Why Tesla (TSLA) Must Build Its Gigafactory

As Tesla’s primary battery supplier Panasonic Corp shows signs of hesitancy to commit to the “Gigafactory”, the fate of the project, which is desperately needed by the automaker so it can start pumping lithium-ion batteries for its popular electric cars, remains uncertain.

Obviously, the plant’s estimated $5 billion financing is in trouble if Panasonic is not on board, and that would be bad news for Tesla (TSLA) as reducing battery costs is critical and a must for the company’s forthcoming mass-market car.

But how bad would that news be?

The Wall Street Journal’s Mike Ramsey explains:

“Tesla’s growth in 2013 was held back by a lack of batteries. Supplier Panasonic Corp is hoping to remedy that with a supply of two billion cells. But those may not be enough once Tesla introduces its higher-volume Gen III vehicle. Tesla, with sales of just over 22,400 cars last year, is already the largest buyer of lithium-ion battery cells in the world. With plans to sell 500,000 vehicles, its own demand would be greater than the demand for every laptop, mobile phone and tablet sold in the world.”

Gigafactory’s first production is expected to begin in 2017, around the same time Tesla begins producing its first mass-market electric car. The timeline puts pressure on the company to break ground this year.

But without Panasonic as joint venture partner, there’s more risk for Tesla’s battery plant, which is projected to reach full capacity by fiscal 2020 providing battery packs to about half a million cars a year. According to Ramsey’s report, Elon Musk is in “direct negotiations with Yoshihiko Yamada, who heads Panasonic’s automotive and industrial systems subsidiary, to invest in the new Gigafactory and run battery-cell production”. The company had previously said it was considering an investment of $1B in Tesla’s battery plant.

Presumably the company has some kind of backup plan if a deal with the Japanese electronics maker is not reached. That said, the uncertainty must surely be frustrating for Elon Musk.

TSLA is up $2.81, or 1.22 percent, at $233.10 in pre-market trading Thursday.

h/t BI

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About Ron Haruni 1067 Articles
Ron Haruni is the Co-Founder & Editor in Chief of Wall Street Pit.

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