Tesla Powerwall priced for impact not profit

In Q2 2015, Tesla Motors made its foray into home energy storage in a move which saw it evolve from a high-end electric vehicle manufacturer.

The most surprising detail about the launch of the Powerwall, a lithium-ion battery that can power your home, was the price.

The starting price of $3,000 for a 7kWh Powerwall or $3,500 for
10kWh design was astonishing low with pre-launch expectation topping
$10,000.

Benchmark Mineral Intelligence estimates that the 10kWh Powerwall battery alone – minus the pack assembly, cooling system, casing, delivery and installation – will cost between $2,500 and $3,500 to manufacture.

Therefore, it is clear that Tesla has been aggressive with its pricing strategy to spark real change and adoption – a strategy that will likely not see the company make a profit on Powerwall for two years.

At present Tesla buys its batteries from Panasonic in a long term supply agreement. These cells are produced in Japan, shipped to the west coast USA and then assembled at its Fremont plant into packs. This is before being installed into its Model S electric vehicles and, now, the Powerwall and Powerpack utility storage line.

Cost has long been an issue with the Model S which is why the company launched an ambitious project to build the world’s largest lithium-ion battery plant, the Gigafactory, in a bid to achieve economies of scale and a 30% cost reduction.

At present, the Gigafactory is on track to produce its first batteries in January 2016, but it is not likely to get a full head of steam until the end of that year. And even then it will only be 20% of the designed capacity where the full economies of scale and lower costs of batteries will be felt.

It is only at full Gigafactory capacity that Tesla will have the best shot of producing the lowest cost cells in the world; this is expected in 2020.

In many ways, Tesla announcing such a significant foray into the home and commercial energy storage market is a masterstroke – it answers all of the questions over whether there will be enough demand to fuel the Gigafactory’s output.

Now the company has two additional and arguably bigger markets for demand. Although these utility storage markets do exist at present, Tesla’s marketing is creating demand and making the average person want to install a battery. This desirability factor is vital if the home energy storage market is going to take-off.

But Tesla is also adding more pressure and potential pain in the short term where it is likely to make a loss in the first two years of Powerwall production until low cost Gigafactory batteries become available.

The company will hope sales of the Model S and Model X – the lower volume, higher value products – will help push it into the black while the utility storage batteries – the low value, high volume products – find their feet.

If anything, the Powerwall price is a clear indication – if ever one was needed – that Elon Musk is less interested in short term profit and more interested in impact and market creation.

This in itself is very different from any corporation or public company out there and why the Tesla buzz continues to grow beyond analysts’ expectations.