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Does Tesla Really Need a $5 Billion Battery?

http://finance.yahoo.com/news/does-tesla-really-5-billion-232300968.html

The Wall Street Journal
By Mike Ramsey
14 hours ago















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In a project that is befuddling industry experts and competitors, Tesla Motors Inc. is looking for possible sites for a giant electric-car battery factory in four Southwestern states.







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The plant, dubbed a "gigafactory" by Tesla Chief Executive Elon Musk, would be the world's largest factory by a long shot. Mr. Musk has outlined a proposal to spend $5 billion on it, hiring up to 6,500 workers and creating thousands of ancillary jobs. He compares the undertaking to auto-industry pioneer Henry Ford's early 20th century Rouge complex. It took in iron ore and other raw materials at one end and rolled out completed Model Ts at the other, aiming to control and cut costs at every stage of production.

Mr. Musk wants to begin making batteries at the plant in 2017, a timeline that puts pressure on the company to break ground this year. Tesla executives say they need the Gigafactory to guarantee the supply of millions of battery cells and to cut costs through scale and logistics savings.

"We need to move rapidly," adds Diarmuid O'Connell, vice president of business development for Tesla.

Mr. Musk's plan has generated excitement among officials in states eager to land the project but skepticism among battery-industry executives and rival auto executives.

"I don't quite get it," Volkswagen AG Chief Executive Martin Winterkorn said last month. "We have enough suppliers and wouldn't get the notion to build a battery factory."

Sales of electric vehicles remain small—less than 1% of the total U.S. market. The U.S. government spent more than $1 billion on new electric-vehicle battery plants as part of the Obama administration's economic stimulus, but many of those plants now run at just 15% to 20% of capacity.

"My first reaction was that Elon Musk is Superman—he can do anything," said Henry Sun, chief financial officer of the Chinese battery maker Highpower International Inc. "But my second reaction was, I'm kind of worried about it."
Jason Henry for The Wall Street Journal Tesla's factory could make more cars if it had access to more batteries.
Meanwhile, officials in Arizona, Nevada, New Mexico and Texas are trying to lure the Silicon Valley-based maker of electric cars to their state. Mr. O'Connell and other Tesla officials are in the final stages of vetting sites in those states.

In Texas, Gov. Rick Perry is said to be leading negotiations directly. He told Fox Business last week that he could support overhauling state laws that block Tesla from operating company-owned retail car stores so the Gigafactory and its jobs don't go elsewhere. "The cachet of being able to say we put that manufacturing facility in [our] state is hard to pass up," he said.

In Arizona, legislators are pushing through bills to allow Tesla to sell cars without franchised dealerships. New Mexico may call a special legislative session to create incentives for the factory. And Nevada, which is rich in natural resources like lithium and the closest to Tesla's car factory in the Oakland suburb of Fremont, Calif., has already had Tesla officials visit Reno to look at sites.

Tesla aims to reduce the cost of its battery pack by 30% when the battery plant opens in 2017. It won't disclose the current cost, but analysts say the 85 kilowatt-hour pack on the Tesla Model S, a car whose price starts at $80,000, probably costs between $21,250 and $25,500.

Reducing battery costs is critical for Tesla's forthcoming mass-market car, which is referred to as the Gen III and is expected to have a starting price of around $35,000.

Tesla's growth in 2013 was held back by a lack of batteries. Supplier Panasonic Corp. is hoping to remedy that with a supply of two billion cells. But those may not be enough once Tesla introduces its higher-volume Gen III vehicle.

Tesla, with sales of just over 22,400 cars last year, is already the largest buyer of lithium-ion battery cells in the world. With plans to sell 500,000 vehicles, its own demand would be greater than the demand for every laptop, mobile phone and tablet sold in the world.

Mr. Musk is leading direct negotiations with Yoshihiko Yamada, who heads Panasonic's automotive and industrial systems subsidiary, to invest in the new Gigafactory and run battery-cell production.

Panasonic CEO Kazuhiro Tsuga sounded a cautious note late last month.

"There's no doubt that [the new plant] will entail a far bigger risk than the current investment we're making. I cannot disclose our investment stance at this point," Mr. Tsuga said.

Harald Kroeger, who runs Daimler AG's electric-vehicle programs and sits on Tesla's board, said the factory "has some advantages of course, but it has some huge disadvantages as well."

Sam Jaffe, a battery consultant with Navigant Research, says the companies he consults for don't understand why Tesla would build such a large factory. Tesla may want to make 35 gigawatt hours of cells a year, they say, but battery makers maintain the benefits of scale disappear at about one gigawatt hour of capacity.

Wall Street is betting on Tesla. The Palo Alto, Calif., company raised a formidable $2 billion through a convertible-bond offering last month. Not long ago, getting the capital to pull off a project like this would have been the biggest challenge, but Tesla's market capitalization of nearly $31 billion has given it considerable leverage to raise more money.

The risks of going ahead with the Gigafactory project start with the tight construction timetable. "There are very few factories of 10 million square feet built all at once," says Randy Abdallah, executive vice president of Walbridge Aldinger, one the world's leading factory-construction firms. But he believes Mr. Musk's plan is doable. "There are solutions if you are willing to pay the cost," he says.

Mr. Musk's vision for lowering costs at the plant includes tying up sources for the primary metals and materials that go into batteries, such as cobalt.

Erin Chutters, the chief executive of Global Cobalt Corp., a mining company with plans to open a mine in Russia, says the "Gigafactory" demand, even if it reaches only a third of the anticipated size, would either lead to a sharp rise in cobalt prices or force several new mines to be opened.

"The only question I have is whether they will actually be able to sell that many cars," she says. "Are there really enough people out there that will switch over?"