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Tesla Motors Inc (TSLA)’s Tiny $5B Gigafactory vs Volkswagen’s $11B Battery Factory

Tesla Motors, Inc (TSLA) Gigafactory

Tesla Motors Inc is never more than a step away from existential threats posed by bigger rivals with deeper pockets and enough resources to take over the EV market. Breaking news over the weekend revealed that German automobile firm; Volkswagen, is planning to build a factory that would dwarf Tesla’s Gigagfactory.

Tesla Motors, Inc (TSLA) Gigafactory

In the world of innovations, the first-mover advantage doesn’t go to the first firm that launches, the first firm that scales out often ends up enjoying the first-mover advantage. Volkswagen came late to the EV party but the firm is trusting on its strong brand recognition, scale, and deep pockets to overtake Tesla in the EV industry.

You think the Gigafactory is big, Volkswagen has it bigger

It is no longer news that Tesla Motors is in partnership with Panasonic to build a sprawling Gigafactory in the Nevada desert in order to provide enough batteries to meet its goal of building 500,000 cars annually by 2020. Handelsblatt reports that Volkswagen is planning to spend as much as $11B (more than twice the cost of Tesla’s Gigafactory) on building a battery factory is Salzgitter Germany.

The battery factory will be located in the same location where Volkswagen builds its internal combustion engines; hence, it is not audacious to assume that Volkswagen is planning to make a shift to building EVs over ICEs in the future. Thomas Lieber, Volkswagen head of vehicle development for EVs provides the motivation behind the firm’s ambitious plans. He says, “It’s simple — the CO2 legislation in the various regions will mean every OEM is compelled to offer e-mobility.”

The firm has revealed that it needs the huge factory because it plans to be selling 1 million electric cars by 2025. We don’t know the kind of chemistry or technology that Volkswagen wants to deploy in building its batteries; however, the plan to sell 1M EVs annually by 2025 makes it important for the firm to own its battery factory instead of relying on traditional battery firms.

Interestingly, the firm currently has 9 EV variants in its lineup, namely; Volkswagen eUp, Volkswagen eGolf, Volkswagen Golf GTE, Volkswagen Passat GTE, Volkswagen Passat GTE Sportwagen, Audi A3 eTron, Audi Q7 eTron, Porsche Cayenne PHEV, and Porsche Panamera PHEV. The firm also plans to introduce 4 new EV models namely, Porsche Mission E, Audi A6 eTron (China-only), Audi eTron Quattro (preliminary name), and Volkswagen Tiguan GTE (China-first) by 2019.

Tesla must step up its battery game

Tesla Motors must step up its battery game if it intends to stay ahead of rivals in the EV space. Tesla currently has the best in-class battery technology system. Its batteries deliver the longest range among the EVs that are currently on the road and rivals must come to the market with comparable or better ranges in order for consumers to take them seriously.

However, Tesla’s current battery technology, which is better than the tech of its rivals, might not necessarily be the best battery tech or configuration for EVs. To start with, Tesla’s battery packs are expensive and the packs are also large and heavy. In essence, the batteries add to the high price tag of Tesla’s cars and the cars expend much of its electric power of lugging around the heavy battery packs.

In the next decade or so, we should expect to see a number of cheaper and more efficient battery technology and designs that would give EVs longer ranges while reducing the cost. However, Tesla will no longer be the small and nimble upstart when those new battery technologies emerge. The ability of Elon Musk to keep Tesla flexible while consolidating its growth might be the singular factor that would keep the firm on the path to relevance when battery technology gains enough momentum for the mass market.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.