Tesla’s Gigafactory in China to Cost a lot less than Expected. But How?

Tesla CEO Elon Musk dropped a huge bombshell during the company’s second quarter earnings call as he told investors that he expects Tesla’s Gigafactory in China to cost around $2 billion.

How Much Did Tesla Spend on Gigafactory 1?

A lot. More than $2.3 billion till March 31, 2018.

Tesla Gigafactory 1 Investment
Tesla Gigafactory 1 Investment

Back in July 2014, when Tesla reached an agreement with Panasonic to invest in Gigafactory and lead battery cell production, Gigafactory 1 was estimated to cost around $5 billion.

In 2016, Panasonic President Kazuhiro Tsuga told Wall Street Journal that the Japanese multinational electronics corporation is planning to spend $1.6 billion to get Gigafactory to full capacity. But he made that assessment well before Model 3 walked away with half a million reservation holders.

Model 3 changed the timeline, it changed the planned investment and it changed everything for Panasonic and Tesla.

Panasonic was forced to accelerate its production plans and the company announced it would raise nearly $3.86 billion in corporate bonds in July 2016 partly to invest in Gigafactory.

Tesla on its part has now spent more than $2.3 billion towards Gigafactory and with capacity at least several quarters  away from maxing out, total expenses will further increase.

Whatever the way we slice it, Gigafactory 1 is going to cost more than $5 billion to reach annual production capacity of 500,000 units.

Why is Gigafactory 3 Cheaper?

For starters, Elon Musk didn’t say that Gigafactory 3 in Shanghai is going to cost $2 billion for building 500,000 cars a year. He expects costs to reach $2 billion for building 250,000 cars per year.

“So with respect to Gigafactory CapEx, I think we learned a tremendous amount with Gigafactory 1, and we’re confident that we can do the Gigafactory in China for a lot less. I think it’s probably closer to – this is just a guess, but probably closer to $2 billion, and that should be at a higher – and that would be sort of at the 250,000 vehicle per year rate.,” said Elon Musk during second quarter 2018 earnings call.

He explained how Tesla will achieve lower costs for Giga 3. He said, “So I think we can be a lot more efficient with CapEx, and that would include at least a factory module and pack production, body shop, paint shop and general assembly.”

CTO Jeffrey Straubel further added, “We found a surprising number of ways to improve efficiency and speed and density as well at Gigafactory 1, and all those lessons will absolutely be shared with Gigafactory 3. The teams are already of course beginning to collaborate and start to figure out ways to do this more efficiently and with less CapEx than last time.”

If Tesla ends up spending  $5 billion for Giga 1, it will be for building 500k cars. A 20% reduction in costs for Giga3  does not look impossible considering the amount of learning that Tesla has gone through in the last five years. Tesla will be able to replicate a lot of its production process from Giga 1, instead of re-inventing the wheel again.