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Tesla Motors, Inc. (TSLA - Free Report) announced that it is planning to construct a large-scale factory – ‘Gigafactory’ – to produce lithium ion batteries in collaboration with various partners. The electric carmaker’s Japanese battery pack supplier Panasonic Corp. (PCRFY - Free Report) is one of the partners, according to media reports.

The automaker expects the factory to provide economies of scale and reduce production costs based on innovative manufacturing techniques, reduced logistic wastes, optimization of co-located processes and lower overhead costs.

Tesla is considering Nevada, Arizona, New Mexico and Texas for the construction of the battery factory, which will be employing around 6,500 people. The automaker will be initiating the construction work this year and expects to finish the factory by 2017. The factory will supply lithium-ion batteries to Tesla's Fremont, CA, assembly plant.

By 2020, Tesla expects the annual lithium ion battery production of the Gigafactory to exceed the global production in 2013. The factory will produce enough battery packs to allow Tesla to build around 500,000 electric cars by 2020. Also, by the end of the first year of manufacture of the planned mass market vehicle, the per kWh cost of production of battery packs is expected to be reduced by over 30%.

Tesla intends to finance the construction of Gigafactory from the proceeds of a senior notes issue. The company has announced an underwritten registered public offer of $1.6 billion aggregate principal amount of convertible senior notes. Of this, notes worth $800 million will be due in 2019 and the remaining $800 million notes will mature in 2021.

Tesla will be offering the underwriters a 30-day option to purchase up to an additional $120 million of convertible senior notes due 2019 and $120 million of convertible senior notes due 2021. This will increase the potential offering size to $1.84 billion.

Other than financing the Gigafactory, the proceeds from the offering will be used for development of the Gen III mass market car, domestic and international business development and other general corporate purposes.

Tesla said it will be investing about $2 billion in the factory. However, the construction will require $4–5 billion. The rest of the funds will be provided by Tesla’s partners.

Tesla currently carries a Zacks Rank #2 (Buy). Some other automobile stocks worth considering are Tata Motors Ltd. (TTM - Free Report) and Dongfeng Motor Group Company Ltd. (DNFGY - Free Report) . Tata sports a Zacks Rank #1 (Strong Buy), while Dongfeng carry a Zacks Rank #2 (Buy).

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