The crazy, real-life story of how the CEO of electric-car maker Tesla dazzled, seduced, squeezed, bluffed, manipulated, and prodded his way to epic state incentives to build a massive battery plant in the Nevada desert.
It’s hard to overstate the mystique surrounding Elon Musk these days. He has been compared to Steve Jobs, Henry Ford, and Thomas Edison. At 43, he’s the CEO of Tesla Motors, an electric-car company so white-hot that it speaks of someday vanquishing the internal combustion engine. He’s chairman of SolarCity, whose panels hold the promise of helping save the world from global warming and fossil fuels. His rocket company, SpaceX, wants to travel to Mars. Never mind that such audacious goals won’t be realized for decades, if ever. Musk’s brilliance, his vision, and the breadth of his ambition make him the one-man embodiment of the future.
The frenzy that attends his stature was visible on Oct. 9, when Musk unveiled two enhancements to Tesla’s Model S before 4,000 people at an airport in Hawthorne, Calif. Musk took the spotlit outdoor stage at 9 p.m.—an hour late, like a rock star—wearing a black velvet blazer. Smartphones flashed; bloggers live-streamed his jokes. Standing in front of his image on a giant videoscreen, Musk showed off the model’s four-wheel drive and autopilot features.
Musk wowed the crowd with the $120,000 sedan, which goes 0 to 60 mph in 3.2 seconds. “It’s like taking off from a carrier deck,” he said. Musk took reporters for a ride, leaving them slack-jawed at the S’s acceleration and technology. No matter that, as others pointed out, competitors already have some auto-drive capabilities. As Charlie Rose put it on CBS This Morning, “Elon Musk is the kind of guy you want to invest in.”
Millions have done just that. Since the start of 2013, Tesla’s stock has soared 614%, producing a market cap of $30 billion—more than half the value of GM, which is expected to sell 10 million vehicles in 2014, compared with Tesla’s 33,000. The company has produced a stellar sedan—Consumer Reports scored it higher than any other car it has ever tested—and Musk’s achievements justify accolades: He co-founded PayPal and has made billions; SpaceX has made multiple missions to the International Space Station. (All of this was enough to make him Fortune’s Businessperson of the Year in 2013 and he’s on this year’s list, too.)
Yet Tesla offers only a single model, and it has yet to record an annual profit. The company’s future—and its giddy stock price—hinge on a seemingly paradoxical strategy: Tesla isn’t profitable selling cars for $70,000 and up, but it’s planning to sell a model for half that price starting in 2017. In theory, sales will jump more than 10-fold, to 500,000, by 2020.
That brings us to the key to the whole strategy, a decision that would raise the stakes for the company and ripple through multiple states: Tesla’s plans to build a gigantic factory to manufacture batteries. To make his new model affordable, Musk decided he needs a plant that can produce 500,000 lithium-ion battery packs per year—equal to the world’s current production. He expects the Pentagon-size facility to cost about $5 billion and begin turning them out by the end of 2016.
Some see this as a bet-the-company move, requiring near-perfect execution and a wholesale public embrace of electric cars, which today account for less than 1% of the auto market. To make the challenge even harder, every big carmaker is racing to develop its own electric models. The factory also means an outlay by Tesla of $2 billion or more—a hefty sum for a company with $3.7 billion in projected 2014 revenues.
The plan is “a tremendous risk,” says Cosmin Laslau, a technology analyst for Lux Research. He thinks Tesla will meet less than half of its 2020 sales target, which will saddle it with cash-draining overcapacity. “Tesla’s grand designs,” Laslau concludes, “are dangerously ambitious.”
But “Do the impossible” is one of Tesla’s slogans, and Musk set out to make it happen. He looked to spread the costs, seeking a mammoth package of incentives from states for the right to be the factory’s home. He succeeded—and then some. Musk landed a stunning $1.4 billion in tax breaks, free land, and other beneficence from Nevada to build the factory outside Reno. It’s one of the biggest gift baskets in history. Moreover, the other companies that have received such massive largesse were giants like Boeing, Nike, and Intel with decades of profits and much more predictable future sales.
These days companies routinely use the cudgel of jobs to extract huge offers from desperate states—a process that can resemble a shakedown. Musk showed himself to have nearly as much genius for that sort of maneuvering as he does for innovation. He took a process that typically plays out behind the scenes and made it public. Musk played an Oz-like role as master orchestrator, sending signals through earnings calls and blog postings, while keeping the states in the dark and playing on their fears of losing out. The combination of his strategy, the electric Musk factor, and the lure of 6,500 jobs inspired excited bidding among seven states and staggering leaps of faith. States were willing to move mountains (or highways, as the case may be) for a chance to have the factory.
Along the way Musk encountered a few surprises, not least that a key figure in this saga is the owner of the legal brothel known as the Mustang Ranch (this is Nevada we’re talking about), who presides over his own realm in the scrub desert east of Reno. Nevada won the deal. Whether that will be a triumph for its citizens will take many years to determine.
Elon Musk is no rookie when it comes to winning gaudy incentives. He previously proved himself a shrewd and unsentimental player. In 2007 he joined Bill Richardson, then New Mexico’s governor, in announcing that Tesla would build its first U.S. auto-assembly plant in Albuquerque. New Mexico had outbid Arizona with $20 million in goodies, including a cash “signing bonus.”
After the announcement—but before the plant could be built—California made a richer offer. Tesla promptly abandoned New Mexico. (The company now says it shifted its site because the New Mexico plan was unworkable.) In California, Tesla has received sales-tax exemptions, which it expects will save the company $90 million over a decade.
In its early days—until Musk added the CEO title to his chairmanship in 2008—the company suffered from infighting, product delays, and a near-bankruptcy. But those early struggles, and skepticism about its prospects, seem only to have fueled its confidence. “At each stage of this company, people said we weren’t going to get to the next stage,” says Diarmuid O’Connell, Tesla’s vice president of business development. “We don’t worry about these things.” (Tesla declined to make its CEO available for an interview.)
Tesla founder and chief executive Elon Musk unveils the dual engine chassis of the new Tesla ‘D’ model which is a faster and all-wheel-drive version of the Model S electric sedan at the Hawthorne Airport in Los Angeles on October 9, 2014. While Tesla produces relatively few vehicles, it has become a star in the sector due to keen demand and a reputation for high quality. A surge in its share price over the past year has pushed its value over $30 billion.MARK RALSTON AFP/Getty Images
Tesla has followed a master plan Musk laid out in a 2006 blog post: “to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.” Musk’s premise is that economies of scale, technological advances, and efficiencies at the new plant will cut battery costs by more than 30%, providing a chunk of the savings needed to sell a Tesla for $35,000. (Tesla’s cells are now made in Japan by Panasonic, which will also be building them inside the gigafactory.)
Far from being daunted by the magnitude of its ambitions, Tesla seems to be energized by it. “We don’t have any concern about the generation of demand,” says Tesla co-founder and chief technical officer J.B. Straubel. “That’s not really something we lose any sleep over.”
And so it was that Tesla’s campaign to find a home for its battery plant began in mid-October of last year with an almost coy mixture of mystery and secrecy. Susan St. Germain, a senior business recruiter for the state of Washington, says her office got a call from a Tesla executive who explained that the company had a “major” project to discuss in confidence. She was invited to fly down to Tesla’s car factory in Fremont, Calif., on condition that she sign a nondisclosure agreement.
When she arrived, St. Germain discovered counterparts from California, Texas, Nevada, New Mexico, Arizona, and Oregon. It was clear there was to be a competition. Tesla executives presented their plans to build a massive battery plant in one of the states represented at the meeting. It would mean thousands of new jobs and billions in investment.
Every detail seemed perfectly stage-managed, down to the name of the planned facility. Any company can build a large factory. Only Tesla would give a manufacturing facility its own brand and hype, dubbing it the “gigafactory.”
The company executives distributed handouts but collected them before anyone could leave the room. Taking notes was prohibited. Afterward, to make sure they were truly hooked, each attendee got a turn at the wheel of a Model S—on a private street where it was possible to floor it. “It was enough to throw you back in your seat,” recalls St. Germain. “It made me a little nervous—you don’t want to wreck their car.”
The company made it clear it wanted to proceed quickly. The states were given just three weeks to submit proposals. Tesla said it expected to select a few finalists the week after that, make site visits before Thanksgiving, and decide where to put the gigafactory by Jan. 10, 2014—less than three months off.
Tesla gave the states a spreadsheet to fill out for each location they proposed. It had more than 90 questions, everything from details on the local labor market to the site’s susceptibility to hurricanes, sinkholes, and floods. At that point, Tesla wanted a minimum of 90 acres, expandable to 300 acres by 2018, or an existing 1.7 million-square-foot building that could also be dramatically enlarged. It needed rail access to move its half-ton battery packs to Fremont for installation and a vast supply of power and water.
Equally important, the company requested details on what enticements the state would offer: tax breaks, free land, infrastructure improvements, job training, and cash. “It was left to the states to be creative,” says St. Germain.
Even as the seven states scrambled to meet Tesla’s submission deadline of Nov. 8, Musk was cagey. When an analyst on the company’s quarterly earnings call asked about the idea of building a battery plant—an idea the CEO had previously discussed—Musk replied that he hadn’t yet decided what to do.
“We’re not quite ready to make a big announcement on the cell and battery gigafactory, but we are exploring a lot of different options right now,” he said. “If I were to guess, I think we would do that, that soup-to-nuts gigafactory…that factory would most likely be in North America, but we are investigating other options as well.”
Musk’s chief lieutenant on the search was O’Connell, the judicious yang to Musk’s creative yin. A 50-year-old Dartmouth graduate and Northwestern MBA from a prominent Boston Irish family, he has a background as a consultant, which is reflected in his propensity for management jargon. As buttoned-up as he is, he realizes how crucial the new plant is. “The gigafactory,” he says, “is going to be decisive.”
O’Connell’s team soon emailed the bidding states confirmations that their proposals had been received, noting, “We expect internal reviews to take one to two weeks and will notify all participants once any decisions are made.”
Some states heard nothing more. After about a month without a peep, St. Germain called a Tesla executive, who informed her that Washington hadn’t made the cut. The state’s low power rates were attractive, but its refusal to offer big tax abatements was a deal killer, she concluded. Oregon also quickly got the ax—and, surprisingly, so did California.
Because Tesla’s assembly plant is already there, a California site would have been ideal. “All things being equal, the best place for this facility is across the street from the factory,” says O’Connell.
Yet even more than proximity, Musk cared about getting his plant up and running fast. Musk’s timetable—to start churning out battery packs in time for the planned 2017 launch of its mass-market Model 3—was already abbreviated. California’s tough environmental laws, which require detailed studies and allow legal challenges, made meeting that deadline daunting. Tesla, says O’Connell, didn’t want to take that “executional risk.” That left four states: Texas, Arizona, New Mexico, and Nevada.
At first, Joey Grisham, president of the economic development corporation in Hutto, Texas, a town of 20,000 about 25 miles northeast of Austin, didn’t even know who he was courting. The governor’s office had told him there was an opportunity, which it code-named Project Five Star. It was identified only as a “publicly traded high tech company.” The mystery didn’t faze Grisham, an earnest cheerleader for his town. He proposed a 465-acre tract of farmland.
In late November, Grisham received word that “Five Star” wanted to make a site visit. He finally learned its identity in an excited email from Dave Porter, economic-development chief for the Austin chamber of commerce. “The state confidentially told us this afternoon the prospect coming to visit next Friday is Tesla,” Porter advised Grisham on Thanksgiving eve. “This is a HUGE opportunity for Central Texas…We will assist with the Red Carpet treatment…Hope this makes your turkey taste better.”
The Texans’ relationship with Tesla kicked off on Dec. 5, when they hosted two executives for dinner in a private room at a downtown Austin steak house, then took them on a windy helicopter tour of the area the next day. Days later, Grisham submitted what he calls an “aggressive” proposal, including some property-tax breaks that lasted for 30 years. Word soon arrived from the governor’s office: Tesla was “very positive about Hutto.”
Under Republican Gov. Rick Perry, Texas has actively chased economic-development projects, closing deals by writing big checks from the Texas Enterprise Fund, a special pot doled out largely at the governor’s discretion. Perry’s office promised to come up with a cash offer if Tesla would commit to Texas by year-end.
“Any news?? I’m getting nervous,” Porter wrote Grisham after 2013 ended with no word.
Tesla finally offered encouragement 11 days later. “Happy New Year!” wrote Kevin Kassekert, Tesla’s director of infrastructure development, on Jan. 15. “I wanted to write to you and inform you that we have completed our next level down-selection and Hutto is still in the running.”
Texas Gov. Rick Perry, eager to show he was standing up for his state in the contest for jobs, drove a Tesla up to the state capitol in Sacramento (never mind that Tesla’s headquarters is hours away in Palo Alto).Photo: Rich Pedroncelli—AP
At that point, Grisham began worrying about Texas competitors. There were rumors Ross Perot Jr. was personally pitching two sites to Musk, including an old American Airlines facility at Alliance Airport, his industrial development north of Fort Worth. “Hopefully their visit sucked!” Grisham wrote Porter.
Grisham had put forward what he considered a dynamite offer, but Tesla soon made it clear it wanted much more. At a 7:30 a.m. meeting on Jan. 17, a team of company executives and finance experts presented a PowerPoint slide showing how the total costs of putting the gigafactory there measured up against four other locations. Based on incentives, utility costs, and various other measures, the final slide showed a $700 million gap between Hutto and “The Competition”—an unnamed leading prospect. The message was blunt: Hutto needed to up the ante.
Tesla didn’t offer specific details of the other offers, much less reveal who was making them. Grisham was negotiating in the dark, obliged to take the company’s word. (O’Connell describes the blind bidding, apparently without irony, as Tesla’s “attempt to be forthright and transparent.”) After the meeting, Grisham wrote to thank the Tesla team for its “candid conversation—we heard it loud and clear and are working diligently as we speak to significantly decrease that $700 M figure.” Already he was working on sweetened tax-abatement offers; a clarification of local electricity costs narrowed the gap further. “As you can tell, we want you in Hutto!” Grisham wrote. “I believe Tesla fits the Austin region and we will do EVERYTHING in our power to help make that a reality!”
The suitors continued to line up. Nevada’s governor, a former federal judge named Brian Sandoval, had run for office in 2010 promising to attract jobs to the state, desperate to expand beyond its casino industry after unemployment topped 14%. Sandoval restructured Nevada’s ineffectual business-recruitment bureaucracy, naming a development czar who reported directly to him. Sandoval was eager to win the gigafactory.
Nevada officials pitched Tesla on potential locations, two of them near Reno and others close to Las Vegas. In early December, company executives, short on time, made plans to visit the Vegas prospects. Hearing about this, the Reno contingent—co-led by Mustang Ranch owner Lance Gilman—feared they’d never even get a shot. They decided to bring a bit of Nevada-style glitz to their courtship.
Chartering a 10-passenger Learjet for $10,000, they offered to pick up the Tesla team in California and ferry them around Nevada so they’d have time to visit Reno too. The Tesla executives agreed, and after dark on Dec. 9, Daniel Witt and Kevin Kassekert boarded the plane at the Oakland airport. A local economic-development executive was waiting to pick them up in a limousine at the airport in Reno, where they’d have dinner in a private room with local promoters and spend the night in a deluxe suite at the Peppermill resort and casino. The next morning, they were to tour the two Reno properties, then hop back aboard the Learjet for Las Vegas.
But as the jet was taxiing toward the runway, an emergency call halted it: Tesla’s brass had second thoughts about the appearance of all this, and yanked Witt and Kassekert off the plane. Still, Reno had made an impression. Kassekert made plans to fly in a week later—on a commercial flight.
There he met Gilman, 69, the exclusive broker, minority partner, and manager of the mammoth Tahoe-Reno Industrial Center. At 6-foot-2 and 270 pounds, sporting a diamond ring on each hand and a gold coin on a chain around his neck, Gilman is a big presence and a Reno-style philosopher. (As he puts it, “They say gambling is at the crap tables. Gambling is buying 100,000 acres worth of dirt and hoping the economy holds.”) A onetime country singer, he has sold yachts in San Diego, Harley-Davidsons in Carson City, and flesh at the Mustang Ranch, which he has owned since 2003. After buying it, he had the building airlifted by helicopter to just outside the Tahoe-Regional Industrial Center, prompting some local wags to refer to the park by the acronym TRIC.
Lance Gilman, owner of the Mustang Ranch and the promoter behind Reno’s bid, hatched the idea for a “biblical” armada of graders and earthmovers to show how quickly he could prep his site.Photo by Winni Wintermeyer for Fortune
“Industrial park” isn’t quite the right term for what Gilman runs, though he bills it as the world’s largest. Located in Storey County, where just 4,000 people live, it feels more like its own 166-square-mile principality, with 166 tenants and its own rules. Under a sweeping agreement reached back in 2000, nearly every imaginable land use has been approved. Tenant U.S. Ordnance, which manufactures for the U.S. military, tests machine guns on a 5,000-acre shooting range inside the park. The county government, where Gilman serves as one of three elected commissioners, promises building permits in fewer than 30 days. To speed construction, county officials will inspect concrete pours at 2 a.m.
So when Kassekert finally came to visit, Gilman told him just what Tesla wanted to hear: “We can put up a building as fast or faster than anyplace in the U.S.”
On Feb. 26, Tesla finally confirmed that it was building its battery plant, in a blog posting on the company website. A map showed the four “Gigafactory Location Finalists” in red—Nevada, Texas, Arizona, and New Mexico—and noted that “final site selection activities are underway.”
One Wall Street analyst immediately concluded that New Mexico—always aggressive in chasing big projects—would land the prize. Arizona’s governor, pressing her state’s bid, called Musk directly. Tesla never ruled out any finalists, but it was spending the most time in Nevada and Texas.
Musk’s ambitions for the site, already outsize, were growing: He now wanted 1,000 acres rather than 90. That would give the plant lots of room for future expansion. Meanwhile, the company had passed its mid-January deadline for picking a site.
The states rushed to adapt their bids. Hutto’s Grisham secured options on farmland adjacent to its original tract, expanding the site to 1,241 acres. This did present one problem: It would require rerouting a mile and a half of state highway that ran through the middle of it. The Texas team began working to arrange that too.
Meanwhile, two more contenders emerged. The first was San Antonio, which had landed a Toyota assembly plant back in 2003. Eager to duplicate that feat, the area’s recruiters were “super-aggressive,” says Tesla’s O’Connell. San Antonio’s trump card was its city-owned utility, CPS Energy, which offered ultracheap electricity. Musk had publicly promised that the gigafactory would be run entirely on renewable fuels, but that wouldn’t happen for years; until then, its site team told bidders, the plant would require an enormous power load. The San Antonio discount could save Tesla $25 million a year.
The second was California. Shocked by its early elimination, state political leaders begged Tesla to reconsider, promising to come up with a sweet offer and expedite the dreaded environmental reviews. Two lawmakers announced plans to draft special legislation to address the carmaker’s desires. On a conference call on May 7, Musk announced that California, while still “in the category of being improbable,” was “potentially back in the running,” ratcheting up the pressure on the other contenders.
Tesla continued to press the states. The company informed Nevada that its “off-the-shelf” assortment of incentives placed Nevada last among the finalists—about $900 million behind an (as always) unidentified front-runner.
Nevada was seemingly out of its league. The state had never given any company more than $89 million. It had no Texas-size “enterprise” fund it could tap to close the deal. “Texas is the 800-pound gorilla in the room in any economic-development conversation,” says Nevada economic-development chief Steve Hill, who led the negotiations with Tesla. “They have more resources—and are more willing to use them—than any other state in the country.”
At this point, Hill says, he and Nevada’s governor asked themselves, How much do we want this? The answer: a lot. The two men talked about not giving away too much. Then they decided, says Hill, “to start offering things that go beyond what we’re normally willing to offer.” These new enticements would be so outsize that they would ultimately require a special legislative session to draft new laws.
Silver-haired and low key, Hill, 55, made his fortune building the biggest concrete supplier in Las Vegas and then entered government in 2011. Hill knew that Gilman’s industrial park outside Reno, the only Nevada site still under consideration, offered a key advantage: It was fewer than 300 miles from Fremont, far closer than its rivals. Hill calculated that this proximity was worth about $300 million to Tesla.
Some 166 square miles, Tahoe-Reno Industrial Center, site of Tesla’s new battery plant, is billed as the largest industrial park in the world, a realm that is home to 166 companies, including Wal-Mart, 1-800-Diapers, and weapons manufacturer U.S. Ordnance.Map Source: Nevada DOT
But no matter how far Nevada was willing to go, it seemed Tesla kept asking for even more. It wanted free land, zero taxes of any sort for 20 years, and a 25% electricity discount.
As desperate as it was, Nevada balked at the big power subsidy. It would cost the average residential customer about $20 a year—and commercial accounts hundreds or thousands of dollars—and was likely to be bitterly unpopular with residents.
Nevada refused. That prompted what looked like sullen silence from Tesla. Hill and Sandoval thought the project was lost. But then, in what would become a pattern, the automaker’s negotiators resumed talks. Says Hill: “That was the first solid indication that they would like to be here.”
In retrospect, Musk’s next move seems like a calculated bit of misdirection. On a May 7 earnings call, he announced that Tesla would soon break ground on “multiple” gigafactory sites, even before deciding where to put it. Musk elaborated at the annual shareholders meeting a month later, saying the company would begin site preparation work in “two or maybe three states, all the way to creating a foundation and completing the plans and getting approvals and everything”—to assure the plant was ready on time. Musk was also now saying he didn’t expect to make a final decision before year-end. The man who had previously pushed the states to act quickly now looked as if he would extract advantage by showing he was in no hurry. (O’Connell denies Tesla was “disingenuous” with dates—and then seems to say the precise opposite: “You have to create forcing mechanisms in these processes. We had a straw man for how this was going to go…We took the time that was necessary.”)
Musk’s calculated ambiguity seemed to be working. At least two states—Texas and Nevada—thought they were nearing a deal and redoubled their efforts. Says Grisham of Texas: “There was a point where we felt like we were the bride.”
In Nevada, Tesla had zeroed in on a site in the Eagle Valley section of the Tahoe-Reno park. O’Connell and Kassekert wondered how the harsh terrain could be flattened into the giant pad the gigafactory required, but Gilman assured them it wasn’t a problem. They had marveled at the progress of a nearby project for online retailer Zulily, transformed from rugged hillside into a 700,000-square-foot warehouse in 180 days. Musk, who implored his team to “find the right dirt,” quietly dropped in to check out the site himself. (Locals spotted the tail numbers on his jet.)
Tesla decided to put Nevada to the test—and once again the team from Reno put on a show. Gilman’s team responded with what he later described as a “biblical” show of force. On June 26, an armada of 200 earthmovers and graders—planned by Gilman but paid for by Tesla—descended onto the site. Work continued 24 hours a day, seven days a week. Drones circled overhead, providing Tesla executives with images of the project’s progress. In four weeks the workers leveled hundreds of acres and moved some 3 million cubic yards of dirt—enough to fill three football stadiums. This made the desired impression. Says O’Connell: “That grading exercise certainly demonstrated how quickly we can execute in that part of the world.”
Better still for Nevada, the two sides seemed to have reached agreement on the crucial provisions: a generous 20-year package of 100% tax abatements, conditioned on specific levels of investment and job creation. On July 3, Sandoval briefed Nevada legislative leaders. He discussed calling a special session starting in late July to pass the needed legislation. “We thought the terms of the agreement were pretty much settled,” says Hill.
Then Musk talked to Sandoval about two weeks later, and the deal was suddenly off. Musk had changed his demands. He now wanted a staggering $500 million in cash upfront instead of some of the tax abatements. This was simply impossible for Nevada. The state didn’t have that kind of money—its entire budget is just $6.5 billion—and it wasn’t about to write a half-billion-dollar check.
For a second time, Nevada’s team braced itself and said no. “The conversations got pretty darn tense,” says Hill. “Tesla was not happy.”
The company made its pique apparent: On July 23 it shut down the grading work outside Reno, abruptly sending 240 construction workers home. O’Connell explains Tesla’s attitude this way: “Okay, fine, if it’s not going to work in Nevada, we’ll take our shovel and go somewhere else.”
This charged drama played out entirely in secret. It took weeks for anyone to even notice the site work, at the end of a remote road, behind miles of fencing, and past a manned guardhouse marked with the code name Project Tiger. When bloggers finally got wind of it—and then learned that work had halted—no one would say what was going on.
Asked about it on his July 31 earnings call, Musk confirmed that Tesla had broken ground in Nevada but said that work had stopped because the pad was
“substantially complete.” He insisted that Tesla still planned to do “something similar in one or two other states.” As for Nevada? “At this point,” Musk cryptically added, “the ball is in the court of the governor and the state legislature.” Hill and the governor, listening in on the public call, knew the message was intended for them.
It’s not exactly clear what prompted Musk’s sudden request for $500 million in cash. One explanation: Battery partner Panasonic was limiting its initial commitment to a few hundred million dollars, leaving Tesla—which had expected $1.5 billion to $2 billion from the electronics company—with a big gap to fill. (Tesla executives deny this, insisting they will have no trouble funding the project, whatever Panasonic invests.)
Then there was a second factor: Just a day or two before Musk’s request, Tennessee announced it was giving $230 million to Volkswagen to help fund a $600 million plant expansion in Chattanooga, expected to create 2,000 jobs. It struck Musk that his larger project should reap Tesla an even bigger windfall. “The VW deal was an eye-opener,” acknowledges O’Connell.
Tesla continued to press to see what it could get from other states. In June, the automaker suggested Hutto buy its potential gigafactory tract outright, at a cost of $10 million to $20 million—without any promise to put the plant there. When Hutto rejected this extremely unusual request, it, too, got the silent treatment. A similar request and rebuff occurred in San Antonio.
In mid-August, after Nevada spurned Musk’s $500 million request, Tesla returned to Texas, making the same proposal to promoters of both sites there—and again getting no takers. Recalls Mario Hernandez, president of San Antonio’s economic-development foundation, describing the request from a Tesla executive: “We needed to be heavy upfront, up to a half-billion—that would be their ideal package…to be under serious consideration.”
By this point, there had been no shortage of stunts by states eager to woo the automaker. Texas Gov. Perry, sporting sunglasses, drove a Tesla up to the California state capitol in Sacramento (never mind that Tesla’s headquarters is hours away in Palo Alto) to show he was fighting for his state. The mayor of Tucson sent Musk a city building permit, good for a $3 billion, 5-million-square-foot building at an Arizona address “to be determined.” California state senator Ted Gaines delivered a golden shovel to Tesla headquarters.
Local promoters seized on every connection they thought might deliver an advantage. Reno reveled in Musk’s history as an attendee at Burning Man, in the Nevada desert, which surely meant he’d passed through town. Hutto noted that Austin held an annual Tesla Project, celebrating the birthday of the inventor who gave the company its name. Says Grisham: “The stars just seemed to be aligned for this. You just think, ‘This is the one.’ It’s like dating.” (Of course, not everybody was so enamored with Tesla. One columnist for the San Antonio Express-News wrote, after Musk’s request for $500 million in cash became public, “It’s getting harder to tell the difference between Tesla’s search and a shakedown.”)
Musk continued to use his public statements to influence and manipulate the contenders. By contrast, the company expected the states to maintain absolute silence. In May a California newspaper reported that Tesla was considering a site at a Sacramento business park. It included a bland comment from a state development spokesman: “The administration is working every day to bring companies to California and help them grow here. Tesla is certainly one of those companies.”
That prompted a tart email from Tesla’s O’Connell to the top jobs adviser to Gov. Jerry Brown: “This is unhelpful.”
In mid-August, Nevada Sen. Harry Reid shared his dismay at the unfolding process at a press conference, telling home-state reporters, “I would not start counting jobs on Tesla…I’m not sure they aren’t playing us.”
But Nevada still wanted in the game—and Tesla, finding no takers elsewhere at $500 million, was ready to play. Most of the final deal was already in place. To give Tesla free land, Hill had orchestrated a three-way agreement to pay for it at public expense. Gilman and his partners would give the automaker the now-level 980 acres. As compensation, the state would pay Gilman’s group $43 million to purchase right-of-way to extend a four-lane road through the industrial park to U.S. Route 50, a major highway. The state would also build the road, at a cost of another $70 million. “That’s our reward,” says Gilman. The industrial park’s owners had sought the extension, which will cut travel times while opening up thousands of acres for development, for more than 15 years.
Tesla would get $1.1 billion in abatements: 20 years without paying sales tax on equipment and construction materials (worth $725.8 million), 10 years without property taxes ($349 million), and a 10-year break on payroll taxes ($29.4 million). It would receive $8 million in electricity discounts.
All the subsidies would start kicking in after Tesla hit targets for job creation and investment. To offset lost education taxes during a decade in which children of gigafactory workers are certain to boost enrollment, Tesla agreed to donate $37.5 million to local public schools starting in 2018. It would give $1 million to battery research at the University of Nevada.
Sandoval also agreed to push through a bill to legalize direct car sales in Nevada, one of six states that permitted automakers to sell only through licensed dealerships. By contrast, in Texas, the state Automobile Dealers Association wrote an open letter to state legislators, urging them to resist any temptation to spike the law to win the gigafactory. That letter, says O’Connell, was “extremely unhelpful.” It wasn’t the only factor, he says, but adds, “It’s hard to imagine us making a $5 billion investment in a state where we can’t sell cars.”
The final piece remained: Even if Tesla couldn’t have half a billion, it still wanted cash to help build the project. Hill found a solution: The state would give the company $195 million in transferable tax credits previously set aside for filmmakers and insurance companies, which it could then sell. Tesla agreed. Combined with the $113 million in highway funds and $1.1 billion in abatements, that brought the total tally to $1.4 billion.
In the last days of August, Nevada’s Hill joined Tesla’s O’Connell and its CFO on a conference call. “I think we’re done,” O’Connell told Hill. Nevada had won the prize.
As of Labor Day, Texas (and Arizona and New Mexico and California) didn’t know that Tesla had made its choice. They still harbored faint hopes that they’d somehow land the factory.
That day Musk called Nevada’s governor to make it official. The next day Sandoval briefed delighted legislative leaders, laying plans for a Thursday press conference in Carson City to trumpet the news, followed by a special session to approve the legislation to benefit Tesla. (Grisham realized Texas had lost when he read about the news conference.)
But there was one final obstacle. According to Hill and Nevada assembly speaker Marilyn Kirkpatrick, who both attended the meeting, Musk—who was in Europe, then due in Japan for its launch of the Model S—had a schedule conflict with the press conference. Kirkpatrick insisted the deal couldn’t go forward without him. “He’s got to be here,” she declared. “We insisted that he tell Nevada residents himself that he was willing to invest in our state.”
The state team, it seems, didn’t entirely trust Musk. Hill wanted him to give a public assurance—even after reaching an agreement with Nevada—that he wouldn’t put his factory someplace else. Hill didn’t want the New Mexico treatment. “This was a very significant step for Nevada,” says Hill. “We didn’t want to take the step and then not have the project.” Musk agreed to upend his schedule. He arrived rumpled and bleary-eyed from London for the public announcement on the capitol steps.
It was a heady victory for Nevada. The little Silver State had bested the likes of Texas and California. The governor, standing on the steps of the capitol with the Tesla CEO, called Musk “a rare visionary who has the courage to reach beyond and to convert the unthinkable into reality.” Tesla, the governor later declared, has “changed the trajectory of our state forever.” Over 20 years, Sandoval predicted, the gigafactory will generate 22,000 jobs, including indirect employment, and add $100 billion to the Nevada economy. (Several outside experts have disputed those claims, saying they rest on shaky assumptions, anticipating an unknowable distant future.)
Still, the victory came at an eye-popping price, generating criticism in the press. Nevada is paying more than $200,000 for each of the 6,500 direct jobs the gigafactory is supposed to create. “I read Nevada’s incentive package,” says former New Mexico Gov. Bill Richardson, who negotiated with Tesla for its first assembly plant. “They literally handed over Reno and Las Vegas, lock, stock, and barrel.” Richardson is quick to add, in a rueful comment that captures the bind that states find themselves in, “I probably would’ve done the same thing as Governor Sandoval. It’s a lot of jobs in a recessionary period. You create a new kind of economy in your state.”
For his part, Musk noted that Nevada hadn’t even offered the biggest package (San Antonio would claim that title). Low costs and high speed had carried the day, he said. “It’s a real get-things-done state,” Musk declared. “The biggest single factor was time to completion.”
By November, when Musk discussed the deal on an earnings call, he sounded exasperated with continued condemnation of the terms he had extracted from Nevada. Calling the deal a “super-good idea” for the state, he said the criticism “kind of bugs me. I thought we got an okay incentive package, given the scale, but not a super-huge one.”
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This story is from the December 1, 2014 issue of Fortune.