Tesla Motors, Inc.'s Gigafactory May Be More Revolutionary Than We Realize

In Tesla's (NASDAQ: TSLA  ) second quarter, the story remained the same. Demand for its all-electric Model S continued to outstrip supply. In fact, Tesla said total demand is growing faster than total supply. And with the Model X SUV just around the corner, which Tesla expects to eventually outsell the Model S, this trend doesn't look poised to change. Fortunately, Tesla has a plan: Gigafactory, to the rescue!

The battery for Tesla's vehicles is built into the floor of the car. With the Gigafactory, Tesla wants to streamline the production of lithium-ion batteries, cut costs, and build at a scale that exceeds total global lithium-ion production levels in 2013. Image source: Tesla Motors.

Even as Tesla breaks ground on the Gigafactory in Reno, Nev., and simultaneously continues to court other states as a potential home to the $4 billion-$5 billion project, the battery factory continues to have its doubters -- particularly related to Tesla's aspirations to scale battery production enough to profitably market vehicles to the mass market.

A closer look at some comments from Tesla, however, shows why battery cost cuts due to the Gigafactory may be more of a sure thing than a lofty goal.

Is a 30% cost cut really possible?
While it's clear that the Gigafactory can help Tesla meet demand for the Model S and the Model X, there is less certainty about whether or not the company will truly be able to successfully and profitably tap into the Gigafactory to support sales of its Model 3, which will sell at half the price. The biggest concern: Can Tesla really cut lithium-ion costs by 30% with the Gigafactory?

Understanding the potential of Tesla's Gigafactory begins by getting one important item, which management has repeatedly emphasized, correct. Thirty percent is not the ultimate goal of lithium-ion cost cuts. Instead, it is the bare minimum that Tesla expects to achieve with the Gigafactory in the first year of Model 3 production.

When Tesla first announced the Gigafactory, it clearly stated in its plans that it expected that battery pack cost per kilowatt hour would be greater than 30% by Model 3 volume ramp in 2017. 

Slide from initial Gigafactory presentation. Image source: Tesla Motors.

Perhaps, however, Tesla is just blindly leading us on? This could have been an argument until Panasonic (arguably more knowledgeable and experienced regarding lithium-ion production than any company in the world) admitted that a 30% reduction by 2017 was, indeed, a conservative prediction. And Panasonic is now putting its money where its mouth is, announcing a deal to partner with Tesla in the Gigafactory in July. Panasonic's investment is considerable; during Tesla's second-quarter conference call, CEO Elon Musk said that he expects Panasonic to invest as much as $1.2 billion-$1.6 billion of the $4 billion the company expects to spend on the factory by 2020.

Surprising confidence
Not only does Tesla view 30% cost cuts to its batteries as conservative, but Musk said during the second-quarter call that he would be "disappointed if it took us 10 years to get to $100 a kilowatt-hour pack." Since Tesla hasn't shared exactly where its costs are today, it isn't clear what percentage of a cut that $100 per kilowatt hour is to today's cost, but as Deutsche Bank analyst Rod Lache noted during the call, it is low enough for Tesla's electric vehicles to reach cost parity with -- and possibly even improve upon -- the cost of an internal combustion vehicle.

The dialogue that followed Musk's bold prediction during the call showed just how sure Tesla is in the future cost cuts of lithium-ion batteries.

Somewhat taken aback by Musk's confidence, Lache commented, "That's a pretty big statement."

But Musk disagreed: "Seems pretty obvious to me."

Tesla chief technology officer JB Straubel chimed in, explaining that even though company is tracking potential breakthrough chemistries for lithium-ion batteries, even these aren't factored in to the path that Tesla sees to reduce its battery costs enough to economically produce mass-market, fully electric vehicles.

Tesla's Model S, with a starting price close to $70,000, isn't affordable for most U.S. citizens. 

"But to get to -- to realize the Giga Factory and those cost targets, we don't need some fundamental breakthrough in chemistry and material science. Those things are pretty well understood in front of us," Straubel said.

So, not only does Tesla expect to exceed a 30% cost reduction during the first year of production for the Model 3 in 2017, but it also is baking in plenty of conservatism in this forecast. In other words, Tesla believes it isn't shooting for the moon with the Model 3 and that, instead, this mass-market vehicle is completely realistic.

Of course, there is still room for doubting. But Tesla and Panasonic's growing confidence certainly makes a good case for the enormous potential of the Gigafactory.

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Read/Post Comments (8) | Recommend This Article (11)

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 August 20, 2014, at 3:25 PM, LithiumClay wrote:

    Great article, need more talk on Western Lithium.

  • Report this Comment On August 20, 2014, at 3:46 PM, Jim5437532 wrote:

    There needs to be more effort and consideration put into reducing the amount of toxic and hazardous materials used in Tesla's batteries.

    Tesla fan boys try to portray heavy metals and toxic chemicals as "green". Many people that tout themselves as environmentalists, are in truth greedy polluters.

    According to TESLA, the high voltage battery (lithium-ion battery) can release toxic vapors; including sulfuric acid, oxides of carbon, nickel, aluminum, lithium, copper, and cobalt.

    A few examples of ignorance and lies a Tesla shill has spammed:

    WeaponZero "There are no toxic heavy metals in a lithium ion battery"

    WeaponZero "lithium ion batteries do not pose risk if they are land filled"

    WeaponZero "lithium ion batteries are non-toxic"

    WeaponZero "As I mentioned before, heavy metals are not a bad thing just because they are heavy metals. Lithium ion batteries are considered non-toxic. The CEO of BYD even drank one".

    WeaponZero "if a battery is discharged and not being used, even if compacted there is no issue."

    WeaponZero "landfill fires have nothing to do with lithium ion batteries"

    WeaponZero "I have done way more research on manufacturing of batteries and heavy metals than you."

  • Report this Comment On August 20, 2014, at 8:08 PM, ifool100 wrote:

    Jim5437532 - It is not an "us or them" thing. People who like Tesla are not the enemy. Using names such as "Tesla fan boys", "Greedy Polluters" and "Tesla shill" belies your objectivity. The car is impressive (Car & Driver, Consumer Reports, US News "Best Cars") and plans ambitious. Why the vitriol? Aren't those admirable qualities? We know ICE's pollute. They use oil that nations fight wars to own. Oil spills, when we pump and transport it, sometimes with devastating results. Hat's off to anyone seeking a better way. It's great to have discussions, but name calling is never productive.

  • Report this Comment On August 21, 2014, at 1:22 AM, Grendal007 wrote:

    Jim5437532 is a known troll. In fact he has posted hearsay complaints with the NHTSA for a car that he does not own. His campaign against Tesla has gone on for a long time. I suspect he has mental problems. As seen here he is trying desperately to create the fear that Lithium Ion batteries are dangerous. Tell that to everyone that owns a cell phone. They use lithium ion batteries and most people in the USA has one on their person. He does not acknowledge the dangers of oil and gasoline. Those are toxic chemicals and they have accounted for thousands of deaths. Here are just the people that have died on oil fields: http://www.houstonchronicle.com/news/houston-texas/houston/a...

    A google search of gasoline related deaths links to statistics that say that there are 6000 gasoline related fires and 500 people are killed yearly. That isn't connected to the people killed in cars.

    So where is the realistic danger? What is fear based possibilities and what is actually happening? Show me any statistic on someone that has been killed by a lithium ion battery.

    How about that crazy Jim?

  • Report this Comment On August 21, 2014, at 10:22 AM, GaryGoulding wrote:

    Tesla has always been one of my favorite stocks. It’s no surprise that their gigafactory is considered by some to be “revolutionary”. I predict great things from this company!

  • Report this Comment On August 21, 2014, at 2:09 PM, jeffhre wrote:

    Funny thing, if Tesla closed up shop and disappeared tomorrow? Battery prices, following the trends we've seen slowly and steadily "accelerate" for the last two decades, would still be 20% lower, in the time frame that the then discontinued gigafactory would have begun production.

  • Report this Comment On August 21, 2014, at 3:05 PM, sharkflyt wrote:

    I love how right wing nut jobs come on here trying to say that batteries will cause more pollution than gasoline. Not even close! Tesla is on to something revolutionary and big oil and it's shareholders are nervous which is to be expected. The new models are reasonably priced and now that Elon Musk announced the warranty which is the best in the industry there is no doubt Tesla will succeed beyond just plain chat on a board.

    Already people are lining up to buy them because of the range and diversity it brings. The ones I have seen are spectacular and classy beyond any gasoline driven vehicle. It's like the difference between a five diamond restaurant and Mcd's. No comparison. The gigafactory will create a massive amount of jobs and is the biggest game changer in automotive history. TSLA stock will soar past $1000 and reach higher than forecast.

    Everyone said Amazon and Google never had a chance. Boy were they wrong and you could learn from history.

  • Report this Comment On August 22, 2014, at 10:51 AM, ffbj wrote:

    To me it's simply a question of efficiency. ICE engines are about 35% efficient EV engines are 80% efficient. Now as the storage and refilling of the motive force becomes better more and more ev's will

    replace our current ice fleet. This will take around 30 years. Musk has said eventually there will be a need for a 100 gigafactories world-wide. This is just the start.

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