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Mindful of past losses, battery maker sets limits on Tesla-related investment

In the brief, intense relationship between Panasonic and Tesla, January 4 2017 was a high point.

The Gigafactory — the gleaming $5bn battery plant the two companies were building in the Nevada desert — had just started mass production of lithium-ion cells to power Tesla’s electric cars. For Kazuhiro Tsuga, Panasonic’s president, whose partnership with Tesla symbolised his turnround strategy for the 100-year-old company, it was a moment to savour.

“We will lead the world market for electric vehicles together,” Mr Tsuga proclaimed.

Elon Musk, Tesla’s visionary founder, responded with effusive praise for his partner. “We think Panasonic’s technology is the best in the world,” he said.

Now, just a little over two years since that milestone at the Gigafactory, the relationship between Panasonic and Tesla is showing signs of strain. After Nikkei revealed in April that Panasonic would freeze its investment in the Gigafactory, Mr Musk took to Twitter to blame his sole battery supplier for holding back production of Tesla’s Model 3 sedan. Panasonic’s battery production had been “a constraint on Model 3 output since July”, he wrote on Twitter.

The unusual public sparring came after months of mounting concern at Panasonic’s Osaka headquarters about Mr Musk’s unpredictable behaviour — and about the wisdom of tying Panasonic’s fortunes so closely to Tesla. Panasonic had also become concerned about Tesla’s plans for the Gigafactory 3 — a battery and car plant due to open in Shanghai this spring — and apparently surprised its partner with its decision to shelve plans to invest in the China factory.

Panasonic’s decision to pull back on investment came as Mr Musk’s company faced thorny production problems for its Model 3, the sedan he hopes will transform his company from a niche manufacturer to a mass-market clean energy car company.

Tesla’s latest production woes were not a direct trigger for Panasonic’s decision to halt investment, but the automaker’s troubles have only mounted since then. It reported a first-quarter loss that was double what Wall Street had expected, as car deliveries dropped 30 per cent from the previous quarter. Tesla burnt through $1.5bn in cash, or 40 per cent of its reserves, in the first three months of the year, leading Mr Musk to admit there was “merit” to the idea of raising more money soon.

Perhaps more worryingly, many analysts expect Tesla’s demand to remain soft in the US, where a federal tax subsidy for its electric vehicles will gradually be eliminated by next year. Tesla’s goal had been to reach 1m unit sales per year by 2020, but the company has recently stopped specifying a date for reaching that target. The company delivered 245,240 vehicles in 2018.

With pressure mounting, both Tesla and Panasonic are openly pursuing new partnerships. While their pioneering tie-up does not appear to be in danger, most analysts agree that it makes sense for both companies to lessen their dependence on each other.

“The partnership is important to Tesla, since [Panasonic] is the company’s only battery cell supplier at the moment,” said Christopher Eberle, senior equity analyst at Nomura Instinet. “Having said that, Tesla is even more important to Panasonic as they are their only electric vehicle customer in mass production.”

Panasonic has already started to hedge its all-in bet on Tesla. In January it began working with Toyota Motor to develop prismatic cells — a battery type that is different from the one used by Tesla’s vehicles — in an attempt to broaden its potential customer base.

Mr Musk is said to have been unhappy to learn of the tie-up between the two Japanese companies, but “it makes little sense [for Panasonic] to just supply one automaker now that EVs have such momentum”, Mr Eberle said.

If Tesla is to reach its goal of joining the ranks of the mass-market car companies, it will probably need more battery suppliers. And then there is the issue of cost: according to Panasonic insiders, Mr Musk often calls Mr Tsuga directly to press for lower battery prices. Having more suppliers would give him more negotiating power.

Mr Musk has said he wants multiple battery cell suppliers for his Shanghai operation, and is thought to be in talks with a number of Chinese battery makers. This is a possible trouble spot for Panasonic, according to analysts at UBS. “The potential loss of being an exclusive battery supplier to Tesla . . . would be a significant negative in terms of differentiation and negotiation advantage,” they said.

But there are few doubts inside Panasonic about how important the Tesla relationship remains.

“If our partnership with Tesla doesn’t work, our EV business won’t succeed, whoever the partner is,” a Panasonic executive said, expressing a view shared by most of the company’s leaders.

New partners in China

If nothing else, Mr Tsuga’s alliance with Tesla has breathed new life into Panasonic. When he became president of the company in 2012, he was forced to come to grips with a failed effort to push into the plasma television business. The unit was haemorrhaging cash: from 2011 to 2013, the company posted net losses of more than ¥1.5tn ($13.6bn). After a huge restructuring, Mr Tsuga began to shift Panasonic into new directions, including automotive electronics, energy-efficient housing — and a partnership with Tesla.

The contrast between Mr Tsuga, a Panasonic lifer, and the swashbuckling Mr Musk was always stark.

But the relationship has paid off in many ways for Mr Tsuga, who has been credited with breaking the mould of the risk-averse Japanese chief executive. The tie-up with Tesla has given Panasonic a key role in a potentially transformative new industry, and the two companies have taken an early leadership role in it. Tesla’s Model 3 is the best-selling electric vehicle in the market and is the highest-volume pure battery EV, according to Goldman Sachs and IHS Global Insight.

Yet the expensive plasma TV fiasco is never far from Mr Tsuga’s mind, and this has left him reassessing investments in Tesla. Panasonic executives think Tesla’s investment needs are much bigger than they can accommodate, and they want to avoid falling into another financial crisis like the one brought on by panel displays.

They found other reasons for concern, too. Mr Musk’s behaviour began to worry executives in Osaka last summer after he made a misleading statement on Twitter about taking Tesla shares private, prompting an investigation by the US Securities and Exchange Commission. (Mr Musk reached a deal with US regulators on April 26 over his Twitter communications.)

Panasonic’s management grew uneasy about having its car battery business — crucial to its plan to reinvent itself — depend on a man who, while considered a visionary, is also erratic and prone to making outrageous statements. In the tweet that landed him in trouble with US regulators, Mr Musk said he had secured funding to take Tesla private at $420 a share — a number that is also used as slang for marijuana. One senior Panasonic executive described Mr Musk’s announcement, which could have triggered a class-action lawsuit if the plan had been pursued, as “unimaginable”. The following month, the same executive was stunned to watch Mr Musk taking a deep drag on a marijuana cigarette during a webcast.

Nonetheless, in October, Mr Tsuga said the Japanese electronics group remained open to additional investments in North America “as we move in step with Tesla”. The partners had planned to raise capacity by 50 per cent at the Gigafactory near Sparks, Nevada, by next year.

Since then, however, production of Tesla’s Model 3 has faced numerous setbacks. The target date for reaching output of 5,000 Model 3 cars a week — the minimum analysts say is needed to ensure profitability — has been pushed back twice. The delays forced Panasonic to cut its earnings forecasts, and the company dispatched more than 200 engineers to the Gigafactory to try to improve its output of cells, a core battery component.

Operating losses in Panasonic’s Tesla battery segment are estimated to have widened sharply in the year ended March 31, to ¥20bn. And Panasonic’s debt-to-asset ratio has almost reached the levels of fiscal 2011-12, during the painful plasma TV-related restructuring.

Against this backdrop, Panasonic decided to freeze further investment in the Gigafactory. Both companies agreed to focus on increasing efficiency at the Nevada plant instead of injecting more funds. Previously, Panasonic had projected it would invest another ¥100bn to ¥150bn in the facility.

The China factor

Around the time that Mr Musk’s tweets were alarming Panasonic executives last summer, they also became concerned about another issue: Tesla’s ambitious plans for the Gigafactory 3 in Shanghai.

“The growth curve envisioned by Tesla is too steep,” a senior Panasonic executive said months after the project was announced in July last year.

Panasonic, still haunted by overinvestment in plasma TVs, was worried about pouring more into the battery business. Still, Panasonic was preparing to supply batteries for the cars produced at the Gigafactory 3, whether as the sole supplier or one of many. “Procurement from one company was not presupposed from the beginning,” a Panasonic insider said. “The issue is up to Tesla to decide.”

But Panasonic recently decided to hold back on investing in the Shanghai facility. Mr Musk has already rowed back on earlier promises for output at the Chinese plant: in April, he said he hoped to produce 1,000 to 2,000 Model 3 cars per week by the end of the year, down from his estimate of 3,000 in January.

Tesla has been seeking alliances with Chinese battery makers such as Contemporary Amperex Technology — commonly known as CATL — along with BYD and Tianjin Lishen Battery, owned by a state-run oil company. But no deal has been struck yet.

One potential factor behind Tesla’s apparent difficulty in sealing a deal with cell suppliers for its Shanghai operations is its use of cylindrical battery cells, which are relatively easier to manufacture but are different from the ones mass-produced in China.

In China, most EV makers use so-called prismatic cells — square, flat batteries consisting of many positive and negative electrodes flanked together. Prismatic cells can be made smaller and lighter than battery packs that use cylindrical cells, but tend to be costlier and are vulnerable to overheating.

Mr Musk has publicly noted the support Tesla has received from the Chinese government for the Gigafactory 3, but some are cautious about the potential for the US company to thrive in China’s electric vehicle market — an industry considered strategically important to Beijing.

“We understand the logic behind the facilitation of Tesla’s foothold into Chinese domestic auto manufacturing as a stalking horse for the fast-growing domestic Chinese EV industry,” analysts at Morgan Stanley noted in a recent report. “We believe that Tesla’s control of its Shanghai factory could potentially come under scrutiny as the technology gets more advanced [and] more sensitive.”

Tesla’s move into China comes as Chinese battery makers are under mounting pressure to slash prices. Beijing is cutting subsidies on electric vehicles in hopes of turning the strongest companies into sustainable businesses.

Tesla’s entry was “definitely a big opportunity for Chinese companies”, an employee at Tianjin Lishen Battery’s research and development department told Nikkei during the Shanghai auto show in April. Lishen is one of the few Chinese companies already producing the kind of cylindrical battery that Tesla uses.

However, it was “challenging” for Chinese companies to produce high-quality batteries that met the standards of foreign companies, Lishen staff members said, and the production costs of domestic makers remain relatively high compared with their global counterparts.

Ge Rui, a researcher at Shenzhen BAK Battery Co — China’s biggest cylindrical battery producer — told Nikkei that the company had also held preliminary talks with Tesla to become a battery supplier, saying: “It’s a big market out there. Everyone wants it.”

Profit pressure

Panasonic’s new venture with Toyota Motor will develop prismatic cells — the customers for which would probably include competitors of Tesla. This points to the potential complexities that are emerging in the Tesla-Panasonic relationship.

“Given Panasonic’s recent JV with Toyota, it would make sense for Tesla to de-emphasise its partnership with Panasonic, but that doesn’t necessarily mean they will end ties with Panasonic,” said Maynard Um, senior automotive and disruptive technology analyst at Macquarie. “Panasonic would love to be the sole battery provider for Tesla, but they also want to be profitable. It’s a codependent relationship: Panasonic needs Tesla as much as Tesla needs them.”

Despite the drama of their relationship, many observers found positive signs in the companies’ recent decision to hold back on their investments in the Gigafactory. Panasonic’s stock rose after the Nikkei report, a sign of investor support for the decision to reduce its spending on the Gigafactory. The focus on increasing efficiency at the Nevada factory is positive for Tesla, too. “Tesla is under pressure to be profitable, and cutting costs and pulling back from investment is one way to achieve that,” Mr Um said.

Mr Musk’s goal of producing Tesla’s Model 3 at a price point of $35,000 has led to concern among Panasonic executives about shrinking profit margins. Executives in Osaka say they can’t commit to investing more money before they are assured that Tesla can sell the new Model 3 without losing money. For Tesla, achieving that goal may mean finding additional battery partners — an idea that people close to Panasonic accept.

“It’s impossible for Panasonic alone to produce electric vehicle batteries in huge demand. Avoiding areas we aren’t good at is an option,” said Yoshio Ito, former head of the automotive-related business at Panasonic.

Of course, sourcing parts from different companies is a mainstay of the global automotive industry. The emerging dynamic between Tesla and Panasonic should be viewed as a welcome sign of evolution, Mr Um says.

“We’ve seen many ‘frenemy’ relationships in the auto industry, and I think that’s where Panasonic and Tesla are,” he said. “And where they will be.”