How Will Tesla's Gigafactory Affect Battery Production?

Tesla Motors, Inc.TSLA is constructing a $5 billion Gigafactory in Nevada to produce lithium-ion batteries, in collaboration with various partners. The electric carmaker's Japanese battery pack supplier, Panasonic Corp. PCRFY is one of the partners.

Tesla signed a formal agreement with Panasonic for the Gigafactory partnership in June 2014. Under the agreement, Panasonic will invest in production equipment for the manufacture of lithium-ion battery cells, while Tesla will invest in land, buildings and utilities for the Gigafactory as well as production equipment for battery module and pack production. Moreover, Tesla will be responsible for the management of the Gigafactory. Other partners too will be involved in this project for manufacture of the required precursor materials.

Recently, Tesla signed conditional agreements with Pure Energy Minerals as well as Bacanora Minerals and Rare Earth Minerals to purchase lithium hydroxide for the Gigafactory.

Tesla plans to finish the Gigafactory construction by 2017. The factory will supply lithium-ion batteries to the automaker's Fremont, CA, assembly plant.

Cost and Volume Benefits

The Gigafactory will be the largest and most advanced battery factory in the world. Tesla is building it to deal with the shortage of lithium-ion batteries that is limiting its vehicle production capacity.

By 2020, the electric carmaker expects the annual lithium-ion battery production of the Gigafactory to exceed the global production of 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars by 2020.

Also, the factory will provide economies of scale and reduce production costs based on innovative manufacturing techniques, reduction of logistics waste, optimization of co-located processes and lower overhead costs. By the end of the first year of manufacturing, the "per kWh" cost of production of battery packs is expected to reduce by over 30%.

Zacks Rank

Tesla currently carries a Zacks Rank #3 (Hold). Better-ranked automobile stocks include Cooper Tire & Rubber Co. CTB and The Goodyear Tire & Rubber Company GT , both carrying a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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