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Tesla Motors Inc. (TSLA) Gigafactory Plans Challenged by Chinese Suppliers

Tesla Motors Inc. (TSLA) Model S

Tesla Motors Inc (NASDAQ:TSLA) could be looking at a huge setback on its Gigafactory plans as Chinese battery suppliers are looking to reduce battery cost by 35%-40% in 2017 while still making a profit, as per a Morgan Stanley analyst.

Tesla Gigafactory may not serve the purpose

Morgan Stanley analyst Shawn King said, “According to Gaogong Industry Institute, some EV makers in China have proposed that battery vendors cut prices by 35-40% in 2017. Our China analyst Jack Lu sees this proposal as likely to proceed, as some battery vendors in China could still make a decent profit after such a cut.”

As per the analyst, this is negative for Samsung SDI and LG Chem, and any sharp decline in the price could imperil the viability of Tesla’s Gigafactory in Nevada. On Thursday, after the note, shares of electric battery maker Samsung SDI tumbled 4% whereas LG Chem declined 1.8%. Tesla stock remained unchanged in after-hours trading.

The success of the Tesla Gigafactory is dependent on two factors – 1) Tesla Motors Inc (NASDAQ:TSLA) must garner enough sales of electric cars to keep the factory running and 2) Tesla’s ability to reduce the cost of the batteries compared to the ones offered by other suppliers.

Three years ago, when Tesla proposed the Gigafactory plan to investors, a 30% price advantage was expected. Since then, the projections remained the same. Tesla’s website still says that it expects to drive down the per kilowatt hour (kWh) cost of the battery pack by over 30%, says Forbes.

Making batteries in-house a bad idea

Dan Dolev at Jefferies did put the possible savings from Gigafactory at 50%+ by 2020. On the other hand, MIT Technology review says experts are projecting only a 15% saving on cost by 2020. However, the present scenario is that the batteries could cost much less when purchased from China, and this could be a big threat to Tesla’s valuation.

Also, many have started to believe that in-house battery plans is a bad idea, notes Forbes. Carlos Ghosn, co-CEO of Nissan and Renault, believe that making your own batteries is a bad idea, when one can get it for less from a willing supplier. Ghosn added that making in-house battery is not as crucial as it was in 2008. He added that it is better to externalize when the technology is available outside.

Tesla Motors Inc (TSLA) Gigafactory

“The way things stand, Tesla is gearing up its $4 bln Gigafactory to make old tech for more, a sure-fire recipe for disaster,” says Forbes.

Morgan Stanley, however, does not think there is something bad in this for Tesla Motors Inc (NASDAQ:TSLA) as few hours later, they upgraded the rating of Tesla from “Equal weight” to “Overweight”.

On Thursday, tesla shares closed up 2.27% at $243.76. Year to date, the stock is up over 14% while in the last one-year, it is up almost 19%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.

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