Tesla and Panasonic freeze spending on $4.5bn Gigafactory - Nikkei Asian Review

OSAKA -- Tesla and Panasonic are freezing plans to expand the capacity of their Gigafactory 1, the world's largest EV battery plant, as concerns mount on Wall Street about weakening demand at Elon Musk's car company.

The partners had planned to raise capacity 50% by next year, but with sales of electric vehicles performing below plans, the two companies concluded that a major investment at this stage poses too much of a risk, Nikkei has learned.

Tesla's goals of becoming a mass producer of electric vehicles, on the order of 1 million cars a year, will be pushed back for now.

The decision reflects the dilemma facing the EV industry. Bringing down production costs -- the key to attracting more buyers -- requires major investments in innovation. But that is difficult under the thin profits that EVs produce.

Tesla shares fell more than 3% in Thursday's trading on the Nasdaq.

The Gigafactory, in the U.S. state of Nevada, has been making batteries for the Model 3, Tesla's new small sedan, since January 2017. Panasonic, one of the world's biggest producers of electric vehicle batteries, manufactures the cells, and Tesla combines them into battery packs before assembling the cars in their California plant.

The Gigafactory currently is said to have the capacity to supply more than 500,000 cars annually. The companies had intended to expand the capacity to the equivalent of 54 gigawatt-hours a year by 2020, up from 35 GWh at present.

Tesla sold 245,240 vehicles in 2018. This year it plans to sell 360,000 to 400,000 cars, but deliveries have been delayed due to production bottlenecks. Since last summer, Tesla executives have stopped specifying a target date for reaching 1 million cars annually.

Tesla and Panasonic have invested $4.5 billion in the plant to date. Six months ago, in October, Panasonic President Kazuhiro Tsuga said the company would consider "further investment in North America, keeping in step with Tesla." It was reportedly considering putting an additional 100 billion yen to 150 billion yen ($900 million to $1.35 billion) into the Gigafactory.

Panasonic's Tesla EV battery business had operating losses exceeding 20 billion yen in the financial year that ended in March, up from a year earlier. The losses were exacerbated by delays in the start of production of the Model 3.

Tesla's unit sales fell about 30% in January to March versus the previous quarter, hurt by slower growth in China, smaller tax breaks for electric vehicles and problems with logistics. This has made the companies more cautious about the future, although they plan to continue joint operation of the plant.

Wall Street analysts have recently raised concerns about weakening demand for the Model 3. In an April 4 report, Goldman Sachs analysts said, "Volume expectations for the company's products in 2019 are too high, with consumer demand likely lower as subsidies phase out in the U.S."

Tesla is scheduled to launch a small SUV, the Model Y, that is likely to use the same batteries as the Model 3. The two companies will reevaluate their expansion plans for the Gigafactory in 2020 or later, depending on how well the models sell.

"We will of course continue to make new investments in Gigafactory 1, as needed," a Tesla spokesperson told Nikkei.

Panasonic will also suspend its planned investment in Tesla's integrated automotive battery and EV plant in Shanghai. Instead, it will provide technical support and a small number of batteries from the Gigafactory. Tesla is committed to buying batteries for the cars built at the Shanghai factory from a number of makers.

Prices for Tesla cars start at $35,000 for the Model 3, its lowest-priced model. Batteries make up about half the cost of an EV.

Given the relatively small profit margin on these cars, significantly cutting battery prices will be difficult without further technological advances. And lowering sticker prices is crucial to getting more EVs on the road.

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