Tesla Gigafactory Unveiled: An Inside Look

By Markets Fool.com

Before going inside, The Motley Fool tours the exterior of the Gigafactory in a Model X. Image source: The Motley Fool.

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It didn't take long after arriving at Tesla's (NASDAQ: TSLA) Gigafactory in Sparks, Nevada, on Electric Avenue on Tuesday to confirm what Tesla has already made clear: This is one very ambitious project. With an 800,000-square-foot footprint, the factory is squarely aimed at supporting a significant ramp-up in battery production.

But here's the catch: This is just the first phase. It's only 14% complete.The finished factory will be absolutely mind-boggling.

Here's a glimpse of the Gigafactory tour in five key takeaways.

1. It's all about batteries

Tesla broke ground just over two years ago on the Gigafactory to address its most pressing bottleneck: lithium-ion batteries. The factory is intended to alleviate production constraints for batteries amid rapidly growing Tesla vehicle sales and ahead of an anticipated jump in vehicle production. On the back of the company's 2017-slated lowest-cost vehicle yet, Model 3, Tesla expects vehicle production to jump from about 50,000 vehicles in 2015 to 500,000 annually by 2018.

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But the Gigafactory isn't just meant to make batteries for vehicles. Under the same roof, Tesla will produce batteries for its rapidly growing energy storage business. Indeed, Tesla has already started building batteries for its Powerwall and Powerpack energy storage products at the factory.

Battery for Tesla energy storage products made at the Gigafactory. Image source: The Motley Fool.

By building its own batteries, Tesla's goal with the Gigafactory is to achieve significant cost reductions. Since Tesla first announced its Gigafactory, the company has been targeting a 30% cost reduction for its batteries by 2020. But on Tuesday, Tesla notably said it is ahead of its cost savings goal, now expecting to drive down the per-kilowatt-hour cost of battery packs by more than 30% by 2018 -- two years earlier than initially planned. It believes these lower costs will be propelled by unprecedented economies of scale and by vertically integrated production.

Importantly, Tesla said the factory is built with flexibility in mind, able to adapt to any changes in battery technology or architecture "over the next decades."

2. This is just the beginning

When the Gigafactory is complete, it will be the biggest building in the world by footprint, at 5.8 million square feet, or 107 football fields. This is much bigger than the current structure. The finished portion of Tesla's Gigafactory today has an 800,000-square-foot footprint, or 1.9 million square feet when including the operational space on several levels of the current structure.

Gigafactory model illustrates scale of current structure in the context of how large the completed building will be. Image source: The Motley Fool.

Tesla CEO Elon Musk said on Tuesday he expects the factory to be able to produce enough batteries to support 1.5 million vehicles per year -- three times more than Tesla initially said the factory would support. This is made possible by "aggressive factory design, density and manufacturing efficiencies," Tesla said.

3. A new standard of just-in-time construction

While the Gigafactory structure is far from being complete, battery pack production is already under way, and the beginning of cell production is just weeks out. Hundreds of engineers and factory workers were hard at work on the factory floor. And robot arms were assembling Tesla's energy storage products.

Tesla builds its Powerwalls and Powerpacks for its energy storage division in a finished area of the Gigafactory in the bottom level of three floors. Image source: The Motley Fool.

With the Gigafactory, Tesla is implementing an unorthodox business strategy of just-in-time construction, building the factory, tooling it, and completing production in phases."The factory is built in phases so that we can begin manufacturing immediately inside the finished portions, thereby minimizing delays," Tesla said.

One of several floors under construction as part of the Gigafactory's expansion. Image source: The Motley Fool.

In addition to the finished 14% of the Gigafactory, "areas currently under construction at the South end of the factory add up to 2.5 million square feet and will house even more cell manufacturing," Tesla said. "In less than one year, these sections will be complete and producing cells."

Furthermore, construction recently began on the north end of the factory. This area will add an additional 0.93 millionsquare feet and will "house additional module and pack production and manufacturing to support Model 3," the company said.

4. Total vertical integration

Tesla's Gigafactory aims to do more than just streamline production. Part of the company's strategy is to vertically integrate the entire process of building batteries. This has been Tesla's plan from the Gigafactory's inception.

"You'll have stuff coming directly from the mine, getting on a rail car and getting delivered to the factory, with finished battery packs coming out the other side," Musk explained shortly after the Gigafactory was announced.

Battery production at Tesla's Gigafactory. Image source: The Motley Fool.

By bringing all the steps for building cells and modules under a single roof, Tesla aims to reduce costs and ensure a stable supply.

5. Getting ready for Model 3

While Tesla is currently using the Gigafactory primarily for energy storage products, batteries for its March-introduced Model 3 will soon become the main focus at the factory. With the $35,000 vehiclehaving generated373,000 deposit-backed reservationswithin less than a month of its unveiling, it's crucial that Tesla's Gigafactory is prepared to produce enough batteries to support sales of the vehicle when the company begins delivering to customers next year. Musk said during the Q&A at the Gigafactory on Tuesday he believed the Model 3 program will generate $20 billion in annual revenue for the company.

Notably, Musk also said Tesla should finish the first battery packs for Model 3 in eight to nine months. These first packs, he explained, will be for early Model 3 production vehicles that will go through validation testing.

Model 3 prototype at Tesla's Gigafactory. Image source: The Motley Fool.

Tesla has made significant progress on the Gigafactory since breaking ground in 2014. But there's still lots of work ahead.

The enormous factory highlights Tesla's staggering expectations for its electric vehicles and its nascent energy storage business. But it also underlines the risk in the company's ambitious plans. Building for such a significant ramp-up in production, Tesla will need to ensure it can simultaneously sustain its rapidly rising demand for its vehicles even as competition increases.

While some may doubt Tesla's aggressive outlook for its vehicle sales and energy storage business, the Gigafactory undoubtedly confirms the company's own confidence in a steep demand trajectory. Indeed, it's probably fair to say Tesla's Gigafactory represents a bet on an electric revolution.

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Daniel Sparks owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.