Though Tesla’s (NASDAQ:TSLA) Model S sedan is the part of its business that garners the brightest spotlight, the company also produces the drivetrains for a handful of other vehicles that drive under different nameplates. That that list just got a bit shorter, though, as Tesla revealed that it would no longer be supplying the powertrains for Toyota’s (NYSE:TM) electric RAV4 EV. Toyota is a 2.4 percent stakeholder in Tesla.
“Toyota is expected to end the current RAV4 EV model this year,” Tesla in a quarterly filing late last week. The supply contract has so far generated $15.1 million worth of revenue for Tesla in the quarter that ended at the end of March, but the company’s “production activities under this program are expected to end in 2014.”
Bloomberg reports that according to a July 2011 filing, Tesla stated that the terms for the deal with Toyota would generate about $100 million for the company. Toyota said in May 2012 that it would purchase enough powertrains to supply 2,600 RAV4 EVs over a three-year period.
Toyota, though, told Bloomberg that there was no such formal announcement to end the RAV4 EV program. “This was a project for a specific number of vehicles that we planned to sell for a specific number of years,” Toyota spokesman John Hanson said. “We have not made any announcement about the relationship or what we’ll do with Tesla in the future.”
Tesla did specifically note that it was the production support for the current RAV4 EV that would be ending. Despite a new model for 2014, the RAV4 EV is still built on the older model’s platform. It’s possible that Toyota is planning to migrate its EV program to the new platform, though no whispers have yet been heard that would suggest that was the case.
The RAV4 EV is largely a compliance vehicle in California, where stricter emissions and fuel economy laws have led to several electric cars designed almost specifically for that market. Toyota says that it has sold 1,594 electric RAV4s since 2012. However, Toyota and Tesla’s end-of-contract announcement comes as Toyota is gearing up to release its new hydrogen vehicle for next year, which would conceivably replace the RAV4 EV as its compliance vehicle in California.
In a way, the ending of Toyota’s contract with Tesla might be beneficial to the Fremont, California-based electric vehicle maker, which is currently ramping production of its Model S sedan and the internals for Mercedes-Benz’s electric B-Class compact. Given that’s Tesla’s biggest headwind is production capacity, the end of the RAV4 contract may help alleviate some strain and help the company focus more on building its own vehicles and supplying the powertrains to Daimler, which is also a Tesla shareholder.
Beginning early next year, Tesla will also be gearing up for the production of its Model X crossover SUV. After that, Tesla’s first real mass-produced vehicle, the Gen-III, will be warming up for production, as well, lifting Tesla’s appetite for battery cells higher than has ever been seen before. To help with that effort, the company will be breaking ground on its gigafactory battery plant as early as next month.
Tesla has a lot on its plate at the moment. Demand for its Model S has proven to remain robust, but in a way, business is still getting off the ground. We recently explored some of the major tasks facing the company and showcased them after Tesla’s earnings. Here are just a couple.
1. The gigafactory
This one factor alone has the potential to turn Tesla from a niche automotive player into a mainstream automaker and force in the energy field, as well, for an estimated cost of $5 billion. It’s the largest undertaking that the company has set out on since releasing the Model S, and if it works out, the payoff could be huge: an estimated 30 percent cut in costs of the battery packs for its cars, currently the most expensive single component in the vehicle.
The gigafactory would turn Tesla from the largest consumer of lithium-ion cells in the world to the largest producer. Not only that, but the gigafactory is a crucial cog in Tesla’s plans to release its Gen-III vehicle, which is anticipated to cost around $35,000-$40,000 and sport a range of 200 miles. However, that can’t happen until the factory is complete.
2. Expanding margins
For the most recent quarter, Tesla recorded an automotive gross margin of about 25.4 percent. For a newer company that’s impressive, especially considering the amount of investment Tesla’s product has required. However, the company is hoping to see 28 percent margins by the fourth quarter, but even this figure pales compared to where CEO Elon Musk eventually wants it to be: along the lines of Porsche, renowned for its ability to command high prices and generate margins in the neighborhood of 50 percent while doing so.
Tesla’s ability to reach that point will hinge on its ability to lower the cost of its battery packs. Whether the gigafactory will be able to deliver to the degree to make that happen remains to be seen, but historically, it’s been unwise to believe that Tesla won’t be able to achieve something the company has its mind on.
You can read the full piece here.