Tesla may have located its famous battery "gigafactory" here in the United States, but it needs to draw on a worldwide value chain for key materials and components. The first signs of just how it may do that are starting to emerge.
Tesla chose to locate its $5-billion facility, which will build batteries for cars and for residential/business energy storage, in Storey County, near Reno, NV, for several good reasons. Chief among them is that Nevada has sources of lithium, a key material for batteries, according to Bob Ferrari, founder and executive editor of Supply Chain Matters.
"That would have been Tesla's first strategic consideration," he said. "The second one would have been, because batteries are so heavy and the transportation costs to high, that the facility had to be somewhere in geographic proximity to the final assembly point." Tesla manufactures its cars in Fremont, CA. A third factor was undoubtedly the $1-billion-plus in incentives that Nevada offered. Then there were the large tracts of land available – the company recently expanded its holdings to almost 3,000 acres – and plenty of sunshine for the solar panels Tesla plans to build to power the factory.
Yet, there was one big downside: the supply chain of components for batteries is almost exclusively located in Asia, Ferrari said.
But Tesla's initial sourcing moves – at least those publicly known – seem to be flipping those geographical issues. The company is going to a foreign country for lithium while relying on a Japanese strategic partner to bring its Asian supply chain to Nevada.
In early September a group called Sonora Lithium Project Partners announced that it had struck a "conditional long-term lithium hydroxide supply agreement" with Tesla. The partners - Bacanora Minerals Ltd. and Rare Earth Minerals plc – are developing a lithium mine in Northern Mexico that has an initial production capacity of 35,000 metric tons of lithium, and the potential to scale up to 50,000 metric tons a year, according to the press release.
Several Nevada legislators who approved the Tesla incentive package were perturbed by that announcement. To quell the kerfuffle, Tesla CEO Elon Musk said that Tesla was also pursuing Nevada sources. The press release did not say that the northern Mexico mine would be the primary, or the only, source. In fact, Ferrari points out that the announcement said stated: "this agreement will form a portion of Tesla's anticipated lithium-based feedstock needs; the remainder of which is expected to come from other lithium peers." Rare Earth Minerals actually owns part of Western Lithium Corp. which is developing a lithium deposit in Humboldt County in northern Nevada.
Indeed, there are a lot of conditions listed in the agreement and the Mexico site has not even been developed yet. Sonora is still working on a pre-feasibility study, and also has yet to secure financing for the project. The agreement says the project must reach certain performance milestones and product specification requirements within the next two years. One of those milestones is for Sonora to prove it can meet Tesla's volume requirements and timeframes.
Tesla has said it plans to start production by the end of 2016, but that's unlikely to be very high volumes. Ferrari believes the Sonora deal is a part of a bigger picture. "The output levels of the Tesla plant are extraordinary, requiring considerable sources of lithium," he says. "U.S. supplies are limited. So it may be that this is to secure a long-term supply of lithium whether from Mexico or Nevada."
Meanwhile, Tesla is relying on battery-maker and strategic partner Panasonic Corp. to bring its Asian supply chain to Nevada. According to Tesla's latest 10Q filing, it is still in discussion with other supply chain partners that may be co-located at the factory. But Panasonic told a Storey County official that it plans to bring up to 15 additional component suppliers to the site, according to a Wall Street Journal report.
Add in the vendors involved in the solar arrays Tesla is building, and Nevada may see a "giga-city" of suppliers grow up around the plant.