QS: Unit Economics
Once QS enters into production, investors will have a better view on the actual costs associated with manufacturing their cells. Until then, they have provided initial guidance on cost projections that we can work off of.
Being that Quantumscape is still at least a couple years away from reaching even a single GWh, and many more years before they hit a steady state growth rate, I will mainly work off of 2030 projections for cell costs. Per IHS, cell costs are expected to reach $73 by the end of the decade. I believe the cited cost includes all cell chemistries, which may not be representative of QS’s initial market (NMC only), but I think this is a good enough place to start.
Legacy Lithium Ion Cell
In my writing, I’ll often mention 'Legacy' cells. Here, 'Legacy' simply refers to current lithium-ion technology, which includes a graphite anode. Quantumscape’s QSE-5 cells will use NMC811 chemistry, so I’ll perform this exercise using the current NMC cost structure.
Visual Capitalist released an article in 2022 with the breakdown of NMC cells. This cost breakdown is particularly useful because they include depreciation, which is the smoothed out version of capex (equipment, building, and land costs). Including these is paramount because cell costs go far beyond just the material costs of the cathode, anode, and separator. The image below is reproduced from the Visual Capitalist article.
It’s important to point out that these costs are based on 2021 numbers. I think this is important to point out because to get total cell costs to fall from $101 per kwh to $73 per kwh (a nearly 28% reduction), we have to think about where these cost savings will come from. Will it come from a straight-line reduction across all aspects of the bill-of-materials and capex (each declining by 28%)? I suspect that much of the cost savings are expected to come on in the form of cathode materials getting cheaper as well as manufacturing costs becoming more efficient. The way we think about this will matter later when we project QS’s profit margins.
Quantumscape
With QS’s novel design, not needing an anode, they originally projected roughly 17% cost savings.
In a competitive market, QS should be able to continue charging (at least) the same cost as the competition. So given our assumed $73 per kwh cost, and assuming that legacy cell manufacturing eventually evolves into a commodity-like business where profit margins are driven down (I used 8% margins, shown below), total cell costs to OEM’s should be roughly $80.30 per kwh in the year 2030. Legacy OEM’s will be able to pocket $7.30 of that as profit.
Considering QS is projecting 17% cost savings, right out of the gate, their cell production costs should come down to $60.60 per kwh. If they sold their cells for the same $80.30 per kwh, it would allow them to profit $19.70 per cell, giving a baseline profit margin of 24.5%. From a business standpoint, this is quite fantastic.
But Quantumscape cells offer performance specs that far exceed current legacy cell offerings. This should, in theory, allow them to charge a premium for their product. Using a healthy, but conservative 10% premium, QS would be able to charge $88.33 per kwh, increasing their profit and margin to $27.70 per kwh and 31.4% respectively. All shown in the illustration below.
This would result in $27.7 million dollars of profit per GWh (or 10,000 cars produced). These numbers can add up quickly with more and more market penetration.
A “fun” caveat is that this assumes that cell costs decrease uniformly across the all the components (i.e., cathode material costs, separator costs, manufacturing costs, etc. all decrease by 28% between now and 2030). But being that cathode costs are the biggest contributor, it stands to reason that those may see the biggest reduction. If the cost savings is favored towards cathode materials, then the anode and separator costs become bigger portions of the pie. Their removal would further drive up QS profit and margins.
Business Model
There are a few different ways QS can attack commercialization. The scenario shown in the previous section is QS simply becoming a cell manufacturer. That’s a very capital intensive way to go, and will be slow to scale (especially initially).
Another way is to become a separator supplier, only, and license the rest of the production process (Cobra) and shift the manufacturing responsibility to the OEM. Going off of the cost breakdown from the visual capitalist, the separator manufacturing might cost $10.95 per kwh: $73 per kwh * (7% + 24%/3)
This is just a ballpark estimate assuming a third of the manufacturing & deprecation cost is assigned to the separator plus the separator materials themselves. We’ll be able to hone in these numbers over time as we get more guidance from Quantumscape.
The total OEM costs for cells for the OEM should be roughly the same as the total cost had they simply purchased the cells from QS. So the $27.70 per kwh profit above should still carry through to QS, giving a profit margin of 253%. Obviously, an OEM would probably insist on capturing some of those cost savings, themselves, for the the hassle of manufacturing their own cells, so this number should be thought of as a ceiling.
Quantumscape could also simply license their IP in full. This would require almost zero capital, while still capturing much of the profit projected in the pricing exercise above. I think this could be pursued initially, but isn’t the long term solution.
In summary:
Cell Manufacturer: Capital intensive, but will yield the most absolute profit. Also gives QS flexibility to continue to innovate.
Separator Supplier: Capital light and quick expansion. Very high profit margins, but lower absolute profit than cell manufacturing.
Licensing: Zero Capital needed. Rapid expansion. Extraordinary profit margins, but probably the lowest absolute profit of the bunch.
Inflation Reduction Act
Just a couple thoughts; I’ll have to explore the impacts of the IRA a little more in depth at a later date (it probably deserves it’s own post). The major takeaway is that cell manufacturers can claim a tax credit of $45 per kwh of production ($35 credit for cells + $10 credit for domestically manufactured modules). This will have very little impact for QS as the full credit is only available until 2030 and then tapers off to zero by 2034. The timing aligns with QS just getting ramped up.
But on a surface level, I don’t think the IRA will really have much impact on the profitability numbers. It’s most likely that much of the IRA funding will go towards offsetting more expensive domestic supply chains, and any cost savings will be passed through to the OEM’s (and, in theory, out to the consumer).
If anything, the IRA could be detrimental for QS. If QS aims to sell it’s cells at $88.33 per kwh, and the IRA cost savings is passed to the OEM, the OEM price becomes $43.33. Likewise, legacy cells would reduce from $80.30 per kwh to $35.30.
The implication here is that QS cells would become 23% more expensive for OEMs, in comparison to legacy cells. This could put some downward pressure on QS pricing if OEMs don’t think QS cells are worth 23% more than legacy. (Note that the dollar amounts are the same: QS cells will cost $8.03 per kwh more with or without the IRA).
Anyways, these were just a couple high level notes. Again, this will have diminished effects beyond 2030 unless the Inflation Reduction Act is extended.
Disclaimer
The information provided here is for informational purposes only and should not be considered as investment advice. We do not provide personalized investment recommendations or endorse any specific investment products. Investing involves risk, including the potential loss of principal. You should consult with a qualified financial advisor or investment professional before making any investment decisions. Past performance is not indicative of future results. Our content is based on sources believed to be reliable, but we do not guarantee its accuracy, completeness, or timeliness. We are not liable for any errors or omissions in the content or for any losses, damages, or injuries arising from its use.