Currently Tesla (TSLA) has 4 so-called "Gigafactories". Tesla calls them "Gigafactories" but in fact they are just factories. The prefix "Giga" is just promotional for Tesla's extreme stock promotion. In Fremont, California, it makes cars, in Nevada it makes batteries in cooperation with Panasonic and in Buffalo it makes solar cells. Below I will outline the problems with each of these factories and then I will discuss the new factory in Shanghai and the proposed factory in Berlin.

The car factory in California (factory 1)

In 2010 Tesla bought a car factory in Fremont from a company owned by Toyota and General Motors. This factory was for sale because it is not competitive to produce cars in California due to high wages there.

At the moment Tesla produces all models in this factory 1. The model S and X each have their own assembly line. Unfortunately demand for the S and X is decreasing fast, in the US and abroad. In particular very few of these cars are still sold in Europe and the S hardly sells in China. These cars have a lot of competition from better quality cars from other car manufacturers, such as from Jaguar, Audi and Porsche. Therefore, I expect sales of the model S and X to decline pretty fast. What does not help either are decreasing incentives for these cars in California beginning December 3, 2019.

Tesla also makes the model 3 in factory 1. It uses two production lines. One production line is in a tent, and the other one is in the factory building itself. I suppose the better quality model 3's are produced in the factory building. What we do know is working conditions can be hash in the tent, especially in summer and winter. This production line is probably also less automated than the model 3 production line in the factory building.

An important metric is the number of cars produced per employee per year. The previous owners of the factory in Fremont produced about 400,000 cars with about 5,000 employees, so 80 cars per employee per year. This year, at peak model 3 production Tesla produces at most 400,000 cars, and probably less with about 10,000 people. So only 40 cars per employee per year. Next year it will be less because part of the production will be done in the new factory in Shanghai. 

Independent from any bias, long or short, nobody can deny Tesla produces fewer cars per employee than other car manufacturers, and more importantly fewer cars than the previous owner of the factory in Fremont. That should not be a problem if Tesla can sell its cars for high enough prices.

But the problem with the model 3 is in fact similar to the problem with the S and X. The model 3 comes in several variants: two expensive variants and a low-priced variant. Tesla hardly makes any money on the low-priced variant. Unfortunately, demand for the high priced variants is waning, for the same reasons as with the S and X, competition and lower incentives for expensive electric cars.

Another problem of this factory is the paint shop. The paint shop is subject to strict air pollution regulations. That should limit the output of the factory to about 4,500 cars per week. For sources start here. Yet Tesla claims it produces more cars than that. We do not know how they do it but we do know there are many complaints about the paint. Often it is much thinner than paint of other cars. See here, here and here.

Lastly, Tesla could stop manufacturing the model S and X. It could use the space for those two lines to produce the new model Y. The problem with that is the model Y is very similar to the model 3. Therefore selling the model Y will take away much of the sales of the model 3. This is similar to what sales of the more luxury variants of model 3 did to model S and X sales.

The battery factory (factory 2)

In factory 2 batteries for the model 3 are produced. More precisely Panasonic produces the batteries and Tesla wraps them so that they can be transported and built into model 3 cars.

Tesla invested a limited amount in this factory: mostly for the building. Panasonic owns most of the equipment. In return Tesla has to satisfy purchase obligations. In other words, Tesla has to spend a certain amount on batteries every quarter. I think they are OK currently but if production decreases Panasonic can pull the plug for this factory.

In principle, batteries produced in this factory can also be used for more general electricity storage, so not just for cars. However, such batteries get few sellers. Almost all production is for batteries for the model 3. Moreover batteries for the model S and X are produced in Japan. Furthermore, it will be difficult to switch production to batteries for other electric cars since these have other formats. Tesla is the only manufacturer using cylindrical batteries in its cars.

The solar cell factory (factory 3)

When Tesla acquired SolarCity it also became the owner of the solar cell factory in Buffalo. If you look at Tesla's quarterly reports this seems to be a profitable business. This factory was built with the help of nearly a billion dollars from New York taxpayers. New York State recently audited its investment and wrote it down from $959 million to less than $75 million. There is a contradiction here. If this factory was immensely profitable then I suppose New York State would not need to write its investment down.

Also In August 2019 Walmart sued Tesla for defective solar panel installations with high fire risks. Because of this fire risk it had to shut down each solar panel installation, hundreds of roofs. Even that drastic measure did not prevent new fires. Though this lawsuit has been settled recently many other similar lawsuits remain unsettled. Because of this I do not think billions of solar installations on roofs and the factory have much value. That Tesla has not written them down on its balance sheet yet does not mean much.

The factory in Shanghai (factory 4)

This factory produces the model 3. The idea behind it is that Tesla can avoid import duties and use cheaper labor by producing locally. If Tesla sells a locally produced car for less more Chinese people will buy it. Furthermore the company might sell more cars because Chinese might prefer to drive a car made in China.

The problem with this reasoning is car factories are only really profitable if they operate close to their maximum production capacity. Currently the production capacity of the factory is about 150,000 cars per year. However, even with optimistic estimates Tesla can sell at most 40,000 imported model 3 cars per year in China. At the moment it sells about 30,000 model 3 cars per year.

According to Mark Spiegel locally produced cars can be about 25% cheaper. So Tesla can sell more cars in China. But how many more? According to Mark Spiegel the price elasticity of cars is also at most 2.4. That means if a car manufacturer lowers the price with 1% it will sell at most 2.4% more cars. So even if Tesla lowers the price with 25% it will sell about 64,000 model 3 cars per year in China. So the factory will operate well below its production capacity and therefore it is highly unlikely to be profitable.

The factory in Berlin (factory 5)

Recently Tesla announced a new factory close to Berlin, Germany. I do not think it makes sense to build a factory there for two reasons:

• Tesla sales are low in Germany and in Europe in general. I do not see how that will improve, in particular because from January 2020 incentives will be decreased in The Netherlands.
• Building a factory in Germany is a very slow process. Because of environmental regulations and other obligations tied to permits it is almost impossible to build a new big car factory there.
• Unlike with the Chinese factory there won't be any substantial cost reductions. Trade barriers between the EU and the US are lower than between China and the US. There is no cheap labor in Germany either.

Bottom Line

So far Tesla has not made consistent profits. That does not surprise me when looking at the separate factory operations. It is unlikely this is going to change. Ultimately, the value of a manufacturer on the stock market is determined by the profitability of its factories. That is a big problem at Tesla. So my take: strong sell.