Tesla's Gigafactory And Why Competitors Should Worry

| About: Tesla Motors (TSLA)


The Gigafactory expected to begin battery production by 2017, in line with the Tesla Gen III.

It is expected to have cell output of 35 GWH/year and battery output of 50 GWH/year.

In-house production should allow for a 30% reduction in the price point of lithium-ion battery.

Tesla's Gigafactory Really is Huge

With nearly $4 billion-$5 billion going into its construction, Tesla's (NASDAQ:TSLA) new Gigafactory is no small project. The company states that the battery-producing factory would be spread over "up to 10M square feet" and would employ approximately 6500 people. Oddly, most of the company's targets with respect to the Gigafactory are hinged to the 2020 year mark, such as Vehicle Volume Output (approximately 500,000), Gigafactory Cell Output (35 GWh/year) and Gigafactory Battery Output (50 GWh/year) - while the factory, itself, is slated to begin production by 2017. So, why aren't shareholders being told what to expect from the giant factory in the three years between 2017 and 2020? Three years are long enough to turn a huge project like the Gigafactory into a white elephant - unless the company has other plans.

It's All for the Third Generation Car

The only target that Tesla Motors seeks to achieve by the first year of the Gigafactory's production is a 30% slash on the production cost of each kWh per battery pack. Incidentally, the completion of the Gigafactory is planned to coincide with the production of Tesla's Third Generation Car, an electric vehicle priced around $35,000, which is approximately 50% less than the Model S, which is priced at $69,900 at the minimum. The CEO of Tesla Motors, Elon Musk, told his shareholders last year that the Third Generation vehicle would be "a smaller version of the Model S at half the price." Much of the reduction in price would evidently be because of the decrease in battery pack cost caused by the construction of the Gigafactory. The rest of the reduction could result from reduced raw material usage, since the car would be smaller, or possibly from a more efficient design.

Whatever the reason behind the dramatic cost cut from the Model S to the Third Generation vehicle, EV consumers cannot complain. The $35,000 price tag means Tesla could be creating an all-new market for its cars by targeting the masses - which could mean an unprecedented increase in EV sales. With competitors' price tags still ranging much higher even than the Model S - such as the hybrid Fisker Karma, priced at $103,000 - there is no doubt that Tesla is set to rule the electric vehicle mass market, unless others come up with cars that match the price tag and performance of Tesla's Third Generation car. But would Tesla - an exclusively electric automaker - be able to challenge the fuel-powered car industry?

EVs should be Dethroning Conventional Cars, Already

Savings on fuel, reduction in environmental pollution, and tax cuts - these are just a few of the reasons why electric vehicles are much more attractive than conventional, fuel-burning cars.

With each gallon of gasoline priced around $3.7 in the U.S., and higher-end cars, such as the Mercedes E63 AMG Saloon giving only 20.7 mpg in urban areas, the cost of travel in most gasoline-powered cars is high enough to turn off buyers sooner rather than later, when an alternative that burns no fuel is available. Couple that with the fact that conventional cars release nearly 30% of all global warming emissions in the U.S. - with each gallon giving off 24 pounds of global warming-inducing emissions - and electric vehicles become even more attractive than their air polluting counterparts. These figures should mean that EVs should be taking over the automotive industry sooner rather than later, with the support of environmental protection organizations such as the Union of Concerned Scientists. So what's holding EVs back?

It's not like EVs do not have any drawbacks. For developing countries where electricity price is high, running on a fully electric vehicle would cost a lot more than the $1 a gallon of gasoline estimated for most developed nations. This is why electric automakers, including Tesla, have their markets restricted to the U.S., Europe or China. The high electricity price in developing countries is what most conventional carmakers are banking their success on for so long. But, hopefully, it would not be long before nations would turn to cheap electricity, as a matter of survival in a polluted world - which is when the world could see the back of fuel-burning cars for good.

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