Why Elon Musk Says The Gigafactorys Are Losing BILLIONS!

So you may have seen some news recently that Tesla’s brand new GigaFactories in Berlin and Austin are losing billions of dollars. And while that is absolutely true, and undoubtedly makes for a great headline on Twitter and Facebook - there is a lot of important context that is getting lost in the rush for clickbait.

I think we’re all familiar with the term, “You’ve got to spend money to make money”. And that is easily true in like 99% of business situations, whether it’s spending your money or someone else's money - expenses always come before profits, that’s just the way it works. So, of course when you build the second or third largest manufacturing plant on the face of the Earth, it’s going to go through a period of being a money furnace before it can start to become a money printer.

And aside from the obvious, there are some really interesting challenges facing Tesla’s newest factories in Germany and Texas, and Elon Musk has recently spoken very openly and honestly about how the company is working to deal with some bumps in the road and ultimately accomplish Tesla’s number one goal right now, which is to scale their production volume to an extreme size.

So let’s talk about how things are actually going at Giga Texas and Giga Berlin while we try to cut through some fear, uncertainty and doubt associated with Tesla’s production ramp up.

Giga Money Furnace

OK, we can start off with what Elon Musk actually said, this comes from an interview that he did with Tesla Owners of Silicon Valley and The Kilowatts. This is a tiny excerpt from a very long, free form conversation that basically covered every subject imaginable with no real focus.

So, when they get around to talking about hardware costs, Elon says, “This factory is losing insane money right now.” He’s talking about Giga Texas, where the interview is taking place, and at this moment in the video Elon is obviously not happy about what he’s saying, he sighs, looks out the window onto the production floor and stumbles over his words for a moment before launching into an explanation, saying, ”Because we should be outputting a lot more cars out of this factory versus a very puny amount. But we had challenges with the 4680 ramp and with the structural pack ramp.” 

Model Y production at Giga Texas was the first time that Tesla had attempted to mass produce a vehicle with not only their new 4680 cell design, but also with their new structural battery pack architecture as well - two big changes to the way the vehicle is made. And the Tesla plant that is manufacturing those cells is also fairly new and also ramping up volume for the first time.

Obviously this introduction of the 4680 and structural pack didn’t go exactly to plan, but Tesla did make a quick pivot to try and correct that by introducing a production line at Giga Texas to build the Model Y in a more familiar configuration with the 2170 cell and non structural pack.

Elon says that pivot also ran into an unexpected setback, quote, “Ironically the tooling necessary for 2170 variant cars was stuck in China, so we had the Shanghai factory inoperable, we had the tooling to enable this factory stuck in port in China with no one to actually move it, which basically then caused this factory’s production ramp to be very tiny.”

There he’s referring to the total lockdown that paused operations in the city of Shanghai for over a month - Tesla’s own factory had shut down completely for three weeks. 

Before he goes even deeper into the troubles, Elon stresses one very important point - he says, “Now this is all going to get fixed real fast, but it requires a lot of attention.”

Now here’s what needs to get fixed - Elon launches into a pretty long rant about how much money he is losing, and this is the part that most news outlets have fixated on - Elon says, “It will take more effort to get this factory to high volume production than it took to build it in the first place, and the same is true of Berlin. Berlin is in a slightly better position because Berlin started off with the 2170 style and did not have the 4680 and structural pack issue - But both Berlin and Austin factories are gigantic money furnaces right now - there should be a gigantic roaring sound which is the sound of money on fire - bigger than a dumpster fire, a dumpster is too small. Berlin and Austin are losing billions of dollars right now because there is a ton of expense and hardly any output - so getting Berlin and Austin functional and getting Shanghai back in the saddle fully are overwhelmingly our concerns, everything else is a very small thing.”

Couple of interesting things here - he says that Berlin is in a slightly better position but still experiencing the same problem as Giga Austin - so yes, the 4680 cells are a contributing factor, but they are not the primary reason for production being constrained, otherwise the problem would be limited to Austin. So what we are looking at is something that Elon Musk has talked about and warned about more times than I can count, we’ve said this so often now, “It's relatively easy to make a prototype but extremely difficult to mass manufacture a vehicle reliably at scale.” - That particular quote is from the Model Y launch in 2019, but Elon has said this over and over again in some form or another for years. And Elon was saying this *before* we had other factors come into play like a virus, a supply chain meltdown and a war to complicate things even further. So, it should be no surprise really what we are seeing play out in real time with not one, but two brand new production lines both ramping up at the same time.

And like the man says, this can all be fixed, it’s just going to require a lot of hard work, and we know that Tesla is up to the task of doing hard things and getting it done.

That hasn’t stopped the media from piling on to the story, and now even the competing automotive CEOs are out for blood, including the self admitted Elon Musk fanboy himself, Herbert Diess of Volkswagen

In new comments to VW employees in late June, Diess seized on Elon’s moment of honesty and said that he expects the opening of Tesla’s two new Gigafactories to be their window of opportunity to overtake them as the leading EV manufacturer.

Diess said, quote, “Elon must simultaneously ramp up two highly complex factories in Austin and Grünheide — and expand production in Shanghai. That will cost him strength.”

Diess even made a meme to accompany his point, it’s a picture of Henry Cavil with a Tesla logo on his chest and he’s about to be tackled by Jason Mamoa with a VW logo. I don’t think that is going to age very well, but it was kinda funny.

This optimism from Volkswagen is being egged on by a report from Bloomberg Intelligence that actually predicted Volkswagen will overtake Tesla in EV manufacturing by 2024. According to the so-called intelligent people at Bloomberg, VW’s new lineup of 16 electric vehicles will allow them to leapfrog Tesla to become the world’s largest EV manufacturer. 

What’s really interesting here is the idea that Tesla attempting to ramp up two factories that only produce one type of car, the Model Y, will apparently slow them down for years to come. But Volkswagen can just pump out 16 different, new vehicles and instantly accelerate their output to unprecedented levels. I don’t know. The company just had to halt production of their new, electric hippie bus, the ID Buzz, because the battery cells are all faulty, so it’s clearly not that easy.

Volkswagen does have their own plan for a next generation EV manufacturing facility - just the other day, on June 28th, the company released a digital rendering of their new Trinity factory, which will be an extension on their existing Wolfsburg headquarters - which is already the size of a small town as it is. Trinity is the VW take on a GigaFactory, except the rendering shows each stage of production, like the body, paint, components and assembly all happening in individual buildings - they’re not under one roof like a Tesla factory, so it’s difficult to compare size, but all of Trinity combined is probably at least as big as Giga Texas. But that factory doesn’t start construction until 2023 and it’s not scheduled to begin producing any cars until 2026 - at which point VW will go through the exact same trouble as Elon is facing right now, and Diess will have his very own money furnace to deal with.

This is Going to Get Fixed

Now back to Elon’s comment about getting this fixed real fast - let’s talk about how that is going to happen.

The first major change that we have seen is new deliveries of the Model Y Long Range from Giga Texas - it’s just been in the last few days of June these new vehicles have begun rolling out to customers. This is using the same old, 2170 module based battery pack that has always been in the Model Y Long Range, but this car does have the benefit of the new manufacturing process at Giga Texas - so in theory it should be a higher quality construction than the Fremont made cars, or at least a more consistent level of quality. So what this does is eliminate the new 4680 and structural pack as a limiting factor - that’s not to say that 2170 cells are an unlimited supply, but clearly they’re more accessible than 4680’s. For now, at least.

In other good news, we can see that Tesla’s battery supply partners are getting closer to manufacturing their own version of the 4680 cell. Earlier in June, Panasonic shipped their first batch of 4680 samples to Tesla for evaluation. These cells are coming from a pilot line in Japan that Panasonic expects will be able to launch series production of the 4680 in 2023. At the same time, Panasonic has released plans to expand their operations in North America, likely choosing a location in Oklahoma or Kansas. The company says that they expect their North American output to at least triple by 2029 - if we consider that Panasonic currently produces about 40 gigawatt hours of cells per year at Tesla’s Giga Nevada, that would put them well over 100 gigawatts of cell production.

We’ve also just learned that Samsung is setting up their own pilot production line to build the 4680 cell for Tesla. The pilot line is located in South Korea, and Samsung expects to have it complete before the end of this year. 

And in mid june, the other South Korean battery maker, LG Chem announced that they would invest 450 million dollars into a 9 gigawatt hour production line for 4680 cells at their Ochang factory.

And all of this will be on top of Tesla’s own cell production at Giga Texas, a 4680 line is either being built, or already completed within the factory itself, plus there is an entire cathode manufacturing facility currently going up just North of the main building.

So, the 4680 battery problem is definitely getting fixed, there’s no doubt about that, I can’t imagine that three of the biggest battery makers in the world would be pouring hundreds of millions of their own money into building new production lines for this battery if they didn’t think that it would be a huge success in the near future.

Did Elon Musk and Tesla bite off more than they could chew by simultaneously ramping up *two* brand new factories at the same time? Yeah, probably did. But very seldom will you get rewards if you don’t take risks.