Last week, Tesla's billionaire CEO Elon Musk revealed the bid he expects from the winning state. Musk, speaking on a conference call with analysts, said the place that gets the Gigafactory will need to put up 10 percent of the total cost, meaning $500 million.
That is an attention-getting number, and one that already shows signs of not sitting well in some of those states. "It's getting harder to tell the difference between Tesla's search and a shakedown," wrote Greg Jefferson, business editor of the San Antonio
But Tesla, as you might surmise, doesn't see it that way. In a conversation with FORBES this weekend, Simon Sproule, vice president of communications and marketing, laid out Tesla's rationale for requesting that states come up with a half-billion dollars to win the project.
It's not that expensive. The Gigafactory will be massive: 10 million square feet of production space to produce battery packs for Tesla's Model 3, the company's lower-priced electric vehicle, due to reach the market in 2017. Says Sproule: "The Gigafactory is quite immense."
By contrast, most modern U.S. automotive assembly plants are about 2 million square feet, and generally cost between $1 billion and $2 billion to build.
So, that 10 percent requirement would be the same as a state putting up $100 million for a $1 billion factory, or $200 million for one double that size. Moreover, Tesla plans to create 6,500 jobs by 2020, versus the 1,000 to 3,000 jobs that ordinarily come with an assembly plant, depending on a company's initial investment. So there's a bigger bang for the states' buck, so to speak.
And, what Tesla wants wouldn't set a record. In Tennessee, state and local officials pledged about $80 million more than what Tesla is asking, to land the Volkswagen assembly plant outside Chattanooga.
According to Automotive News, Tennessee paid $580 million to win Volkswagen in 2008. That plant, in which VW has invested $1 billion, employs 3,200, or half the number of jobs Tesla promises to create.
Shareholders deserve the best deal. Still, $500 million is no bargain, given the tattered state of the economies in places like California, which initially wasn't included in the group of states Tesla selected as semi-finalists.
Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla. That's key, given the intense investor interest in Tesla, Sproule said.
"Any publicly traded company has a fiduciary responsibility to get the best deal for its investment," he said. "It's the responsibility of management to look for the best financial arrangements for the company. I really would describe it as business as normal."
Every company does it. For more than 30 years, virtually every automotive investment in the United States has been the subject of an intense competition between states to land the factory. Rarely, except in the case of Toyota's Texas truck plant, does an auto company set out with a state in mind.
"There isn’t an industrial company in the world that doesn’t look at different alternatives," Sproule said. He pointed out
And, the competition between the states actually gained a participant, California, which maneuvered its way in after Tesla initially decided to leave it off the list. Sproule also noted that the states involved in the competition know Tesla's incentive requirements, and thus far, none has dropped out because of the cost.
It's a huge risk for Tesla. Last week, Musk said the company's battery partner, Panasonic, could put up 30-40 percent of the cost, other suppliers 10 percent, the state 10 percent, and Tesla the rest.
One of the reasons why Tesla is asking multiple states to launch work on the Gigafactory location is to limit the risk that a spot won't be ready when Tesla wants to start production. Sproule points out that the moderately priced Model 3 is a crucial automobile for the company.
"If it doesn't get up and running in time for Model 3, that's a major financial blow for the company," Sproule said, at many times greater than the risk to the chosen state.
Tesla has said that it will consider two to three finalists for the Gigafactory, before it selects the winner by year's end.
In retrospect, there were clear signs that Reno, Nevada, would be the first finalist, given the land-clearing and other site preparation taking place in plain sight (albeit with security guards at the entrance).
Now, anyone watching where Tesla plans to go simply has to look for a massive site-clearing operation that is preparing a multi-million square foot plant bed, which probably couldn't be used for anything else.
"We were just waiting for people to say, 'what's going on in the desert outside Reno?'" Sproule said, with a laugh. "I don't think we get away that easily next time."
