Tesla’s massive $1.25-billion deal with Nevada to build a huge battery factory near Reno took observers by surprise when it was announced two weeks ago.
The scale of the deal, that is. Not the deal itself.
Tesla had already started construction in Nevada, but on the company’s most recent earnings call, CEO Elon Musk was anything but committal about Nevada being the true winner of a multistate competition for the first of what could be several “Gigafactories.”
California vaguely re-reentered the run-off in the past few months, and that seemed to enough incentive for the Nevada state government to come up with enough…Incentives! to definitively end the discussion. Besides, it was unclear whether California was really interested in giving Musk & Co. a sweet deal anyway, given that the state legislature ended its session without voting to authorise any sort of competing incentive package.
In any case, Nevada coughed up the money, and now the deal — which would have Tesla and partner Panasonic effectively paying no state taxes for a decade — is being worked over.
On the one hand, you could argue that for Tesla the company — and probably more importantly, Tesla the speculative Wall Street investment — having the Gigafactory plan settled is a big positive. Musk’s entire master plan to move past the luxurious Model S sedan and bring higher-volume electric vehicles to the market hinges on being able to secure a very large supply of lithium-ion battery cells.
The Gigafactory makes that possible.
But is it really a goods deal for Nevada? At the Atlantic’s CityLab, noted urban theorist Richard Florida is appalled:
I am a fan of Tesla cars (I’d like to have one of my own) and Musk is surely one of the most intriguing innovators and minds of his generation. But no matter how you slice it, the deal makes utterly no sense. It is just one more example of a government giveaway for a factory that would have been built anyway. As I’ve argued before, there is virtually no association between economic development incentives and any measure of economic performance. And it’s not just me. I spoke with several experts in economic development incentives and advanced manufacturing and the consensus was the same: this deal was overblown and unnecessary.
Florida goes on to cite sources who question how many jobs the Gigafactory will actually create (Tesla and Nevada say 6,500; others suggest 3,000 may be closer to reality), point out that Nevada is paying hundred of thousands, potentially, for these jobs, and note that a successful Tesla and successful Gigafactory will reduce jobs at traditional auto manufacturing operations.
There’s also some stuff in Florida’s analysis about how Reno isn’t likely to become a tech hub, hinting at Tesla’s cynicism over the way the company is pitching the Gigafactory’s prospects.
The point about traditional engine plants losing jobs if the Gigafactory gains them is one that could easily be disputed. At the moment, the traditional auto industry is booming: in August, new vehicle sales in the U.S. jumped above a 17-million pace, with the vast majority of those cars and trucks powered by good old-fashioned gas engines.
Tesla, meanwhile, is selling a few thousand cars a month.
Even if Tesla achieves its ambitious goals of selling half a million cars by 2020, that still only about 3% of the overall U.S. auto market at present. And it’s likely that a decent chunk of Tesla’s production will be exported, as sales grow in countries like China.
So Tesla could have some marginal effect on employment at traditional auto plants, but so what? Of course, the underlying argument is, as Florida notes, that Tesla won’t contribute 6,500 net jobs to the U.S. economy, if the Gigafactory in Nevada subtracts jobs from elsewhere. But what if a growing conventional auto market actually adds jobs?
The more damning allegation, as far as the size of the deal goes, is that Tesla was going to build the Gigafactory in Nevada anyway. The past few months have been nothing but tax-incentive theatre, with Musk directing the show. For Florida’s perspective, this is not a good way for states to do business, and he concludes by calling for “an end to incentives once and for all.”
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.