Tesla’s Quest to Build the Machine Behind the Machine

The Tesla Gigafactory is shown under construction outside Reno, Nevada
Construction of the Tesla Gigafactory outside Reno, Nevada is shown February 18, 2015. Once known primarily for its casinos and quickie divorces, the Reno area has made impressive strides in its attempt to transform itself into a technology hub in the high-desert of Nevada. In the last few years, it has attracted big Silicon Valley names, including Tesla, Apple and Amazon. But now a new challenge has arisen for Reno: managing its success. Even as the region celebrates its economic wins, it is struggling to cope with the additional demands that the new businesses -- and the new residents they draw -- will place on Reno?s infrastructure, schools, and city services. To match Insight USA-RENO/TECH Picture taken February 18, 2015. REUTERS/James Glover II (UNITED STATES - Tags: TRANSPORT BUSINESS SOCIETY) - RTR4R9MN
Photograph by James Glover — Reuters

Next month, electric car maker Tesla will throw what will likely be its biggest, flashiest party to date. On the night of July 29, the company will hold an official “grand opening” for its massive—and highly unusual—battery factory under construction outside of Reno, Nevada.

When the factory is completed it could be one of the largest of any kind, anywhere in the world, and it could double the world’s lithium-ion battery production. The factory, which could be the first of several for Tesla, is meant to eventually churn out enough batteries for 500,000 electric cars a year by 2018. Previously Tesla was planning to make that many batteries by 2020, but the company recently decided to accelerate that goal by two years.

This production ramp may show how confident Tesla is, but the factory is also a mega gamble for the automotive upstart. Tesla needs the battery factory to reduce the cost of its batteries by a third. It’s vital that the company lower the battery costs in order to be able to manufacture its next electric car, the $35,000 Model 3, which is aimed at mainstream consumers.

Tesla Model 3
Tesla’s Model 3

Working with Panasonic, which is providing its battery cell production machinery, Tesla (TSLA) plans to produce its very first lithium-ion battery cells at the factory later this year, Tesla’s CTO JB Straubel said during the company’s annual shareholder’s meeting last week.

For Straubel, the Gigafactory is the company’s “chance to reinvent battery manufacturing.” Before this, consumer electronics companies were running all battery production, explained Straubel during the shareholder meeting.

The company is already assembling battery packs (made up of battery cells) in the Nevada factory, dubbed the Gigafactory (Tesla has another factory in Fremont, Calif. that assembles its cars). The battery packs being assembled in the Gigafactory are made of cells likely from Panasonic (PCRFY) for the company’s grid battery initiative, and they’ll get plugged into the power grid or paired with solar panels.

When the Gigafactory starts manufacturing its own battery cells, it will be a huge milestone for a brand new and completely redesigned type of factory. That facility will cost around $5 billion, including at least $2 billion from Tesla. The state of Nevada is providing $1.4 billion, in tax breaks, free land, and other beneficence.

During Tesla’s shareholder’s meeting last week, Tesla CEO Elon Musk discussed just how he’s thinking about the design, construction and organization of the factory. He said his attention is focused on the importance of building “the machine that builds the machine.” It takes a hundred to a thousand times more resources, and far more difficulty, to build the machine that builds the machine, compared to creating an individual product, said Musk.

For more on Tesla’s Model X car, watch our video.

But he says he came to realize just how important manufacturing was about two to three months ago (construction on the battery factory started a year ago). Musk and Straubel also focused heavily on the design of the company’s assembly plant in Fremont, Calif.

Musk said the Gigafactory is being designed “like you’d design an advanced computer”—all of the pieces of the factory will be optimized to be as efficient as possible. The company is bringing in engineers that are used to doing this type of work and have them focus on the factory design and engineering. Engineers usually are met with a series of walls when they work on projects, said Musk, adding “We explain those walls don’t exist here.”

The Gigafactory was only 14% completed as of early May, but the company is already working with Panasonic to “collapse the supply chain and drive down costs,” as Bloomberg put it after a tour of the place. There are already 350 Tesla employees working out of the factory.

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That concept of building the “machine that builds the machine,” is now what gets Musk “really fired up,” he said during the shareholder’s meeting. Despite that the Gigafactory hasn’t yet manufactured its own battery cells, Musk said: “I’m highly confident that this will by far be the best [battery] cell production in the world.”

For Tesla, the battery factory will help Tesla build, and meet the demand for, its upcoming Model 3 electric car. The company was able to secure $1,000 deposits from about 400,000 potential customers for the Model 3. Not all of these reservation holders will end up being customers, but the clear high demand caused Tesla to push its Model 3 production plans ahead by two years. And that means the Gigafactory development is now being set on overdrive.

The Gigafactory is supposed to be what enables the cost effective and low cost development of the Model 3. The Model 3 is Musk and Tesla’s longtime dream to make electric cars for mainstream car owners. In other words, there’s a whole lot riding on the factory, and its very large promises.

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