Tesla Motors, Inc. Announces Deal With Panasonic on the Gigafactory

Tesla Motors (NASDAQ: TSLA  ) reports earnings today after market close. Among a handful of storylines that will be closely watched, the company's comments regarding its planned Gigafactory are likely to take center stage -- especially after it was announced today that Panasonic and Tesla have finally signed an agreement for building the factory. Here's what you need to know headed into the report.

A Tesla Supercharger station outside of the company's Fremont, Calif., factory where it manufacturers its vehicles. Image source: Tesla Motors.

What is the Gigafactory?
The primary goal for Tesla since the company went public is to eventually produce a compelling mass-market electric vehicle. That vehicle, Tesla says, is now three years out. But there's one major problem: There is currently not enough lithium-ion production to supply the company with enough battery packs to make a car for the masses. Even worse, there isn't even enough production scale to manufacture the battery packs cheap enough to make an affordable electric vehicle with meaningful range marketable.

The solution to this production problem is Tesla's planned Gigafactory, a facility "designed to reduce cell costs much faster than the status quo and, by 2020, produce more lithium ion batteries annually than were produced worldwide in 2013," as Tesla said in the blog post announcing the factory.

With the help of unprecedented scale in lithium-ion battery production, Tesla says it conservatively estimates that it can cut battery costs by more than 30% once the factory goes live in 2017 and starts building the packs to support its more affordable mass-market vehicle.

Rendering of Tesla's planned Gigafactory. Image source: Tesla Motors.

And here is the main reason investors are so interested in Tesla's Gigafactory. By 2020, Tesla believes it can ramp up production to 500,000 vehicles per year. That makes Tesla's 2014 guidance for 35,000 deliveries look paltry in comparison.

Tesla says the factory is going to require around $4 billion-$5 billion dollars of investment, $2 billion of which will be invested directly by Tesla, with the rest shared by Gigafactory partners.

Panasonic finally signs up
Tesla's biggest partner in the Gigafactory will be Panasonic. At first, the electronic product manufacturer showed some skepticism toward Tesla's project, even though it was already Tesla's primary supplier of batteries. Though it's very possible that the skepticism was only a mask to boost Panasonic's negotiating power with Tesla in the deal.

Battery pack for Model S. The battery is built into the floor of the vehicle. Image source: Tesla Motors.

But Panasonic is now officially on board, and the company will play a major role in Tesla's Gigafactory: 

Tesla will prepare, provide and manage the land, buildings and utilities. Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval. A network of supplier partners is planned to produce the required precursor materials. Tesla will take the cells and other components to assemble battery modules and packs. To meet the projected demand for cells, Tesla will continue to purchase battery cells produced in Panasonic's factories in Japan. Tesla and Panasonic will continue to discuss the details of implementation including sales, operations and investment.

Panasonic will occupy about half of the planned manufacturing space in the Gigafactory, the report also says. The rest will be occupied by key suppliers and Tesla's module and pack assembly operations.

Tesla reiterated its goal of reducing costs in the report, saying that the "Gigafactory is being created to enable a continuous reduction in the cost of long range battery packs."

Tesla chief technical officer and co-founder JB Straubel said of the products the Gigafactory will enable: "Not only does the Gigafactory enable capacity needed for the Model 3 but it sets the path for a dramatic reduction in the cost of energy storage across a broad range of applications."

Knowing execution on the Gigafactory is absolutely paramount to Tesla's success, the company has previously said that it is breaking ground on multiple sites before it chooses the final location at the end of the year. Tesla is hoping this strategy will speed up the construction process and reduce the risk of delays.

It is possible that Tesla may have already broken ground on at least one site. Investors will certainly prod Tesla CEO Elon Musk during the call to see whether or not this is the case.

Model S outside of Tesla's headquarters in Palo Alto, California. Image source: Tesla Motors.

Further, Musk said at the Tesla 2014 annual shareholder meeting about a month ago that even Panasonic now believes a 30% reduction in the cost of battery packs by 2017 is possible with the Gigafactory. 

Successful execution on Tesla's Gigafactory would obviously be not only a game-changer for Tesla, but also for the entire auto industry.

Tune into the earnings call today at 5:30 PM EST here. Download the quarterly letter to shareholders when it is made available after market close here. And for your pre-game, here are the key metrics to watch and storylines to follow when the results are made public.

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Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

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