PV Talk: Why Tesla needs the Gigafactory

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Tesla’s much talked about Gigafactory should be up and running in 2017. The Elon Musk-owned EV maker is hoping to use it to produce up to 500,000 battery packs a year by 2020, amounting to around 50GWh. That claim was met with scepticism by one source, Lux Research, questioning the likelihood of even the biggest player in the EV market meeting that target, even if the company is also able to call on its deal to supply stationary storage to SolarCity and its partner in the Gigafactory, Panasonic.

However, Dean Frankel from Lux told PV Tech Storage that his analysis firm did not think the ‘500,000 packs by 2020’ claim was make-or-break for Tesla, with the company still in a good position to claim a competitive advantage by building the Gigafactory. The dust has cleared a little since it was announced at the beginning of last month that the Gigafactory will be built in Nevada, so PV Tech Storage asked Frankel about some of the other talking points of the plan.

Tesla claims the Gigafactory will lower costs by around 30%. Image: Tesla.

Why does Tesla need the Gigafactory?

There are three key components here. Cost reduction, localising a supply chain and reaching economies of scale by making sure their partners will scale alongside them. When we talk about EVs, cost is a key component. Can you get a battery cheap enough such that people will buy your batteries in bulk? Ultimately cost won’t be the major concern for the consumer going to adopt EVs.

It will be other factors, like charging infrastructure or whether the car looks nice, which is what’s normally considered in consumer adoption, as well as performance. So we know EVs have the performance, we know Tesla can make a car that looks nice.

Tesla Model S. Image: Tesla.

And costs?

They claim they can get those down by 30%. We were projecting that we think there’ll actually be a 20% reduction versus their already low 2020 figures. Let me put numbers on that. Right now, industry average production for LG Chem Power, [which is] selling to the Volt or Nissan Leaf through its joint venture, is over US$300 per kWh for a battery pack. Tesla is already lower than that at around US$275 or US$274 per kWh for their battery pack. If they never build the Gigafactory, if they just do what they’re doing now through Panasonic, they will get costs down to US$245 per kWh. If they build the Gigafactory, they will see improved economies of scale, they will have a localised supply chain to reduce shipping costs, and they’ll improve [battery] chemistry.

So those three combined will lead to around a 20% to 30% cost reduction for Tesla but then what does that do for the consumer? If you’re talking about the Model 3, for a 48kWh battery pack, that only leads to a US$2800 price difference between the Model 3 with the Gigafactory and the Model 3 without the Gigafactory.

Our analysis [in the report] was, does that matter that much? Elon talks about demand not necessarily being a limiting factor. Well how inelastic or elastic is the demand for a Model 3 and is US$2800 going to move the needle? To a certain degree it will but it’s probably not as needed as much as we talk about when we talk about cost reduction.

The component that’s most important for the Gigafactory as to why it’s needed, is the supply chain. How fast can they get these batteries to market, how quickly can they ramp up from what their projected capacity will be? And that’s something that they’ve struggled with previously. Famously, a while ago Elon had to ship tyres on a chartered jet from Europe to California to make shipments on time. Obviously that’s something that’s incredibly costly and they’ve had to work with their supply chain tirelessly to make sure that their own supply chain matches Tesla’s production.

For the full interview, visit PV Tech Storage.

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