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COMMENTARY

Tesla gigafactory shows Musk can deliver on promises

Take heart, Buffalo. Elon Musk showed this week at the Tesla Motors battery gigafactory in Nevada that he can think big and stay on schedule.

That's no small accomplishment, because Musk has a long history of setting aggressive – and usually unrealistic – deadlines for its ambitious projects. Too often, skeptics say, the Tesla CEO fails to meet them. It happened again earlier this week when Tesla's electric vehicle deliveries fell short of its forecasts during the fourth quarter.

Like the SolarCity solar panel factory in Buffalo, the electric vehicle maker's Nevada battery gigafactory could have a transformative impact on the Reno economy with its promise of creating 6,500 jobs. With production now underway at the battery gigafactory, Musk is showing that he can deliver on some of its biggest promises.

Tesla, in a partnership with Japanese consumer electronics giant Panasonic, had promised to start making batteries in Nevada by the end of 2016. Tesla on Wednesday hosted analysts and investors at an invitation-only event at the gigafactory outside Reno, Nevada, to show off a partially-completed factory that has officially started making its new and improved batteries.

David Tanberrino, a Goldman Sachs analyst who attended the event, wrote in a note to clients that the most important thing he heard during the tour was that the gigafactory was "on track" to meet its ambitious production goals, which are closely linked with Tesla's timetable to start production on its more affordable Model 3 sedan.

[Related: Panasonic will invest in Tesla's South Buffalo solar plant]

If Tesla can pull off the launch of its battery gigafactory, which will double the world's capacity for making lithium-ion batteries, it's encouraging for the SolarCity plant in Buffalo, which will be the biggest solar panel factory in the Western Hemisphere. Tesla, which acquired SolarCity in November, plans to start production this summer, but the Buffalo factory will ramp up gradually, not hitting full production until 2019. SolarCity more than a year ago pushed back the start of production at its Buffalo solar panel factory to conserve cash.

The giant SolarCity plant at RiverBend in South Buffalo. (Derek Gee/Buffalo News)

While batteries and solar panels are two entirely different things, the two projects have a surprising amount in common.

Both are being developed in partnership with Panasonic. At the gigafactory, Panasonic makes battery cells that go into the battery products made there. In Buffalo, Panasonic last month finalized a deal for it to make the solar cells and modules that Tesla will use in the solar panels it makes at the RiverBend complex, and eventually the solar roofing products that the company plans to produce.

In both cases, Panasonic's involvement eases the financial commitment that Tesla needs to make in the sprawling facilities. At the battery gigafactory, Panasonic is investing $1.6 billion so it will be able to produce battery cells in Nevada. In Buffalo, Panasonic has agreed to invest $256 million in the solar panel factory, which reduces Tesla's financing needs at a time when it not only is opening two big factories, but moving to ramp up production of its much-anticipated Model 3 sedan.

Both factories are a reflection of Musk's commitment to vertical integration – an old and out-of-favor belief that companies should control as much of the production process and its supplier network as possible.

Most businesses today think relying on suppliers that specialize in specific products is more efficient, cheaper and less risky than trying to turn a company into a jack-of-all-trades. Musk believes that massive scale and the production control that only can come with owning key supply sources are the best way to drive down costs and create the best environment for money-saving design innovations.

Tesla needs the Nevada battery factory to succeed because the new type of battery it will produce there will help reduce battery costs for its electric vehicles by 30 percent. It needs them soon because Tesla expects to start shipping its $35,000 Model 3 later this year. And it needs the gigafactory's scale because it will need lots of batteries if Tesla meets its goal of selling 500,000 electric vehicles by 2018 and 1 million by 2020. At that kind of scale, those savings could add up fast – something Tesla needs to happen for the Model 3 to be profitable.

In Buffalo, Tesla needs to make high-efficiency solar panels on a grand scale to squeeze out costs and help make solar energy more competitive with the electricity sold by utilities. Those lower costs are essential for SolarCity to pare its losses and reduce its reliance on the money it constantly has to raise from bankers and investors.

The ties between the two factories could grow. Eventually, Musk wants to sell solar energy systems that include batteries, allowing consumers to store excess power during the day and use it when the sun isn't shining. Those batteries could come from the gigafactory, and the solar-plus-battery system would allow consumers to largely separate themselves from the power grid, providing protection against blackouts. The more self-contained system also would reduce SolarCity's reliance on increasingly uncertain utility rate subsidies that make conventional solar energy systems economical.

The Tesla Powerwall battery is shown installed at Rongomai School in Auckland, New Zealand, in May 2016.(Hannah Peters/Getty Images)

In Nevada, the focus is on making manufacturing more efficient by focusing on making the machine that makes the machine," Goldman's Tamberrino said. That's also happening in Buffalo, where the company has reduced its estimate for how many factory workers it will need to around 500 because of improvements in the manufacturing process since the scope of the plant was expanded following SolarCity's acquisition of Silevo 2 1/2 years ago.

Both factories are promising big economic returns to their communities. In Nevada, Tesla expects employment at the factory to peak at 6,500 people, with another 20,000 to 30,000  jobs associated with the plant in the surrounding area. In Buffalo, SolarCity is promising 1,460 direct jobs and another 1,440 at suppliers and service providers.

Getting production rolling in Nevada is an encouraging sign that Tesla can meet its ambitious goals. But there's still plenty to do. The battery gigafactory is less than 30 percent complete. The Buffalo factory is done, but SolarCity still needs to install its equipment and get it running. And ramping up electric vehicle production from just under 80,000 cars a year to 500,000 isn't a small task.

"There is a high risk of execution missteps, a challenged track record on meeting timelines, cost challenges and potential impact from an otherwise full plate of initiatives in '17," Barclays analyst Brian Johnson said in a research note before the tour.

To be sure, there's plenty that can go wrong. But at the moment, Tesla is still on track.

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