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Tesla Motors, Inc.: Battery Supply Won't Constrain Model 3 Production

By Daniel Sparks – Mar 2, 2016 at 9:30AM

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Tesla's Gigafactory, which was announced just two years ago, is already reducing risk significantly for investors.

As electric-car maker Tesla Motors' (TSLA 11.00%) unveil event for its long-awaited Model 3 approaches, some investors may be beginning to think more about how quickly the company will be able to ramp up production of the important vehicle. Of particular interest is whether or not Tesla will be able to produce enough lithium-ion batteries. After all, Tesla expects soaring sales, driven by Model 3, to require unprecedented battery production. And with production and first deliveries of the lower-cost vehicle set to begin in late 2017, these supply needs are right around the corner, raising the stakes for the automaker to have a solution.

Tesla factory in Fremont, California. Image source: Tesla Motors. 

Lithium-ion batteries: Not a bottleneck
Model 3's battery supply requirements will be massive. With Model 3 expected to lead the way in vehicle sales, Tesla expects its vehicle production by 2020 to require more lithium-ion supply than the entire world required in 2013.

But despite these enormous supply requirements, Tesla said in its most recent earnings call that management wasn't concerned about battery production.

How is management so confident? Their optimistic outlook for battery production begins with a 2014 factory announcement. Two years ago, Tesla announced plans to build the world's largest battery factory, called the Gigafactory, in anticipation of growing demand for its vehicles and respective needs for much higher battery production. Later that year, the company broke ground on the factory.

Rendering. Image source: Tesla Motors.

"The Tesla Gigafactory was born of necessity and will supply enough batteries to support our projected vehicle demand," the company says in a description of the factory on its website. 

Construction on the Gigafactory to-date has progressed faster than anticipated.

Beyond expectations for enough production to support Tesla's vision to produce 500,000 vehicles per year by 2020 -- up from a forecast for 80,000 to 90,000 units in 2016 -- Tesla believes the economies of scale gained from the Gigafactory will help Tesla cut costs significantly to battery production.

Tesla's Gigafactory, while still under construction, is already manufacturing battery packs for Tesla Energy products. And management is aiming to produce battery cells, too, at the Gigactory before the end of the year.

Initial progress at the Gigafactory appears to have management very confident battery production won't be a problem for Model 3.

"Basically, to the best of our knowledge, you should not worry about the Gigafactory as a constraint on Model 3," Tesla CEO Elon Musk said during the company's most recent earnings call (via a Reuters transcript). "That does not appear to be anywhere near the critical path for Model 3."

Tesla batteries are positioned across the floor of the vehicle, between the front and rear axels. Image source: Tesla Motors.

It wasn't always this way. Before the Gigafactory announcement, battery production was definitely on the critical path.

Beyond battery production, Tesla could certainly run into other unexpected hiccups and detours when it comes to ramping production for its Model 3. So, investors should keep an eye on the company's overall confidence surrounding the company's ongoing ramp. But it's good news for investors that the automaker at least isn't expecting battery supply to be a problem.

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