Tesla's 'million-mile battery' could sound the death knell for combustion engines

New battery tech may make EVs cost the same as traditional smog spitters.

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Tesla has long been locked in a battle with fundamental chemistry to reach its holy grail: the point on the curve at which its electric vehicles can be sold at a price comparable to gasoline cars. The company might be reaching that inflection point, with Reuters reporting that Tesla will soon introduce a low-cost, long-life battery in its Model 3 sedan in China. Given Tesla's ongoing ascent and technological dominance in the EV sector, the news must be giving rival carmaker's execs sleepless nights.

The report comes as Tesla CEO Elon Musk has been teasing a "Battery Day" expected to take place in June, where he says the company's announcements will make it "one of the most exciting days in Tesla’s history."

Musk has made it clear repeatedly that the cost per kilowatt-hour of Tesla's batteries has been a major roadblock to selling the cars at a price competitive with traditional internal combustion vehicles. That, in turn, has been an obstacle to their mass adoption. But beyond boosting sales, Musk envisions the new batteries having a second life on the power grid as storage devices, which could help him achieve another goal: A move to a sustainable-energy focused economy.

New tech, new possibilities — Per the Reuters report, Tesla is relying on a few key changes to drive down battery costs. First, a change of chemical composition and coating will make the batteries more efficient and allow for a second-life as storage, driving down the upfront costs in the process.

Second, the new batteries will use less cobalt, which is the most costly part of electric vehicle batteries. At the same time, Tesla is working with an affiliate (Redwood Materials) to recycle cobalt, which could further cut costs.

Finally, the company is trying to boost automation in the battery manufacturing process, which will cut costs and allow it to ramp up production enormously. That increased scale will also help keep overheads down. The facilities it's planning for battery production — dubbed "terafactories" — will dwarf the current gigafactories the company operates.

Experts in the auto industry say that battery packs need to reach a price of roughly $100 per kilowatt-hour (kWh) for EVs makers to achieve pricing that rivals that of combustion vehicles. With all the combined improvements Tesla has planned, some estimates suggest its new batteries could reach a price of as little as $80 per kWh.

Scale means profitability — Tesla started out selling a high-end, low volume Roadster sports car with the intention of plowing profits from those into the development of affordable offerings. The company's Model 3 is its closest step yet to a mass-market car with a starting price of $38,990 — still a bit more than the $24,400 starting price of the Toyota Camry, the most common car in Tesla's home state of California.

The Model 3 also, crucially, has a lower profit margin than Tesla's more expensive Model S and X cars, so the company needs to sell many more to make up the difference. Combined Model S and X sales were 12,200 in the first three months of 2020 compared to 76,200 for the Model 3. Tesla hasn't made any significant update to either car in years as it focuses on the Model 3 and the newer Model Y SUV that it began delivering recently.

By driving down the cost of batteries, and subsequently of cars themselves, Tesla could achieve both better profit margins and increased demand by making those who'd buy an EV if it cost less do just that.