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Electric car maker Tesla (s TSLA) is racing toward building the world’s largest factory for lithium ion batteries. In the company’s earnings call on Wednesday, Tesla CEO Elon Musk said that Tesla plans to break ground on the factory in a still undetermined location as early as next month.
In an unusual style, Tesla actually plans to break ground on at least two sites (maybe even three) in parallel until it ultimately chooses one. The list has been narrowed down to a handful of states in the southwest including Nevada, Arizona, New Mexico and Texas (that list also now includes California). Musk said Tesla would break ground on the second site a couple months after the first one.
Why such a big rush? Tesla needs the battery factory to be able to produce enough batteries for 500,000 electric cars by 2020, including for Tesla’s third-generation lower cost electric car. If the factory isn’t ramped up at the same time as the ramp up of its third-gen car, it would be a big problem for Tesla.
Production of Tesla’s cars is already constrained by battery supply. Tesla buys small-format lithium-ion batteries from Panasonic, and thousands of batteries are used in each Model S battery pack. On the earnings call this week Musk said that battery supply would constrain Model S production in the second quarter of this year, but would be relieved in the third quarter of this year.
Worries about how battery constraints would hurt the development of the third-gen car are why Tesla is racing forward with the factory so fast and breaking ground on multiple locations. It’s a delicate dance of product launch and supply.
Tesla’s CTO JB Straubel said on the earnings call that every one month delay in the third-gen car due to battery supply constraints “is far more expensive for us than the incremental costs that we may incur up front to kick off two sites at one-time.” Musk said:
If we don’t have the Gigafactory online when we have the vehicle capacity online, we will actually be in deep trouble, because we’ll have all the equipment and tooling and people for making cars, but not be able to produce the battery packs.
Having to move so fast on such an unprecedented factory — the factory is supposed to double the current entire world’s lithium ion battery production — will be difficult and will take a lot of swift and creative thinking on Tesla’s part. Tesla already has an idea of how it would operate.
The battery factory will be like “an industrial park under one roof,” said Musk on the call. Panasonic will likely produce the battery cells in the factory (Tesla now has a signed letter of intent from Panasonic), and then other companies would work in the factory and produce the anode, cathode, separators, and feed them to Panasonic. Tesla would produce the battery packs and be the landlord, said Musk.
California is now a contender for the location of the battery factory, but Musk said California is an “improbable” choice. That’s because the state requires a lengthy process for approval of construction on new sites, and Tesla needs to act quickly.