Tesla Motors, Inc.'s Gigafactory May Be More Revolutionary Than We Realize

In Tesla 's second quarter, the story remained the same. Demand for its all-electric Model S continued to outstrip supply. In fact, Tesla said total demand is growing faster than total supply. And with the Model X SUV just around the corner, which Tesla expects to eventually outsell the Model S, this trend doesn't look poised to change. Fortunately, Tesla has a plan: Gigafactory, to the rescue!

Slide from initial Gigafactory presentation. Image source: Tesla Motors.

Perhaps, however, Tesla is just blindly leading us on? This could have been an argument until Panasonic (arguably more knowledgeable and experienced regarding lithium-ion production than any company in the world) admitted that a 30% reduction by 2017 was, indeed, a conservative prediction. And Panasonic is now putting its money where its mouth is, announcing a deal to partner with Tesla in the Gigafactory in July. Panasonic's investment is considerable; during Tesla's second-quarter conference call, CEO Elon Musk said that he expects Panasonic to invest as much as $1.2 billion-$1.6 billion of the $4 billion the company expects to spend on the factory by 2020.

Surprising confidence

Not only does Tesla view 30% cost cuts to its batteries as conservative, but Musk said during the second-quarter call that he would be "disappointed if it took us 10 years to get to $100 a kilowatt-hour pack." Since Tesla hasn't shared exactly where its costs are today, it isn't clear what percentage of a cut that $100 per kilowatt hour is to today's cost, but as Deutsche Bank analyst Rod Lache noted during the call, it is low enough for Tesla's electric vehicles to reach cost parity with -- and possibly even improve upon -- the cost of an internal combustion vehicle.

The dialogue that followed Musk's bold prediction during the call showed just how sure Tesla is in the future cost cuts of lithium-ion batteries.

Somewhat taken aback by Musk's confidence, Lache commented, "That's a pretty big statement."

But Musk disagreed: "Seems pretty obvious to me."

Tesla chief technology officer JB Straubel chimed in, explaining that even though company is tracking potential breakthrough chemistries for lithium-ion batteries, even these aren't factored in to the path that Tesla sees to reduce its battery costs enough to economically produce mass-market, fully electric vehicles.

Tesla's Model S, with a starting price close to $70,000, isn't affordable for most U.S. citizens.

"But to get to -- to realize the Giga Factory and those cost targets, we don't need some fundamental breakthrough in chemistry and material science. Those things are pretty well understood in front of us," Straubel said.

So, not only does Tesla expect to exceed a 30% cost reduction during the first year of production for the Model 3 in 2017, but it also is baking in plenty of conservatism in this forecast. In other words, Tesla believes it isn't shooting for the moon with the Model 3 and that, instead, this mass-market vehicle is completely realistic.

Of course, there is still room for doubting. But Tesla and Panasonic's growing confidence certainly makes a good case for the enormous potential of the Gigafactory.

Warren Buffett's worst automotive nightmare (Hint: It's not Tesla)

A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.

The article Tesla Motors, Inc.'s Gigafactory May Be More Revolutionary Than We Realize originally appeared on

Daniel Sparks owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

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.

In This Story


Other Topics


Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More