Analyst believes Tesla's Model 3 will benefit from lowest ever battery costs
Jefferies analyst Dan Dolev reiterated a Buy rating and increased his price target on Tesla to $365.00 (from $360.00) after detailing why he believes the forthcoming Model 3 will benefit from the lowest ever automotive battery costs. "Lowering battery cost via changes to cell chemistry and Gigafactory scale benefits are critical determinants of Tesla's ability to sell an affordable Model 3 starting at $35K," Dolev wrote. "Our detailed battery component cost analysis details a path to 50%+ reduction in battery pack cost to $125/kWh by 2020, driving up to a 1,000bps vehicle GM tailwind, placing TSLA at the upper-end of peer OEM profitability levels."

The Tesla Model 3 electric sedan will start production in 2017, if the carmaker can keep to its schedule.

Tesla is aiming for a 200-mile range and $35,000 base price, in the hope that it can significantly increase volume with a more-affordable product.

Whether Tesla can actually achieve those two targets has been the subject of much speculation.

DON'T MISS: Tesla Model 3: Revealed Next Year, Production Starts 2017, Company Confirms

One party that seems confident in Tesla's abilities is investment firm Jefferies.

A Jefferies analyst believes Tesla will be able to appreciably reduce battery costs for Model 3 production, according to Street Insider.

This is largely due to the economies of scale offered by Tesla's enormous "Gigafactory," and anticipated advances in battery chemistry.

2012 Tesla Model S

The firm expects Tesla to switch to a new lithium-rich nickel cobalt manganese cathode, and to replace the liquid electrolyte in its cells with a gel.

These and other changes are expected to yield efficiency benefits.

Costs will further be reduced through the Gigafactory, which is expected to be running at full capacity in time for the Model 3's 2017 launch.

ALSO SEE: Tesla Model 3: Speculating On Batteries, Power, Price, Versions

The massive factory will offer economies of scale, as well as other efficiency benefits stemming from supply-chain optimization, increased automation, and its location in the U.S., Jefferies claims.

If Tesla can achieve this 50-percent reduction, Jefferies says it may not only be able to make a business case for the Model 3, but also make it among the most profitable models in the industry.

It estimates that battery packs currently account for 21 to 22 percent of the average price of a Tesla electric car, but can be reduced to 12 to 13 percent.

2012 Tesla Model S beta vehicle, Fremont, CA, October 2011

But Tesla may not be the only carmaker to benefit from lower battery-cell prices.

There have been several analyses indicating that cell prices are declining, and other manufacturers looking to boost the range of their electric cars are likely counting on it.

MORE: Electric-Car Battery Costs Already Cheaper Than 2020 Predictions: Study

In 2017, General Motors plans to launch the Chevrolet Bolt EV, with a 200-mile range and a base price of $37,500 before incentives.

The next-generation Nissan Leaf could also have substantially greater range, but at a price point similar to that of the current model.

The consensus among analysts seems to be that cell prices will have to drop to $100 per kWh for electric cars to be truly competitive with internal combustion.

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