Lucid's profit projections depend on its getting steady battery suppliers and those suppliers getting steady lithium supplies.
The electric car race seems very complicated. It’s not. ForLucid Motors(NASDAQ:LCID) and its competitors, it’s all about the batteries.
Lucid CEO Peter Rawlinson, a formerTesla(NASDAQ:TSLA) executive,knows a lot about batteries.Thanks to his Saudi investors, he’s about to win a contract forthe largest battery storage system in the world.
The question is whether he can make them. Lithium is already inshort supply.Prices for lithium carbonate, a key ingredient in modern batteries, are atrecord highs.
Designing great batteries, and having the supplies with which to make them, is the key to winning the mass market. Batteries are key to eliminating “some of the biggest barriers to entry for consumers: range, recharging times, charging infrastructure, cost,”National Geographic’sCraig Welch reported. Lucid claims its EVs will exceed a range of 500 miles per charge.
The Scaling Problem
Now that Lucid is starting to make itsluxury Lucid Air sedan, and gettinggreat reviews, it must scale that production.
This won’t be easy. Elon Muskwears the scars of scaling. I warned about this backin 2018. Musk heeded the warnings, solved the problems, and rode Tesla to glory.
In theory, electric cars are very simple. Electric motors have one moving part, which is attached to the driveshaft. Gas-powered cars have hundreds of parts. Most of an electric’s moving partscan be hidden in the wheel wells.
In practice, scaling is not so simple. You don’t get anywhere without scaled production of batteries. Musk realized this. Hisbattery “Gigafactory”in Nevada is the key to his whole operation.
It’s the Batteries, Stupid
Lucid is depending onLG Chemfor its batteries. If the Korean companycan deliver, Lucid can meet its ambitious 2023 production target of nearly 1,000 cars per week.
But that’s not going to be easy. LG Chem is already supplying other car makers.General Motors(NYSE:GM) blames LG Chem for a$1 billion recall of its Chevy Bolt.Shares of LG Chem lost a quarter of their value in August after problems were found attwo of its Asian plants.The shares have since recovered just half the losses.
Those with gray in their hair remember the Democrats’ 1992 slogan, “It’s the economy, stupid.” With electric cars, it’s thebatteries, stupid. Rawlinson is glossing over what could be a major problem.
The GM problem was fixed in September. But a shortage of batteries could be a bigger problem for car makersthan the chip shortage.
Meanwhile, Lucid Air stock is up 21% since the start of September, mainly on the strength of its reviews. None of thefive catalystsour Samuel O’Brient found recently for the stock’s rise involve proof of battery production and supply.
Yet battery production bottlenecks are now seen asthe key roadblockto electric vehicle production. It’s not the assembly lines, not the design, not the orders. It’s whetherthere are going to be enough batteriesto supply this demand. My InvestorPlacecolleagueTezcan Gecgil has a piece today that offers an investment strategyonQuantumScape(NASDAQ:QS), which is working on developing energy-dense solid-state batteries with high driving range and fast charging times.
Pay attention to recent moves by Tesla to use iron-based batteries for its models. Lithium-iron-phosphate (LFP) batteries use an older, cheaper battery chemistry and are popular in China.TechCrunch reported on Oct. 21.“One major reason why LFP batteries are not seen much outside of China relates to a series of key LFP patents, which have allowed the country to dominate the LFP market,” wroteAria Alamalhodaei,“But those patents will soon be expiring, and it seems that Tesla has its eye on that timeframe.” That could enable Musk’s battery manufacturing to be done nearer to its car assembly lines.
The Bottom Line
There’s a certain “yadda yadda” in the positive chatter about Lucid Motors. They’re skipping over the key point.
The key point is the battery. Lucid islined up alongside every other car makerin seeking batteries to power its assembly lines. Many are going with the same supplier, LG Chem, which has had difficulties, and whose stock is down as a result.
If you believe in Lucid, look toward the December spin-off of its battery supplier asLG Energy Solutions.Or dial up your broker and buySigma Lithium(NASDAQ:SGML). That’s a Canadian lithium supplier whose stock has quadrupled this year. Sigma claims it can supply LG Energy’s needs forat least six yearsfrom a plant in Brazil.
If Sigma can execute on that contract, Lucid should be fine. Just remember. Battery supplies are the gating factor to its growth.
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