Tesla's Iron-Based Battery Strategy: Impact on Manufacturers

Tesla's Strategic Shift Towards Iron-Based Batteries

Elon Musk recently articulated his strongest support yet for iron-based battery technology. He indicated that Tesla is undertaking a “long-term shift” towards utilizing lithium-iron-phosphate (LFP) cells in both its energy storage solutions and select entry-level electric vehicles.

The CEO of Tesla suggested that the company’s battery composition could ultimately be approximately two-thirds iron-based and one-third nickel-based across its entire product line. He further emphasized the abundance of iron globally, stating, “And this is actually good because there’s plenty of iron in the world.”

A Growing Trend in the Automotive Industry

Musk’s statements mirror an evolving trend already gaining momentum within the automotive sector, particularly in China. Historically, battery chemistries outside of China have largely favored nickel-based options, such as nickel-manganese-cobalt (NMC) and nickel-cobalt-aluminum (NCA).

These newer chemistries have appealed to automakers due to their superior energy density. This allows original equipment manufacturers (OEMs) to enhance the driving range of their vehicles.

The question now arises: can battery manufacturers outside of China adapt quickly enough if Musk’s optimism signals a widespread industry change?

Other Automakers Follow Suit

Elon Musk isn't alone in revisiting the LFP formula. Jim Farley, CEO of Ford, announced earlier this year that the company intends to incorporate LFP batteries into certain commercial vehicles.

Similarly, Herbert Diess, CEO of Volkswagen, revealed during the company’s battery day presentation that LFP technology would be implemented in some of VW’s entry-level EVs.

Energy Storage Applications

Regarding energy storage, Musk’s comments regarding the use of LFP-based chemistries in Powerwall and Megapack align with the broader industry trend. Other stationary energy storage companies are also increasingly advocating for iron-based formulas.

Sam Jaffe, head of battery research at Cairn Energy Research Advisors, explained to TechCrunch, “The stationary storage industry wants to move to LFP because it’s cheaper.”

The Advantages of LFP Batteries

LFP battery cells offer several compelling benefits. They are not reliant on scarce and price-sensitive materials like cobalt and nickel. Cobalt, largely sourced from the Democratic Republic of Congo, has faced criticism due to unethical mining practices.

While LFP batteries have a lower energy density compared to nickel-based alternatives, they are significantly more affordable. This cost reduction is crucial for accelerating the adoption of electric vehicles.

China Leads the Way

Elon Musk foresees a substantial role for iron-based chemistries within Tesla’s future. His recent statements have brought renewed attention to LFP technology. However, it’s important to note that LFP batteries have already established a dominant position in the Chinese market.

China's Dominance in LFP Production

According to Caspar Rawles, the head of price and data assessments at Benchmark Mineral Intelligence, the vast majority of LFP (Lithium Iron Phosphate) production is currently concentrated within China, as he stated in a recent TechCrunch interview.

This significant control over LFP battery manufacturing is largely attributable to a set of crucial LFP patents. These patents are overseen by a collective of universities and research organizations.

A decade ago, this consortium reached an agreement with Chinese battery manufacturers. Under the terms of this agreement, licensing fees were waived, provided the LFP batteries were exclusively utilized within the Chinese domestic market.

Consequently, China established a firm hold on the LFP market.

The potential shift towards LFP technology is expected to particularly benefit Chinese battery manufacturers like BYD and CATL. CATL already produces LFP batteries for Tesla vehicles manufactured and sold within China. Volkswagen also holds a considerable investment in Gotion High-Tech, a Chinese LFP producer.

These manufacturers are continuing to expand their capabilities. For example, CATL and Shenzhen Dynanonic entered into an agreement in January to construct an LFP cathode plant in a Chinese province, representing a $280 million investment over three years.

Industry analyst Roskill notes that the LFP patents are scheduled to expire in 2022. This expiration could enable battery manufacturers outside of China to begin transitioning a portion of their production towards iron-based formulations.

However, the battery factories currently planned in Europe and North America, often joint ventures with South Korean companies such as LG Chem and SK Innovation, remain primarily focused on nickel-based battery chemistries.

“For the United States to fully realize the advantages of LFP, establishing North American manufacturing capabilities is essential,” Jaffe emphasized. “Current gigafactory projects in the U.S. are geared towards high-nickel chemistries, creating a substantial demand for locally produced LFP batteries.”

Rawles anticipates the emergence of some LFP production capacity in both North America and Europe in the coming years, particularly following the patent expirations.

He highlighted the moves made by CATL and SVOLT, both Chinese companies, into Germany. This raises the question of whether companies from other Asian nations or Western countries can effectively compete in the LFP market. (Stellantis has selected SVOLT as a battery supplier starting in 2025.)

Regarding energy storage, Jaffe believes that “the widespread adoption of LFP in stationary storage systems is inevitable.”

However, there is positive news for domestic manufacturing within the United States. “A key advantage in building local LFP manufacturing is the simplicity of the supply chain. Aside from lithium, the primary materials – iron and phosphoric acid – are inexpensive and already produced in large quantities within the U.S.,” Jaffe added.

Ultimately, the debate isn’t about choosing one battery chemistry over another. The trend already observed among automakers, including Tesla, suggests that iron-based batteries will be primarily used in entry-level and more affordable vehicles.

Nickel-based cells will continue to be utilized in higher-end and performance vehicles. Many consumers will likely find a vehicle with a 200- to 250-mile range, offered at a significantly lower price, to be satisfactory compared to models with a 300- to 350-mile range.

Automakers are also actively seeking to gain greater control over the battery supply chain, through either vertical integration or joint ventures with established battery companies. This indicates that the expansion of LFP capacity in North America and Europe is not only probable but also unavoidable.