Wall Street Daily

The Battle is on for Tesla’s New Gigafactory

Almost 150 years have passed since the American Civil War ended… but a new battle is brewing between a handful of U.S. states.

Rather than a North versus South clash, though, this war is being waged between the West and the Southwest.

And instead of muskets, these combatants are fighting with today’s ultimate weapon – money.

It’s a battle that will profoundly change the face of an entire industry – and the fortunes of one company in particular.

Five states are duking it out – and they’re each dead set on winning this lucrative reward.

Giga-What? Giga-Who?

The ultimate prize for winning this war is Elon Musk and his electric car company, Tesla Motors (TSLA).

More specifically, the battle will decide which state will win the right to house Tesla’s brand-new battery gigafactory – a $5-billion, purpose-built facility to build lithium-ion batteries for Tesla cars.

The reason for building this factory is two-fold: cost reduction and mass production.

Tesla’s design calls for a 10-million-square-foot lithium-ion battery plant, which would require roughly 500 to 1,000 acres of land. That would easily make it the world’s largest battery plant.

The problem is, lithium-ion batteries aren’t cheap. In fact, they’re the most expensive components inside electric vehicles.

And given that these batteries are the heart and soul of Tesla’s business, Musk wants to cut costs through in-house mass production.

The equation is simple for Tesla: Bring down battery manufacturing costs and the cars will be cheaper. And that’s crucial when it comes to getting more consumers to adopt electric cars.

In fact, Musk believes he can reduce the per kilowatt hour (KWh) expenditure by 30% as soon as 2017 – just in time for the launch of Tesla’s critical third-generation sedan – the Model 3. And the price is pegged to be roughly $35,000 cheaper than the current Model S series.

So where will Tesla build its gigafactory?

Five States Battle for Tesla’s Bounty

The gigafactory is a $5-billion project that will create approximately 6,500 new jobs.

And by 2020, it will be able to produce 50 times the number of batteries shipped in Tesla cars in 2013, as it ramps annual output to 500,000 cars. That kind of increase will create even more jobs.

So you can see why several states are jockeying for position.

Musk has whittled the list of candidates down to five: California, Nevada, Texas, Arizona, and New Mexico.

Lawmakers must now give Musk an offer he can’t refuse. In other words, an irresistible incentives package.

So what can each state offer Tesla? Keep in mind that there are a few factors for Musk to consider…

Tax Breaks & Incentives: As the world’s largest battery facility, even 1% less in taxes could mean hundreds of millions in savings.

Regulatory Landscape: Some states have legislation that will hinder Tesla’s gigafactory business. For example, Tesla has a “direct sales” business model, and some states prohibit direct auto sales. Musk wants to see who’s willing to change the most for Tesla’s business – and, more importantly, who’s willing to do it the fastest.

Land: A 10-million-square-foot factory requires a lot of available land. The location of the land comes into play, too. For example, is it close to major transport links?

Natural Resources: Musk says the gigafactory will be heavily powered by renewable energy sources like solar and wind power.

Cost: Musk wants whichever state he chooses to cover 10% of the $5-billion factory project. So that’s $500 million coming from the government’s coffers.

Existing Relationship With Musk: Any relationship that Musk already has (or has had) with certain states could help or hurt their chances.

Here’s how the states stack up…

Pros:

  • Tesla headquarters in Palo Alto, CA, with a manufacturing plant in Fremont, CA.
  • Home of Silicon Valley – the world’s biggest tech hub.
  • AB 2389: This bill has already passed, which addresses “large-scale battery factories” and $420 million in tax credits over the next 15 years.
  • SB1309: This legislation is pending and will give Tesla extra incentives like tax credits, investment credits, and hiring credits. It also reduces fees for regulatory and environmental process changes.
  • Solar power benefits.

Cons:

  • High land costs.
  • Higher wages.
  • Regulatory issues.

Pros:

  • No corporate tax or income tax.
  • Job training grants.
  • A right-to-work state.
  • Close to Tesla’s Fremont plant in California.
  • Tesla has already broken ground in the state.
  • E-commerce hub.
  • Large rare earth deposits.
  • Solar, wind, and geothermal benefits.

Cons:

  • The $500-million tab to help build the factory is a lot to ask of Nevada, but not California or Texas.

Pros:

  • The most powerful manufacturing state, accounting for $211 billion in GDP and 8% of the state’s employment.
  • Boasts the Texas Enterprise Fund and Emerging Technology Fund.
  • Corporate tax rate between 0.5% and 1%.
  • A right-to-work state.
  • Elon Musk’s other big project, SpaceX, is headquartered in Brownsville, TX.
  • Texas is home to major auto manufacturing plants for Toyota and General Motors.
  • A huge wind farm is expected near the proposed site for the Tesla gigafactory.

Cons:

  • It’s not a “direct sales” state, so Texas currently bans direct auto sales (although Governor Rick Perry wants to re-open the conversation with legislators).

Pros:

  • The Surprise Railpark in Surprise City Arizona has “Foreign Trade Zone” status, which offers businesses a 5% property tax rate instead of the regular 18.5%.
  • Musk is on the Solar City board… whose CEO, Lyndon Rive, is Musk’s cousin.
  • The state has already helped establish another huge tech hub – the Apple-GT Advanced sapphire manufacturing plant. Apple received $10 million in building improvement grants from the Arizona government, which also assisted with job recruitment. Intel’s semiconductor campus is also located in Arizona.
  • Arizona is the leading solar power producer of the five states.

Cons:

  • It’s also not a “direct sales” state. However, with the HB2123 bill in the works has legislators working on language that specifically caters to Tesla.

Pros:

  • Passed a tax reform bill in 2013 with a “Single Sales Factor,” which lets corporations exclude local payroll, local sales and property from its income taxes. A pending bill will subsidize electrical rates for large-scale manufacturers.
  • Two major national laboratories – Los Alamos and Sandia – are in New Mexico, which brings a flood of federal funding. This has quietly made the state an emerging tech hub, particularly with fiber-optics and autonomous driving development. One of Intel’s most cost-efficient factories is also in Rio Rancho, NM.
  • There are thousands of acres of vacant land on the New Mexico-Texas border, west of El Paso, TX – perfect for Tesla’s factory needs, and with a massive labor force to fill it.
  • As a Sunbelt state, New Mexico is perfect for solar power.
  • Close railway access offers easy access to renewable energy resources.
  • Former Governor, Bill Richardson lost out on a Tesla auto assembly factory to then-governor of California, Arnold Schwarzenegger. The state is trying to make up for it.

Cons:

  • Not a right-to-work state, although legislators are talking about changing this.
  • Doesn’t have the same status as its bigger, better-known rivals.

Musk’s Big Tease

Musk’s plan is to break ground at three sites in three different states. In fact, Tesla has already broken ground in Reno, Nevada.

But it’s not going to complete the construction.

It’s essentially a tease to legislators of those states, saying, “We’re ready when you are.”

As Musk stated on this quarter’s conference call, “The final site for the first gigafactory will be determined in the next few months, once we have full visibility and agreement on the relevant incentives and processes for enabling the gigafactory to be fully operational to meet the timing for Model 3.”

Clearly, the state that gets Tesla’s gigafactory will see its investment pay off big time, in terms of job creation, economic growth, tax revenue, and prestige.

But will retail investors be similarly positioned to profit?

Analysts at UBS (UBS) say, “No,” noting that 70% of the costs associated with lithium battery production come from raw materials, which limits Tesla’s projected savings.

Sorry, boys… but that’s only partially true…

Crucial Partnership to Shoot Tesla Auto Production Higher

The UBS analysts are forgetting one key aspect when they relate the raw materials costs to battery manufacturing…

This is hotshot visionary Elon Musk we’re talking about here. He doesn’t do “normal,” or settle for the conventional way of doing things.

For example, Tesla has two key benefits in its corner here…

Energy Density: At 56 kilowatt hours (kWh) of electric energy, and 215 kilowatts of electric power, Tesla’s battery packs have the highest energy density, bar none. The more energy-dense a battery is, the less spending is required for materials.

Once the new gigafactory reaches full capacity, and Tesla’s batteries become even more energy dense, the company will spend even less money on materials. Tesla will also source all its raw materials from North America.

Panasonic Partnership: Tesla has signed a deal with electronic heavyweight, Panasonic (PCRFY), on the gigafactory. Per the deal, Tesla will handle the land, buildings and utilities, while Panasonic handles the manufacturing and supplying of lithium-ion cells. Its network of suppliers will produce the required amount of graphite, cobalt, lithium, copper, nickel, and bauxite (aluminum) needed to make Tesla’s batteries.

Panasonic will also invest in the necessary equipment, machinery, and other manufacturing tools needed to bring material manufacturing in-house. Just like the Apple-GT partnership is reducing the costs of synthetic sapphire manufacturing, this will alleviate concerns regarding suppliers being able to keep pace with Tesla’s increased demand.

As Wall Street Daily Founder, Robert Williams, said about the company in June, “Tesla is 10 times more likely to hit $300 than it is to fall beneath $193, the level at which shares peaked in October 2013. I’d say that’s bullish.”

I agree. And by 2020, not only will Tesla add at least 5% to its margins by reducing the cost of batteries, its production will soar. Specifically, from 35,000 electric vehicles produced today to 500,000, as it moves “down-market” and makes its cars more affordable to more consumers.

Your eyes in the Pipeline,

Marty Biancuzzo