Tesla’s Gigafactory: An Energy Tour de Force?

TeslaGigafactory

Last week, Tesla Motors (NASDAQ:TSLA) shed some more light on the “Gigafactory,” a 10-million square foot facility that will produce the massive quantities of cells for its cars to allow the company to keep pace with its growing production. The project is huge in just about every way — its colossal physical footprint aside, it’s expect to cost upward of $5 billion in initial costs, and its output is expected to put Tesla on the map as a serious player in the energy industry.

By investing in such great economies of scale, Tesla will be able to bring the cost of the lithium ion battery cells down, thus making its cars more affordable and competitive with conventional gasoline engines from a pricing perspective.

Additionally, there is one giant boon that Tesla could take advantage of with its new factory. Lithium ion cells are not relegated to today’s electric cars; they can be found in just about any battery-powered device or gadget, including cell phones.

“If Tesla really produces batteries at the scale it’s promising, cars could become just one part of what the company does,” Marcus Wohlsen wrote for Wired. ”One day, Tesla could be a company that powers just about everything, from the phone in your pocket to the electrical grid itself.”

This implies several big ramifications for Tesla’s growth and future cash flows and business strategy. Despite showing promising signs of production ramping up for its Model S sedan, Tesla is still considered a niche vehicle, a play-toy for the rich, but hardly a real-world alternative for the ubiquitous gasoline-powered vehicle. These concerns have fed worries that the company’s long-term prospects might be cut short as the small affluent pool of buyers becomes increasingly saturated.

But by becoming a key provider of lithium ion cells, Tesla is establishing itself as a supplier for some of the largest companies using the technology. Think Apple (NASDAQ:AAPL), for example. Tesla CEO Elon Musk confirmed that Tesla had spoken with the iPhone maker, and with more details on the Gigafactory now available, it’s possible that the two were discussing things other than an acquisition.

“Depending on the capacity of the factory and who the other investors will be, Tesla could start selling its batteries for other products besides cars,” Gartner auto industry analyst Thilo Koslowski told Wired. “This could actually mean Tesla might build batteries for Apple.”

What’s more impressive is that even if Apple doesn’t play into Tesla’s production plans, the potential for the EV maker is still enormous, Wired points out. Sam Jaffe, a battery industry analyst with Navigant Research, told the publication that the price drops predicted by Tesla are in line with his firm’s forecasts, and the cheaper batteries will bring Tesla closer to achieving its primary mission of making a widely affordable electric car, the Gen-III.

“The whole point of that model and the whole point of the company was to make that car,” Jaffe said. “It wasn’t to make sports cars or luxury cars. It was to make a family car comparable in price to a gasoline model.”

Tesla Model S, photographed in Switzerland by James Lipman // jameslipman.com

By 2020, Tesla is hoping to be producing 500,000 vehicles annually, resulting in a huge appetite for lithium ion cells. Last year, the company produced slightly more than 22,000 Model S sedans, and it plans to churn out about 35,000 this year. Over time, though, the battery cells start to wear down, losing strength and hurting the car’s range.

Rather than just tossing the old cells, the Gigafactory may play a role in helping Tesla recycle the old cells, Wired says. They have the potential to store energy generated by home solar grids, which use the weakened strength cells because they are stationary — there’s no risk of stranding the user somewhere without an outlet. While Tesla is already supplying Elon Musk’s other prjoect — no, not SpaceX, the SolarCity one — the cells could also be used to store backup power for electrical utilities.

Of course, this all hinges on Tesla’s ability to bring prices down, according to battery industry consultant K.M. Abraham. Wired quoted him as saying that Tesla will have to figure out how to make its batteries without pushing up costs for component suppliers who would have to increase their output to meet the car maker’s demands. “Unless you come out with new low-cost materials, the battery prices will remain pretty much the same,” he said.

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