Here's the Biggest Risk With Tesla's Gigafactory

[BBR Esq]

By Chris Ciaccia
The Street
02/27/14

NEW YORK -- Everyone and their brother went nuts yesterday (myself included) when Tesla Motors unveiled plans for the Gigafactory. After a good night's sleep, a shower and some thinking, it might be time to take a step back and say, "wait a minute."

-snip-

Forget the fact that the Gigafactory is going to be expensive, which is part of the reason why Tesla announced a $1.6 billion convertible debt offering yesterday, as the company continues to grow. All companies need access to capital, and Tesla is no different. The one thing that bothers me is right smack in the company's 10-K filing, which it released yesterday in conjunction with the debt offering and the Gigafactory announcement:

In addition, we have also announced our intent to develop Gen III which we expect to produce at the Tesla Factory after the introduction of Model X. We intend to offer this vehicle at a lower price point and expect to produce it at higher volumes than our Model S. Importantly, we anticipate producing our Gen III vehicle for the mass market and thus we will need a high-volume supply of lithium-ion cells at reasonable prices. While our plan is to attempt to produce lithium-ion cells and finished battery packs for our Gen III vehicles at a new Tesla Gigafactory, our plans for such production are at a very early stage and we have not yet selected a site for the construction of the Tesla Gigafactory nor completed a factory design. In addition, we have no experience in the production of lithium-ion cells, and accordingly we intend to engage partners with significant experience in cell production and to date we have not formalized such partnerships. In addition, the cost of building and operating the Tesla Gigafactory could exceed our current expectations and the Tesla Gigafactory may take longer to bring online than we anticipate. If we are unable to build the Tesla Gigafactory in a timely manner to produce high volumes of quality lithium-ion cells for Gen III at reasonable prices and thus are forced to rely on others to supply us with lithium-ion cells for Gen III, our ability to produce our Gen III vehicles at a price that allows us to sell Gen III profitably could be constrained. Finally, we have very limited experience allocating our available resources among the design and production of multiple models of vehicles, such as Model S (including any variants we may introduce such as right-hand drive), Model X and Gen III. While we intend each of our production vehicles and their variants to meet a distinct segment of the automotive market, our vehicles may end up competing with each other which may delay sales and associated revenue to future periods. Also, if we fail to accurately anticipate demand for each of our vehicles, this could result in inefficient expenditures and production delays. Furthermore, historically, automobile customers have come to expect new and improved vehicle models to be introduced frequently. In order to meet these expectations, we may in the future be required to introduce on a regular basis new vehicle models as well as enhanced versions of existing vehicle models. As technologies change in the future for automobiles in general and performance electric vehicles specifically, we will be expected to upgrade or adapt our vehicles and introduce new models in order to continue to provide vehicles with the latest technology and meet customer expectations. To date, we have limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our electric vehicles."

The part that's bold-faced (I added that) is concerning to me. Tesla wants to build the biggest factory in the world as it relates to lithium-ion cell production, yet it has no experience producing them? That's a bit worrying to me.

More: http://www.thestreet.mobi/story/12459570/1/heres-the-biggest-risk-with-teslas-gigafactory.html

[BlueStreak]

1. That's how Musk always operates

There are some entrepreneurs -- the Google principals come to mind -- who are intensely analytical and have a very clear vision for where they want to be in the future and how they can get there. They just don't share that openly.

Musk seems to me the opposite of that. He seems to rely very heavily on his intuition, in the sense of "Hey, I don't know how I'm going to do it, but I know it is going to be really big and I know I can work my way through it."

I'm much more analytical than intuitive, so this Musk character really makes me uncomfortable. But he has proven to have very good instincts and unlike most people from that end of the spectrum, he is enough of a manager to really get it done. I wouldn't bet against him.

[BBR Esq]

3. I don't know enough to bet for him or against him

but I sure hope he succeeds. We need to get internal combustion engines off the road for good. It's appalling that we still drive them.

[Scuba]

2. Why does that worry you?

[BBR Esq]

4. It doesn't worry me,

I just thought this article was worth posting for discussion. (See my response above.) I don't think you need to laud an idea with blind devotion to be in favor of it.

[Scuba]

5. I guess I can't tell what part of the OP is cut/paste and what is yours.

[BBR Esq]

6. The OP is all cut and paste.

[BlueStreak]

7. I think the issue is that Musk will use other people's money and LOADS of public handouts

in an enterprise that nobody would take seriously if not for the charter at the head of it. It does have an element of P.T. Barnum to it.

Or to put it another way, it this a Paypal or is this a rhino tube project? Musk has had some enterprises that had a business proposition that made good sense, such as a friction-free payment system for eBay that could avoid a lot of bank charges. But this same guy is also proposing rhino tubes as our transportation system for the future.

Which is this? It this one of his serious projects or it is one of his fantasies? Should the taxpayers have to put up hundreds of millions of dollars of concessions and infrastructure investments just to find out?

[kristopher]

8. The storage market for EVs, solar panels, and the grid is ready to explode

One of the top items on ALEC's agenda is to pass laws making utilities hostile to grid tied PV. The battery project seems timed to capitalize on that.
The plummeting cost of PV coupled with a general ratcheting down of cooperation from utilities to install grid tied PV is (right now) opening up a "utility in a box" approach to going off grid with solar.

[BlueStreak]

9. This technology will never be on the grid

This is not the profile for the store the grid needs. The gar market needs light, small, fast recharge. The grid needs hugely scalable and cheap. Two entirely different problems. Li-Ion will never buffer the grid.

[kristopher]

10. Not true at all, my friend.

You've apparently never heard of Vehicle to Grid (V2G) power. It is a near certainty that the vehicle fleet of tomorrow will be one of the primary storage mediums for the grid of tomorrow. That isn't just my opinion either, the fellow that just retired as the Chairman of the Federal Energy Regulatory Commission has been using policies to structure the grid to do just that.

In addition to the role they'll play while they are in the automobiles, they have an afterlife with utilities also. Since EV batteries' functionality depends on their power to weight ratio, when they drop to the point where they can only hold 80% of their original charge they are replaced. The utilities can (and a couple already are) aggregating these batteries into large banks and using them for the grid.

Before you say it won't work, let me stress that this isn't something just out of a blog or a popular science magazine; it is a thoroughly researched and published in peer reviewed journals by a range of different groups from academics, to business to government.

That's why the push for EVs is considered critical to establishing a "least cost" transition to renewable energy.

[BlueStreak]

11. V2G is a preposterous idea. It is wrong in every way possible

It is the wrong technology for grid storage and absent a law-of-physics breakthrough in battery technology there will never be enough excess battery capacity on vehicles such that any person would be willing to give up any of those electrons.

This is a fanciful idea that is utterly disconnected from the real world. The storage systems that serious people are considering for the grid are large-scale, scalable systems like compressed air, pumped water, flywheels, and flow batteries. Yes, there are a few examples where Li-Ion has been used in grid applications, but this will never be widespread because the economics are all wrong, not to mention the safety.

Here are some companies to look at.
http://www.eosenergystorage.com/ does zinc-air.

http://www.capstoneturbine.com/ makes systems that can be spun up literally in seconds to add scalable peak capacity driven by natural gas. The better you handle the peaks, the less important storage becomes.

This article talks about developments in flow-battery technology. If you are going to use large-scale chemical storage on the grid, it will be something like this. http://www.csmonitor.com/Environment/Energy-Voices/2014/0109/Clean-energy-storage-on-the-cheap-in-new-flow-battery

If Musk thinks he will sell a lot of lithium batteries for the grid, he is a fool. And I don't think he is a fool. If he can build a good, economical lithium-ion battery, there will be plenty of demand for that in the transportation world at least for the nest 8-10 years. Worst case, he will have a dependable supply of batteries for Tesla production. But that is the point of the OP article. Do we have any good reason to believe Musk can do Li-Ion better that all the others who have been trying (with mostly disappointing results) to take this technology forward? Not really, but again, I wouldn't bet against Musk.

[kristopher]

12. No, your rejection of the body of work that supports it is "preposterous"

Your argument hinges on a fundamental flaw: the grid we're building isn't a centralized thermal generation grid. It is a distributed renewable energy grid. I can guarantee you that, no matter your absolutely incorrect invocation of "the laws-of-physics" notwithstanding, V2G will have a very high value from todays grid until the end, through the entire range of grid permutations.

And since you brought it up - that is, in fact, what "the laws-of-physics" tell us. I mean, do you seriously think all of the people involved in developing this concept are ignorant of "the laws-of-physics"?

Sure there is a place for flow batteries. There is also a place for rock batteries, CAES, pumped hydro and thermal storage of all sorts. But Musk knows what he's aiming it.

[kristopher]

21. If only I'd known you were shorting Tesla when we had this exchange...

...it would have made a lot more sense.

[BlueStreak]

22. It has gone down almost $20/share since I bought my puts.

I did not own them at the time of this thread. You helped me make my decision. Thank you for that.

And Capstone Turbine is up 20%. Take a good look there. That company is having a significant impact on the grid TODAY -- not in some future time if everything just happens to break the right way. In areas where grid kW are expensive, large users (such as hospitals) are putting in these systems right now -- not as backup generation but as their primary power. They easily pay for themselves in a few years, and the payback time is even quicker if they capture the heat in the exhaust to take care of their hot water needs.

[kristopher]

13. "Utility in a Box" or "The Economics of Grid Defection"

The Economics of Grid Defection

Distributed electricity generation, especially solar PV, is rapidly spreading and getting much cheaper. Distributed electricity storage is doing the same, thanks largely to mass production of batteries for electric vehicles. Solar power is already starting to erode some utilities’ sales and revenues.

But what happens when solar and batteries join forces? Together they can make the electric grid optional for many customers—without compromising reliability and increasingly at prices cheaper than utility retail electricity. Equipped with a solar-plus-battery system, customers can take or leave traditional utility service with what amounts to a “utility in a box.”

This “utility in a box” represents a fundamentally different challenge for utilities. Whereas other technologies, including solar PV and other distributed resources without storage, net metering, and energy efficiency still require some degree of grid dependence, solar-plus-batteries enable customers to cut the cord to their utility entirely.



This first installment of two reports outlines the possible scenarios in five different U.S. regions—Hawaii, California, Kentucky, Texas and New York—and identifies when solar PV and storage combinations could disrupt existing utility business models. The continuing decline of solar PV and battery storage costs, coupled with increasing retail electricity prices, has resulted in grid parity today for commercial customers in Hawaii. The most optimistic projections, based on certain solar and efficiency targets being met, depict grid parity for millions of residential and commercial customers in New York and California within this decade....

You can download the full report or a summary at http://www.rmi.org/electricity_grid_defection

[MicaelS]

14. Considering how much money Musk has...

And the remarkable success with Tesla, and SpaceX, I'd say he won't have any trouble finding a boatload of engineers who would jump at the chance to work for him. I'll bet there are people out there salivating at the chance to possibly make a major breakthrough in lithium-ion cells production. They're probably wondering where to send their resume. Musk does have a Bachelor of Science in physics from the University of Pennsylvania, so he's not just another MBA smuck who doesn't know science.

More power to him, pun intended.

[Mother Muckraker]

15. The 500,000 production figure is deceptive

Tesla said it expects to reach production unit rates of 500,000 cars per year by 2020 because of the Gigafactory.

That is a lie. Simply having the ability to produce more batteries will not automatically produce sales. Sales is the result of demand, not supply. Tesla is hyping this "gigafactory" to pump up their stock price.

[BlueStreak]

16. Did he say they would al be Teslas?

Maybe I didn't read carefully enough. A battery factory of that scale could certainly supply product to other manufacturers. There is a fundamental problem. Li-Ion is not progressing very fast. There are some incremental increases possible with better packaging but basically WYSIWYG. There isn't a n order of magnitude available. A full order of magnitude is not necessary to make an all electric car viable for the non-enthusiast. But certainly a 3:1 improvement is needed, and that is 8 years off in the most optimistic case, and realistically a 2:1 improvement may be the end of the line for that technology.

If that is true, then there won't be demand for 500,000 cars a year that produce range anxiety. But his batteries most certainly could be used in hybrid packages, especially in combination with fuel cells or other technologies like micro-turbines. This guy is plenty smart to get deals that leave all the risks in the hands of others. He will structure it such that he doesn't suffer if the plant never reaches the scale he is boasting about. If he can produce batteries economically, he'll do fine.

[Mother Muckraker]

17. Who cares how "he" does?

What about the union busting campaign "he" is working against the workers at the Tesla plant? Are you aware he hired a union buster as head of HR at the plant?

And no, you did not read carefully enough. It was referencing Tesla's claim of being able to mass market 500,000 cars by 2020.

It's pretty amazing how easily a lot of people get sucked into Musk's lies and misinformation. The guy's a libertarian and is only out to make a buck for himself. He does not care about the environment. He said so himself.

[BBR Esq]

18. That's food for thought.

[BlueStreak]

19. Just for the record, I am not sucked in by his lies

I admire what he has done as an engineer, but I also know that he is one of the greatest conmen of our times, as was Steve Jobs. I can admire his conman excellence while still regarding the man as a crook, can't I?

Personally I have purchased puts against his Tesla stock. He has built a house of cards and I don't think he can sustain a $265 stock price, no matter how many concessions he extracts from government agencies and how much he is able to use other people's money. The value just isn't there and eventually the mob will find that out.

Same things can be said of Zuckerburg and Faceboook, although Musk is ten times smarter than that punk at Facebook.

Let's see, GM sold 9,700,000 vehicles in 2013 and has stock valued at a total of $57 billion.
Tesla sold has stock valued at $30 billion based on its sale of 22,450 vehicles in 2013.

400 times as many vehicles sold and over $5 billion in profits gets you a stock value less than double the company that hasn't yet turned an annual profit -- ever. Yeah, that makes a lot of sense.

[BlueStreak]

20. As if on cue, TSLA stock drops over $8 today

A fair valuation for that stock is probably $50-$70 based on realistic future earnings. But there are plenty of fools to bid up the stock price -- the same people who have bid up FB, LinkedIn and all the other stocks that get ridiculous market cap without ever making a penny of profit. Nonetheless, I am betting it will get a lot closer to $200 in a couple of months. At this rate, that could happen next week.