Tesla’s Massive Nevada Factory Will Need Massive Results to Pay Off

Tesla’s much publicized “gigafactory”—to be built in Nevada, the company announced on Thursday—is a gamble that demand for electric vehicles will increase rapidly in coming years. In fact, for the factory to truly pay off and make batteries substantially cheaper, as Tesla hopes, the company will have to sell 10 times more cars each year than it currently does.

Once completed, Tesla’s factory will be able to produce more lithium-ion batteries than all the world’s existing lithium-ion factories combined—enough to power 500,000 vehicles each year. It will also produce many subcomponents on site, instead of importing them from elsewhere.

Tesla is betting that such economies of scale and savings on transportation costs will bring down the cost of batteries by a third, a crucial step toward its goal of selling an electric car with a range of 200 miles that costs $30,000 to $35,000. The company’s Model S, which costs between about $70,000 and $115,000, can travel 265 miles on a charge. Most existing electric cars have a range of only about 100 miles on a charge.

Tesla’s CEO Elon Musk is therefore gambling that his cars will be far more popular than any electric cars to date. It’s a risky bet, with one industry analyst firm, Lux Research, predicting that Tesla will sell 240,000 cars a year by 2020, when the factory is to be finished—or less than half as many as the factory is designed to build batteries for.

Tesla had been considering several other states for its gigafactory, including California and Texas, as it sought government incentives to help it build the big factory. To land the factory, Nevada agreed to provide Tesla significant financial incentives over the next few decades. Tesla says the factory will be a “net zero energy” building, although it’s not clear exactly how the company is doing this accounting; such buildings typically generate as much energy as they consume.

The battery typically accounts for less than a quarter of the cost of a Model S, which means that even if Tesla can reduce the cost of battery manufacturing by 30 percent, it will need to come up with cheaper ways to make other components in order to make an affordable 200-mile-range electric car.