Inside the Gigafactory: Tesla’s big plan

Tesla’s much talked about Gigafactory should be up and running in 2017. The Elon Musk-owned EV maker is hoping to use it to produce up to 500,000 battery packs a year by 2020, amounting to around 50GWh. That claim was met with scepticism by one source, Lux Research, which questioned the likelihood of even the biggest player in the EV market meeting that target, even if the company is also able to call on its deal to supply stationary storage to SolarCity and its partner in the Gigafactory, Panasonic.

However, Dean Frankel from Lux told PV Tech Storage that his firm did not think the ‘500,000 packs by 2020’ claim was make-or-break for Tesla, with the company still in a good position to claim a competitive advantage by building the Gigafactory. The dust has cleared a little since it was announced at the beginning of last month that the Gigafactory will be built in Nevada, so PV Tech Storage asked Frankel about some of the other talking points of the plan.

Why does Tesla need the Gigafactory?

There are three key components here. Cost reduction, localising a supply chain and reaching economies of scale by making sure their partners will scale alongside them. When we talk about EVs, cost is a key component. Can you get a battery cheap enough such that people will buy your batteries in bulk? Ultimately cost won’t be the major concern for the consumer going to adopt EVs.

It will be other factors, like charging infrastructure or whether the car looks nice, which is what’s normally considered in consumer adoption, as well as performance. So we know EVs have the performance, we know Tesla can make a car that looks nice.

And costs?

They claim they can get those down by 30%. We were projecting that we think there’ll actually be a 20% reduction versus their already low 2020 figures. Let me put numbers on that. Right now, industry average production for LG Chem Power, [which is] selling to the Volt or Nissan Leaf through its joint venture, is over US$300 per kWh for a battery pack. Tesla is already lower than that at around US$275 or US$274 per kWh for their battery pack. If they never build the Gigafactory, if they just do what they’re doing now through Panasonic, they will get costs down to US$245 per kWh. If they build the Gigafactory, they will see improved economies of scale, they will have a localised supply chain to reduce shipping costs, and they’ll improve [battery] chemistry.

So those three combined will lead to around a 20% to 30% cost reduction for Tesla but then what does that do for the consumer? If you’re talking about the Model 3, for a 48kWh battery pack, that only leads to a US$2800 price difference between the Model 3 with the Gigafactory and the Model 3 without the Gigafactory.

Our analysis [in the report] was, does that matter that much? Elon talks about demand not necessarily being a limiting factor. Well how inelastic or elastic is the demand for a Model 3 and is US$2800 going to move the needle? To a certain degree it will but it’s probably not as needed as much as we talk about when we talk about cost reduction.

The component that’s most important for the Gigafactory as to why it’s needed, is the supply chain. How fast can they get these batteries to market, how quickly can they ramp up from what their projected capacity will be? And that’s something that they’ve struggled with previously. Famously, a while ago Elon had to ship tyres on a chartered jet from Europe to California to make shipments on time. Obviously that’s something that’s incredibly costly and they’ve had to work with their supply chain tirelessly to make sure that their own supply chain matches Tesla’s production.

Tesla claim the Gigafactory will reduce costs by up to 30%. Image: Tesla.
You talked about hitting economies of scale, which it seems like a fairly huge factory is going to help Tesla with. How crucial are partnerships to that and has their main partner, Panasonic, taken a bit of a gamble being involved with the Gigafactory?

So that’s a key component of the Gigafactory going forward. How do you select partners that will have a key interest in your plant and who will scale as you scale? The supply chain will make it cheaper but it will also make sure that there are no hiccups. Time delay is critical.

Panasonic absolutely had to do it, they tried to raise a little bit of a hard bargain saying publicly that it was something they weren’t totally committed to, but Panasonic’s battery division went from unprofitable to having US$30 million in profit one quarter of last year and there’s only one reason for that and that’s Tesla. So they would have to be really, really, really short-sighted and just for lack of a better word, dumb, to not commit to Tesla.

There was a lot of speculation over where the Gigafactory would be built, with several different states in the running, including Tesla’s home state of California which joined the race late only to lose out to Nevada. Why Nevada and not California?

It wasn’t costs – it wasn’t that labour costs are too high in California or anything like that. It was really that they feel that in order to have the most impact with the Gigafactory they have to get it up as soon as possible. So both Nevada and California would’ve given them huge incentives and I’m sure Nevada is probably putting US$500 million either in equity or deferred payments or taxes for the factory. But it’s about the fact that Nevada has the ability to ignore some of the environmental regulations California has in place. California has a very tight air resources board so there’s a lot of restrictive policies, especially for factories like the Gigafactory. That was Elon Musk’s claim, that it’s not incentives, it’s not about the cost to produce, it’s really just time to get there. California wasn’t going to be considered initially and then there was a lot of political favour being dealt to Tesla to try and make sure that they could site it in California.

A Model S charging. Image: Tesla.
Finally, with the media and industry speculation over where the factory would eventually be sited, Tesla was reportedly originally going to set up two Gigafactories – with the aim of hedging their bets if one site fell through.

Yes, that was exactly the rationale. They believe that timing is critical and basically every month that they delay is significant revenue loss in their own mind, getting the factory started, getting the cars sold and ultimately reaping the benefits from that. That speaks directly to the California versus Nevada point – how fast can we get this factory up and running?

Their initial plan was very interesting and it’s something I wouldn’t advise any other company to do, which was to build two factories, lease land on two sites and build them simultaneously until everything was permitted and ready to go. Then if there was any production issue, in terms of the construction of the plant, then they would just abandon one and go for the other. The whole reason for that plan was that if there were any production or permitting hiccups they would just abandon that site.

They’d be able to swallow the cost of doing that?

I personally haven’t evaluated that statement but I heard what they said on the earnings call, that their key concern was getting product to market as soon as possible and getting the factory running. To them it was much cheaper in their own analysis to get the battery factory up and running sooner than build two different sites. They were willing to eat that cost.

Panasonic has established a new company, Panasonic Energy Corporation of North America, for the manufacture of batteries at the Gigafactory. Image: Tesla.