Manufacturing News

Tesla to fund $5 billion Shanghai car, battery factory with local debt

Tesla Inc. plans to use mostly local debt to fund a new factory in Shanghai, its first outside the U.S.

The plant, known as the Gigafactory 3, is expected to churn out about 250,000 vehicles and battery packs per year initially, capacity that will double over time. The first vehicles are forecast to roll off the production line in about three years, Tesla CEO Elon Musk said in a letter to shareholders Wednesday.

Bloomberg News reported earlier Wednesday that the company would look to China to at least partially fund the $5 billion price tag of the manufacturing complex, citing a person familiar with the plans, who asked not to be identified as the matter is private.

While construction is expected to start in the next few quarters, Tesla’s investment won’t begin “in any significant way” until next year, according to the letter. Musk said on a conference call Wednesday that the cost would probably be closer to $2 billion for the factory to be able to build 250,000 vehicles a year.

Investors and analysts have repeatedly said that Tesla will need to raise more money over the next year, with some estimates in excess of $2 billion. Musk has been adamant that the company doesn’t need to raise more financing, saying that increased output will produce the necessary cash flow to finance the company’s needs.

Critics will need more convincing. Tesla ended the second quarter with more than $2.2 billion in cash and equivalents, down from nearly $2.7 billion in the first quarter. It’s been spending billions of dollars to accelerate output of the Model 3 sedan, which Musk has referred to as “production hell.”

Tesla said Wednesday that its cash burn slowed in the second quarter as Model 3 output picked up. The company expects the third quarter to become sustainably profitable for the first time in its 15-year history.

“The financing that they have on the Shanghai Gigafactory is testament that Elon still has investor confidence and the ability to win investors over,” said Gene Munster of Loup Ventures. “But the bears still have something to chew on, because Tesla hasn’t hit profitability yet."

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