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Tesla Motors, Inc.'s Gigafactory Aspirations Are Giga-Huge

By Daniel Sparks - May 9, 2015 at 9:02AM

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Understanding Tesla CEO Elon Musk's vision for the company's Gigafactory.

Tesla Motors (TSLA -2.05%) CEO Elon Musk unveiled the company's first batteries targeted at the nascent energy storage business during an event in Hawthorne, California, last month. During the same keynote, Musk also shared a new name for its Gigafactory. Now he's calling it "Gigafactory 1," a sign of just how serious Tesla is about building more than one of its battery factories.

Here's the backstory behind the company's big ambitions for its battery factories.

Tesla CEO Elon Musk refers to the Gigafactory as Gigafactory 1 for the first time. Source: Tesla Motors.

Betting on big demand
The notion that Tesla plans to build more Gigafactories in addition to its currently under-construction factory in Nevada is not new. Management has indicated on a number of occasions that its Nevada factory -- which is scheduled to go live next year and is aiming to, by 2020, achieve lithium-ion battery annual production levels greater than the total lithium-ion battery capacity produced worldwide in 2013 -- would not be the company's last.

Tesla's move to begin referring to the Nevada factory as Gigafactory 1 highlights management's bullishness for the future of batteries.

The initial response to Tesla's just-launched energy-storage business has given Musk more confidence than ever in the future for its Gigafactory. Musk said during the company's first-quarter earnings call on Wednesday that demand for its energy storage batteries is "off the hook."

Tesla Powerwall.Source: Tesla Motors.

Musk added perspective:

In the course of like less than a week, we've had 38,000 reservations for the Powerwall, 2,500 reservations for Powerpack. The Powerpack, it should be noted, typically this is bought by utilities or large industrial companies for heavy industrial work. So, typically, ... it's like at least 10 Powerpacks per installation. So if there's 2,500 reservations, actually 25,000 Powerpacks.

Notably, unlike the 20,000-plus orders for its Model X SUV, these "orders" are not backed by deposits. They are simply reservations, which customers may choose not to follow through with.

Tesla Powerwall comes in two models, priced at $3,000 and $3,500. While Powerpack pricing is unknown, the battery will undoubtedly have a much higher price tag. Powerpacks are 100 kilowatt-hour, or kWh, towers sold in a minimum of a grouping of five units. Powerwalls are available as either a 10 or 7 kWh battery.

Tesla Gigafactory construction progress. Source: Tesla Motors.

After seeing the higher-than-expected demand for its energy storage products, Tesla executives are exploring whether or not Gigafactory production capacity can be boosted by 50%.

The Gigafactory as a "product"
Tesla designed the Gigafactory from the ground up to be easily replicated. During Tesla's announcement of stationary storage products, Musk explained how Tesla approached Gigafactory design differently than the construction of traditional factories:

The way we're approaching the Gigafactory is really like it's a product. So, we're not really thinking of it in the traditional way that people think of as a factory -- as a building with, sort of, a bunch of off-the-shelf equipment in it. What we're really designing in the Gigafactory is a giant machine. ... Think of it as a product of Tesla. We're making this really big product that doesn't happen to move ... And that's what we're doing.

Musk went on to emphasize that "there will need to be many Gigafactories in the future."

Tesla's Gigafactory gets it name from the factory's targeted annual battery production capacity, at a level measured in the "giga" unit of measurement. One gigawatt-hour, or GWh, is 1 million times one kWh, or, as Tesla's website notes, "is the equivalent of generating (or consuming) one billion watts for one hour." Tesla intends for the Gigafactory to be able to produce 35 GWh of cell output and 50 GWh of pack output annually by 2020.

Tesla clearly believes energy storage will play a key role in helping it solicit enough demand for 50 GWh of pack output annually by 2020. But investors should keep in mind that while it's good to see Tesla believes this storage will help with demand for its lithium-ion batteries, these forward-looking aspirations are still speculative at this point. Sure, the reservations for Tesla's Powerwall and Powerpacks are impressive. And, yes, its planned lower-cost Model 3 should help spark greater demand for its vehicle battery packs. But Tesla still has a long way to go.

Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends and 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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