Why does Elon Musk believe 'batteries aren't expensive, but are held hostage by the pricing model'?

The core of this idea is what he often talks about: "First Principles thinking." Let's not overcomplicate it; simply put, it's about "getting to the root cause and meticulously calculating the costs."

Imagine you want to bake a cake yourself. How would you calculate the cost? You might go to the supermarket to check the price of flour per pound, eggs per piece, and sugar and butter per pack. Adding up the costs of these core ingredients, the material cost for one cake might only be a dozen yuan. This is the "First Principles" cost.

But if you buy one from a bakery, it sells for over a hundred yuan. Why? Because the price includes rent, baker's wages, utilities, brand premium, marketing expenses, and the owner's profit. This price of over a hundred yuan is a price dictated by the "pricing model." It's not determined by "how much does it cost to make a cake at minimum," but rather by "my location, my brand, and how much the bakery next door is selling it for."

Elon Musk applies this "meticulous accounting" approach to batteries.

He didn't look at how much other companies were selling batteries for, but instead asked a fundamental question: "What are the most basic raw materials that constitute a battery?"

The answer is: lithium, nickel, cobalt, manganese, aluminum, graphite, steel... and so on.

Then, he had his team check the market prices of these metal raw materials at the London Metal Exchange, just like we check the prices of flour and eggs at the supermarket. They did the math and found that if all the metal raw materials needed to manufacture a battery pack were purchased and piled together, the total cost was surprisingly low.

So why are batteries sold to consumers so expensive in the end?

This is where the "pricing model" comes into play:

1. The Multi-layered, Value-Added Supply Chain: A battery isn't produced by a single factory. Mining companies sell to smelters, smelters sell to cathode/anode material manufacturers, material manufacturers sell to cell manufacturers (like CATL, LG), and cell manufacturers then sell to car companies. Every link in this chain needs to make a profit, adding a layer of margin. It's like a cake: from the farmer growing wheat, to the flour mill grinding it, then to wholesalers, and finally to the bakery, each layer takes a cut, and the price naturally goes up.

2. Pricing Based on "Value" Rather Than "Cost": In the early days of electric vehicles, battery manufacturers' pricing logic wasn't "my cost is 100, add 20 profit, sell for 120." Instead, it was "How much fuel money can you save by using my battery? Your car, because it uses my high-performance battery, can be sold for more than competitors'. Alright, I'll take a portion of that 'value'." They priced based on gasoline prices and competitors' prices, not on their own raw material costs. This led to artificially inflated prices.

So Elon Musk believes that the "physical cost" of batteries itself isn't that expensive; it's the industry's outdated, inefficient supply chain and pricing models that make it so expensive.

His solution is also straightforward: since intermediaries are adding layers of cost, he decided to do it all himself or shorten the supply chain as much as possible. This is the fundamental reason he built "Gigafactories" — to bring in raw materials and complete most of the processes, from material refining to the final battery pack, directly in one factory, cutting out all unnecessary intermediaries and profits.

In summary: Musk believes that the true cost of a battery should be infinitely close to "a pile of raw materials + the most efficient processing fees," whereas the market price at the time was "a pile of raw materials + profits from N intermediaries + brand premium + value-based pricing referencing oil prices." What he aims to do is eliminate those inflated components and bring the price back to its "true cost."