What's Behind Tesla's Plan to Build a Record-Breaking Factory?

Tesla Motors (NASDAQ: TSLA  ) is supply-limited, selling every car it makes. During the company's third-quarter earnings call, Tesla CEO Elon Musk pointed his finger at the bottleneck holding the company back: cell production -- or production of the company's lithium-ion batteries. How will Tesla address the issue? Possibly by building the world's largest lithium-ion factory ever.

The bottleneck
"The main constraint on our production is ... the cells," Musk told investors during the third quarter earnings call. 

Model S battery platform. Source: Tesla Motors.

The good news? When Dougherty & Company analyst Andrea James asked Musk whether or not raw materials were an issue for the cell production bottleneck, Musk responded confidently that they weren't. In order of weight, Musk explained, the main constituents in the Tesla's battery pack are nickel, cobalt, aluminum, and then lithium. Lithium, he says, accounts for just about 1% to 2% of the cell.

With plentiful raw materials, solving this bottleneck is only really a matter of how quickly Tesla can ramp up production. How is Tesla addressing this issue?

For now, the recent agreement announced between Panasonic and Tesla, in which Panasonic will "expand its supply of automotive-grade lithium-ion battery cells to Tesla," is a solid first step. The announcement explains that the agreement covers "nearly 2 billion cells over the course of four years" and that Panasonic's supply "will be used to power the award winning Model S as well as the Model X."

The agreement could help Tesla reach the company's expectations laid out in its second-quarter letter to shareholders for "annualized sales for Model S [that] could exceed 40,000 units per year by late 2013."

Longer term, Tesla may even build its own "giga factory" -- the world's largest factory for lithium-ion batteries -- according to Musk's comments during the third-quarter earnings call. Musk says it would be "very green," with a lot of solar power. It would "have essentially zero emissions" with no toxic elements coming out of the factory. Even more, battery recycling would be built in. Just how big will the production be? "Comparable to all lithium-ion production in the world -- in one factory." But Tesla isn't ready to make a big announcement yet, Musk said. For now, it's just speculation.

The need
Even at a rate of the 40,000 vehicles per year, which doubles Tesla's current annualized rate, Tesla is far short of the production capacity it will need when it launches the company's gen III affordable vehicle. Musk has said Tesla hopes to begin shipping several hundred thousand cars per year once it brings the lower-cost car to market. Tesla stated in a corporate presentation in September that it could launch this lower-cost, smaller sedan as early as 2016.

There's no way around it: Tesla needs a giga factory at some point. With plentiful raw materials, the question isn't whether or not it will happen, but whether Tesla or one of its suppliers will take ownership of the project?

Either way, Musk's confidence is a relief for Tesla investors. That said, hundreds of thousands of gen III vehicles per year are already priced into the company's stock -- so Musk's confidence isn't anything to get excited about, either.

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  • Report this Comment On November 23, 2013, at 10:06 AM, drax7 wrote:

    Totally disagree with your valuation assertion and what is discounted. This firms mkt cap will exceed 100 billion before and when Gen 3 production starts.

  • Report this Comment On November 23, 2013, at 10:52 AM, oTeslaManiax wrote:

    Once the whole fire episode is over, Tesla will resume its rise. In terms of pure EV, there is no competition for the next couple of years at least. By that time, the model X will be out and also the model E will be revealed. Tesla battery will cost 1/4 of the competition. There will be no way they can compete at the same price. The giga factory will be built by Tesla. It is part of their strategy. I think Musk will cut the deal with a partner in early 2014. In my opinion, when the giga factory is built, it is the beginning to the end of ICE cars...

  • Report this Comment On November 23, 2013, at 11:23 AM, sabebrush6 wrote:

    I like my rompy sounding hot gas engine car. Won't sell it no matter what. I'm not interested in sliding by like a cloud in the night. Love that dual mode exhaust tune.

    Electrics are good, just not for me.

  • Report this Comment On November 23, 2013, at 11:28 AM, Sam026 wrote:

    Drax7: What are you smoking?

    $100B market cap for Tesla on projected 50,000 unit sales per year, little to no profits and only future dreams to market?

    In other words, you're saying Tesla will have a greater market cap then GM or Ford and just about every automobile company in the world except Toyota.

    No way! IMHO your rose colored glasses need a different prescription.

  • Report this Comment On November 23, 2013, at 11:56 AM, lem2004 wrote:

    Sam026:I agree some of these people are so blinded by Musk's BS that they can't see past their nose.

  • Report this Comment On November 23, 2013, at 12:00 PM, lem2004 wrote:

    sabebrush6:There is nothing like the sound of a hot V8.It gives me goose bumps every time I hear one.

  • Report this Comment On November 23, 2013, at 12:38 PM, ashaskevich wrote:

    Unless gasoline goes to $1.25/gallon and vehicles get 40mpg in the city, then electric is the future. At 11cents kilowatt it is far cheaper to fill your electric vehicle with energy than gasoline.

    This is not BS, this is simple economics. Electricity is far cheaper than gasoline engines. As electric vehicles get cheaper than gasoline engines will become history.

    The problem that Tesla Motors has right now is too much demand for their cars. There are not enough batteries to make the vehicles. Demand is not going away. This reminds me of the days when Microsoft was dismissed as a fad and Apple was also dismissed as BS. Tesla will be a monopoly like Microsoft and Elon Musk is more like Bill Gates than Steve Jobs.

  • Report this Comment On November 23, 2013, at 1:58 PM, dannystrong wrote:

    … and the fool's love affair with Telsa goes on. Musk is just saying anything to try an prop up his stock price and get people to get the burning cars.

    Muskophiles should sometimes look at how many people die every year (mostly in the DR Congo) scraping cobalt out of the ground for his sanctimonious pronouncements about the rightness of their product. Or Nickel. Or Lithium. Waving your hands and calling it "supply" is rather more the attitude of a grubby capitalist exploiter, isn't it?

    Elon Musk will not change the world, no matter how loud he shouts, and no matter how many flattering articles the fool runs. Electric vehicles might make the owner feel superior to his neighbors, but they are not the solution. Batteries are by far the least efficient method of storing energy for vehicles. To misquote Rundstedt (which is not easy :-), "make hydrogen, you fools."

  • Report this Comment On November 23, 2013, at 3:37 PM, thegreentreefrog wrote:

    Cars owned and operated by left wing liberals that have no taste for fine cars anyway.A great combination for Tesla.This car is so far ahead of its time ,its halfway to the junk yard.

  • Report this Comment On November 23, 2013, at 5:50 PM, luckyagain wrote:

    So Lithium is only 1% to 2% of the weight of the battery. Interesting. I see that throwaway lithium batteries in stores, so the cost of lithium must not be a problem. My guess is that if he decides to build a mega-battery factory, he will partner with Panasonic in some fashion. Only time will tell how this EV thing will go.

  • Report this Comment On November 23, 2013, at 6:01 PM, peterwolf wrote:

    I notice it doesn't mention where this new factory will be. Want to guess where it WON'T be? California. Want to guess where it WILL be? Texas. This seems to be the pattern of high-tech startups from California. Get your start in California, but when you have to REALLY make a business out of the thing, you leave the anti-business lunatic asylum of California for the pro-business, sanely run state of Texas. Apple is doing it. So is Google. CISCO and INTEL long ago said they're spending no more money in California. So here's betting that Musk announces Texas as the location for his factory.

  • Report this Comment On November 23, 2013, at 7:25 PM, Jason87467 wrote:

    Elon Musk is one heck of a BS'er. I predict Tesla will go under when his competition really starts competing and that taking place today.

  • Report this Comment On November 23, 2013, at 7:41 PM, kca124cain wrote:

    Musks latest comment about how the "rear wheel drive" Tesla S is great for winter driving. This guy is either nuts, or the best liar in the world.

    Even if they increase the clearance, it will still plateau on just a few inches of snow. Real wheel drive, while good for dry conditions is absolutely the worst for snow.

    Maybe he meant winter in So.Cal.

  • Report this Comment On November 23, 2013, at 7:43 PM, kca124cain wrote:

    oTeslaMania, what kind of drugs are you on. This company has never made a real profit and with a NEGATIVE 95% EPS, there is no profit in sight.

  • Report this Comment On November 23, 2013, at 7:54 PM, kca124cain wrote:

    ashaskevich, I can not recall when Microsoft was dismissed as a fad, or when Apple was either. While there were some touch and go times with Apple, they were always highly regarded and we did not get a line of absurd lies from their CEO

  • Report this Comment On November 23, 2013, at 8:40 PM, skreusz wrote:

    Musk has a big problem. He is way out front with a great product but, like the SONY Betamax, having a superior product doesn't guarantee success.

    The problem is battery replaceability. Were LI-Ion cells as easily changeable as filling a car with gas or hydrogen , it might make sense. Until every other car firm agrees with Musk that LI-Ion is the way to go and they abandon H2 fuel cells, musk will be fighting a rear guard action. H2 is so cheap and so easy to make and so safe, that, if I were Musk, I'd prepare a fallback plan to switch his cars to Fuel Cells or to use both Li Ion plus fuel cells-it's all electricity.

    Ever more manufacturers are claiming to be ready to adopt H2 fuel cells. This doesn't make the S a bad car, but it makes it only one of a bunch of superior electric cars , each of which has it's own ability to travel far and get a replacement charge.

    Cars didn't become the consumer icons they are in the USA until nationwide gasoline filling stations spread through the country l;ike contagion. If hydrogen filling stations can do the same; it will make the Tesla S into a luxury specialty car on its way to becoming a collectible.

  • Report this Comment On November 23, 2013, at 11:02 PM, rotorhead1871 wrote:

    the battery is a horrible idea, it should be a fuel cell. li batteries on this scale are a horrible idea, super consumptive of natural resources, take forever to charge, very expensive to manufacture, and when they deplete, very expensive and messy to render....BATTERIES are not a PRIMARY energy source.....never have been, never will be. FUEL CELLS ARE THE FUTURE...

  • Report this Comment On November 24, 2013, at 9:24 AM, hab wrote:

    I'm hoping Tesla doesn't get lured into manufacturing its own batteries to deal with short term production issues. Part of the brilliance of Musk's strategy is that Tesla's able to tap into the fierce competition in the battery industry and ride the wave of innovation to dramatically lower costs and improve performance, without having to spend a dime on R&D in this area. There are enough other areas where Tesla needs to continue to innovate in order to remain ahead of well-funded but slow-witted competitors. That's where their time and money should be going.

    That's how he'll get to a mid-priced Model E or a Model S that will go 1,000 miles to the charge - not by gaining temporary production efficiencies while being locked in to quickly outdated factories.

    And by the time the traditional auto industry figures out that the Tesla is a different way of thinking about cars - a blend of hardware, software and cloud integration - and not just a traditional car with fun apps, Tesla should have an extremely solid position in the industry.

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