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Tesla Motors Inc.: California Is Back in the Race for the Gigafactory

By Daniel Sparks - Jul 17, 2014 at 2:45PM

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Tesla has five states just where it wants them: racing. And California is officially one of them.

At the starting line, the race had four players: Arizona, Nevada, New Mexico, and Texas. But California has nudged its way in, according to a new report from The Wall Street Journal. These players are all vying for a piece of Tesla's  (TSLA -0.89%) growing manufacturing pie in the U.S. The next expansion to Tesla's manufacturing presence will come in the form of the world's largest battery factory, dubbed the Gigafactory. The eagerness for these states to win Tesla's next big project is just what Tesla was aiming for when it announced the race in the first place.

Model S outside of Tesla's headquarters in Palo Alto, Calif.

How did California get a late acceptance to the race?
After Toyota decided in April to up and leave California for the Lone Star State, California is more eager than ever to do whatever it takes for Tesla to continue building out its manufacturing presence in the Golden State, where the fast-growing car manufacturer's headquarters and vehicle manufacturing factory is already based.

How does it plan to woo Tesla? California has proposed new tax breaks and has voiced a willingness to make regulatory changes that could speed up the construction process for the Gigafactory while also lowering costs.

The Wall Street Journal's Mike Ramsey explained:

The state last week authorized local property tax breaks for battery plants. On Thursday, Gov. Jerry Brown signed a bill authorizing a $420 million tax credit for Lockheed Martin Corp. that included language also allowing local governments to offer property tax breaks to battery manufacturers, essentially creating a pathway for Tesla's gigafactory.

Separately, State Senators Ted Gaines, R-Roseville, and Darrell Steinberg, D-Sacramento, proposed a bill with placeholder language that refers to an economic development project involving a battery factory. The legislators are working the state's economic development department and Tesla to come up with a list of requirements to try to get the bill through the legislature when the session restarts in August.

California Sen. Gaines says he will "do everything in [his] power to have California land this factory."

Exactly what Tesla wanted
Tesla expressed from the get-go that speed was going to be key for the Gigafactory. Tesla Chief Executive Officer Elon Musk has said that Tesla would be in "deep trouble" if the Gigafactory and the Model 3 affordable car weren't ready for the production ramp at the same time. Given the giant production leap the company will be taking when it launches the car in 2017 (if everything goes as planned), it will be important that both battery supply and manufacturing tooling are running smoothly in order for Tesla to be able to execute on the likely massive amount of customer orders it will have at the time.

Tesla's Fremont factory in California. Image source: Tesla Motors.

So, when Tesla initially announced the Gigafactory, and said multiple states were in the running, it was clear the company wanted states to bend over backwards for Tesla to speed up the construction process.

To drive home the importance of speed, Tesla said it is likely to break ground on multiple sites even though it may only choose one final selection for the Gigafactory at the end of this year. The wasted construction cost in building in multiple sites is less costly than getting behind on the Gigafactory, Tesla says. 

Like California, Texas has also been vocal in doing whatever it takes to get the Gigafactory built in its state. Texas Gov. Rick Perry even drove around in a Tesla in California, talking to press about how much Texas wants Tesla to build its new factory in the Lone Star State.

Watching states battle it out for the Gigafactory is a good sign for Tesla shareholders. The Gigafactory is the only way Tesla could achieve the lithium-ion battery scale it needs to cut costs enough to build and market its affordable car profitably.

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.

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