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Tesla to invest $2 billion in U.S. gigafactory

Battery plant will be located in the Southwest

The chassis of the Tesla Model S electric vehicle is displayed at the Panasonic Center Tokyo in Tokyo. Panasonic is considering investing in Tesla's gigafactory project with an eye to expanding battery supplies to the EV maker when its current supply contract ends in 2017. Photo credit: BLOOMBERG

UPDATED: 2/26/14 6:25 pm ET

Tesla Motors Inc. said it plans to invest $2 billion in a U.S. car battery plant that will be capable of supplying lithium ion packs for 500,000 vehicles a year by 2020.

The factory, which is expected to go online in 2017, is part of Tesla's blueprint for a more affordable electric vehicle and would be the first major, integrated U.S. facility producing battery cells for electric cars.

The company said in a blog Wednesday that it has narrowed the list of sites for the plant to locations in Nevada, Arizona, New Mexico and Texas and that "final site selection activities are underway."

Tesla and its partners are expected to invest $4 billion to $5 billion in the factory through 2020, the company said.

The giant factory will allow Tesla "to achieve economies of scale and minimize costs through innovative manufacturing, reduction of logistics waste, optimization of co-located processes and reduced overhead," the company said.

By 2020, the plant is projected to produce more lithium ion batteries annually than were produced worldwide in 2013.

"By the end of the first year of volume production of our mass market vehicle, we expect the Gigafactory will have driven down the per kWh cost of our battery pack by more than 30 percent," Tesla said.

Tesla expects the plant to employ 6,500 people.

Panasonic Corp., Tesla's primary supplier of lithium ion batteries, is considering investing in the plant, sources familiar with the plan told Reuters on Wednesday.

Last week, Tesla gave some initial hints about plans for the lithium ion battery plant, or what it calls a gigafactory, that would likely include Panasonic and other suppliers as partners. It said that further details would be announced this week.

Panasonic wants to expand its cooperation with Tesla but declined to comment further.

"We have a cooperative relationship with Tesla and are looking at various ways of strengthening that relationship in the future," the company said.

Sources close to the situation said Panasonic was considering investing in the gigafactory project with an eye to expanding battery supplies to Tesla when its current supply contract ends in 2017.

"Panasonic is looking at various types of cooperation, including taking on some of the investment," the source said. "But Tesla is a venture business, so there's a need to be cautious in looking at the risks involved."

The Nikkei business daily said Panasonic was inviting several Japanese materials makers to join the project.

The Nikkei said the plant would produce small, lightweight batteries for Tesla and may also supply Toyota Motor Corp. and other automakers.

Lower costs

Battery costs have been a major stumbling block to widespread electric car adoption in the United States, according to analysts. Tesla's gigafactory will lower costs by shifting material, cell, module and pack production to one spot.

In Tesla's earnings conference call last week, CEO Elon Musk said the electric carmaker expects to build the factory with more than one partner, but a "default assumption" was that Panasonic, as a current battery cell partner, "would continue to partner with us in the gigafactory."

"The factory is really there to support the volume of the third generation car," Musk said on the call. "We want to have the vehicle engineering and tooling come to fruition the same time as the giga factory. It is already part of one strategy, one combined effort."

Tesla posted better-than-expected fourth-quarter results and said deliveries of its luxury Model S electric sedan would surge more than 55 percent this year to more than 35,000 vehicles.

Morgan Stanley analyst Adam Jonas said in a research note this week that the potential for lower battery costs through higher sales volume could nearly double Tesla's share of the global car market to 0.9 percent by 2028. Tesla remains the firm's top pick in the U.S. auto sector,

"Tesla is an extremely ambitious company for whom flooding the market with fun-to-drive EVs and giving competitors a headache might not be the endgame," Jonas said.

Stifel analyst James Albertine said the gigafactory could be far more than an auto opportunity, as Tesla could have an even more significant opportunity to supply the energy storage market. He expects the factory would take two to three years to build and require a $5 billion to $6 billion capital infusion.

"While we remain negative on Tesla shares above $200 as an automotive OEM (original equipment manufacturer), the energy storage opportunity requires a broader perspective and could very well justify current, if not higher valuation levels," he said in a research note.

Reuters, Mark Rechtin and David Phillips contributed to this report.

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