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Batteries Tesla's war between the states for the Gigafactory (Tesla)

Published on September 3rd, 2014 | by Sandy Dechert

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Is Tesla Overreaching With Gigafactory Tactics?

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September 3rd, 2014 by
 

Tesla's planned Gigafactory (Tesla)

Tesla’s planned Gigafactory

Tesla Motors announced big plans earlier this year. Though the agreement is not public, Panasonic is also involved: it plans to manufacture and supply cylindrical lithium-ion cells Tesla uses to build battery packs to power electric cars. Specifically, said Sebastian Blanco of Autoblog Green in June, batteries from Tesla’s announced Gigafactory will power the concept vehicle Tesla Model 3, a mainstream EV ($35,000 base price) that will go over 200 miles on a charge.

Tesla CEO and SpaceX innovator Elon Musk has acknowledged that Model 3 batteries need to be much cheaper than those used for the Model S in order to achieve the lower price. How much? Musk says the new battery packs should reduce the per-kWh cost by more than 30%. He has set up a plan to construct a large-scale manufacturing plant to produce 35 GWh of cells and 50 GWh of packs per year by 2020.

Tesla's war between the states for the Gigafactory (Tesla)

Tesla’s war between the states for the Gigafactory

Like its unconventional and brilliantly cheap “interactive” marketing and advertising, Tesla’s new plan for funding Gen 3 batteries takes a tack that’s far from orthodox. Blanco points out in yesterday’s article that the brilliant 21st-century-flamboyant Musk’s novel tactics have set off a bidding war among officials in the five states. The Gigafactory process is to start out with $500 million in subsidies from the winning state. Public interest groups from each state have jumped on the implications of this with a widely circulated open letter to state officials.

Overspending on Tesla–or any other company–could be a net-loss game in which fewer public resources are then available for investments in areas that benefit all employers, such as education and training, efficient infrastructure, and public safety. All state and local taxes combined equal less than 2% of a typical company’s cost structure, but lost tax revenue comes 100% out of public budgets.

The consumer-directed organizations believe the half-billion-dollar tax breaks could be better used. They consider Tesla’s corporate-induced battle among entities representing the American public as “a race to the bottom from which no real winner may emerge.” In other words, the independent watchdogs think Tesla is pitting state governments against each other to get the best deal for the corporate-owned Gigafactory.

Their letter chides Tesla for proposing a scenario in which the corporate sector will benefit more than any of the other players. Although as Tesla says the Gigafactory is “undoubtedly a valuable source of economic growth for its eventual home state,” the ultimate loser would be the states and the nation as a whole, because all taxpayers will end up subsidizing the costly race and a needlessly expensive venture.

This is not the way company-government bargaining is supposed to work. Since when do private entities, however forward-thinking and benign their motives, hit up the public to reap top dollar? The reverse is the usual case. The advocate correspondents note that $500 million could go a long way toward solving more pressing problems. And as for much-vaunted “transparency,” although Tesla’s voluntary disclosures certainly exceed those of wheeling-dealing in the back rooms of Congress (or in corporate boardrooms), Your Houston News reportedly notes that Tesla is asking the states “not to discuss their offers, and states aren’t talking.”

Three generations of TeslasThe public advocates in five states wonder out loud if Tesla would be “receptive to a multi-state dialogue” and not reinforce the “harmful pattern of one state ‘winning’ a high-profile competition.” That may still defeat the argument that the issue is federal, but at least it wouldn’t needlessly shift a huge amount of money into corporate profits and cause potential public risk.

Elon Musk may even be responsive to this unusual opportunity to help innovate the traditional path of economic development, Mr. Blanco argues. He point out the success of the traditional automotive industry—“with its far-flung supply chains and 50-state market”—in treating states as interdependent and pursuing the main goal of the long-term growth of American jobs. Certainly, in an international parallel, it would waste resources for every nation to have its own plan to check the Islamic State or cure Ebola.

“We call upon our elected officials to seize this rare opportunity,” say the consumer advocates. “Talk to each other, let the public into the process, and when the time comes, strike a smarter deal that will preserve the tax base for the benefit of all.”

Tesla's Gigafactory plan and timeline

Signers of the letter, representing all five states, are: Diane E. Brown, Arizona PIRG; Chris Hoene, California Budget Project; Bob Fulkerson, Progressive Leadership Alliance of Nevada; Javier Benavidez, Southwest Organizing Project (New Mexico); Craig McDonald, Texans for Public Justice; Greg LeRoy, Good Jobs First.

Tesla expects to issue an official announcement on the location of its first Gigafactory toward the end of this year. For now, you can read CBP’s open letter in full here.

As usual, controversy rages. If you want to act on the situation from any perspective, we suggest you do so right away by letting Mr. Musk and the appropriate state governors, legislators, and regulators know what you think.

Editor’s Update: It looks like the deal may already be made anyway, with a leak that Nevada has secured the Gigafactory. Perhaps the early announcement was spurred on by this controversy.

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About the Author

covers environmental, health, renewable and conventional energy, and climate change news. She's worked for groundbreaking environmental consultants and a Fortune 100 health care firm, writes two top-level blogs on Examiner.com, ranked #2 on ONPP's 2011 Top 50 blogs on Women's Health, and attributes her modest success to an "indelible habit of poking around to satisfy my own curiosity."



  • http://techmarketintel.com/ David Dines

    “Their letter chides Tesla for proposing a scenario in which the corporate sector will benefit more than any of the other players.”

    Hmm…Every large industry and individual company engages in this behavior. I can think of a few: car factories (VW), oil exploration and drilling rights are often given with lots of tax benefits, forestry, mineral and grazing rights are consistently below market, pharma lobbied for no competitive bidding on prescriptions in the medicare reform, health care. So I am not sure why they are singling out Tesla.

  • Eric

    Those are three very nice Aston-Martins in the photo, but I’m not sure how they are relevant to the story. Assuming it was meant to be a photo of Tesla models.

  • Roger Pham

    Perhaps corporate taxes and business taxes should be abolished by all states to level the playing field, to be made up for by other forms of revenues and budget cuts. Corporates and businesses are the goose that lays the golden eggs to create jobs and bring money into the state, that should not be taxed. Instead, go up on income tax and sale tax, more traffic tickets, etc…It is simply not fair to give tax break to one but not to another.

    People will go where their job will go, and don’t mind paying higher income tax if there are job available vs no job, esp if the pay is good. It is better for their ego to go to a state with higher income tax but get paid higher, so they can boast about their income level, instead of go to a state with low to no income tax but with lower-paying job that it give them little to brag about! Status and image are more important to most people than actual material posession.

    Another alternative is to tax exempt all new businesses for the first few years. This should be applied to all new businesses regardless of size. The playing field must be level in order to promote true competition that will benefit the people.

    • JamesWimberley

      Why stop at zero taxes? The sports franchises have shown the way: net handouts.
      It is open to the states to agree not to compete for investment with tax breaks.

  • http://www.carnewscafe.com electricnick

    Hi Sandy, the Tesla Panasonic deal is public. As far as Tesla playing the devising card game, it’s true, but only when you look at it from this angle. All states have serious chronic budget crisis and all want to bring Tesla onboard, not so much for the immediate financial results, but mostly for the bragging rights. It will take the Gigafactory a few years before it has rippling effects locally.

    As much as I would love for all states to join, kind of like the Tri-Boro states in New York, that won’t happen soon. All are fundamentally different, political and financially. Do I think it’s a good idea? You bet, but the nature of modern politics doesn’t lend itself to transcending mediocre local battles.

  • Matt

    This is the way it is done in USA. The city of Cincinnati paid more than that for a football palace, even push several long standing companies out of town. For much less economic benefit, than will come from this plant. Not saying I like it, but it is what it is. Short of a federal law banning it in all states/cities it will keep happening.

  • A Real Libertarian

    All state and local taxes combined equal less than 2% of a typical company’s cost structure

    So, let’s see…

    $500 Million x 50 = $25 Billion cost structure.

    50 GWh/year x $100/KWh = $ 5 Billion in revenue.

    Add in the activity of all the other businesses involved.

    e g. Silver Peak is the only current source of lithium inside America’s borders:

    https://en.wikipedia.org/wiki/Silver_Peak,_Nevada

    Add in all the subsidies other businesses get…

    Having a hard time seeing the problem.

  • Ronald Brakels

    Toyota is being offered $146.5 million in tax breaks to build a new model car in Kentucky. I’m not saying this is a good way to run a country but considering that Jules Verne mocked this particular American habit in his novel From the Earth to the Moon in 1865 I’d say it’s a little odd to suddenly start complaining about it now in regard to Tesla. This straining at a gnat while passing a log nonsense is exactly the sort of thing the Manly Man Hummer Club, headquartered in Riyadh, gets up to.

  • Bob_Wallace

    Sounds like the battery plant is going to be in Nevada.

    Announced a few hours ago.

  • Barry

    How come this argument is happening now, how about the last century of gasoline automobile subsidies, why has no one complained about them, they enjoyed widespread support
    I agree with the point that massive subsidies are a reward for being an large (and usually an oligopoly) and should not exist, but we already have food, oil, ethanol, and many other ridiculous subsidies, but only the one that should get us off oil is bad? How about ending big oil’s subsidies then giving that money to Tesla, it would be revenue neutral and would produce much more economic activity

    • jeffhre

      “This is not the way company-government bargaining is supposed to work. Since when do private entities, however forward-thinking and benign their motives, hit up the public to reap top dollar? The reverse is the usual case.”

      And how do “The consumer-directed organizations believe” that every single modern auto and automotive supply factory now existing, came into being? BMW, Honda, Toyota, Mercedes all worked the states over mercilessly. At least now a US company, benefiting US owners, managers, investors and consumers can be a part of the process.

  • Kevin McKinney

    “Since when do private entities, however forward-thinking and benign their motives, hit up the public to reap top dollar?”

    At least since pro sports became a religion, I’m afraid.

    • Matt

      Its not just state that compete with each other its cities. Look at Walmart. But our politicians only look at short term, they get great press for winning the big one. Even if they lose at lot on the side.

  • Brian Donovan

    The argument is that all the states should join in? They have to build the factory in one place. I suppose 4 states could be included, but that land is a public park.

    I sure can understand folks wanting the taxes to go to education, healthcare and modest room and board for those who need it.

    A new battery company is a huge risk, agreed.

    After some thought, I think I agree, let the private market fund this factory, they will also get massive federal breaks, so why should the states get into a race to the bottom, to make investors rich?

    If they want tax breaks, or anything, Tesla should offer up stock. Just like the deals investors get. That’s stock in Tesla, and in the new venture.

    • jeffhre

      They do it for the jobs taxes and economic multipliers generated by basic manufacturing industries.

      • Jouni Valkonen

        Indeed and exactly.

        It is surprising that people cannot see the big picture. But if Gigafactory is a loss for Tesla and Panasonic as an investment it is loss precicely because Tesla is paying salaries and taxes for 6000 workers. Other possible tax revenues are irrelevant compared to income tax of workers and VAT gathered from their spendings.

        Not to mention the multipliers because Tesla workers will use all kinds of services in Reno.

        But I guess that investment is a success. The more problematic is to try to predict the markets and guess how many gigafactories it is needed? I guess quite many, as 100 % cars manufactured in 2030 are fully electric. So there is so much potential for market expansion that over-investing probably is not a long term problem.

      • Brian Donovan

        So no company should pay taxes. That hasn’t workjed out very well.

        • jeffhre

          Where, and how? Examples? Economists say companies don’t pay taxes the buyers and consumers do. I see that as true when I look at rental real estate. The landlords are charging enough to pay the property taxes. Which comes entirely from the renters.

          Even though many (not economists type folks) say tenants do not pay property taxes. I’ve even spoken with tenants that feel one of the good things about renting is no property taxes, LOL! I guess the landlord is just picking up that tab out of kindness and generosity :)

          In any case, I never liked that system of pitting states against each other. Though the governors have an association with 50 members and they have never done anything about it, so they must not see it as a problem, or at least one that they could agree upon. Cities within states do the same thing. Seems like if they cooperate they could get better deals.

          • Bob_Wallace

            I can assure you that tenants are paying for property tax, property insurance, maintenance, the mortgage, and some profit after a few years once increasing rents have exceeded mortgage payments (or the mortgage paid off). They’re paying for the new roof, the new carpet, and all the other capital improvements as well.

            This ‘gifting’ companies to set up in a state started years ago. I think largely in the Southeast with foreign auto manufacturers (but I’m not sure about that part). At the time there was a big discussion about states undercutting each other but that didn’t stop the practice.

            Now days if a company has an option of more than one state and fails to play the states off against each other they would be doing something very foolish. They’d be handing their competition an advantage.

            States come off alright. The jobs created means a lot of revenue coming from the people employed as they pay taxes and their salaries wash through local economies.

          • jeffhre

            “their salaries wash through local economies.” Multipliers. The first round.

          • Brian Donovan

            Economists don’t agree on ANYTHING. You can find economists who say most anything.

            http://economix.blogs.nytimes.com/2013/02/19/who-pays-the-corporate-income-tax/?_php=true&_type=blogs&_r=0

            “economists say” ….

            Remember that a lot of the value added on that plant will be spent outside the state.

            If all this does is send more money to the rich investors, while the citizens lose more ground, then it’s wrong.

            We have a huge imbalance to fix.

          • jeffhre

            “If all this does is send more money to the rich investors, ” If this were true, we should not allow any corporate development to occur anywhere.

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