How do you build enough fully electric Tesla's (NASDAQ:TSLA) to go mass market when the world doesn't supply even half the needed lithium-ion batteries to get started? You build a factory large enough to house all of the earth's current lithium-ion production under one roof. It's a daunting task. But Tesla isn't hesitating. Big aspirations and big bets are commonplace under Elon Musk's leadership. Here's the latest on the company's Gigafactory plans.
The talk about a Gigafactory began during Tesla's third-quarter 2013 earnings call. While Tesla's timeline on the factory was still up in the air, it was able to provide one of the best descriptions of the process to date:
This is going to be a very green factory. There is going to be a lot of solar power. It's going to have essentially zero emissions and there are no toxic elements that are going to come out of this factory and we will build in recycling capability right into the factory. So, old packs would come in one side and get reprocessed as new packs.
With the Gigafactory, battery pack production is entirely vertically integrated so that Tesla can benefit from some massive scale advantages. Tesla explained in a document that further detailed the factory, which it shared with investors after the Q4 results were released earlier this year, that it expects to cut battery pack cost by 30% in 2017. That's the year it plans to begin production of its mass market EV -- the cost reduction would make Tesla's planned affordable third-generation vehicle possible.
Just how capable will the Gigafactory be? Tesla believes the factory will enable it to produce as many as 500,000 vehicles per year by 2020. Comparatively, that would make last year's 22,500 Model S sales almost insignificant.
With Musk speaking about the Gigafactory several times since the Q3 earnings call, new details are surfacing. Importantly, Tesla won't be going at the project alone. Tesla said in its first-quarter earnings call that Panasonic had signed a letter of intent to partner in the factory. And Tesla is going even further to minimize risk of the $4 billion-$5 billion project by planning to break ground on two sites. The rationale? Tesla Chief Technology Officer broke it down for investors in the Q1 earnings call:
I think as Elon has said a few times, for us, it's really critical that we have the first Gigafactory ready on time to supply the sales for Gen three. And that delay, every one-month delay at that point is far more expensive for us than the incremental costs that we may incur up front to kick off two sites at one time.
Most recently, Musk said this week during an on-stage interview at the World Energy Innovation Forum with venture capitalist and Tesla director Ira Ehrenpreis (via San Jose Mercury News) that he thinks Tesla will "probably do better than 30% cost reduction," with battery packs made in the Gigafactory.
Vertical integration, Musk explained in the interview that took place at Tesla's Fremont factory on Wednesday, is key to the cost savings.
You'll have stuff coming directly from the mine, getting on a rail car and getting delivered to the factory, with finished battery packs coming out the other side. The cost-compression potential is quite high if you are willing to go all the way down the supply chain.
While there is certainly risk to the Gigafactory, Panasonic's intent to partner, a plan to break ground at multiple sites, and Tesla's confidence about the effect on cost reduction all incrementally help provide greater conviction that the project will have a successful outcome.
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Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of 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.