The Hot Battery Startup That Could Zap Tesla

 The Hot Battery Startup That Could Zap Tesla

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An employee positions a Tesla Model S automobile during a battery-pack fitting at a factory in Tilburg, Netherlands.

An employee positions a Tesla Model S automobile during a battery-pack fitting at a factory in Tilburg, Netherlands.

Photo: Jasper Juinen/Bloomberg News

One of the wildest plotlines in the great 2020 electric-vehicle rally was the late-year rise of
QuantumScape,
a battery startup that has yet to report any revenue. If investors are even close to being right about its roughly $44 billion market value, they may need to worry more about the fortunes of Tesla.

QuantumScape’s shares have soared since going public in November. The company revealed promising test results for a limited version of its “solid state” battery in early December, but otherwise the stock’s meteoric ascent has been hard to explain.

Based in San Jose, Calif., and backed by
Volkswagen
and

Bill Gates,
the company now has a market value greater than
Ford.
Investors have gotten used to dizzying valuations for electric-vehicle startups positioning themselves as the next Tesla. With QuantumScape, the mania has reached potential suppliers too.

Solid-state batteries have long been seen as a way of breaking through performance limitations associated with today’s electric vehicles. Like your smartphone, a Tesla or
BMW
i3 is powered by a battery with a liquid electrolyte that carries lithium ions back and forth between the cathode and anode during charging and discharging. These liquid electrolytes are bulky and liable to overheat.
General Motors
recalled almost 69,000 Chevrolet Bolt electric vehicles in November after five reported fires.

The promise of solid state is to get rid of the liquid, and with it the fire risk. Moreover, “lithium-metal” cells being developed by QuantumScape, among others, combine the lithium component with the anode, further reducing bulk and potentially delivering more power at a lower cost. This is also critical: Electric vehicles have long been held back by the relatively high cost of batteries, which makes them more expensive than combustion-engine equivalents.

Other advantages of solid state include rapid charging and longer life expectancy. QuantumScape said in December that its cell as tested could be recharged to 80% in 15 minutes and retained more than 80% of its capacity even after 800 charges. Such numbers would make owning an electric vehicle much more similar to owning a gas-powered one today.

Many in the battery industry see solid state as the most likely technology of the future. Tesla Chief Executive
Elon Musk

is a prominent exception. Solid state wasn’t among the many developments discussed in the company’s September “battery day.” Mr. Musk told analysts on the third-quarter results call that removing the conventional anode “is not as great as it may sound” in terms of delivering space savings in the cell.

Tesla’s skepticism may also be related to its own battery technology, which would likely make it harder than for others to adapt to solid state electrolytes. Tesla uses cylindrical batteries formed from rolled cells, whereas its competitors typically favor so-called prismatic batteries, in which cells can be stacked. Because solid-state cells are more brittle than liquid ones, they will be much easier to stack than to roll.

Adapting most of today’s electric-vehicle battery factories to the new technology won’t be too disruptive, says

Graeme Purdy,
chief executive of Ilika, a U.K.-based solid-state company that is working with Jaguar Land Rover to ensure a smooth transition. But it might be another story for Tesla. This could be the point where the company’s batteries, which have been a competitive advantage to date, turn into a competitive disadvantage.

Tesla does have time on its side, if it needs to change tack.
Toyota
probably has the most advanced solid-state batteries today: It planned to have them powering prototype vehicles at the 2020 Tokyo Olympics, which were postponed a year, and is targeting a mass-produced model by 2025. But the technology probably won’t be cost competitive with today’s batteries until the late 2020s at the very earliest.

QuantumScape’s investors are playing a very long game. The business plan doesn’t envisage meaningful revenues before 2026. There is also no guarantee that the company’s solution will win out over those of Toyota and others. The test results QuantumScape announced last month were for single-layer battery cells. Private U.S. startup Solid Power is already producing multi-layer solid-state batteries in a factory in Louisville, Colo. “The manufacturing challenges get exponentially harder as you move to multiple layers,” says

Mark Newman,
an analyst at brokerage Bernstein who focuses on the battery industry.

The valuations of companies like Tesla and QuantumScape require investors to look far into the future and assume mass disruption to the status quo. The wrinkle is that if QuantumScape’s plan works out—a big if—Tesla itself could be one of the companies most disrupted. In 2020, investors bought almost anything related to electric vehicles. This year they need to become more discerning.

Write to Stephen Wilmot at stephen.wilmot@wsj.com