Could This Challenge Derail the $5 Billion Tesla Motors Inc. Gigafactory?

One major challenge lurks in the shadows of Tesla Motors (NASDAQ: TSLA  ) planned $5 billion lithium-ion-battery factory, and it's not funding, location, or resources. For Tesla, the bigger issue will be in finding a battery supply partner like Panasonic to get on board. Tesla had initially suggested that Panasonic would be one of its strategic partners in building the plant. Panasonic, after all, is the main supplier of battery cells for Tesla Motors' all-electric cars today.

Source: Tesla Motors

However, earlier this month, Panasonic's president, Kazuhiro Tsuga, told Bloomberg that Tesla's Gigafactory presented considerable investment risks. "Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger," he said. This could be a disastrous setback for the EV maker, particularly as Tesla has outlined a specific time frame for its Gigafactory build out.

A troubling start
Building a multibillion-dollar Gigafactory (link opens a PDF) from the ground up would be a game changer for Tesla. Not only would it create an upwards of 6,500 new jobs and contribute billions to the local economy, but it would also be capable of producing more lithium-ion batteries annually than were produced worldwide last year. Additionally, the lithium-ion factory should lower the cost per kilowatt of the company's battery packs by more than 30%, according to Tesla.

This last point is important because it's likely one of the key reasons why Panasonic and other battery suppliers are reluctant to collaborate with Tesla. And can you blame them? A factory of this magnitude would enable Tesla to manufacture battery cells cheaper than the ones Panasonic currently sells them for to Tesla.

Furthermore, as analyst Sam Jaffe of Navigant Research explains: "Let's imagine you're a battery manufacturer and your big buyer comes to you and says, 'I want you to help me build a factory so I can make a product that you make today and cut you out of the supply chain," he said. When looked at from this perspective it is hard to imagine any battery maker getting onboard.

Where to from here?
Locking down a battery supply partner such as Panasonic is important because it would afford Tesla access to Panasonic's supply chain and help reduce risks, according to a Wedbush Securities analyst. However, for now, Tesla Motors can likely count on SolarCity (NASDAQ: SCTY  ) as one of its joint-venture partners. This is true for a number of reasons.

For starters, Tesla's CEO Elon Musk has said the Gigafactory will be mostly self-sustainable, thereby heavily relying on solar and wind power. This makes SolarCity a clear fit for the undertaking.

Also, we already know that SolarCity and Tesla can work together, as they're currently involved in other joint ventures. Tesla provides the sun power company with lithium-ion cells for its solar energy storage systems. SolarCity, on the other hand, supplies the solar panels used to power Tesla's Supercharger stations throughout the world. Then there's the issue of family.

As you may know, Tesla's Musk and SolarCity chief executive Lyndon Rive are cousins. Not to mention, Musk is also one of SolarCity's majority shareholders. Together, these factors leave little doubt that SolarCity will step up to the Gigafactory plate when the time comes. Nevertheless, it will be interesting to see how Tesla proceeds in its search for a cell supplier to go in on the deal. Ultimately, driving down the costs of its battery packs is critical for Tesla if it hopes to reach its goal of producing 500,000 cars per year by 2020 -- and at this point that means getting its Gigafactory off the ground.

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  • Report this Comment On April 23, 2014, at 11:06 AM, Urpani wrote:

    I can't agree with your argument. In my opinion, Panasonic would rather join in with Tesla on the Gigafactory then not as Elon Musk would still go ahead with his plan. If Panasonic don't join, most probably Mr. Musk would seek another partner which would probably be one of Panasonic's competitors. Panasonic would lose a big customer and would also lose out on being involved in the world's largest lithium-ion factory. Why would they do that ? I might be wrong but it's my opinion.

  • Report this Comment On April 23, 2014, at 11:14 AM, weaponz wrote:

    Panasonic is pretty much confirmed at this point.

    The biggest hesitation on Panasonic's part is that they weren't doing very good financially. Tesla is pretty much what got Panasonic profitable again.

    But to Panasonic this is pretty much an ultimatum. Even with their pockets tight due to their financial struggles, if they refuse, Samsung would gladly jump in. To Samsung who has been trying to court Tesla away from Panasonic, a few billion is chum change.

  • Report this Comment On April 23, 2014, at 11:16 AM, justanallusion wrote:

    I do not understand how Mr. Jaffe of Navigant managed to contrive the rationale that the goal of Tesla was to "cut" ties with Panasonic, the battery manufacturer who they are not only currently contracted with for the supply of the batteries that power the Tesla vehicle lineup and their energy storage facilities, but also wish to partner with on the manufacture of batteries at the planned Gigafactory as a means of reducing cost by way of, apparently, ramping up production and NOT cutting Panasonic out of the equation altogether...Would anyone care to explain?

  • Report this Comment On April 23, 2014, at 11:24 AM, drax7 wrote:

    Tesla could buy a battery manufacturer and use that to ramp up its production.

    Buy a substantial interest in Panasonic is a visible solution.

  • Report this Comment On April 23, 2014, at 11:28 AM, rocket22man wrote:

    I have little doubt Panasonic will come on board. All they're doing is negotiating the price. Of course the investment risk is larger, and Panasonic wants a bigger piece of the pie.

  • Report this Comment On April 23, 2014, at 12:21 PM, junger74 wrote:

    Here are the comments of the CEO of Daimler who owns a stake in Tesla,

    Mr. Zetsche, in a meeting with reporters at the Beijing Auto Show on Sunday, expressed skepticism about the giga-factory project, suggesting now isn’t the time to plow money into producing lithium-ion batteries.

    “A question is, when do you realistically see the next-generation batteries,” Mr. Zetsche said. “Lithium air, lithium sulfur? No one has the answer to the next generation.”

    There are so many battery technologies in development that serious companies will not commit $5billions to a particular one right now.

  • Report this Comment On April 23, 2014, at 1:04 PM, LikeTesla wrote:

    I think the comments above are fairly spot on! Since Tesla's stated goal is to reduce the cost of battery pack so costs inherit in Gen III and presumably Model S and X are reduced so that Tesla EV is a no brain er for most anyone that implies limitations on profit related exclusively to battery cell as well. Something that would need to be agreed upon in any partnership! Some means to control risks, enable flexibility, and remain adaptable to changes in technology over time.

  • Report this Comment On April 23, 2014, at 2:20 PM, s2dbaker wrote:

    Q: Could This Challenge Derail the $5 Billion Tesla Motors Inc. Gigafactory?

    A: No.

  • Report this Comment On April 23, 2014, at 3:13 PM, Beckler wrote:

    @junger74

    Who cares what the CEO of Daimler thinks about it. With that sort of thinking, nothing is ever done. New battery breakthroughs are *always* just around the corner.

    That's the thing about Musk/Telsa - he just does whatever he wants and ignores the naysayers. His strategy has worked spectacularly well so far.

  • Report this Comment On April 23, 2014, at 3:17 PM, DoubleFelix wrote:

    "As you may know, Tesla's Musk and SolarCity chief executive Lyndon Rive are cousins. Not to mention, Musk is also one of SolarCity's majority shareholders. Together, these factors leave little doubt that SolarCity will step up to the Gigafactory plate when the time comes. "

    Are you kidding me? These guys are all about using OTHER PEOPLE'S MONEY. They aren't going to put their OWN MONEY into this thing.

    And at this point, nobody is walking down the aisle to hand this character 30 million $100 bills.

  • Report this Comment On April 23, 2014, at 3:34 PM, JRUwing wrote:

    I'm not sure who this article is meant for, Musk already announced the details will be provided in June or July. @DoubleFelix, I think it is the other way around, Musk risked all of his own money in Tesla and SpaceX.

  • Report this Comment On April 23, 2014, at 5:14 PM, TheeMadCatte wrote:

    The size of the investment is risky.

    What happens if they build the factory and then:

    1. Tesla goes bust because of some other factor

    2. Lion batteries fall out of favor because of some other better tech

    Building up that much capacity has to be scary for anyone (except for Tesla that pretty much has nothing to lose from it).

  • Report this Comment On April 23, 2014, at 7:55 PM, Johnny04 wrote:

    Panasonic is in a very difficult spot. It has to ramp up production to meet Tesla's current contract, but after the gigafactory opens, it has to scale down.

    If it partners, it has to cough up billions, but as a partner, maybe it can work it out so that the gigafactory will only product additional batteries and Panasonic doesn't have to scale down. And if Tesla succeeds, more car companies will want to produce electric cars and the demand for batteries will increase. So again, Panasonic may not need to scale down.

    Either way the gigafactory will happen because if Elon can build a rocket company from the ground up, a battery factory would be no problem. In fact, he would not need Panasonic's supply chain since he wants to use supplies in north America.

    As for concerns about "when do you realistically see the next-generation batteries.” Elon always seems to be one step ahead of the game, so if he continues to do so in his battery company, I don't think it's much of a risk. You can either establish the next-generation batteries or wait for someone to establish it and follow, but I don't think follow is a good option here.

  • Report this Comment On April 23, 2014, at 8:20 PM, Jason87467 wrote:

    Elon Musk, the gambler, has been running the Tesla car company on hype and when the big auto builders comes out with their Tesla busters, you will see the Tesla stocks take a dive......and then, you can kiss Tesla goodbye.

  • Report this Comment On April 23, 2014, at 8:31 PM, DoubleFelix wrote:

    @JRUwing "Musk risked all of his own money in Tesla and SpaceX. "

    SpaceX was practically no risk to Musk. It was a structured buyout of NASA technology with guaranteed NASA contracts. As close to a sure bet as anybody will ever get. They fluff up the picture with the Burt Rutan gee-whiz stuff, but that is a sideshow. The business model is outsourcing NASA programs using the best "Socialize the risks - Privatize the profits" principles.

    Tesla is funded mostly from stock offerings, not from Musk's wallet. It is always other people's money. I'm not saying there is anything illegal, unethical, or even improper. That is how the 1% play the game, and he is good at it.

    But instead of hero worship, we should recognize it for what it is.

  • Report this Comment On April 23, 2014, at 10:25 PM, CrazyDocAl wrote:

    It's been stated over and over again that Musk's plan of reducing the price of Lion batteries is just wishful thinking. The current factories have already reached the point where expanding further doesn't see any reduced costs in production. With that knowledge companies are not going to sign onto this factory.

    If a new technology comes out that would change the game but for now I don't see Panasonic jumping on board. They have seen too many battery companies already fail in the recent years.

  • Report this Comment On April 23, 2014, at 10:37 PM, nonqual wrote:

    " Tesla provides the sun power company with lithium-ion cells for its solar energy storage systems. SolarCity, on the other hand, supplies the solar panels used to power Tesla's Supercharger stations throughout the world."

    No details of these arrangements are disclosed in either company's SEC filings. Most SCs (and all international ones) are installed by local contractors. Solar City is a finance operation with some installation capability in certain locales; it doesn't make solar panels.

    Two profitless companies supporting each other. What more could you ask for?

  • Report this Comment On April 24, 2014, at 1:34 AM, btc909 wrote:

    This article is funded by Big Oil.

    It's risky, DON'T DO IT!!!

  • Report this Comment On April 24, 2014, at 5:15 PM, ckgod wrote:

    There is also a secret weapon which is Hon Hai/Foxconn. It's a $100 billion company with the best manufacturing know how in the world. It is known to most people as the iPhone assembler but it does much more than that. It has been supplying electronic parts (e.g. the 17" screen) to Tesla already. It's billionaire CEO is said to have very good business and personal relationship with Elon Musk too.

    Don't be surprised if it plays an important role in the gigafactory. Remember you heard it from here first.

  • Report this Comment On April 24, 2014, at 5:19 PM, ckgod wrote:

    @ DoubleFelix You're of course totally wrong. Go watch the video (you can find it on youtube or Netflix) "Bloomberg Risk taker: Elon Musk" to find out how he risked everything he got (~$200M) down to the last penny in 2008 to make Tesla and SpaceX what they are today.

  • Report this Comment On April 24, 2014, at 7:09 PM, luckyagain wrote:

    Building this battery factory is certainly risky but only by taking big risks can a new industry be formed. Will scaling up the battery factory really make lithium ion batteries much cheaper? Eldon believes that it will. If he succeeds then he will have a huge jump over every other EV manufacturer in the world. The other major auto companies will be further behind and playing catch up is really hard and very expensive to do.

  • Report this Comment On April 24, 2014, at 8:53 PM, ih8aloss wrote:

    Maybe they should look into a quantum dot capacitance battery. QuantumScape is quietly gearing up their new manufacturing facility for three shift coverage.

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