The Historical Significance of Tesla’s Gigafactory

Source: Tesla

Deep in the Nevada hinterlands, under the scorching desert sun, Elon Musk is quietly building a $5 billion, 5.8 million square-foot battery plant that will forever change the auto industry.

Now, most of the attention Tesla receives has to do with its cars. And perhaps justifiably so. Just last week, Motor Trend announced that Tesla’s Model S P100D can go from 0–60 MPH in a record-breaking 2.2755 seconds. (That level of torque puts Tesla on par with Ferrari, by the way.)

But this article does not concern the actual vehicles Tesla is producing. Rather, it’s about something much bigger, and, in my view, infinitely more important for Tesla’s long-term success: The Gigafactory.

In partnership with Panasonic, Tesla’s Gigafactory is building lithium-ion batteries — the same type of battery that’s been popular for use with personal electronics, but deemed too expensive for electric cars. The Gigafactory is changing that.

As of January 2017, Tesla has begun mass production of the cells, and by 2018, the Gigafactory will “reach full capacity and produce more lithium ion batteries annually than were produced worldwide in 2013,” the company says. The facility will be staffed by 6,500 full-time Reno-based employees and “single-handedly double the world’s production capacity for lithium-ion batteries,” according to Bloomberg.

The company also plans to be producing one million electric cars by the end of the decade.

Now, let’s take a step back. Why is the Gigafactory such a big deal, you ask?

Well, two main reasons: Cost and storage.

Batteries for electric vehicles are historically not very cheap, nor do they hold a very good charge. But Musk wants to change that. Specifically, he wants to drive down the per kilowatt hour (kWh) price of the battery pack by more than 30 percent to make it suitable for electric cars, while increasing the amount of energy storage in the battery pack. “It really comes from the first principles of physics and economics,” Musk said at a January 2017 event. “That’s the way we try to analyze everything.”

As stated in a January 2017 investor presentation, Musk announced that the drivetrain for Tesla’s much-anticipated $35,000 Model 3 will be built at the Gigafactory 1, in order to vertically integrate the battery production with car production. In a subsequent Q&A session, Musk “compared the concept of the Gigafactory’s vertical integration to Ford’s effort 100 years ago at River Rouge Complex, the largest integrated factory in the world at the time,” Electrek noted.

The big question for investors, however, is whether or not the Gigafactory will pay off in the long-term.

My belief is that yes, it will.

Let me explain.

The Gigafactory Will Push Tesla’s Cars Costs Down, And Increase Demand For EVs

There’s a whole host of reasons why electric cars are the future (fewer greenhouse gases, unstable oil price, a smaller amount of serviceable components, etc.) but the purpose of this article isn’t to prove why electric cars are the future. That’s just the reality.

By 2040, about 23 years from now, analysts at Bloomberg predict that electric cars will account for 35 percent of all new vehicle sales. Some have even rosier predictions for the EV market: The Argonne National Laboratory predicts that electric cars will make up 58% of the light vehicle market by 2030.

Bloomberg

Right now, what’s holding back the sale of EV cars is battery cost and quality.

By owning the production of low-cost batteries with the Gigafactory, the thinking goes, Tesla will establish itself as the king electric vehicle automaker in the long-run.

It should be noted, too, that Tesla already has an enormous position on the incumbents in the market, meaning that when the factory is fully up-and-running, they will be best-positioned to target consumers interested in electric vehicles.

Best-selling all-electric cars in 2015

Statista

The point is — though Tesla is forgoing short-term profits to invest $5 billion into a battery factory (a decision some in the market have criticized) the long-term rewards are well-worth it.

“The cost of batteries is so critical in all this that it justifies [Tesla] having this control,” David Keith, an MIT professor studying automotive technologies, told Quartz recently. “No one else is going to push as hard as they want to bring down the cost of batteries, and to push the market as fast as they need it to go.”

The Gigafactory is Opening To Europe — Taking Teslas With It

In November 2016, Tesla announced that they’ll be building Gigafactory 2 in Europe.

Since then, plenty of country officials have thrown their hat in the ring, practically begging Musk to choose them. The Dutch Minister of Finance, for instance, officially expressed his country’s interest, while Cyprus began a social media campaign to attract Musk. Portugal, however, is perhaps the most gung-ho about the Gigafactory. As DW reported:

Euphoria has nevertheless gripped many Portuguese over a possible Tesla investment. There’s even a Facebook group called “Bring Tesla Gigafactory to Portugal.” It has only been online since mid-November, but just one month later, it already has nearly 70,000 members. Whether that will help sway Elon Musk as he considers his options for siting Europe’s first Gigafactory remains to be seen. It’s expected that he will make the siting decision sometime in 2017.

Opening a Gigafactory in Europe is no-doubt a big bet for Tesla.

But it’s the type of calculated gamble that could pay off huge in the end. While China makes up the largest contingent of the EV market, Europe is a close second, and the market is slated for enormous growth over the next decade.

“How Tesla And Elon Musk’s ‘Gigafactories’ Could Save The World”

A few months back, Forbes published an article about Tesla’s Gigafactory with the headline above.

Now, that title might be hyperbolic, but there’s an element of truth to it. Let’s go back a decade. Why did Musk create Tesla? Simply to create a fancy electric car? Not at all.

As stated in his “Master Plan,” Musk wants to build an electric car, yes, but he also wants to tackle the much larger issue around climate change and the use of fossil fuels.

“By definition, we must at some point achieve a sustainable energy economy or we will run out of fossil fuels to burn and civilization will collapse,” Musk writes. “Given that we must get off fossil fuels anyway and that virtually all scientists agree that dramatically increasing atmospheric and oceanic carbon levels is insane, the faster we achieve sustainability, the better.”

Could the Gigafactory become the basis through which Tesla competes as a formidable player in the $1.3 trillion advanced energy industry? Absolutely.

While the Gigafactory is positioned as a the battery-producing facility for Tesla vehicles, Musk is quietly parlaying the Gigafactory into something much larger: A type of sustainable energy that could one day overtake the fossil fuels.

On January 31, just a few weeks back, Tesla cut the ribbon on the world’s largest battery plant in the California desert, which is comprised of 16,000 lithium-ion battery cells and capable of powering 15,000 homes. Tesla “is making a huge bet that millions of small batteries can be strung together to help kick fossil fuels off the grid,” Bloomberg wrote.

If they are successful, Tesla has the opportunity to become one of the largest energy companies of all time. And they’ll have the Gigafactory to thank for that.

Got a question? Contact us: info@wormcapital.com.

Disclosures:

The opinions expressed herein are those of Worm Capital, LLC and are subject to change without notice. The company (or companies) identified or referenced herein is an example of a current or potential holding or investment target and is subject to change without notice. This information should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the investments or strategies referenced were or will be profitable, or that investment recommendations or decisions we make in the future will be profitable. Past performance is no guarantee of future results. Worm Capital reserves the right to modify its current investment views, strategies, techniques, and market views based on changing market dynamics. This article contains links to 3rd part websites and is used for informational purposes only. This does not constitute as an endorsement of any kind.

Arne Alsin and Worm Capital clients are currently long Tesla (TSLA) and stand to benefit if the trading price of Tesla increases.

Worm Capital, LLC does not accept any responsibility or liability arising from the use of this document. No document or warranty, express or implied, is being given or made that the information presented herein is accurate, current or complete, and such information is always subject to change without notice. Shareholders and other potential investors should conduct their own independent investigations of the relevant issues and companies involved in this article. This document may not be copied, reproduced or distributed without prior written consent of Worm Capital.
Worm Capital, LLC is an independent investment adviser registered in the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Worm Capital including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. WRC-17–08

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.