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Panasonic, Pondering Tesla Investment, Unsure on Battery Cost Cut Goals
Electronics maker committed to investing in U.S. plant but amount it will contribute still being debated
OSAKA, Japan
Panasonic6752.TO inYour ValueYour Change Short position Corp. on Friday said the extent of its role in a proposed battery joint venture with electric car maker
Tesla Motors Inc.
TSLA inYour ValueYour Change Short positionis still being debated as it expressed uncertainty over the venture's cost-cutting target.
The electronics maker has committed to investing in the U.S. plant, which could cost as much as $5 billion, but the amount it would contribute is still being debated inside the company. Some Panasonic executives are still haunted by earlier failed capital investments in plasma televisions and batteries.
"Is 30% [cost savings] in sight? Not yet. It isn't that easy," said Yoshio Ito, Panasonic's senior managing executive officer who heads the automotive unit, in a round-table discussion with reporters.
Tesla needs to reduce the cost of the existing Model S battery pack by at least 30% to make a proposed car designed to attain 200 miles of all-electric range and start at $35,000 (3.57 million yen).
Mr. Ito said Panasonic has offered to jointly work on electronic controls in addition to battery-cell cost reductions as a means to lower the overall cost of the battery pack, which is a significant portion of the expense of Tesla's current Model S electric car.
Lowering the cost of the existing 1,000-pound battery pack is the primary driver of constructing a 10-million-square-foot factory.
Tesla plans to use vertical integration in the giant factory, pulling in partners like Panasonic, as well as makers of component parts, like the metal suppliers for cathode and anode materials, into the plant.
JB Straubel, Tesla's chief technical officer, said he believes the cost reduction effort is on track, based on the company's analysis. Lower costs for battery cells will come from lower logistics cost and cutting out middleman margin expenses, and even tying in base material supplies from mining companies.
"There will be other partners. There are other partners. Panasonic is by far the primary," he said, in an interview with The Wall Street Journal.
Mr. Straubel said Tesla is a few weeks away from breaking ground on the first of two sites for the battery factory, but he isn't concerned that Panasonic hasn't made a firm commitment to the plant.
In order to meet its timeline to start production in 2017, Tesla is starting site work on two different locations to ensure it can complete the project. Tesla is vetting potential sites in Arizona, Nevada, New Mexico, Texas and California.
"There is not any frustration. It is that this whole external world is saying it is taking too long to get a [Panasonic] commitment," Mr. Straubel said. "With the excitement about the Gigafactory, suddenly the whole relationship is pushed into the limelight. It doesn't feel to us that things are taking too long. There is no sense of foot-dragging."
He reiterated that Panasonic will be the lone battery maker working with Tesla. Panasonic helped boost Tesla's cash in 2010 with a $30 million stock purchase when the shares were $21.15. The stock is now trading at $203.
Under Chief Executive Kazuhiro Tsuga, Panasonic officials say they are compiling detailed risk scenarios and multiple backup plans to make sure new investments don't flop and jeopardize the turnaround Mr. Tsuga engineered.
The Japanese technology giant has spent the past two years drastically restructuring its television, mobile phone and semiconductor divisions to stem losses totaling $15 billion. Having brought the company back into profit for the previous fiscal year, Mr. Tsuga has admitted he is eager to resume investments to capture new growth.
One of the main growth drivers for Panasonic will be an expansion of its auto-parts business, which hinges in part on its key client Tesla.
The Japanese firm has already signed a letter of intent with the Silicon Valley electric-car maker to participate in the construction of the "gigafactory," but hasn't disclosed how much it would invest.
"We will make sure to carry out investments one step at a time in line with demand," Mr. Ito said recently.
The caution is warranted. Starting in the early 2000s, Panasonic invested around $5 billion to build production capacity for plasma displays and was saddled with costly investments that went sour after prices slid and a strong yen eroded profitability. After Mr. Tsuga took over as chief executive in 2012, Panasonic pulled out of manufacturing plasma display panels.
In 2008, Panasonic also announced that it would invest around $1 billion to set up a new plant in Japan for lithium ion batteries, but later froze part of the investment as demand plummeted following the global financial crisis.
"Investments are scary considering the bitter experiences we've had," a company official said on condition of anonymity.
Last month, Mr. Tsuga also said the company needs to first recover its credit ratings before it can move onto big investments, although he added that officials internally wanted to resume investments as soon as possible. In 2012, Standard & Poor's Ratings Services cut Panasonic's credit rating by two notches to BBB, the second lowest of the investment grade.
To supply batteries for Tesla's luxury electric cars, Panasonic is already ramping up production at one Japanese plant while resuming operating at an idled plant in western Japan. The company has an agreement to provide 2 billion cells to Tesla through 2017. Analysts have questioned whether an additional plant in the U.S. may lead to overcapacity if Tesla car sales don't grow as strongly as expected in the future.
"Nobody knows how demand will grow in the future, and it is no longer an environment where companies can just say, 'Let's go for it,'" said Renzo Yamamoto, an analyst at research firm Techno Systems Research Co.
While
Sony was first to commercialize lithium ion batteries in the early 1990s, Japanese makers have lost market share to Korean rivals since 2011, hurt by a strong yen and disruptions to supplies following the earthquake that year, according to Techno Systems.
Despite the risks involved, the tightknit partnership with Tesla is critical to Panasonic's plan to double sales in its auto division to ¥2 trillion by the fiscal year ending in March 2019. Nearly a quarter of those sales are expected to come from auto batteries.
In a round table interview Friday, Mr. Ito also said risks in battery investments can be better controlled than flat-panel displays. For example, Tesla and Panasonic exchange information on sales and production levels on a weekly basis and can make adjustments if demand doesn't grow according to initial estimates. If Panasonic buys a stake in the new Tesla plant, Mr. Ito said the investments will be made in phases instead of the huge spendings seen with TV panels.
And while TV panels can basically be made with similar materials by rivals, battery production is unique to each manufacturer. Panasonic's cylindrical lithium ion batteries, for example, are distinct in using more nickel for material and has higher density than other batteries of the same size.
Panasonic and Tesla have set up joint working teams that talk two to three times a week to work out a range of issues from how to control costs to dividing up their investments, Mr. Ito said.
Officials also say the company is compiling risk scenarios with Tesla regarding sales, costs and currency rates. And if Tesla demand doesn't grow as expected, Panasonic also expects sales of their batteries to other auto makers and their potential use in power-storage systems, they added.
For the new U.S. plant, Tesla has said Panasonic would be the only battery cell manufacture involved. But analysts say Korean battery makers will likely try to woo Tesla in the future, while Panasonic is eager to maintain its so-far exclusive relationship.
The two companies have been close partly because a number of employees at Tesla are originally from Panasonic, including its battery technology director Kurt Kelty, who spent more than a decade at Panasonic and speaks Japanese fluently.
"I hired Kurt. Not just because of his connection to Panasonic, but [because] he also knew the Japanese business culture," said Mr. Straubel, Tesla's chief technical officer.
Panasonic officials admit they need to balance their cautious investment stance while keeping up with Tesla's speedy decision-making.
"I'm not sure if we're keeping up with the speed sought by" Tesla, Mr. Ito said.
"But there is no growth without investment," he added, speaking broadly about the company's auto business.