How Tesla Linked its Marketing Strategy and its Operations
In July 2014 Tesla Motors, along with its partner the Japanese manufacturer Panasonic, announced the construction of the Gigafactory 1, a $5 billion manufacturing facility to produce the lithium-ion battery cells, packs and modules for Tesla’s electric vehicles and stationary energy storage products.
The plant will be the largest building in the world by footprint, extending for over 10 million square feet (930,000 square meters) of usable space, enough to fit 100 Boeing 747 jets inside its 71-foot-tall structure.
The gigantic factory will allow Tesla to lower its battery costs around 30 percent, a reduction that will make possible Tesla’s $35,000 Model 3, its affordable car targeting the masses.
The factory will support the production of Tesla’s vehicles and its growing energy division, which develops the company’s home storage solution, the Powerwall, and its commercial battery, the Powerpack.
At the time the Gigafactory was announced, Tesla was making around 35,000 vehicles a year, but meeting its target of half a million vehicles per year would have required the entire worldwide production of lithium-ion batteries.
To support its market goals and reach the scale it needed to bring the costs of its battery down from $274 to around $196 per kilowatt-hour (kWh), Tesla decided to build its own battery manufacturing facility and picked Panasonic, already a battery supplier to Tesla, as a partner.
According to a Tesla Gigafactory tour handout: “Panasonic brings experience in high volume cell manufacturing, while Tesla provides creative, first principles thinking, clear vision, a rapid pace of execution, and the end product design and demand”.
The Gigafactory’s output was planned to reach a capacity of 50 GWh a year by the end of 2018, and three times that volume by the end of 2020, equivalent to 1.5 million Model 3s a year.
The facility will be powered by 100 percent renewable energy, in part through a combination of a 70 MW solar rooftop array and solar ground installations, with the rest being provided by nearby wind farms.
To force itself to stick to its only renewables goal, the company has decided not to build a natural gas pipeline to the factory.
A large portion of its heating will be provided by heat waste recovered from production processes and a closed-loop water system, with six different treatment stages which will allow the plant to reuse 80 percent of the water.
The Gigafactory is Tesla’s operational answer to its ambitious market goals and has been entirely designed to support the company’s market strategy.
Let’s review a few key decisions that reflect the connection between Tesla’s market strategy and the Gigafactory’s operational design.
The Gigafactory announcement attracted a lot of attention and interest from different states who wanted to host the plant expected to create 6,500 jobs and $5 billion a year in economic impact, mainly from wages.
Tesla’s initial siting shortlist included five states in the western United States: Arizona, California, Nevada, Texas and New Mexico.
Almost a year before the official Gigafactory announcement, the company sent a Request for Information (RFI) to each of the shortlisted states, so that they could propose specific sites along with incentive packages and accommodations to make those sites attractive for Tesla.
According to some accounts, Reno (Nevada) was never one of the top choices for Tesla.
The company finally settled for the Tahoe-Reno Industrial Center (TRIC) in Storey County due to a combination of regulatory speed, the state’s tax incentive package, the ability to sell cars directly to buyers (which is prohibited in Texas and Arizona), proximity to lithium production and direct rail access to Tesla’s assembly plant in Fremont, California.
“It’s really a get-things-done state” said Tesla’s CEO Elon Musk during the location announcement.
Tesla’s battery packs weigh close to 1,000 pounds each so transportation costs from the plant to vehicle assembly facilities would be an important factor to consider.
The site is also around 200 miles from Silver Peak, Nevada where the mine that will provide the lithium for the plant is located, so the location has favorable inbound and outbound transportation features.
The state of Nevada is also offering a juicy tax incentive package which includes no corporate taxes, 20 years free from sales taxes, 10 years free from property taxes and $200 million in transferable tax credits.
These incentives will help Tesla reduce its production costs and offer affordable models to mass markets.
The Gigafactory’s initial capacity will allow Tesla to meet its production targets by 2020. The company initially purchased 1,000 acres for the initial phase and executed an option to buy twice as much for future expansions.
Its modular architecture and in-house design-and-build approach facilitates low cost replication and rapid expansion. The facility has also been designed to accommodate future battery chemistries and packaging configurations, minimizing stranded asset risks.
The construction has been broken down into phases to facilitate short-term manufacturing and continue expansion works simultaneously.
Operations and cost optimization
The Gigafactory 1 is a fully integrated battery manufacturing facility. It takes raw materials like lithium, aluminum, cobalt and nickel and produces fully-assembled battery packages.
Within each factory module, three production lines work around the clock to produce the three basic components that make a battery: the cathode, the anode and the separator.
These components are later combined with the electrolyte in an assembly line that produces Tesla’s 2170 lithium-ion battery cells, which are later packed and stored ready to be shipped out.
The entire process, from raw materials to cells, happens at heart-stopping speeds. “Cells will be going through that thing like bullets from a machine gun. In fact, the exit rate of cells will be faster than bullets from a machine gun” Musk said during an analyst call.
The entire process has been highly automated to increase efficiency and reduce costs. Mobile robots called Automated Guided Vehicles (AGVs), will roam around the factory moving parts from one place to another following a magnetic tape on the floor helped by laser sensors.
Both Tesla and Panasonic understand the challenges they face in trying to achieve the target costs and have gone to great lengths to minimize capital investments and cost per kWh. Some of these decisions include:
- They have designed the facility to maximize output per square meter and to accelerate production throughput.
- Design and construction have been kept in-house to facilitate market expansions, rapid replication and fast improvements.
- Design, layout and construction have been optimized to reduce capital and operational expenses.
- They have re-engineered their supply chain to increase volume and quality while reducing costs per kWh.
- They improved cell design and moved from the old cell model 18650 to the new 2170, and
- Increased automation to enhance production and reduce waste.
The end result is a highly-optimized operation that will support Tesla’s market strategy of producing affordable under $35,000 models for the masses.
A company’s operations must be optimized to support its market strategy and make this sustainable.
Although some argue that the opposite is also the truth, that there are cases where a market strategy must adjust to constraints found in operations, we’d argue that a successful strategy always results from finding market needs that need to be served and then optimizing the value chain to meet those needs well.
Whatever the case, a successful strategy always requires good alignment between the market strategy and the company’s operations.