5 Incredible Opportunities Attached to Tesla Motors' Gigafactory

Will the wonders of Elon Musk never cease to amaze us?

Known for his industry-challenging ideas, Musk unveiled perhaps the crown jewel in his attempt to revolutionize the auto industry as we know it by announcing, just a little over a week ago, his company's intentions to build a 'Gigafactory.'

The way Musk envisions it, this Gigafactory has industry-changing potential. The goal, according to a blog post from Tesla Motors (NASDAQ: TSLA  ) is to build a large-scale battery manufacturing facility, in cooperation with partners, to "achieve economies of scale, minimize costs through innovative manufacturing, and reduction of logistics waste." 

A deeper examination of the Gigafactory is provided by Tesla (link opens a PDF), and the goals being set are nothing short of lofty. In 2013, there were less than 35 GWh/year of production put out by all battery cell developers combined! By 2020, Tesla's Gigafactory is expected to be producing 35 GWh/year of production annually by itself! Furthermore, Tesla anticipates, with its Model S sedan, Model X SUV, and economical Model E, to be producing some 500,000 vehicle annually by 2020, which would be up markedly from the 35,000 it's forecasting in 2014.


Source: IIT Takeshita via Tesla Motors. 

What Tesla has proposed here isn't a whimsical flash-in-the-pan idea -- it's going to happen. The question really should be, can it succeed? Despite being short shares of Tesla Motors at the moment in my personal portfolio, I do see a number of opportunities that this Gigafactory could offer Tesla which would be incredibly positive for the electric vehicle industry and the company itself. On the other hand, this utopian idea isn't without its own unique risks.

Today, we're going to look at five opportunities that I believe have the potential revolutionize Tesla. Tomorrow I'll cover those five terrifying risks that could also cause this utopian dream to come crashing down.

In no particular order, these five opportunities are:

1. Cheaper batteries = cheaper cars
The most obvious benefit of building a factory capable of mass-producing lithium-ion batteries quickly and cheaply is that it'll drive the cost for EV battery packs down significantly and make Tesla's EV's more affordable.

Source: Tesla Motors.

One of the biggest drawbacks of the Model S is its current price point, which begins around $70,000 and works its way up. Put simply, a majority of the population is priced out of owning a Model S. However, more efficient and streamlined production will, according to Tesla's estimates, reduce its battery pack cost/kWh by greater than 30% by the time the Model E is introduced in 2017. This means more attractively priced EVs, and possibly even lighter EVs with more space if capacity levels are improved through innovation.

2. Diversifies Tesla's revenue stream
Another important aspect of the Gigafactory is it could move Tesla beyond just being an auto manufacturer. If Tesla can make good on its promise to efficiently produce lithium-ion batteries at an accelerated pace relative to its rivals, it would hold a competitive edge that could garner it orders from other automotive companies or the energy industry.

The benefit here would be that the auto industry is naturally cyclical, but the energy sector tends to see relatively stable demand in expansionary or recessionary economies. By expanding Tesla's economic moat into LI-production Tesla may be able to weather a recession far better than its peers through revenue stream diversification.

3. Spreads the costs of the factory build-out beyond just Tesla
Tesla is being smart about its venture into an LI-battery factory and understands that two or more brains is going to be better than one. The company hasn't exactly announced a development partner as of yet, but rumor has it that Panasonic (NASDAQOTH: PCRFY  ) could be in the lead, since it's the current partner for the battery going into its Model S.

Ultimately, Tesla pegs the total capital expenditures of its factory at $4 billion-$5 billion through 2020, with Tesla expecting to share these expenses with its partners. Obviously this means giving up some profit, but it also means not having to shoulder the burden of potentially backbreaking costs. Think of this as Tesla's way of combining its superior EV knowledge with the superior LI-battery technology knowledge of a partner, or number of partners, and splitting the costs, and possible profits, down the middle. 

4. Reinforces a reliance on alternative energies
One of the more notable aspects of the Gigafactory is that it'll be completely powered by solar panels and wind farms in one of the four states (Arizona, Nevada, New Mexico, and Texas) currently in contention for the Gigafactory's location. This immense solar and wind project will only help to reinforce the importance of lower-cost alternative energies, will push forward their real-world viability, and could also serve as a nice jumping off point for Elon Musk's SolarCity (NASDAQ: SCTY  ) , which may be called upon to provide the panels for this grandiose project.

Source: U.S. Air Force, Wikimedia Commons.

If there was any shred of doubt that Tesla is going to appeal to the socially conscious investor, its plans to power the Gigafactory through solar and wind farms sealed the deal. And let's not also forget that solar and wind also have lower costs over the long run, meaning once the initial hefty costs are out of the way, the Gigafactory should be far less costly on an energy usage basis than its rivals.

5. Remains first-in-class
Finally, the Gigafactory would allow Tesla to maintain its rite of passage as the first-in-class EV pioneer. As my Foolish colleague and auto analyst John Rosevear noted in December, Tesla was the first company to successfully introduce a new auto brand in 50 years. Its electric range on the Model S is far superior to its peers, and it's able to utilize that comparative first-in-class advantage to its benefit through incredible pricing and branding power.

Although Tesla wouldn't be the first LI-battery manufacturer by any means, its output projections from the Gigafactory would put its production potential so far ahead of current LI-battery factories that it's not even funny. This first-in-class way innovation could afford Tesla big margins and remarkable pricing power.

Tomorrow we'll look at five risks which are generally flying under-the-radar that have the potential to turn the Gigafactory into a monumental failure.

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Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 08, 2014, at 10:38 PM, CAGriffinX2 wrote:

    Gee, I can't wait to read all the negativity coming tomorrow from this "Short TSLA" author. I understand this is a high-risk stock, but I just hope that Tesla's potentially negative points are respectfully written, and are not just Tesla FUD. I will say that today's piece was well-written and factually accurate.

    IMO, so far, Elon Musk has demonstrated very well that he will typically over-deliver on his goals. With Tesla, SpaceX, and Solar City, he has done what many people said was impossible. He is a self-proclaimed perfectionist.

    I truly believe he has more major tricks already up his sleeves (like this Gigafactory), which will put together even more pieces of his giant puzzle for all of us to see. I would not bet against this man.

  • Report this Comment On March 09, 2014, at 9:49 AM, davep007 wrote:

    Future Headlines:

    Telsa representatives met with UPS today to discuss electric delivery vehicles. UPS in the past had contracted with a AMP for a small quantity of electric delivery vehicles but they lacked range and reliability. Tesla has been working a prototype delivery vehicle that has a 200 mile range which UPS representatives are very excited about. UPS representatives explained that a mere 150 miles per day is more than adequate for most of their routes while 200 mile range is a bonus and will help convert most of their rural routes as well. Telsa is bringing an added feature to the deal with Solar City partnering with the charging stations at the UPS depot centers. Tesla representatives are excited that with the combination of solar and battery storage the vehicles will be mostly free to operate except on cloudy days. The charging stations combined with the roof top area on the UPS centers will offer a huge area for the Photovoltaic panels needed to charge batteries during the day while the vehicles are making deliveries. UPS and Telsa are excited about the maintenance of the vehicles over the previous ICE models citing huge savings on Brakes, Clutches, engines and other expendables. The electric models will prove themselves as a huge savings to the UPS brand. Prices of TSLA and UPS rose today on the news that they will both gain by this venture. The first test sites will be Florida, Texas, California and Nevada. FedEx has also been reported as in discussions with Telsa. Elon reported that a truck plant will be built on the same property as the Giga-Factory. Elon has started the process for a convertible offering to pay for the truck plant. Elon was excited that the marriage with UPS will pave the way for Tesla to break into the truck market. Tesla will focus on the UPS vehicle first and foremost but Elon was excited to know that with the truck factory that they would also be working on a Pickup style truck for the masses.

  • Report this Comment On March 09, 2014, at 11:27 AM, nonqual wrote:

    The author ignored the mega-opportunity:

    Supplying batteries for inventory at the Tesla fast swap "stations."

    How quickly the hoi polloi forget "fast or free."

  • Report this Comment On March 09, 2014, at 3:18 PM, SteveTG3 wrote:

    Translation of article:

    "I'm short. Before I pump out my FUD tomorrow while the market is open (you know what I referred to as 5 "terrifying" risks), while the market is closed, I'm going to imply that I am fair and balanced by listing 5 positives about the Gigafactory. Of course, I will mention nothing of the positives that sent the stock up 20% after Morgan Stanley's Adam Jonas wrote about them."

    fwiw, the positives Sean ignored were the potential for the energy storage business to disrupt the utility business via grid storage, and making renewables markedly more attractive by smoothing out peaks and valleys of renewable energy production.

  • Report this Comment On March 10, 2014, at 6:03 AM, TurbulentTime wrote:

    Homebuilders will be pitching the benefits of having Li-ion batteries as backup power with higher concentration and power. Housing markets are still on the recovery mode, and this will greatly benefit Tesla Motors. Not to mention that solar power companies will be buying boatloads of Li-ion batteries from Tesla Motors also for they will be of the lowest costs to purchase.

  • Report this Comment On March 10, 2014, at 6:07 AM, TurbulentTime wrote:

    People who like to worry always will have unlimited reasons to worry. It is like having your own child and raising him/her up, there are a lot of risks involved. Your child can get killed by a car while walking across the street; your child can learn bad habits from his/her bad classmates; your child may never succeed in school or job. Then, are you to not 'start-up' the life of your child and continue to help him/her grow? So much worry, I bet these short-sellers may never have children since they worry and worry and worry forever.

  • Report this Comment On March 10, 2014, at 6:09 AM, TurbulentTime wrote:

    The greatest companies are the ones with wonderful CEOs who see the opportunity, meet face-to-face with problems, find great solution for existing problems, do something which other think are 'impossible' to do.

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