The announcement of Tesla’s (TSLA) $5 billion battery plant, the Gigafactory, left Nevada, New Mexico, Texas, and Arizona fighting to become the host. The gigantic project is expected to create 6,500 jobs, and rack up $5 billion in infrastructure investment, which is a strong incentive for the states’ governments to make an offer worth Tesla’s while.
Why the Gigafactory?
With an all-new crossover Model X due next year, and a mass market Model E due in 2017, and increasing global demand for Tesla’s Model S, there is added pressure on the automaker to shore up its battery production.
Tesla currently sources its lithium-ion batteries from Panasonic Corporation (PCRFY). This leads to bottlenecks in the supply chain, which is precisely the problem that the Gigafactory is being built to resolve. The factory can purportedly produce as many battery packs as are currently produced in the whole world – at 70% the current costs.
The Potential Host States
In order to avoid timing risks, Tesla recently announced that it will break ground in two out of the four states under consideration. The likely hosts are Texas and Nevada, with potential sites in San Antonio in the former and Reno in the latter. The final location for the plant is expected to be revealed by the year’s end.
New Mexico is probably at the back of the line, as it has high labor costs and labor union pressures for Tesla. Arizona may stand a better chance than New Mexico as it is a right-to-work state and is offering some undisclosed incentives to Tesla. Nevada, in addition to having no corporate income tax, has a distinct advantage in its direct rail route that leads to Tesla’s production facility in Fremont. This allows logistics costs to be slashed to around a third of other transportation options available to Tesla.
Texas has strong chances to become the host state, as Toyota (TM) earlier this year announced it is moving its US headquarters there, and Ford (F) and General Motors (GM) already have operations in the state. For Tesla, the right-to-work status, no corporate income tax, and an ample supply of workers are additional perks. Most importantly, the port of Houston allows Tesla to easily pursue its export strategy, a key point in the company’s plans of emerging as a global automaker.
Notably, a bonus contender also in the race is the automaker’s home state, California. Elon Musk, the company’s CEO, had dismissed California earlier on grounds of higher labor costs and taxes, and regulatory hurdles. Depending on the relaxations Governor Jerry Brown may be willing to lend to Tesla, the company may just deliver yet another surprise by retaining the project at home.