Posted on 10/05/2014 6:40:13 PM PDT by ckilmer
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October 5, 2014 | Comments (10)
Tesla Motors (NASDAQ: TSLA ) is calling it the Gigafactory. The electric-car maker estimates that the $5 billion factory will boast lithium-ion battery production that by 2020 will exceed the entire world's 2013 lithium-ion battery production. The factory, Tesla says, is necessary for the company to bring the economies of scale to batteries that will enable Tesla to launch an electric vehicle at half the price of its Model S by 2017, one that will be disruptively aimed at the mass market. Citing the Gigafactory among the key reasons, Morgan Stanley analyst Adam Jonas is calling Tesla "the most important car company in the world."
Tesla's Fremont, California, factory produces vehicles as fast as it can. Limited only by supply, with the main bottleneck being lithium-ion batteries, Tesla hopes its Gigafactory can help make the company a mass-market player. Image source: Tesla.
While Tesla's bold move with the Gigafactory certainly comes with its fair share of risk, the risk to those in the auto industry overlooking its potential may be far greater -- colossal, even. Fortunately for investors, there is still a way to profit from this potential revolution.
The beginnings of disruption
After the electric-car maker narrowed its prospective locations for the site down to five states, the finalists competed viciously for several months to land the enormous factory. There was a sense of desperation as Texas, California, Nevada, New Mexico, and Arizona vied for what could be the beginning of a revolution that could flip the auto industry upside down.
Texas Governor Rick Perry went as far as driving a luxury Tesla Model S sedan around in California. California State Senator Ted Gaines even showed up at Tesla's Palo Alto headquarters with a golden shovel. And the offers presented by the different states behind closed doors were probably all worth hundreds of millions of dollars.
Of course, it's no surprise that government officials went to great lengths in their attempts to convince Tesla to make their state home to the Gigafactory; the factory will bring 6,500 jobs. And experts have predicted the location could help add $100 billion of value to the wining state's economy over a span of 20 years.
Rendering of planned Gigafactory. Source: Tesla Motors.
Nevada finally won Tesla's race for the Gigafactory home in early September with the help of an incentive package with an estimated value of $1.25 billion. But Tesla, whose first principle in the defining values of its "Tesla Culture" is "Move Fast," had actually already broken ground on the factory in the first half of July, keeping the heavily guarded construction quiet until the company's second-quarter conference call on July 31.
Why was Tesla building the Gigafactory in Nevada before the company officially chose the state for the final location?
"If we don't have the Gigafactory online when we have the vehicle capacity online we'll actually be in deep trouble," Tesla CEO Elon Musk said during the company's first-quarter conference call in May. He went on to explain that the risk of not having the Gigafactory ready by the time its lower-cost Model 3 is ready was greater than the risk of starting construction on a site that may not have ended up being the official location. In fact, Musk said he was even willing to break ground in multiple locations to reduce the probability of any delays.
The biggest transformation the automotive industry may ever see
The potential for the Gigafactory is enormous. In fact, it could serve as the first step in making electric cars more compelling than the internal combustion vehicles we know today. Consider these two items that quickly put the massive potential of the Gigafactory into perspective:
Back of Model S. Image source: Tesla Motors.
500,000 vehicles: This year, Tesla plans to deliver just 35,000 vehicles. But with the help of the Gigafactory -- which should be complete by 2017 -- and a launch of its Model 3 around the same time, Tesla hopes to ramp up its global sales to 500,000 vehicles per year by 2020.
Half a million vehicles is no small sum. Consider that General Motors' total global sales in 2013 were 9.7 million. At these levels, Tesla may be stealing meaningful sales from competitors. Furthermore, if Tesla can truly grow its sales from 35,000 to 500,000 in just six years, what's to stop the electric-car maker from taking its winning formula one step further with another Gigafactory and more new models -- perhaps helping Tesla reach annual sales that exceed 1 million vehicles in less than 10 years? Even more, if Tesla can prove it can sell 500,000 vehicles per year, other automakers may join in to help spur the transition to electric vehicles -- a move that would most likely benefit Tesla, not hurt it.
$100 per kilowatt hour: During Tesla's second-quarter 2014 earnings call, Musk offered up a thought-provoking prediction that has game-changing implications. "I'd be disappointed if it took us 10 years to get to $100 [for] a kilowatt-hour pack," Musk said during the Q&A portion of the call.
Deutsche Bank analyst Rod Lache, who upgraded his price target for Tesla stock from $220 to $310 after the call, seemed shocked. "So, basically you're saying that, you know, within the next -- within that time frame you would expect electric vehicles to reach cost parity and maybe even improve upon the cost of an internal combustion vehicle?"
"Yeah," Musk responded.
"Uh-huh. That's interesting ... that's a pretty big statement," Lache mused.
But, for Musk, this seemed to be old news: "Seems pretty obvious to me."
This commentary highlights how Tesla's estimate of a minimum of a 30% cost reduction for lithium-ion batteries by 2017 (when the Gigafactory is supposed to go live) really is just a minimum -- not the target. More important, this prediction shows that, according to Tesla, this 30% cost reduction by 2017 is just the beginning.
Model S and an early prototype of Tesla's Model X SUV (launching next year). Source: Tesla Motors.
As Lache suggested, a cost of $100 per kilowatt hour would mean that compelling electric vehicles with meaningful range could be more cost-efficient to manufacturers than internal-combustion-engine vehicles. Such an achievement could lead to disruption in the automotive industry at mass scale.
But Musk insists that this is exactly where electric vehicles are headed.
"It's heading to a place of no contest with respect to gas," Musk boldly predicted.
The opportunity
Reflecting the market's confidence in Tesla's story, the growth company's stock isn't cheap. Tesla's market capitalization currently sits at just over half of General Motors'. So, investors looking for a bargain may be prone to overlook Tesla as an opportunity for their portfolio. However, the best companies with the greatest potential rarely trade at prices that appear to be discounts. With this in mind, before investors fret over the company's wild valuation, they should take a closer look at Tesla's monstrous growth potential and give it the weight it deserves. If Tesla really can outline a compelling value proposition with a vehicle aimed at the mass market, it's likely that we are looking at the beginning of a revolution.
It would increase demand. But the good news is that 100% of Americans aren't buying Teslas tomorrow, so this would be a gradual evolution. Moreover the impact would be limited because I'm guessing the peak demand for recharging is at night, whereas the peak demand for electricity is normally during the day.
What would that increased demand do to electric rates?
Probably increase them in the short run, although I assume in response to additional demand, new generation and transmission would be added to the grid, lowering prices.
Would the cost of operating an electric car then be cost prohibitive?
Hard to say -- too many variables. Price of the car, price of gas, price of electricity, all of which are hard to model.
Elsewhere? I'll take my chances with a conventional gas/diesel engine, thankyouverymuch.
I think to be successful, electrics will need to be capable of being refueled much like gasoline cars. Pull into a service station, pop out the old fuel canister(s) (fuel cells perhaps? Something new?), pop in the new fuel canister(s), and your good to go. That is not what the gigafactory will provide as I understand it. They are about making batteries for Tesla’s cars which can be recharged multiple times. With the service station model, they can recharge, recondition, or fill the fuel canister to where it can again be inserted into a vehicle and power it for 300 - 500 miles.
Without the convenience of fast refueling, I think the market for pure electric vehicles will be limited to those applications where a day’s use is well within the cars range for a single charge.
Fixed that for you. All of this crap is underwritten by the US. Taxpayer to a very substantial degree. Without taxpayers subsidizing these boondoggles, they wouldn't be happening.
Mostly what I expected. The ratings are best performance to wring every ounce of distance from the batteries at optimal conditions.
But you wouldn't have that "warm feeling" you get with a Tesla.
There are some freepers who really badmouth electrics and will never drive one. Then there are freepers who are gung-ho on electrics and want everyone to get one. My take on it, is that a lot of specs, say range from batteries, is literally eked out under very optimum conditions that the average Joe can't duplicate. It really burns me up to be behind a slowpoke in an electric or hybrid tenderly moving along to get optimum distance from the batteries. When I drive my daughter's hybrid, I punch it, range be damned. That's how you test best performance, and it shows you whether it is useful. All-electrics won't be replacing fuel powered cars anytime soon.
Beside Hopium, TESLA has a couple other back-up power sources if the battery dies: Unobtanium and the car can actually tap into the driver and passenger’s smug sense of self satisfaction.
Tests done in the Eugene, Oregon area show the car is a near perpetual motion machine.
I am more excited about the 707hp 2015 Dodge Challenger Hellcat.
I’d rather bet with him too. You know, it’s kind of sad to see people I like here become so damned negative on things like this.
There were people who thought the horseless carriage was a novelty and wouldn’t last long.
When trains exceeded 40 MPH, there as talk if man could survive that speed on a sustained basis.
I watch Musk with some interest. I don’t know if he’ll eventually be a success at this. In the long run, I hope he is.
I’d like to see the United States become the forefront of a new technology.
I have mixed thoughts on batteries, the whole electric thing, but in the long run I think it would be better than the internal combustion engine.
It will be interesting to watch.
Frankly, I would love to be able to afford a Cadillac ELR.
I have questions about this image. The battery pack of a Tesla is a sort of “skateboard” design, flat, shallow and basically forming the floorboard between the front and rear wheels. The electric engine is between the rear wheels. The fire shown indicates something highly flammable in the front, which is to my knowledge a storage area and safety crumple zone. There should not be anything there to burn like that.
Do you have the backstory for it, where did the image come from?
Recharging is not “free”. It’s either subsidized by taxpayers, included in the price of the car, or the company voluntarily loses money on a temporary basis. At some point Tesla will go bankrupt or start charging a fee for recharging, probably when the “lower price models” are introduced.
“There were people who thought the horseless carriage was a novelty and wouldn’t last long.”
Electric cars have been around for over 100 years. Haven’t exactly taken over the gas engine yet.
One of the options when you order a Model S is to get either “Single” or “Dual” charging circuitry. Either way, you would need to also install a wall charger provided by Tesla in your garage. It operates at 240 Volts and needs either a 50 or 100 Amp circuit from your garage depending on if you got the Single or Dual option in your car.
With the Dual option, the home charger can charge 58 miles of range per hour. With the Single Charger option, the home charger can charge 29 miles per hour. Either way, the home charger is mostly used for overnight charging.
A Supercharger (basically Tesla's version of a gas station that they have installed around the country and that customers can use for free) can charge 170 miles in 30 minutes. (source)
But the bigger picture is that the vast majority of an owner's charging will be done in the convenience of their own home while they sleep. Which, not to mention, is when the electric grid has lots of excess capacity. Also, electricity costs about 60% less than gasoline on a per-mile basis. It is even less if you get one of the discounted nighttime electricity plans that electric companies have started to offer around the country. (I went more in-depth about this in this post.)
Right now, you wouldn't buy a Model S to save money. But you might with the mass-market Model 3 that they are going to build with the Gigafactory.
Why?
By the way, aren't you all glad that I'm not a liberal, telling all of you that you shouldn't own one? That perhaps they should be banned? Nah, I'm for personal freedom for everybody, not just me.
There are indeed liberals saying that gasoline powered autos should be banned.
and by the way morphing libertarian, I'm a great grandpa too, many times over (actually only 5 great grands). I have 4 adult children, 2 minor children, still at home and 13 grand children, God has truly blessed me and my family. (Things do get hectic around here at Christmas time)
Getting old I reckon, my wife informs me that we have 16 g/children, not 13 that I posted previously. I’m 69 years old.
If that sounds old to still have minor children at home, the two are adopted. God bless you all.
I’m 67, 3 grc
With the number you have easy to lose count.
I’ll probable have an electric or hybrid as my second car before I ride off int the sunset. I think over time, many kinks will be out and the cars will have appeal.
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