Is Tesla heading towards overcapacity with its Gigafactory? Some researchers seem to think so.

Tesla Motors’ Gigafactory plan is to build a new 35 gigawatt-hour lithium-ion cell production facility for electric vehicles. The exact location of this factory is still being debated.

Researchers from Lux Research said that this Gigafactory will bring only a modest reduction in battery costs, and create significant overcapacity, given likely sales of less than half the targeted 500,000.

Tesla and its partner, Panasonic, will contribute about 45 percent and 35 percent, respectively, of the initial $4 billion required to build the Gigafactory, proposed to go on-stream in 2017.

An analysis by Lux Research, titled The Tesla-Panasonic Battery Gigafactory: Analysis of Li-ion Cost Trends, EV Price Reduction, and Capacity Utilization, projects sales of only 240,000 Tesla vehicles in 2020, leading to razor-thin margins to Panasonic and 57 percent overcapacity. The analysis can be accessed here.

“The Gigafactory will only reduce the Tesla Model 3’s cost by $2,800, not enough to sway the success of the planned lower-cost EV,” said Cosmin Laslau, Lux Research Analyst and the lead author of the report. “Besides, Lux’s analysis reveals significant overcapacity because Tesla will miss its ambitious target of half a million.”

Lux Research said it evaluated Tesla Motors’ Gigafactory plan and its consequences for the EV industry and stated the following:

  •    Cost-cutting is the name of the game, but the Gigafactory does not do enough. Battery prices need to fall dramatically if plug-in cars hope to break beyond their current niche. The OEMs backing the U.S. Advanced Battery Consortium are targeting $125 per kilowatt-hour by 2020 — more than four times lower than $520 per kilowatt-hour, the price Ford paid for its Focus EV battery packs. Currently, Tesla has the lowest cost of about $274 per kilowatt-hour, according to Lux Research analysis. Tesla founder Elon Musk aims to cut cost by 30 percent, on the strength of scale, location and technology, lowering the price to $196 per kilowatt-hour with the Gigafactory.
  •    Panasonic faces risks. The Gigafactory might seem like a great win for Panasonic, ahead of rivals such as Samsung SDI, LG Chem, and NEC. But in reality the Japanese company faces high risks. In the optimistic scenario of Tesla attaining its targeted half a million EVs, Panasonic could rake in more than $15 billion between 2017 and 2020. But at the more likely 240,000 EVs, as estimated by Lux Research, Panasonic would take in only $7 billion on its likely investment of $1.4 billion, with questionable margins.
  •    Gigafactory will lead to huge overcapacity. The Gigafactory, proposed to be built at a cost of $5 billion, is designed to make 35 gigawatt-hour Li-ion cells for half a million EVs. But in the likely event of much lower sales of 240,000, overcapacity will be to the extent of 20 gigawatt-hour. This 57 percent overcapacity is unlikely to be filled either by rival carmakers or Tesla’s own plans to sell some stationary battery packs to developers like SolarCity for residential photovoltaic integration and other uses.