News broke on Wednesday that Nevada had apparently won the five-state competition to land Tesla Motors’ vaunted Gigafactory. A boost in manufacturing prestige and 6,500 jobs are expected to result – but is it possible this giant battery plant of the future could turn out to be a white elephant?
OK, Lux Research didn’t go that far with a provocative new analysis released just before the Nevada story leaked, but it did argue that the Gigafactory, to be built with Panasonic as a significant partner, is a riskier venture than Tesla-mania-fueled conventional wisdom might suggest.
Through economies of scale, customization and the elimination of supply chain risks and kinks, the Gigafactory has been sold by Tesla CEO Elon Musk (and perceived by investors) as a pivotal leap forward for Tesla, the key element to transforming it from a purveyor of very expensive niche cars to a mass manufacturer.
Lux agreed that the Gigafactory will bring Tesla supply chain security, no small thing. The problem, Lux said, is with the “mass” part of the equation.
“The Gigafactory, proposed to be built at a cost of $5 billion, is designed to make 35 GWh (gigawatt-hours) Li-ion cells for half a million EVs,” Lux said in a news release. “But in the likely event of much lower sales of 240,000, overcapacity will be to the extent of 20 GWh.”
Tesla’s plans call for the Gigafactory to begin operating in 2017 and grow into full capacity by 2020. Along the same timeline, Tesla is planning to begin making and selling the Model 3 at a base price around $35,000, about half the price of the Model S, the lone car now in the Tesla line. The crossover Model X will come before the 3, but it’s the 3 that is being counted on to drive Tesla sales from around 35,000 now to 500,000 in 2020 – taking advantage of that vast battery-factory capacity.
Under Telsa’s half-million scenario, the company would probably have to sell around 350,000 Model 3s in 2020. Lux analyst Dean Frankel said to pull that off would require “executing perfectly,” with none of the couple-quarter delays that have marked the company’s efforts in the past. Then there’s the matter of the car’s prospective category, occupied by the likes of the BMW 3 Series and Audi A4.
This is a category with “a very well understood sales pattern,” Frankel said. “The Model 3 would have to be disruptive to those models and increase demand.”
An interesting thing about the Lux report is that it didn’t cast doubt on Tesla’s claim that the Gigafactory would allow it to slice 30 percent off the cost of battery packs, whose expense is a key factor in the high price for electrics. The problem is that for the Model 3, this doesn’t really amount to a seismic shift, yielding a reduction of about $2,800 if the battery price per kilowatt-hour drops from the current estimated $274 per kilowatt-hour to $196/kWh.
“In short, the Tesla Model 3 will be success or failure largely irrespective of the Gigafactory: Consumers will make their decision about the appeal and value proposition a 48 kWh Tesla EV based on other factors, not a $35,000 versus a $37,800 price point,” Lux wrote.
Of course Musk, in Musk fashion, has suggested that 30 percent is really just scratching the surface of what might be accomplished. “I’d be disappointed if it took us 10 years to get to $100 a kilowatt-hour pack,” he said in the company’s last earnings call, at the end of July.
As for the possibility that other electric vehicle manufacturers could utilize a portion of the Gigafactory’s capacity, Frankel wasn’t optimistic, noting that product cycles run five years and no manufacturers have committed to the unique Tesla battery format with their next-generation vehicles.
With Tesla’s ties to SolarCity – Musk is chairman of the solar installer – some Gigafactory output could flow to the stationary battery market, but it would take a lot of 10 kWh residential battery packs to make much of a difference. Frankel said the Gigafactory could be a strong player in that market, but stationary batteries would at best amount to 4 GWh of the plant’s likely 20 GWh of excess capacity in 2020.
