Sprawled across a parched landscape in Nevada, Tesla is constructing the most massive building in the world. The electric-car maker calls it the Gigafactory. And it’s already estimated to equal 35 Costco stores combined.
The grand structure is meant to accelerate the world into sustainable energy as it creates a one-of-a-kind car battery. It will be Tesla’s flagship battery plant.
“We’re reinventing the battery-manufacturing process from end to end,” said CEO Elon Musk, at the Gigafactory’s grand opening in July. He is keen that the factory will eventually produce a world supply of batteries. “It has to be big because the world is big,” he said.
At only 30 percent complete, it is surrounded by a city of construction sites that are building it in phases.
In 2017, Tesla set out to lead the world’s transition into green energy with the announcement of the new mass-produced Model 3 Sedan, its highly anticipated affordable electric car. At the heart of its ambition, was its crown jewel, a compressed and long-lasting battery. The new battery proved difficult—even with Tesla’s new all-purpose Gigafactory—and led to production problems with the Model 3.
The company had the means to mass-produce its newest car, but not the know-how. If Tesla engineers could master the battery— the heart of the car—they could significantly increase car output. However, the company’s predictions for actual production didn’t test right for targets and led to the announcement of reduced goals on the earnings call for the third quarter for 5,000 Model 3s per week into 2018.
The Model 3 battery is distinctive because it is slightly larger than Tesla’s other batteries, structurally more compact, and volumetrically stores more energy.
The carmaker’s nimbler battery forecasted a more streamlined production process. The critical variant was to cut down on human labor, which would make the car cheaper for its customers.
But Tesla’s car-battery cells require an enormous amount of arduous welding. And the company hasn’t mastered the process with automation yet. It slowed down production and spurred a revamp of Tesla’s manufacturing goals. Admittedly, the high degree of automation on the Model 3 battery-production line proved a challenge, said Tesla in a recent shareholder letter.
“It’s basically impossible to do economically with a human welder, and it’s a very difficult manufacturing trick to do with robots,” said Sam Jaffe, a battery analyst at Cairn Energy Research.
A better battery
The battery is unlike the typical electric-car battery, which is shaped like an encyclopedia. The Model 3 battery pack’s large, cylindrical shape houses more cells, and stretches the amount of energy it can provide, according to Jaffe. It uses 2,170 cells to produce energy to power the car. The most common battery has 1,850 cells.
It is also a lithium-ion battery, rather than the traditional lead-acid battery, which differentiates Tesla’s Model 3 from competitors like carmakers Volt, General Motors, and Ford. A Tesla driver doesn’t have to replace the battery for at least eight years, compared to other electric vehicles that require a replacement every five to six years.
When Tesla announced the vehicle in July, company executives were excited about the influx of car reservations. There was growing consumer enthusiasm around the car, which is Telsa’s cheapest, starting at $35,000. It can also last 220 miles on a full charge —twice as long as competitors like Ford and Mercedes-Benz.
The higher battery output, to meet the demands for the Model 3, came with purchasing power, too. Tesla cut down the costs of materials to make the battery because they purchased them in bulk for less than the going market price. And, now that the company is manufacturing the cars in-house at the Gigafactory, it cut down on outsourcing from different places around the world.
The Gigafactory is meant to hone all aspects of production for the battery. It aims to produce 35-gigawatt hours of the annual output, a hundred times more than the average battery facility, and the equivalent of powering 720,000 households, said Jaffe.
“On the battery-cell manufacturing basis, it’s a factory of enormous scale,” he said.
Initially, the niche luxury automaker set an aggressive delivery target for its Model 3 Sedan of 10,000 vehicles per week in 2018. Investors thought the goal was ambitious for the newly minted car company and the stock peaked at $400 a share on the announcement day. A month after Tesla announced assembly of the car, Musk quoted 400,000 back-logged orders of Model 3s, with reservations stretching into 2018.
A build-up of car reservations meant more capital for the company’s projects. But later down the road, the robust back-log would spell trouble for the carmaker, as people grew impatient and canceled their orders.
In November, Tesla reported weak third-quarter earnings after it missed Model 3 production targets. Revenue increased annually by 30 percent in the last year, from an estimated $2.3 billion to $3 billion in the fiscal year 2017. But the company still hasn’t turned a profit off the Model 3.
Car analysts are divided. Some believe the missed targets don’t equate to scores of Model 3 reservation holders pulling their bids. Others are skeptical.
“They’ve encountered all these production problems, and they’re burning cash at a faster and faster rate,” said Michelle Krebs, an executive analyst at Auto Trader. “There are a lot of questions of whether they can continue to attract capital, which they’ve had much success doing, and turn the corner on cash burn.”
Tesla spent $1 billion in the third quarter to ramp up production of the Tesla Model 3 at the Gigafactory. That is a lot of money. In the same quarter, the company brought in $3 billion in revenue, mostly from its sales of the Model S and X.
Tesla was expected to see a modest revenue benefit by reaching a target of 1,500 Model 3 sedans in the same period but surfaced with an output of 260. The carmaker is reducing its objectives for production in 2018 to 260,000, down from 350,000 Model 3s.
Despite missed targets, investors haven’t lost hope. Tesla’s stock was up 60 percent in November from the same period last year.
But, some car buyers have moved on.
Attracted to the car’s minimalist design and battery and charging technology, Portland, Oregon resident Garret Murray was in the market for a Model 3. After waiting several months for the car, he canceled his reservation and instead bought a Chevrolet Volt.
“Back-logged orders were a big reason for canceling because their production output is currently very slow and it wasn’t clear when I might actually get my Model 3,” he said.
Murray would’ve received the vehicle in May 2018 but didn’t trust the timeline given the slowed output. He didn’t buy Tesla’s email that said: “we’re trying our best.”
Tesla’s growing pains aren’t enough to say whether production faults have soured the carmaker’s future. With the promise and power of the Gigafactory, the automaker may be able to iron out the wrinkles in its battery production. Tesla sees its challenges as transformative to produce its first mass-market electric car and could reach great heights as it roots itself into the auto industry.