Tesla Is More Than a Car Company -- and That's Terrible News

The Tesla Model S, the most hyped car of 2014.

Tesla Motors' most ardent supporters see the electric-vehicle maker as far more than a car company years from now. A central tenet of that thesis centers around its Gigafactory currently under construction in Nevada, which will be the world's largest battery plant when it's complete.

Last week, fellow Fool Simon Erickson wrote an article highlighting that Tesla Motors is in a unique position because this factory can make it far more than just a car company. In a few years, Tesla will be able to supply batteries for its own vehicles, but it could also eventually supply batteries for a plethora of other electronic devices.

That thesis sounds fabulous when you consider that smartphones are growing in popularity, wearable tech needs batteries, and the Internet of Things is going to add even more battery-powered devices to the market. It seems like the potential is nearly infinite for this new entrant in the battery market. But is this really what Tesla Motors wants to be?

Be careful what you wish for The problem withTesla's Gigafactory is that it isn't exactly making a new product, unless you're talking about electric vehicles. The lithium-ion batteries that go in cellphones or wearable gadgets have been around for years, and there are a number of very large players -- including Panasonic, Tesla's current battery supplier and partner in building the Gigafactory -- that already serve the market. And they aren't exactly profit machines. In fact, based on Panasonic's own financial data, we can get an idea of how profitable the battery business is.

Below are the financial results for 2014 from Panasonic's automotive and industrial systems business, as well as the portable battery business, which is part of its automotive and industrial systems segment. You can see that they are fairly low-margin and single-digit sales growth.

Source: Company earnings reports. TTM = trailing 12 months.

Tesla and Panasonic think they can lower costs by 30% when the Gigafactory opens in 2017, but that may only keep them a small step ahead of competitors. The website Green Car Reports says that long-term the cost of lithium-ion batteries has fallen 6%-8% per year since the early 1990s. McKinsey & Company predicted in 2012 that the cost of large-scale batteries would fall by two-thirds by 2020. The bottom line is that Tesla and Panasonic aren't the only manufacturers focused on cutting costs, particularly now that the battery business has become big business.

Most of the other lithium-ion battery makers are intermixed with large conglomerates, private companies, or foreign companies -- but EnerSys, LG Chem, and Johnson Controls are all large battery makers, and you can see their financials below.

Source: Company earnings reports and Yahoo! Finance. TTM = trailing 12 months.

These are financially solidbusinesses, but not the high-growth, high-margin business electric vehicles are. And let's not forget that lithium-ion manufacturers A123 Systems and Ener1 filed for bankruptcy before ever truly getting off the ground.

Lithium-ion batteries are essentially a commodity in today's electronics, with dozens of large suppliers and continuous technology and cost improvement. Unless Tesla Motors can do something fundamentally different than everyone else making batteries -- which isn't currently planned -- I'm not sure commodity batteries are truly a good backup plan.

There's also another scenario that could be bad for Tesla's non-auto potential. If Tesla finishes its Gigafactory as planned, it could actually flood the market with lithium-ion supply. This would have the side effect of lowering prices for competing EV batteries, as well as lowering potential upside revenue if Tesla indeed sells into other markets.

Tesla Motors' Gigafactory will be making batteries for the Model S.

Why does Tesla want to be more than a car company?I like to think about what would happen if another auto company made a similar move into another unrelated business. Just imagine if BMW -- a high-margin car company -- suddenly said they wanted to open up a steel mill with enough to supply not only its own needs but the needs of other steel consumers as well. If its demand for steel grew, it could just expand into new markets or even sell to other automakers.

What would make this crazy is that steel is a commodity business -- and not only are steel manufacturers struggling to make a profit today, many have in fact gone bankrupt in the past few decades. Sound similar to the battery makers I outlined above?

Unless BMW could make steel differently than anyone else could or somehow fundamentally produce it for a lower cost than anyone else, what would be the point of expanding from the car business into the steel business?

Tesla can be anything, but what will it be?Part of the draw of Tesla Motors is that it's an innovative company in an industry that's done things exactly the same way for decades. Elon Musk's aggressive expansion has thrown an entire industry for a loop, and many people want to think he can expand into adjacent markets just as quickly.

Musk and Tesla may do just that, but investors need to consider where Tesla Motors can add value to the world and where it'd just be another player in a commodity market. The auto business is ripe for innovation and Tesla could be that high-margin, high-growth player investors hope it is.

But is the commodity battery market or high-volume energy storage -- where there's also a lot of competition -- really an attractive adjacent market for Tesla to grow when it could be focusing efforts on EVs?

Count me skeptical, but if there's anyone who can prove me wrong it's Elon Musk. As always, he's the wild card in Tesla Motors' future, and investors buying the stock today are betting big on him. They'd just better hope whatever decisions he makes are profitable ones.

The article Tesla Is More Than a Car Company -- and That's Terrible News originally appeared on Fool.com.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.