Elon Musk's Tesla Motors (NASDAQ:TSLA) is one of the standard bearers of the electric-vehicle revolution. However, leading is sometimes expensive, particularly when an industry is just getting its start. That's why Tesla is pushing the envelope on the batteries used to power autos. And with a little help from Nevada, its plans for a giant battery manufacturing plant are one step closer to fruition. But why pick this state over the others? (Hint: It wasn't just about the money...)
There's no question that an all-electric car is cutting-edge. Musk noted as much when he announced that Tesla was opening its patents to the world earlier this year: "[E]lectric car programs ... at the major manufacturers are small to nonexistent, constituting an average of far less than 1% of their total vehicle sales." In other words, there is no electric-car industry to speak of yet.
Musk has been aggressive in his efforts to push the accelerator, however, giving away the competitive advantage that patents often provide and spending ahead of demand to build charging networks domestically and abroad. Another big push for Tesla has been the so-called Gigafactory.
The Gigafactory is nothing short of audacious, since this $5 billion project, which it was recently announced will be located in Nevada, is expected to produce more lithium-ion batteries in 2020 than were made globally in 2013. The goal is to reduce the cost of batteries, one of the most expensive components of an electric car, by 30% or more. Tesla is taking the leading role, pitching in an anticipated $2 billion. Partners like Panasonic will help cover the rest of the cost.
Where, oh where?
Musk put the battle for location front and center when he announced his plans for the Gigafactory, singling out Texas, Arizona, New Mexico, and Nevada as potential sites. Although it was never said, this set the stage for an incentive bidding war. And the winner was Nevada, with a $1.3 billion package. As the project is a partnership, the benefit of this will accrue mostly to the factory -- not specifically to Tesla. However, one not-so-small benefit added to the package was meant for Tesla alone.
The big number in the Nevada deal is $1.1 billion worth of tax abatements over 20 years. Essentially, Tesla and its partners won't have to pay taxes on construction materials and factory equipment for two decades. The state sales tax in Nevada is just under 7%, so that will go a long way toward keeping construction costs down. This break is projected to save a grand total of $725 million over the 20-year span.
During the construction phase alone, this abatement will be a big benefit. However, Tesla and its partners will also be relieved of property and business tax burdens for 10 years. That should be worth another $300 million or so, according to Reuters. Nevada Governor Brian Sandoval thinks these concessions are well worth the cost, since he estimates the plant will boost the state's economy by as much as $100 billion over the next two decades.
If you look at it from a different angle, any taxes the Gigafactory will pay wouldn't exist at all if the factory were sited elsewhere. So it's almost a wash for the state. Except that Nevada will have to build and maintain new roads and other infrastructure (the Reno Gazette-Journal estimates that will cost about $100 million). And Tesla will get access to discounted electricity for up to eight years, too ($8 million according to the RGJ). Another $200 million or soof the $1.3 billion will come from tax credits that Tesla can sell to other companies, estimates the RGJ.
All in all, it's a pretty good deal for a site that is in close proximity to Tesla's California factory. However, there's another little kicker: Tesla also got official approval to sell its vehicles directly to the public in Nevada, something that Texas and Arizona, its competitors for the Gigafactory, don't allow. That will mean more money going directly to Tesla from each car sale in the state, over and above the incentive package.
It's not unusual for a company to get incentives to locate in a state. In fact, Musk said it wasn't the best financial offer on the table. So, the incentives in and of themselves aren't really that important. However, add in the ability to sell direct, and all of a sudden the deal offered by Nevada has real long-term appeal for Tesla.
Among the reasons Musk cited for picking Nevada was an ability to "get things done." Since the Nevada governor signed the bills backing the deal just a few days after they were submitted to the legislature for approval, it looks like Musk was right. But the real "get things done" here was likely the concession to allow Tesla to sell directly in the state, something that Nevada car dealers backed despite the fact that they had originally been opposed to this not-so-little compromise.
Tesla has been fighting for the right to sell directly on a state-by-state basis across the country. Getting a decent incentive deal for the factory and adding another state to the direct-sales approval list (which is now up to eight states, in some form) advances two goals at once. You know the old saying about killing two birds with one stone?
It may seem a small thing to add one state to the direct-sales list, but in a battle like this, every stepping stone counts. And this helps get Tesla closer to the tipping point, where direct sales are simply the accepted norm. Add the Tesla-specific direct-sales approval to the money side of the deal, and it's no wonder Nevada won this bidding war.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Ford 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.