Tesla’s Gigafactory Promise and Why We’re Scaling It Back to Reality

By now, you’ve read bullish reports gushing over the Tesla Gigafactory, a proposed battery plant that would become the world’s single biggest source of lithium-ion cells by the decade’s end. Indeed, unlike CEO Elon Musk’s white paper on “hyperloops,” the Gigafactory is a genuine plan to make Tesla the dominant player in the electric-vehicle segment. Tesla is scouting sites in four states—Nevada, Texas, Arizona, and New Mexico—to build a 10-million-square-foot facility that would eventually crank out more energy storage than all the reserve power in the entire U.S. electrical grid.

It’s going to cost at least $4 billion, and Tesla—after paying half—wants to attract partners that could include battery, automotive, and electronics companies (such as Apple, which met privately with Tesla last year) who need these batteries in greater quantities and lower costs. It sounds brilliant on paper: Tesla, the underdog and tech-savvy American company risking its future to raise the economy of scale while hiring 6500 people in the U.S. to build things that normally are imported from Asia.

By Tesla’s own estimate, it will produce about 500,000 cars per year by 2020, or roughly 14 times the amount it made last year. Morgan Stanley analysts recently projected Tesla would hit 1.1 million cars per year by 2028. To get there, and if its $35,000 “Gen III” EV is to ever sell en masse, Tesla needs lots of cheap batteries at a fraction of their current cost. We’re not Tesla haters, but we’re also skeptical of reports that seek to drive up this company’s stock prices without looking at the serious roadblocks impeding Tesla and, indeed, all electric vehicles.

Tesla Can’t Be Treated Like a Tech Company Forever

For now, comparing Tesla to Apple makes sense. The company’s proprietary software and hardware, its tight leash on distribution and factory-owned stores—not to mention the incredible style, speed, and overall safety of its product—are laudable. But to reach 500,000 cars per year, Tesla can’t continue delivering cars on flatbeds and battling every state’s franchise laws. That door-to-door strategy works for a $100,000 luxury toy built in limited batches, but it’s not going to function if Tesla becomes a giant. Tesla will have to leverage dealers to gain visibility outside high-end shopping malls and handle the influx of servicing and warranty repair that will inevitably come. Tesla will have to advertise. Tesla will have to hire more workers and get another plant (its Freemont, California, plant, formerly owned by Toyota and General Motors, capped out at 500,000 cars per year under its former owners). Tesla, as the only major non-union U.S. automaker, may soon find the UAW circling overhead. Tesla has no plans for any of this. Reporting monthly sales would be a good start. Making a profit for more than one quarter would help, too.

Tesla’s Future Assumes EV Demand Will Skyrocket with It

Tesla wants the Gigafactory, outside of cars, to make batteries for homes that could store power from solar panels (Musk is the biggest shareholder in SolarCity, run by his cousin) or natural-gas generators, thereby cutting homes entirely from electrical utilities. Who wouldn’t love cutting out government monopolies and huge bills? The thing is, that’s as much of a dream as Musk’s hyperloop, as least for now. Battery production in the U.S. has never reached its potential—A123 Systems’s bankruptcy is a prime example of overreach—because the demand for large lithium-ion packs simply isn’t there.

But Tesla knows there is no chicken-and-egg solution when it comes to electric cars going mainstream—it requires the whole henhouse. If the automaker builds the batteries, manages the charging network, and sells the cars, does that mean people will still buy a brand-new electric car over a cheap Honda Civic? Americans are keeping older cars longer than ever, and even with electric cars dropping under $30,000, they’re not flying off shelves. What happens when battery production falls short of Gigafactory expectations? At this point, investors are funding Tesla’s future on the pretense that it will outperform every other automaker in the segment. Morgan Stanley bases Tesla’s market cap today—hovering around $30 billion, it’s nearly half of Ford’s—based on sales projections eight years from now. Even if the Gigafactory is a success, that assumption presumes Tesla won’t face heavy competition from profitable, major automakers. In eight years, the brand surely will.

Batteries Still Don’t Work Like They Should

Granted, Tesla makes the best and longest-lasting EVs in the industry. Last year, it captured nearly 40 percent of all pure-EV sales in the U.S. But even Tesla suffers from significant range losses in hot and cold weather, capacity losses during the car’s lifecycle, enormous weight penalties, and long charging times. Batteries, with all of the money thrown at them over the past century, still can’t match the energy density of gasoline. There needs to be a breakthrough. But why assume that Tesla is the only company positioned to get there? Like it or not, intense competition from big automakers will happen, and it could happen much faster than the rate at which Tesla hopes to grow.

Stopping here, before we write a 53-page report like Morgan Stanley, we’re sure Tesla will have continued success and think the Gigafactory is a laudable and potentially revolutionary enterprise. But automakers, unlike cell-phone manufacturers, have more regulatory hurdles and liabilities than any consumer product. Tesla may not realize that yet, but when it gets big, it’ll have to face the same groaning music, and that means tempering big dreams with more reasonable expectations.