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

Tesla Motors Gigafactory could be at risk of never getting off the ground. Here's what you need to know.

Apr 23, 2014 at 10:33AM

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.

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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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Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends SolarCity and Tesla Motors. The Motley Fool owns shares of SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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