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Tesla stock on the charge as plans for 5bn “Gigafactory” revealed

Elon Musk must be the busiest man in California right now, and he is reaping the financial rewards. But how tangible is the end product he is selling?

Like Facebook CEO Mark Zuckerberg, the only man to have increased his personal wealth more so far in 2014, Musk is a man with a vision, and the ambition to back up his words with actions.

Tesla Motors Inc., manufacturer of the high end Model S electric car, which currently retails at around $90,000 USD, has seen its stock rally an astonishing 619% over the past year, and even more incredibly, this gain was achieved on sales of just 22,400 cars, with sales in 2014 projected to increase by just 55% to over 35,000 in 2014.

To put this into perspective, Tesla’s market capitalization now stands at $31 billion USD, which is more than half of the valuation of both General Motors Co. and Ford Motor Co.

General Motors sold 2.8 million vehicles in the US alone last year; Ford sold 1m units in China alone. The Toyota Camry, the biggest selling car in the US last year, sold over 400,000 units, or 20 times more than the Tesla managed.

The appeal of the Tesla can of course be summed up in a single word. Potential. Elon Musk, the South African born 42 year old entrepreneur has stuck his hand up to answer the question that preoccupies America like no other. “What do we do when the oil runs out?”

The US has the largest fleet of electronic vehicles in the world, with 16 plug-in models available from 9 different car companies, the best-selling being the Chevrolet Volt, with the Tesla taking fourth place overall behind the Nisan Leaf and Prius hybrid plug-in.

Where Musk has really done his homework, however, is in the marketing department. For years scientists have wrestled with the problem of creating a battery capable of powering a vehicle over long distances at a price that appeals to consumers. But the problem persists: too many lithium ions needed, not enough space in the battery to wrap them all up.

In its desperation to succeed, the Obama administration has made grants worth $2bn USD available but so far nobody has succeeded in making the leap from concept to reality, with even the most fervent of electrical evangelists suggesting the wait will go on for at least another 2 decades.

By creating a highly stylised, sleek and attractive product, however, and focusing on improving the lifetime of existing battery models whilst decreasing the cost of production, Musk is daring to sell us both the sizzle and the steak. Don’t wait for tomorrow, he is saying, for tomorrow never comes; let’s live in the here and now. Let’s play with what we’ve got.

By unveiling plans for a $5billion USD battery producing “Giga-factory”, Musk is creating his very own bull market and grabbing it firmly by the horns.

Economies of scale dictate that a facility of this kind will drive down production costs of lithium ion batteries by at least 30%, allowing the automaker to produce as many as half a million new affordable electric cars every year. The Tesla, currently as rare a sight on Californian highways as rocking horse manure, could end up becoming the new Camry. But hold onto your hats folks, for Musk, this is just the beginning.

For it so happens that he is also Chairman of solar power company Solar City Corp, currently petitioning the US monopoly power utility, which the Company believes has been dragging its heels over connecting solar panels to its current grid system, as it directly benefits from the current power system, to the tune of $360 billion USD of sales in 2012 alone.

Lyndon Rive, the CEO of Solar City, who also happens to be Musk’s cousin, explains: “When you have a game changing technology, those in the game don’t want to change – they like the existing game, the sole source, cost plus model” With a battery factory on the horizon as big as Tesla’s, however, which is capable of providing stationary battery packs perfectly in tune with Solar City’s customer’s needs, times aren’t just changing, they’re charging.

The Giga factory concept represents nothing so simple as a long bet that no-one will produce a more efficient battery than the existing Tesla model by 2017, when the 10 million square foot facility is due to open, and if the share price is anything to go by, investors are preparing to back him to the hilt. The stock’s surge has enabled Musk to trigger the sale of a $1.84 billion USD convertible bond offering which will part finance its construction.

Tesla has announced that it will likely partner with Japanese Company Panasonic, which would bring another 1 billion to the table; Panasonic already enjoys a productive relationship with Tesla as the supplier of its battery packs, which at $300 per pack is already some $200 dollars cheaper than any of its rivals can boast, with the potential to drop to $200 dollars, a holy grail like figure regarded by analysts as the key to making mass production a viable economic reality.

There are 4 US states in the running to host the plant; Texas, Nevada, Arizona and New Mexico, with the batteries being shipped to San Frisco where the Tesla is made. Funds will be invested into researching and building a “Gen III” vehicle that will be cheaper and more efficient that the current high end model.

So far so upside; Musk has succeeded in creating radical growth for not just one, but two companies, a two pronged assault on the American automotive industry, and just for fun, its national electricity grid too.

Musk might be reflecting that he finds himself in a curious situation: he has blown investors away with the scale and ambition of his project, but even he must wonder if he can really pull this off. He needs to build, and sell, 500,000 units per year to make his model work. He can become the world’s largest energy store if he can get this factory built before his product becomes obsolete or his rivals builds their own Gigantor style plants. These are challenges indeed, and it may very well come down to fine margins.

So how can we tell if Musk believes his plan will work? Well here’s a clue; he also heads up a third investment vehicle: its name? Space Exploration Technologies Ltd. Strap yourself in and enjoy the ride!

 
1 Response
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    April 30, 2014

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