So, What Actually Is Tesla's Gigafactory?

Since 2014, electric car maker Tesla Inc. (NASDAQ:TSLA) has been constructing what they call a Gigafactory. But what, exactly, does that mean? What makes it different from a regular manufacturing plant?

According to Tesla, one of its goals as a company is to expedite the process of transitioning to global sustainable transportation. In order to do this, enough vehicles must be produced to sway change in the automobile industry as a whole. Tesla plans to have a production rate of 500,000 electric cars every year by the second half of this decade, which will require a huge supply of lithium ion batteries, a type of rechargeable battery.

Thus, the Gigafactory was born.

The name “Gigafactory” is a term that comes from Tesla’s planned battery production amount per year of 35 gigawatt-hours (GWh). In quantifiable terms, “giga” is a measurement unit that stands for “billions”; one GWh is the same as generating one billion watts for one hour, or one million times more than that one kilowatt-hour (kWh).

The Tax Deal

Tesla’s Gigafactory is located outside the city of Sparks, Nevada, but the state had to go through a somewhat arduous process to win the factory deal. Three additional states were in the running: Arizona, Texas, and New Mexico.

According to The Verge, Nevada won the deal after the state controversially “offered an incentives package that was the largest in Nevada history, and became one of the 15 largest nationally. Over the next 20 years, Tesla could take in nearly $1.3 billion in tax benefits for building its Gigafactory in Nevada…[a]ssuming Tesla meets its obligations under the deal, it will spend 20 years free from sales tax, and 10 years free from property tax, while it receives millions of dollars more in tax credits.”

These sorts of tax deals are not uncommon for large companies. Back in 2012, The New York Times investigated governmental tax incentives in Louise Story’s article “As Companies Seek Tax Deals, Governments Pay High Price.” It found General Motors (NYSE:GM) earned $1.7 billion in incentives over the span of five years, with Ford (NYSE:F) and Fiat Chrysler (NYSE:F) also receiving deals.

“’The way he played this tax break game was super old school,’ says Greg LeRoy, executive director of Good Jobs First. The group has been critical of the Tesla deal, arguing that the company effectively gamed the states into a bad bargain, playing them off each other to raise incentives beyond reason,” The Verge continues.

Good Jobs First, an organization that keeps track of large subsidy deals, has found the biggest deal ever went to Boeing (NYSE:BA) back in 2013 from Washington State; the deal could eventually reach a valuation of $8.7 billion.

Production Plan

Since the idea of the Gigafactory was conceived out of the necessity to increase the supply of lithium-ion batteries, it makes sense that the factory would utilize renewable production methods. The entire plant will be powered by renewable energy sources in order to achieve net zero energy. Most notably, the majority of the manufacturing processes will be under one roof, a choice that could potentially reduce cost, waste, and enhance innovation.

Tesla began lithium-ion battery cell production this past January, and the cells will be used in the company’s Powerwall energy storage products. By 2018, Tesla expects the cost of its batteries to decline by over one-third thanks to large-scale production at the Gigafactory.

Tesla also anticipates annual lithium-ion battery production of the factory to reach near its original goal of 35 gigawatt-hours by the same year, which equals the total global production from 2014. Tesla hopes to reach full capacity by 2020.

The company also announced plans to invest $350 million in the Gigafactory for the production of electric motors and gearbox components for its Model 3 sedan, its highly-anticipated mass-market vehicle. The investment will create about 500 jobs.

Future of the Gigafactory

Last January, electronics company Panasonic (OTC:PCRFY) agreed to invest up to $1.6 billion in Tesla’s Gigafactory. Kazuhiro Tsuga, President of Panasonic, said that "We are sort of waiting on the demand from Tesla. If Tesla succeeds and the electric vehicle becomes mainstream, the world will be changed and we will have lots of opportunity to grow."

Tesla is even considering building more Gigafactories. CEO Elon Musk has referred to the Nevada plant as “Gigafactory 1” in the past, and during the company’s fiscal 2016 earnings release back in February, the electric car maker informed its shareholders with plans of two or three more potential Gigafactory plants.

“Later this year, we expect to finalize locations for Gigafactories 3, 4, and 5 (Gigafactory 2 is the Tesla solar plant in New York),” said the company in its earnings report.

But before the vision of multiple Gigafactories can come to fruition, Tesla and Elon Musk will need to see if its original battery production plant can live up to its promises. The company’s tax incentive from Nevada may create many jobs, but it could also bring about unforeseen financial consequences for both the state and Tesla. Only time will tell if the Gigafactory was even worth it at all.

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