy. This enables these companies to close the gap between fossil fuels used today towards realizing the sustainable energy economy of the future. The transition to sustainable energy will accelerate if the unit economics win convincingly against using fossil fuels.
Best,
Stephen
I’m long TSLA mentioned in this Update. Nothing in this Update 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.