For Tesla’s Gigafactory, a dash of brinkmanship
FORTUNE — For Tesla Motors (TSLA), the success of its mass-market third-generation electric car hinges largely on the swift completion of its proposed $5 billion lithium-ion battery factory.
So much so that the electric automaker plans to go through the entire pre-construction process, all the way to breaking ground, in at least two locations simultaneously.
“The critical path for us is timing,” said Simon Sproule, vice president of communications for Tesla. “This is an insurance policy for any delays.”
The company has three years to complete its site review, negotiate a lucrative incentives package with whatever state and municipality it chooses, work through the design and approval process, build the factory, install equipment, and launch production. Considering the size and logistics of its so-called Gigafactory as well as the regulatory hurdles it will have to navigate, time is in short supply.
On Feb. 26, the electric automaker revealed the first details for its Gigafactory, a massive facility that will be designed to produce more lithium-ion batteries annually by 2020 than were made worldwide in 2013. Tesla estimates that the plant will have the capacity to produce 50 gigawatt hours of battery packs a year, which will be used for its Model S luxury sedan and a cheaper third-generation vehicle intended for the mass market. By 2020, Tesla estimates the facility will be able to make enough batteries to supply 500,000 vehicles a year.
“The Gigafactory is essential for our growth,” Sproule said. “So timing is just as important to us as other components in the total business package.”
The factory is expected to reduce the per-kilowatt-hour cost of its lithium-ion battery packs by more than 30% by the end of 2017, the first year of volume production. That price decrease is necessary for CEO Elon Musk’s bid to make a car 50% cheaper than its luxury Model S, which starts at $70,000.
Tesla initially said it was evaluating 500- to 1,000-acre sites in Arizona, Texas, New Mexico, and Nevada as four potential sites for the factory, which will employ about 6,500 people.
“We’re in uncharted waters here,” said Alec Gutierrez, senior analyst at Kelley Blue Book. “This is certainly a unique approach, and — not in a negative way — a very shrewd tactic as well.”
Tesla will undoubtedly have much higher upfront costs if it pursues two sites at the same time, Gutierrez said. “But my guess is they’ve done the math, and the concessions package they’re expecting will more than offset those costs.”
The promise of hundreds of high-paying jobs can create a bidding war between states and even municipalities, each one trying to offer a sweeter package of incentives.
States might offer to cover job training costs, invest in infrastructure, property tax abatements, corporate income tax credits, and energy subsidies, said Leigh McIlvaine, research analyst with Good Jobs First, a Washington, D.C.-based non-profit.
So far, little information has trickled out about potential concession packages, and it’s possible that the four states being considered are waiting each other out, McIlvaine said.
“Unfortunately for the taxpaying public, negotiations for these types of deals are very often performed in secret, and the public doesn’t learn about it until the deal is struck,” she said.
Arizona lawmakers approved energy subsidies last month targeted towards companies that plan to use renewable energy. These subsidies would be attractive for Tesla, she said, unlike conventional electricity subsidies usually considered by states for major manufacturing deals, which would not be. The city of San Antonio has reportedly offered Tesla a package of local incentives estimated to be around $800 million, according to a report from the San Antonio Express News that used two unnamed sources. However, government officials have yet to publicly confirm those numbers, McIlvaine said.
Nevada and New Mexico remain quiet.
Pursuing two sites at once seems like a “phenomenal way to piss someone off,” McIlvain said. “It’s sort of like leaving a bride at the altar.”
New Mexico has played the jilted bride-to-be before. In 2007, Tesla chose Albuquerque for its auto manufacturing plant, but then changed its mind and decided to move production to California instead.
Correction, May 6, 2014: A previous version of this story misquoted McIlvaine as saying that Arizona’s proposed energy subsidies package would not benefit Tesla. The package, which is focused on renewable energy sources, would directly benefit the automaker.