U.S. manufacturing jobs have taken a beating in the last few decades.
Peaking at 19.5 million in 1979, that number had plunged 41% by 2009 as hundreds of companies outsourced production to countries with cheaper labor, such as China and Mexico. However, one U.S. company is doing its part to help return manufacturing jobs to the U.S.
Tesla: Betting big on better batteries
Tesla Motors Inc (NASDAQ:TSLA) recently made big news when it chose Nevada as the site of its $5 billion Gigafactory. The factory is expected to build 35 GWh per year of lithium-ion battery packs, more than all the world's capacity in 2013, enough for 500,000 electric cars, by 2020.
Tesla has high hopes for the Gigafactory, which is designed to lower the cost of its battery packs by 30% in 2017 and by as much as 50% by 2020, when the factory is slated to hit full production capacity. Those cost reductions are necessary due to Tesla's plans to launch the Model 3, a purported $35,000 electric sedan with a 200-mile range that Tesla hopes will bring the joys of electric motoring to the masses and let the company achieve its aim of 500,000 cars sold annually by 2020.
However, I'd like to focus on the prospect of manufacturing jobs that the Gigafactory offers its new home state of Nevada, as well as how the factory could help Tesla supercharge its growth in the future.
Gigafactory: A jobs bonanza
The Gigafactory is expected to create 3,000 construction jobs and 6,500 factory jobs once it's fully online in 2020. Through economic multiplier effects, up to 22,000 jobs might be added to the local economy.
The factory is expected to generate $100 billion in economic activity over the next 20 years. To put that into perspective, "that is more than 3% of the state's GDP. It is more than 20% of the region's economic output," Steve Hill, Governor Brian Sandoval's economic development director, recently told the Reno Gazette-Journal. To put it another way, this single factory could increase the Reno area's workforce by 11% while increasing Nevada's total employment by 2%.
What's more, Bloomberg is reporting that Elon Musk, Tesla's co-founder and CEO, has hinted that a second Gigafactory may eventually be needed, which is sure to provide another major economic boost wherever it's located.
Why is Tesla getting into the battery manufacturing business?
Currently, Panasonic is Tesla's lithium-ion battery supplier and reported partner on the Gigafactory. According to a report from the Nikkei Asian Review, Panasonic is likely to invest $194 million to $291 million (possibly as much as $1 billion) into the factory.
Tesla is expected to provide the personnel, materials, and land for the project, while Panasonic will focus on battery manufacturing technology. However, Tesla's interest in the Gigafactory extends beyond just significant cost savings.
For example, Tesla's Model S is greatly supply-constrained, with customers having to wait seven to 10 weeks for delivery. The location of the Gigafactory, less than four hours from Tesla's Fremont, California, factory, is likely to cut down on such wait times for the Model 3, as well as lowering shipping costs.
In addition to the cost and time savings, Tesla's co-founder and CEO, Elon Musk, is determined to take the lead on environmentally friendly manufacturing. The Gigafactory is expected to be partially powered by local renewable energy such as wind and solar, as well as to recycle old battery packs from Tesla's vehicles.
However, there is another facet to the Gigafactory that Tesla investors should be aware of: the optionality it offers the company in terms of future growth markets.
Batteries are a booming industry
Today the global battery industry is a $50 billion market dominated by Asian manufacturers, one that's expected to see major growth in the years ahead.
Frost & Sullivan Research Manager Vishal Sapru recently told Renewable Energy World that by 2020 the world market for lithium-ion batteries is expected to quadruple. This demand will be driven by utilities needing to store renewable energy as well as the growing popularity of electric vehicles, hybrid cars, and consumer electronics such as smartphones.
SolarCity (NASDAQ:SCTY), the residential solar installation giant where Elon Musk serves as chairman of the board, began partnering with Tesla when it began offering customers energy storage systems along with its solar power systems back in December 2013. SolarCity began small, expecting to install 30 to 50 commercial energy storage systems per year.
The reason for SolarCity's foray into battery technology? SolarCity's chief technology officer and COO, Peter Rive, explained to Greentech Media that Tesla's batteries allow commercial customers to smooth out energy flows throughout the day and avoid peak energy rates, which can be much higher than standard electrical prices. This improves the economics of solar power and helps SolarCity sell its services to businesses.
Why should Tesla investors care about this? Simply put, the success of renewable energy such as wind and solar requires adequate storage of the clean energy generated. If Tesla can optimize the manufacture of affordable battery technology, not only will it have a strong competitive advantage in the electric automotive arena, but it could become one of the world's largest suppliers of batteries to global utilities for their renewable energy storage needs. In this way Tesla could tap into a $6.4 trillion megatrend that could supercharge its own growth potential.
In addition, by factoring environmentally friendly features into the design of the factory, Tesla is future guarding itself against possible future environmental regulations that could raise the costs of its competitors' batteries relative to its own.
Tesla's construction of the Gigafactory in Nevada, with its 6,500 jobs, represents not only a boon to Nevada's economy, but also a new growth opportunity for the company. Not only will the factory make possible Tesla's ambitious growth plans in terms of selling an enormous volume of affordable electric cars, but it lets Tesla break into an entirely new, and potentially much larger market -- energy storage. As it partners with Panasonic to optimize the environmentally friendly manufacture of lithium-ion batteries that are likely to power the cars and electronics of tomorrow, Tesla also greatly increases the probability of improving returns for long-term investors in the years and decades to come.
Adam Galas has no position in any stocks mentioned. The Motley Fool recommends and owns shares of SolarCity 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.