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Can The Tesla Motors Inc (TSLA) Gigafactory Really Slash Battery Costs By 30%?

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Tesla Motors is building a massive 10 million square feet Gigafactory in Nevada which it hopes will help slash battery costs by at least 30%. We analyze how that could be difficult to achieve

Tesla Motors Inc (NASDAQ:TSLA) is eyeing transitioning into a mass electric automaker on the back of noticeably larger production and sales volumes of its electric vehicles over the next few years. That goal however depends on Tesla’s ability to ramp up production smoothly. But more so, Tesla needs to keep a tight lid on costs – battery costs in particular that form the bulk of the production costs of these alternate fuel vehicles.

To do that, Tesla is trying to take advantage of in-house economies of scale by building a 10 million square feet, $5 billion lithium ion battery factory it calls the Gigafactory in the state of Nevada, outside of Reno. The company’s CEO, Elon Musk has cited sharply falling battery costs, and says that at optimum production capacity (half a million battery packs a year) the Gigafactory could help slash battery costs for Tesla by at least 30%, thereby making it easier for the company to price its vehicles in mid-ranges to appeal to a larger target market.

However, a core input that goes into making batteries for electric vehicles and other applications (stationary storage), lithium that is, has been on the move up on the price curve as miners and related companies see the burgeoning demand for the what Goldman Sachs calls “white gasoline.”

Consider this: Tesla has already said that its Gigafactory alone will be producing as many batteries as the rest of the world combined. That equation does not factor in other automakers and energy storage players that are ramping up their production to take on Tesla.

According to a report from Bloomberg, lithium carbonate being imported into China alone in the last two months of 2015 saw prices more than double to $13,000 per ton. Bloomberg also quotes some contracts worth more than $23,000 per ton.

Bloomberg claims that for every one percent increase in global market share of electric vehicles demand for lithium jumps by 70,000 tons a year. The data and analytics firm proposes that in the next 10 years, lithium-ion market could literally triple in size.

And the claim is conceivable too. Tesla – arguably the most successful pure play electric automaker – has already reported booking over 300,000 orders for its new mass market Model 3 sedan, slated for a rollout late next year, and unveiled only as recently as March 31.

For Tesla, which plans to make part of the Gigafactory operational later this year, rising lithium-ion costs could quickly mount a major challenge in trying to cap production costs – a goal that lies at the center of the $5 billion Gigafactory project.

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