There’s been a ton about Tesla in the news lately — about two days ago, it was on Google Trends — but I’m not going to run that deep on it, since I’m not a business journalist. Here’s what you essentially need to know about the current situation, though:
1. Most energy experts think a full-scale electric car industry can’t really happen until the 2030s or 2040s. This probably goes without saying, but for electric to be the norm, you essentially need to replace gas stations with charging stations, and think about the infrastructure of doing that in a country like the U.S. It can be done, and eventually it will simply have to be done in all likelihood, but it does seem fairly distant at this moment.
2. This all comes back to batteries. Didn’t know this, but battery research and production is a two trillion dollar industry globally (with a “t”). In the last decade or so, the U.S. government has invested $2 billion in research; we’re still not there yet. So this is the next step for Tesla: build, essentially, the world’s largest battery factory. (Here’s more, including the four finalist states: Nevada, Arizona, New Mexico and Texas.)
3. Basic economics time: this factory is a major capital expenditure. To off-set that, you need to obviously (a) get to scale and (b) sell units. What does this all rest on? A couple of things. The most important is that by 2020 — 10 to 20 years ahead of most expert analysis — Tesla needs to be selling 500,000 cars per year. Last year (2013) they sold 22,000. In the entire world right now, there’s about 180,000 electric cars. So, in six years, they need to be selling — per year — three times what’s currently in existence in totality. Gulp.
4. This is ultimately how the scale will work in the electric car world:
Gallagher, who co-invented a widely used model for forecasting battery economics, says that Musk’s numbers align with his program. Although carmakers vigorously conceal their specific battery economics, the assumption in the field is that Musk’s use of conventional Panasonic batteries has allowed him to cut the cost of his battery packs to about $300 a kilowatt hour, compared with an industry average just below $500 per kilowatt hour. If with the factory he reduces his costs by another 30%,he would reach $200 a kilowatt hour, or the precise number that Gallagher’s forecasting model suggests is possible with economies of producing 100,000 vehicles.
So basically — build massive factory, get the perfect battery, drive down the cost, and then make the Tesla available for $30,000 with the idea that if you buy one, there will be places to charge it in your city/town. Do all this in six years. Gulp.
5. People do have faith, though: Tesla was one of the five best-performing stocks of 2013, and the stock shot up after news of this GigaFactory came out.
6. I’m not sure this is the right analogy, but Musk is looking like this generation’s Howard Hughes right now, minus the crippling anxieties. (Zuckerberg, I guess, would be Gates.) Musk has been associated with SpaceX, with the hyperloop, and now with this. If 2 of those 3 things worked, they would literally utterly shift society in some respects. Those are big bets. Very few people make big bets with the flourish of Elon Musk in the Silicon Valley/business world right now, but he hasn’t hit with SpaceX, the hyperloop, or (as of yet) Tesla.
7. The base situation here is that eventually, we will need electric cars or cars that run on something else — there are a million and one debates about peak oil and whether we’ve hit it yet, but the fact is … at current global supply rates, we basically need to extract 3 million barrels of oil per day, which means we need to discover another source like Saudi Arabia every 3.75 years. That’s a tall order, and the answer right now isn’t “change consumption habits,” which means the answer becomes stuff like “fracking.” Electric cars (and/or something else, like vegetable oil-powered cars or some noise) will be a thing, and probably in the lifetime of many people reading this (all 6 of you). It’s just a question of when the infrastructure, the culture, and the price point can shift in alignment. A big bet has just been made. Let’s see where it goes.