Back in 2013, Tesla first announced its plan to build Gigafactories all over the world. Gigafactories were designed to ramp up production of cars and lithium-ion batteries to achieve the company’s mission to help the world transition to sustainable energy by providing affordable electric vehicles and energy products.
Gigafactories are crucial to Tesla’s global expansion strategy. With the need to increase production and deliver to customers faster, Tesla is accelerating construction of its ambitious Gigafactories. In addition to the three current ones near Reno, Buffalo, and Shanghai, Jerome Guillen, Tesla’s president of automotive, says Gigafactories in Texas and Germany are under construction at full speed. Tesla’s goal is to deliver 500,000 electric vehicles in 2020.
“Gigafactory has a massive expansion in capabilities, not just on auto production, but on battery technology,” said Daniel Ives, a managing director and senior equity research analyst at Wedbush Securities. “Some of the most innovative battery technology in the world has come at Giga Shanghai, and the brand that Tesla has is unrivaled in its distribution — years ahead of the competition.”
While the Gigafactory strategy illustrates Tesla’s ambition to expand production and dominate the market, it presents risks: more debt, lack of experience in producing lithium-ion batteries, potential pollution, and possible miscalculation of what cars the public wants. Those risks make the success of the Gigafactories strategy uncertain.
“To date, we have limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our electric vehicles,” Tesla admitted in its initial report on Gigafactories in 2014.
Tesla has performed very well, whether in the stock market or in its rapidly increasing revenues. Its stock has soared 600% year to date, and its revenues reached a historic high for the company at $331 million in the third quarter, beating Wall Street’s estimates. Tesla has continued making profits in the last few years and recently joined the S&P 500, the premier index of big U.S. companies. Given the company’s current market value, an estimated half a trillion dollars, analysts predict Tesla’s stock price and revenues will go much higher.
Though Tesla’s financial performance is strong and exciting, the most important risk to its Gigafactories strategy is debt.
Given the cost of the Gigafactories, Tesla’s financial results may fall into a trap. The company’s debt has increased from $3 billion in the first quarter of 2015 to $14 billion in the second quarter of 2020, resulting in concerns about the company’s financial health from not only investors but also creditors. With 14 Gigafactories still to be built or under construction, analysts are concerned about Tesla’s financial balance. According to a report from Electrek, a news website covering electric transportation, Tesla spent almost $100 million on land alone for its Texas Gigafactory. Taking on debt can help a company grow. But if Tesla overloads itself with debt because of its aggressive expansion on Gigafactories, it could ruin the company.
“With a young, growing company, there is always more risk of taking on too much debt to fund growth,” said David Whiston, sector strategist at Morningstar Inc., an American financial services firm. “Given the many uncertainties regarding Tesla today, including COVID-19 and the debt load, our fair-value uncertainty rating will remain very high for a long time.”
In addition, Tesla said in its 10-k while announcing the Gigafactories plan in 2014 that it lacked “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.”
The production of lithium-ion cells is crucial, as it is closely connected to the company’s new battery cells, also announced in 2014. To solve this problem, after a year of negotiation Tesla is collaborating with Panasonic to set up a new production line at the Nevada Gigafactory to increase battery cell production in 2021. But for other Gigafactories around the world, Tesla has announced no new partnerships, indicating lithium-ion production remains a tough issue.
Tesla also has to anticipate demand for each car model accurately because mistakes will “result in inefficient expenditures and production delays,” the company pointed out when it introduced the Gigafactory plan. To avoid shipping and tariffs, Gigafactories are expected to help Tesla make more profits by delivering cars at lower cost, producing the models that are popular in the market where a Gigafactory is situated. But it is not easy for Tesla to make accurate estimates of demand for all the Gigafactories, and shipping the cars to different countries costs much more than selling them locally.
“We had basically no access to any of the subsidies,” said CEO Elon Musk during a February interview early this year on Third Row podcast. “We paid a tariff and we had to ship the cars over, and every single thing was set against Tesla.”
Tesla cannot ignore the issue of pollution. To build Gigafactories worldwide, it has to buy land in different countries that were forest or parks before. Especially when Tesla produces lithium-ion batteries at Gigafactory sites, environmental concerns rise not only for Tesla but also for local residents.
Its Gigafactory in Brandenburg, Germany, is now facing an order on Dec. 8 from a local court to suspend clear-cutting trees on the land it has bought to build its first European Gigafactory. Tesla does not yet have planning permission to build the factory, Reuters reported, and the company is proceeding at its own risk. Unlike the Gigafactory in Shanghai, the one in Germany is opposed by many environmental activists concerned about its potential negative impact on the local ecosystem.
“Here are many protests against Tesla because there was a new factory is built,” said Frank Schwope, an analyst at Norddeutsche Landesbank in Germany. “They cut thousands of trees, and people who live where the Gigafactory is built really don’t like it.”
Despite these risks, Musk reaffirmed his commitment to the strategy on Twitter in July this year saying, “Gigafactory is the product even more than the car.”