The electric car race seems very complicated. It’s not. For Lucid Motors (NASDAQ:LCID) and its competitors, it’s all about the batteries.
Lucid CEO Peter Rawlinson, a former Tesla (NASDAQ:TSLA) executive, knows a lot about batteries. Thanks to his Saudi investors, he’s about to win a contract for the largest battery storage system in the world.
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’s Craig Welch reported. Lucid claims its EVs will exceed a range of 500 miles per charge.
The Scaling Problem
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 parts can 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. His battery “Gigafactory” in Nevada is the key to his whole operation.
It’s the Batteries, Stupid
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 at two 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 the batteries, stupid. Rawlinson is glossing over what could be a major problem.
Meanwhile, Lucid Air stock is up 21% since the start of September, mainly on the strength of its reviews. None of the five catalysts our Samuel O’Brient found recently for the stock’s rise involve proof of battery production and supply.
Yet battery production bottlenecks are now seen as the key roadblock to electric vehicle production. It’s not the assembly lines, not the design, not the orders. It’s whether there are going to be enough batteries to supply this demand. My InvestorPlace colleague Tezcan Gecgil has a piece today that offers an investment strategy on QuantumScape (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,” wrote Aria 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 is lined up alongside every other car maker in 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 as LG Energy Solutions. Or dial up your broker and buy Sigma Lithium (NASDAQ:SGML). That’s a Canadian lithium supplier whose stock has quadrupled this year. Sigma claims it can supply LG Energy’s needs for at least six years from 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.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.