Tesla’s big gamble: Nevada wins Gigafactory

Yahoo Finance

It’s appropriate that Elon Musk has chosen Nevada to call home for Tesla’s massive battery plant, the Gigafactory. After all Nevada is the gambling capital of the country and a gamble is exactly what such a big factory is. Tesla says once this factory is up and running it can build batteries for 500,000 vehicles a year. The goal is to hit that number around 2020.

Making 500,000 batteries is one thing, selling 500,000 cars to go with them is altogether another. According to Edmunds.com sales of electric and hybrid cars are stalling - they have 3.6% market share through August compared to 3.7% last year - just as the industry at large is surging.

Should Tesla be concerned? Maybe not says Yahoo Finance senior columnist Mike Santoli. “i don’t think people are out there saying ‘I definitely want to buy an electric car, I wonder which one I’m gonna buy.’” People looking for electric vehicle want a Tesla. “There’s not enough of them to go around,” Santoli adds. “They still have back orders that are basically filling up the books.”

The future, especially after laying out the cash for the Gigafactory is admittedly murky however. Santoli points out “the half a million vehicles in 2020 is what all the bulls on Tesla’s stock are fixated on. They say they can have a 15-20% margin on that car which would be the highest in the industry and all of a sudden you have $5 or 6 billion in cash flow in five years.”

That’s all well and good but will the demand keep up with the growing supply? Is that the only key to Tesla’s long-term success?

There are a few key elements to watch in order to answer such a question. For starters, once Musk’s new factory is up and running, just how cheap will making these batteries be? Santoli notes that Musk did a good job playing several states off of one another to get the best deal on the location of the Gigafactory and looping in Panasonic to help was a solid decision.

What Musk didn’t do (or at least hasn’t yet done) is attempt to bring energy giants like Exxon to the table to help build out an infrastructure to help people power up on the road. Range anxiety has been a key hurdle for many consumers and so far that hasn’t been solved.

Another challenge has been price. Tesla’s offerings are pricier than their gas guzzling counterparts but Santoli thinks that is going to change in the coming years, leveling the playing field on sticker price. He says penalties for higher emissions, lower efficiency gasoline powered cars will force tradition automakers to makes better cars and that will drive prices up to Tesla’s level.

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