I write about industrial innovation and the global auto industry
Tesla Motors Inc., CEO Elon Musk discusses the company’s new Gigafactory Tuesday, July 26, 2016, in Sparks, Nev. It’s Tesla Motors biggest bet yet: a massive, $5 billion factory in the Nevada desert that could almost double the world’s production of lithium-ion batteries by 2018. (AP Photo/Rich Pedroncelli)
A week after unveiling a new strategic plan that includes everything from electric buses and semi-trucks to driverless car-sharing networks and solar energy production, the chief executive of Tesla Motors is now talking about building gigantic battery factories in Europe, China and maybe India.
He hasn’t even finished constructing the first so-called gigafactory in the U.S., a massive $5 billion project that when fully operational, would produce more battery cells than the rest of the world’s suppliers combined.
But Musk has no qualms about laying out ever-more ambitious plans, even if it’s not quite clear how the company will pay for them.
Expanding into new product lines would cost “tens of billions of dollars” over time and would likely require “a modest capital raise,” Musk told reporters ahead of this week’s grand opening of the battery factory outside Reno, Nevada.
Most of the money, he said, would come from sales of electric vehicles, including the upcoming Tesla Model 3, which will be priced from around $35,000. Musk says he expects the Model 3 to generate $20 billion in revenue per year and $5 billion in gross profit.
While it sounds good on paper, there’s no guarantee Tesla can produce 500,000 cars a year by 2018, which is the target under Musk’s accelerated timetable. Cell production for the Model 3 has yet to begin at the gigafactory, which is still an active construction site. Nor has Tesla begun installing machinery for the body shop or general assembly lines for Model 3 at its vehicle factory in Fremont, Calif.
But Musk hardly seems worried. “Some things are already in place,” he said, such as the paint shop, which can handle 300,000 vehicles a year. “That covers us for the start of production next year and we think with some increments we can get that to 500,000.”
From the beginning, in 2006, when Musk published his original “Secret Master Plan,” the goal was to begin at the top with a premium electric sports car, and then roll out a succession of lower-cost models in higher volumes. The whole idea was that cash from earlier models would fund R&D for the next ones. Rapid scaling to mass production, and the cost-saving efficiencies that go with it, was critical to making the business case work.
So far, Tesla’s execution has fallen short. It has delivered the cars – the Roadster, the Model S sedan and the Model X SUV – but they’ve been consistently late, more expensive than promised and generally in lower volumes than expected due to manufacturing challenges.
The river of cash for future investment has yet to materialize, either. Since 2008, Tesla has generated about $2 billion in free cash flow (including about $500 million in zero-emission vehicle credits sold to other automakers). Yet it has spent some $6.2 billion on R&D and capital expenditures, leaving what Barclays analyst Brian A. Johnson describes as “a $4.2 billion hole.” Luckily, as he notes, Wall Street has been happy to fill the gap – and will likely be asked to provide more. Johnson expects Tesla to have to raise another $1.7 billion in 2017.
Some hints might come Aug. 3, when Tesla releases its 2Q financial results.