Tesla Motors Plans Major Expansion, But Not in the Golden State

California-based Tesla Motors, electric vehicle pioneers and manufacturer of the high end, totally electric-powered Model S, has come up with a new business model in partnership with Panasonic. The cornerstone of the plan is the development and mass production of a new line of vehicles, priced to attract the general car-buying public. It is anticipated that the company will build 500,000 such vehicles by the year 2020.

To support this strategy and attain this price point, serious cost-cutting measures must be taken along the manufacturing supply chain. Of paramount importance is availability of the most technologically advanced (yet low cost) lithium-ion batteries. What better way to guarantee the quality and ready availability of this key component than to bring the entire research and manufacturing operation in-house?

To accomplish this, Tesla plans the construction of a $5 billion, 10-million-square-foot production facility, dubbed “The $5B Giga Battery Factory.”  It is expected to bring with it billions of dollars in direct investment, and potentially create over 6,500 new jobs. Tesla is now on the hunt for a suitable site, but one thing has already been decided: the company will not expand operations in its home state of California.

A spokesman in Gov. Jerry Brown’s administration said the state presented a proposal to the automaker with several possible sites, but that none of these interested Tesla. Tesla will not release specifics, but there is plenty of speculation based upon substantiated data. From 1995 to 2012, California lost over $42.5 billion in wealth through outward migration due to an unfavorable tax environment. Further, according to Joe Vranich, an Orange County consultant with Spectrum Location Solutions, in 2011 alone, 254 companies relocated out of California, at a rate of nearly five companies per week. “High taxes, costly regulations and general hostility directed toward businesses by state and local public agencies” were behind the decision, Vranich said, adding that companies in virtually every industry are exiting the state. So it comes down to cost and politics!

According to Tesla’s regulatory filings, the list of suitable sites has been narrowed down to four southwestern states: New Mexico, Arizona, Nevada and Texas. Ironically, California has already “donated” $ 23.8 billion in Adjusted Gross Income (AGI) to three of these, namely Nevada, Arizona and Texas.

This potential bonanza will be accompanied by strict requirements for Tesla’s new home, beginning with land availability and tax incentives. Additionally, there must be accessible rail service to the company’s Palo Alto, California complex. The site must also have favorable environmental conditions and regulations so that Tesla can build its own wind farms and solar power plants to supply its energy needs. One of Tesla’s most controversial demands, however, is that these states revise current legal policies and allow Tesla to market its product directly to the consumer, as opposed to through a dealer network. Considering the objections from dealers, this demand will present a major hurdle.

Naturally, there are pros and cons for each site, so here is how they stack up:

Texas – The state has a reputation for being business friendly, ranking number one on the chiefexecutive.net 2013 listing of Best and Worst States for Business. It has no personal income or corporate taxes, boasts pro-business regulations, and is also the largest producer of wind power in the US. Texas is no stranger to technology or vehicle manufacturing. The SpaceX program (started by Tesla founder Elon Musk), GM, and Toyota manufacturing plants all have a presence here. On the downside, Texas has been historically very hostile to Tesla’s direct car sales model.

Arizona – Currently, a bill is moving through the state legislature that would grant Tesla a special exemption from franchise laws, exclusive to electric vehicle production. Like Texas, Arizona is open to granting large incentives for tech companies, and it leads the other three contenders in solar power. Arizona is ranked 6^th on Chief Executive’s list. On the downside, the state’s public service company had a bitter fight with solar power company SolarCity over their net metering policies.

Nevada –  Nevada is considered the odds-on favorite for the “Gigafactory.” In addition to being one of nine states without a personal income tax, or any corporate taxes, Nevada is said to be the only site of the four finalists where zoning and permits are being discussed. It is also ranked as the ninth-best state in which to do business. One possible location is a former Air Force base with 3,000 acres ready to develop, and rail links to the not-so-far-away Tesla plant in California. They also have the green energy requirement covered. And lastly, direct sales have not yet been a source of any litigation. It seems that Nevada has met all of the requirements set down by Tesla.

New Mexico – New Mexico is the “wild card” in the hunt. The state is working hard to sell itself as a forward-thinking technological state, but ironically New Mexico was originally turned down in its bid to be the site for production of Tesla’s flagship Model S. New Mexico’s tax code and electricity regulations are favorable, and it has the rail and solar power requirements covered as well, but the state is ranked 32^nd on chiefexecutive.com’s 2013 ratings.

So it appears Tesla is Nevada’s to lose. It will be interesting to see what the competitors can come up with by way of incentives and regulation changes in order to turn the heads of Tesla executives.