Tesla Gigafactory's Promise: More and Cheaper Batteries
The company opened the doors to its partially built factory Friday, showing off what could become one of the world's largest buildings at 10 million square feet.
Tesla CEO Elon Musk said the Gigafactory will pump out batteries faster and cheaper than its competitors and reduce costs by at least 30 percent. That's important, analysts said, to meet the company's ambitious goals for transportation and energy production.
If shareholders approve Tesla's proposed $2.8 billion acquisition of SolarCity later this year, the Gigafactory will be a foundation for an integrated power and transportation company.
"I think as a combined automotive and power storage 
and power generation company, the potential is there for Tesla to be a $1 trillion company," Musk told investors in June.
Analysts said the factory presents a risk that's necessary for Tesla to reach its big goals. Analyst Ravi Manghani said the factory could substantially lower Tesla's costs for batteries. There's a great potential market, he said, but also a risk if the power storage or electric vehicle markets don't expand as quickly as Tesla anticipates.
"It's a big deal," said Manghani, director of energy storage for GTM Research. "It is going to be the largest storage-manufacturing facility in the world."
Musk updated Tesla's master plan last week, setting a course to integrate solar power systems and expand its line of vehicles to include small SUVs, pickup trucks, buses and semitrailers.
In 2014, Tesla and Panasonic began hunting for a site to build a battery factory in the United States. The companies considered locations in California as well as Arizona, New Mexico and Texas before choosing the 1,000-acre site outside of Reno, Nevada.
Nevada promised the Palo Alto-based electric vehicle maker $1.3 billion in incentives over 20 years. The public money comes with strings -- Tesla is required to hire local workers, meet construction deadlines and file regular reports detailing its progress. The state hopes to net $1.9 billion in benefits -- even after factoring in tax abatements and credits -- over 20 years.
Construction is roughly 14 percent complete. When finished in 2020, it is expected to be one of the largest buildings in the world.
The factory's name comes from the measurement prefix for 1 billion units, "giga." The company expects to produce 35 gigawatt-hours of battery storage annually by 2018, roughly equivalent to the entire world's production of lithium-ion batteries in 2014, according to The Associated Press. The factory could produce roughly four times that amount at peak capacity.
The Gigafactory will begin producing cells later this year. Musk said it will be powered by clean energy when it is finished.
The battery packs will fill vehicles and Powerwall and Powerpack storage units serving residential and commercial customers. Tesla Motors plans to ramp up production from 50,000 vehicles to 500,000 in 2018. The company also says it's speeding up construction on the Gigafactory.
Musk said the company is placing a high priority on making its factories faster and more productive. He boasted last month that the battery-cell manufacturing already done with Panasonic is three times faster than that of any other battery producer in the world.
"Cells are going through that thing like bullets from a machine gun," Musk told investors. "In fact, the exit rate of cells will be faster than bullets from a machine gun."
The scale of the factory should help Tesla cut production costs, get cheaper rates from suppliers and learn new manufacturing techniques, Manghani said. The price for storage has dropped rapidly since 2010, he said, from about $1,000 per kilowatt-hour to around $300.
Batteries are a significant cost in the price of electric vehicles. Tesla needs the cells for next year's release of the Model 3, the $35,000 sedan for which the company has taken close to 400,000 reservations since it was announced in March.
T.R. O'Neill, analyst for Ascendiant Capital Markets, said the battery gives Tesla its advantage over automotive competitors. The cylinder-shaped units are a steady, proven technology and relatively easy to manufacture. Their shape allows Tesla to slide the power packs into the base of the vehicle, providing a low vehicle center of gravity and greater room for passengers and storage.
Other car companies use different shaped cells for their vehicles, he said, limiting the design and performance. O'Neill added that other automotive companies have been reluctant to chase Tesla's battery design. The Model S was the top-selling luxury sedan in the U.S. last year, topping those from Mercedes and BMW.
With the proposed acquisition of SolarCity by Tesla, Musk said Tesla batteries would be used in conjunction with SolarCity power systems. Musk left open the possibility of selling storage to other solar companies, provided they meet Tesla's standards.
O'Neill said the purchase of SolarCity makes sense, but it may be a bit early. He expects storage needs -- large batteries for residential and commercial buildings -- to soar after government subsidies for solar power generation expire.
"Elon's vision is spot on," he said. " It's just years away."