This may be the next gold mine for Tesla and other electric vehicles

When people think of charging electric cars, the first thought that comes to mind is: "So you're going to put charging stations at gas stations. There will be long lines of people waiting to recharge their cars, since it takes much longer to charge an electric car than to fill a car with gasoline. It will never work. ”

Capitalism will take care of expanding the charging infrastructure. My divination: At some point there will be a mini-bubble charging station when companies raise capital and make a land grab. Grocery stores will use charging stations to attract customers. Charging stations will be in all parking spaces, from restaurants to office buildings. Electric vehicle (EV) charging will be a gold rush, while gas stations are just another relic of a bygone era, such as telephone booths and cassette tapes. Future EV batteries will have a wider range, last longer and charge faster.

The transition from internal combustion engine (ICE) cars to electric vehicles is about the transition our ancestors underwent when society switched from horse to gasoline-powered cars. For starters, people wondered how they would "feed" these cars (grass was more plentiful than gasoline), whether they would have decent roads to actually drive anywhere, and whether cars would crash into pedestrians and each other. The shift from horses to cars required a whole new paradigm.

The domain of the horses came with an ecosystem that was simply not relevant when we switched to cars. Although both performed the same function ̵[ads1]1; horses got people and goods from point A to point B – the car was fundamentally different, as was the ecosystem.

I imagine the 110,000 US gas stations holding ICE cars closer together today will look like a rounding error next to the millions of electric "filling stations" that will one day be located in domestic garages and public parking spaces.

Batteries lead the charge

The engine of an EV, although it will gradually improve over time, is less important than the battery, which is also the most expensive single part of the vehicle and a very complex one. The battery in an EV must be treated tenderly to maintain charge and service life. For example, your iPhone is optimized for charging duration, but not for battery life. First of all, Apple

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has an incentive to build scheduled obsolescence on his iPhone – it wants you to replace it every three years. Second, most iPhones do not spend much time sitting in extremely hot or cold weather; they stay mostly in your pocket, at a battery-friendly temperature. Not least is the cost of replacing a battery on your iPhone under $ 100, but replacing the battery in a Tesla

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costs $ 10,000.

Read: Relax, Tesla drivers – thieves don't want your electric cars

Plus: How to take advantage of electric car revolution – without buying Tesla shares [19659002] Tesla does not own the battery cell technology that goes into the batteries. belonging to the partner, the Japanese conglomerate Panasonic

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. Tesla designed the battery pack housing that holds the battery cells) and the battery control system controller (computer) that directs and controls the power and microclimate of the battery cells.

The battery is a key technology for Tesla, but at the moment Panasonic has control over much of it. Just as Apple chose to bring the development of the CPU running its iPhone internally, Tesla, which is vertically integrated, can eventually increase control over battery technology. The company's acquisition of Maxwell Technologies, which has a battery technology that can significantly reduce cell production costs, is the first move toward Panasonic independence.

On the one hand, this strategy has a great appeal because if Tesla is able to produce a better (more durable, lighter, faster charging with longer range) at a lower price, it could be a source of competitive advantage. Today, Tesla doesn't quite control fate when it comes to batteries, like BMW's

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decides to use Panasonic's cells, Panasonic will gladly supply it. BMW will still have to develop its own battery control controller.

On the other hand, this vertical integration strategy could backfire. If EV batteries become a commodity and the aforementioned features become ubiquitous, the lowest price manufacturer wins. Tesla will argue that vertical integration will ultimately result in lower costs. The company has built a giant battery plant in Nevada called Gigafactory. When fully operational, Gigafactory will be able to produce twice the amount of lithium-ion batteries produced globally today. Tesla owns the building, and Panasonic owns the cell production equipment.

Traditional ICE carmakers tipping on EVs have adopted a more conservative strategy and rely on suppliers (LG Chem

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Samsung SDI

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and others) to produce a complete battery for them.

One of the biggest differences between the Tesla battery and the batteries used in other companies' EVs (such as the BMW i3, Chevy Volt

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and Jaguar i-PACE) are metals they put into the cathode. Traditional car companies chose the combination NMC (nickel, manganese, cobalt), while Tesla ended up making a less conservative choice of NCA (nickel, cobalt, aluminum). NCA offers long battery life, fast charging and good performance. NMC, on the other hand, produces a little less energy, but is less volatile and can withstand larger areas and temperature variations.

Tesla chose a more powerful and more volatile cathode chemistry and chose to control the volatility by trying to manage the macros environment by a special design of the battery cabinet, to cool or heat the battery cells as needed. Each battery pack has an incredibly sophisticated battery management system that tracks the voltage and temperature of each cell and orchestrates which cells the Model 3 uses.

Lithium-ion batteries are a technology in the late 1980s. This improved in the 1990s and early part of this century at a somewhat slow pace (especially compared to semiconductors, which have followed Moore's law and doubled the rate every 18 months). The rate of improvement has accelerated over the past decade (largely thanks to Tesla), and the cost per kilowatt hour (kWh) dropped to $ 127 in 2018 from $ 446 in 2013. For example, the Tesla Model 3 comes with a 75kWh battery, meaning The approximate cost of the battery has dropped to $ 10,000 from $ 33,000.

From the perspective of how much it is likely to develop over the next decade or two, EV battery technology is still in its infancy. As we move from ICE cars to EVs, the value of the price will explode; tens if not hundreds of billions of dollars will be poured to improve the battery. Tesla, for example, has already gone through three battery reformulations. My $ 50,000 Tesla Model 3 has the latest version, which charges faster than the $ 90,000 Model X or $ 80,000 Model S that Tesla sells today.

While in the short term, battery technology will be an important distinguishing factor in the long run running the EV battery is likely to be a commodity and those separating factors will be in software and self-driving ability. An EV is a giant computer on wheels, and historically when computer hardware is commoditized, most of the remaining value lies in the software.

How to invest in this overvalued market? Our strategy is described in this rather long article.

Vitaliy Katsenelson is the Head of Investment Management at Investment Management Associates in Denver, who has no positions in any of the companies listed. He is the author of "Active Value Investing" (Wiley) and "The Little Book of Sideways Markets" (Wiley). Read more about how EVs will disrupt the automotive industry, including whether Tesla and traditional car manufacturers will survive in the long run, and who is right in the debate about the Tesla bull vs. bear.

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