First of two stories.
RENO, Nev. — Last month, Tesla Motors Inc.’s co-founder and chief technology officer, J.B. Straubel, strode to the front of a stage at a University of Nevada auditorium and described his company’s Gigafactory.
"It won’t be some kind of satellite facility remotely controlled by some headquarters far away," Straubel said. "It needs to feel like a startup in its own right."
The Gigafactory is Tesla’s $5 billion, 10-million-square-foot industrial plant under construction east of Reno. It’s the world’s largest investment in the mass production of electric car batteries and energy storage systems designed to smooth the way for more solar power.
In partnership with Panasonic, Tesla’s goal is to build more lithium-ion batteries annually by 2020 than were produced worldwide in 2013. The purpose is to drive down the costs by at least 30 percent. Half-a-million electric cars a year would hit the roads by the end of the decade under the Tesla plan, and rooftop solar panels and large-scale renewable energy farms would be coupled with electric storage units.
"If we’re able to find ways to drop the price of storage much faster than anyone expected," Straubel told the jammed room, "then we’ll have the opportunity to do something that we’ve long felt has been a missing piece."
But dropping $5 billion of corporate cash on an advanced battery factory is a risk. The pitfalls of building a massive assembly line for today’s technology aren’t known yet. And the casualties outnumber the success stories among carmakers and technology labs trying to stretch the limits of lithium-ion batteries and crack new codes for storage.
The factory is ahead of schedule here in the high desert of Storey County, Nev. A mile down a winding blacktop road called Electric Avenue that cuts through the Tahoe-Reno Industrial Center, it sits on a long, flat pad closed off to outsiders by surrounding hills also owned by Tesla. The nearby PetSmart and Wal-Mart distribution centers are small by comparison.
Tesla’s narrative around the Gigafactory conceived as a "startup" is a far cry from the growing 3,000-acre site.
CEO Elon Musk’s vision of a clean technology manufacturing hub is on full display. It is physically big, and it’s meant to commandeer the cost constraints of selling more electric cars and home batteries and firming up the power grid. Under the umbrella of the colossal factory, Tesla and Panasonic aim to wrestle control over the supply chain leading to their nickel-packed cathodes, tweaking power density along the way.
When Musk and Straubel talked with Wall Street analysts in early November, they said the timeline for the Gigafactory’s larger-scale cell production is now the second half of 2016. In 2017, Tesla says it will launch its mass market Model 3. If the Palo Alto, Calif.-based company can’t boost its output, analysts say, then the Silicon Valley darling, which closed at around $207 a share Friday, could run into problems.
Tesla’s assurances are building an impression: Success or failure is rooted in its ability to build factories — to be a major manufacturer — and pull political levers in the same way that General Motors Co. and General Electric Co. did in other eras.
Bricks and mortar
"My gut response is to point out the limitations of Silicon Valley’s innovation model in what are essentially brownfields," said Andrew Hargadon, a professor in the Graduate School of Management at the University of California, Davis.
Tesla’s greatest challenge is getting 500,000 electric cars to market and reliable electric storage units to consumers quickly, Hargadon said. In part, it’s the old Rust Belt economy at work, wrapped in Musk’s lofty ambitions to shift the auto and power sectors away from fossil fuels.
"This is not the kind of thing you can have Foxconn produce overnight," he said, referring to the Taiwanese contract manufacturer of Apple products and other big global brands. "It is real bricks and mortar and a real supply chain. If you get a part wrong, you’re on the hook."
In its third-quarter call with analysts, Musk’s singular focus was on ensuring investors they would scale up production. For Tesla’s Model X SUV, he told one analyst, "Actually, seven days a week, every day, I get an update on manufacturing progress and what the issues are."
On electric storage: "That is again sort of a production-limited thing, so we’re trying to scale our production as much as possible," Musk said.
Wall Street is giving Tesla an enormous amount of rope to lay groundwork in Nevada, where investors hope a vertically integrated bricks-and-mortar approach begins to build a car company rivaling GM and an electric company rivaling GE.
Tesla is innovative and disruptive, analysts for RBC Capital Markets wrote after the Nov. 3 give-and-take call with Musk. "It’s also a classic story stock that is difficult to value given the investment decision is often qualitative vs. quantitative. Thus, the near-to-mid-term performance is likely to be determined by expectations and delivering on targets.
"To that end, Tesla is essentially learning how to become a manufacturing company on the fly," RBC said.
The highest bidder
In 2013, Musk launched a contest for where to build the Gigafactory, pitting state and local governments against each other. Ultimately, Tesla hammered out a deal with Nevada that secured a $1.3 billion package of tax breaks over 20 years. That’s 13 times greater than the $89 million package of goods Nevada had given to Apple to locate in the state.
"We didn’t have the biggest incentive package, we know that," said Mike Kazmierski, president of the Economic Development Authority of Western Nevada. "Most of what we gave was abatements. Texas could just write them a $200 [million] to $500 million cash check. Our state law prohibits any contribution."
Wearing his multiple hats as the founder of SpaceX and chairman of SolarCity, Musk for years has watched foreign and domestic automakers, Boeing Co., oil companies, power and industrial conglomerates, and technology giants secure friendly tax packages from governments in exchange for the promise of jobs.
Since the Great Recession, states have shelled out billions of dollars in incentives. Tennessee, with the 11th highest poverty rate in the nation, helped Volkswagen amass $566 million in tax breaks in 2008 to build a $1 billion plant in Chattanooga. Nearly $400 million in additional state and local incentives have gone toward expanding the plant since then, according to the Institute for Southern Studies.
In 2012, Pennsylvania agreed to $1.6 billion in tax credits for Royal Dutch Shell PLC to build an ethane cracker north of Pittsburgh. Shell hasn’t said whether it plans to build the plant. The Legislature in Washington state agreed to a record $8.7 billion package for Boeing in 2013.
Scoring the megadeal is now Political Bargaining 101. Innovative clean energy companies that emerged from the solar shakeouts, technology flubs and political controversies at the start of the decade, including Tesla, are taking pages from corporate America as they expand.
"What we’re looking at is a form of rent seeking by the companies," said Kenneth Thomas, a political science professor at the University of Missouri, St. Louis, who studies incentive packages.
"They know the location decision is an opportunity to extract economic rents related to the factory," he said. "They do it because they can."
The state of New York last year agreed to $750 million in subsidies to locate a SolarCity plant in Buffalo.
"He’s already quite sophisticated at extracting subsidies for his projects," Thomas said of Musk.
Project Daniel had been the name given to the super-secret Gigafactory that Nevada’s economic development gurus were pursuing in early 2014.
Tesla executives bided their time as they flew from one potential location in the West to another. In February, it was clear that Nevada, New Mexico, Texas and Arizona were the finalists. For location alone, Reno had an upper hand. It sits 250 miles from the Tesla auto plant in Fremont, Calif., and Interstate 80 cuts across both states.
Still, Nevada was out of its league in Tesla’s auction for the largest taxpayer incentive package. Texas had been squirreling away hundreds of millions of dollars in an "enterprise fund" since 2003, and New Mexico had been down this road before, determined not to lose out on another job-creating manufacturing plant.
In Carson City, the state capital, a pitch to Tesla coalesced around the 107,000 acre Tahoe-Reno Industrial Center, or TRIC. The 160-square-mile industrial park — equipped with its own train line and power plant — occupies nearly two-thirds of Storey County, a sparsely populated area that had been home to Mark Twain and the Comstock Lode silver cache.
Ten miles east of Reno, pink-lit casinos and urban sprawl give way to Storey County’s desert sagebrush and brown moonscape hills, where TRIC quietly grew into a hub for major regional distribution centers.
The come-from-behind tale of how "The Biggest Little City" of Reno and Storey County landed Tesla is now regional lore. And much of it revolves around a swashbuckling dealmaker named Lance Gilman, the industrial park’s original developer and its exclusive broker.
Gilman, 70, is the owner of a legal brothel. He once owned the area’s biggest Harley-Davidson dealership. He wears a bolo tie and a diamond ring. And he’s a master at the real estate game. "It’s so damned fun to play on the chessboard," he said.
The former country music singer dipped his toes into commercial real estate in the early 1980s, building shopping centers outside of San Diego. When Gilman cashed out, his family went to Reno. By the early 1990s, he and a partner had knitted together enough fallow land outside the city to score a big win for the region: a giant Lockheed Corp. data center.
When the Tahoe-Reno Industrial Center started taking shape in 2000, Storey County was one of the poorest counties in the state and was subsisting on a meager budget.
In December 2013, as he and the regional development brass in Reno began courting Tesla, they feared they were being overlooked. They chartered a Learjet for Tesla officials to visit the site. While Tesla officials thought better of it, Tesla’s head of infrastructure, Kevin Kassekert, eventually paid a visit.
"I asked, ‘If I can answer one question, what is it?’" Gilman said last month in the double-wide trailer he works from at the corner of USA Parkway and Electric Avenue. "They said, ‘We’re really concerned about scheduling risk.’"
Tesla wanted to know that it could build the Gigafactory fast. A county official slid a grading permit across the table in good faith. In a matter of months, Gilman had moved so quickly on a pad for Tesla, Musk called off the bulldozers. Tesla had more negotiating to do.
In Carson City, the development-minded team under Gov. Brian Sandoval (R) raced to cobble together a competitive tax package and land sweeteners throughout the spring and summer. Tesla played its hand. Talks with Nevada were on-again, off-again. Finally, a late demand by Tesla for $500 million in upfront cash ground talks to a halt.
When the other states also balked at the demand, Tesla returned to Sandoval in August 2014 and put the final touches on the $1.3 billion package, including a land deal securing an initial 1,000 acres of Gilman’s park for Tesla and a new road at public expense.
In exchange, Tesla said the Gigafactory will create 6,500 direct jobs. Sandoval has trumpeted 22,000 jobs and $100 billion in economic activity he believes will come of the state’s investment over two decades.
"It’s a real get-things-done state," Musk told lawmakers near the steps of the capital in Carson City.