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April 19, 2018

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Gigafactory opening shows ‘Tesla effect’ taking shape


Rich Pedroncelli / AP

Elon Musk, CEO of Tesla Motors discusses the company’s new Gigafactory Tuesday, July 26, 2016, in Sparks.

Tesla Factory Sneak Peek

Tesla CEO Elon Musk discusses the company's new Gigafactory Tuesday, July 26, 2016, in Sparks. It's Tesla Motors biggest bet yet: a massive, $5 billion factory in the Nevada desert that could almost double the world's production of lithium-ion batteries by 2018. Launch slideshow »

At a meeting last week, Gov. Brian Sandoval was beaming. A state economic development board was about to approve tax incentives for automotive supplier Valeo North America Inc., a company that is planning to co-locate at Tesla’s massive $5 billion plant to help manufacture a battery cooling system.

“This is what we talked about when we had the Tesla project,” the governor said. “It wasn’t just about Tesla. It was about the other companies that are part of that process. And without that, you would not have likely otherwise …” An executive from Valeo cut him off mid-sentence with an affirmation.

“That’s correct,” the Valeo executive said.

Tesla, the ambitious electric carmaker helmed by Elon Musk, broke ground on its 3,200-acre site at the Tahoe-Reno Industrial Park at the end of June 2014. Like the company, the project is ambitious. Once complete, it is expected to cover 5.8 million square feet, giving it a footprint equal to about 107 football fields. Several states wanted it in their backyards, but Tesla ultimately chose Nevada, in part because legislators had approved tax breaks and incentives worth an estimated $1.3 billion over 20 years.

Until this week, when the company escorted reporters around the sliver of the factory that has been constructed, it had largely remained quiet about its progress. Later today, Tesla will lift the lid even further at an official opening. Tesla, whose factory is about 14 percent complete, has hurried construction so that it can start producing battery cells later this year to meet demand for its mass-market sedan launching in 2017.

“I find this to be quite romantic,” Musk said of the site this week. “It feels like the Wild West.”

The goal of the Gigafactory is to reduce Tesla’s costs for lithium-ion batteries. It could be key in the future of a Tesla reliant on batteries for vehicles and for its Powerwall, a device that can store backup energy or solar power. It could also be key to the region’s economic development, state officials argue.

Two years later, the Tesla deal is not without some critics, who continue to argue the company should pay more taxes, and others frustrated with auditing issues. But economic development officials rebut those claims, arguing that the economic impact is well worth any costs. The Gigafactory, they argue, has brought jobs and companies to the state in addition to boosting the regional economy around the plant.

A recruitment tool

To date, Valeo is the first supplier to set up a location in Nevada because of the Tesla project (though one exception might be Panasonic, which has invested millions in the Gigafactory as Tesla’s partner).

But the state is expecting more to come. Steve Hill, who directs the Governor’s Office of Economic Development, said Nevada officials working with several similar companies and expect about a dozen companies to eventually be on site at the Tesla Gigafactory. Apart from suppliers, Hill said Tesla has been “very helpful” in luring other companies, including carmaker Faraday Future, to Southern Nevada.

“It’s caused Nevada to be front and center in a lot of national and international conversations,” he said.

This has been especially true in Reno and the surrounding region. Mike Kazmierski, who runs the ‎Economic Development Authority of Western Nevada, said the Tesla Gigafactory helped prospective businesses see the area as a business community, rather than a gaming town or a miniature Las Vegas.

He said the region is seeing more demand from several industries, including advanced manufacturing.

“If Tesla went to Austin or if Tesla went to Charlotte, people probably wouldn’t have been too surprised. When people announced Reno … everyone went, ‘Reno'? What the heck is Reno?’” Kazmierski said. “We didn’t have a brand that was associated with advanced manufacturing or with industry.”

The incentive issue

Despite the boost in profile, seen as one of the biggest short-term benefits of the Tesla agreement, some question whether the estimated $1.3 billion tax incentives for Tesla were worth it. On the right, the argument is that incentives amount to corporate welfare. On the left, the argument is that incentives result in reduced revenue, placing a greater burden on the remaining taxpayers to pick up the tab.

“You can always buy companies at some price,” said Martin Kenney, a professor of human and community development at UC Davis. “(But) what are you getting for what you paid for?”

The large majority of the incentive packages are abatements, meaning that Tesla gets a break on sales and property taxes for several years. But the company is expected to receive discounted electricity rates and about $195 million in tax credits tied to employment and spending. These credits can be sold for cash at a potential hit to the state. Tesla has sold $20 million in tax credits to MGM Resorts International.

“I understand the point but I clearly think the cost has been worth it,” Hill said.

He cautioned against such judgments, noting tax credits are unlikely to have a large impact on the state’s general fund because of roughly commensurate cuts in a film tax credit and a tax credit for insurance companies.

Tesla has also paid in excess of $1 million to Storey County, where the plant is located, to help offset added costs to government services, according to Pat Whitten, the county manager. The county recently bought a $750,000 ladder truck so firefighters could reach the top of the Gigafactory in an emergency.

“I will say the impact (of the factory) is massive,” he said. “I would tell you that while we are not currently (getting) the normal revenue streams, that Tesla has been very cooperative working with us.”

Regional and future impact

Officials say the actual impact from the factory is still minimal, with one exception: construction. As of the first quarter this year, the site had a weekly average of 638 construction workers and a total of 2,600 unique construction workers, according to a state audit. Nearly three-quarters were Nevada residents, the audit said. As construction ramps up to meet Tesla’s production deadline, the number is expected to increase.

“That is one place where we can feel the impacts of Tesla most immediately,” Kazmierski said.

Business licenses have increased in Storey County since the Tesla announcement, the Reno-Gazette Journal reported last year. Of the 197 new licenses in 2015, 128 were for contractors, the paper found.

Tesla has ambitious hiring plans. Right now, it has a permanent staff of about 400, lower than what was projected for this time (Hill said this was a “mistake” in how the office timed its projection). But Musk told reporters on Tuesday that he could see about 10,000 employees in the factory within a few years. That would comprise a considerable part of the growth Kazmierski’s organization expects in the market.

“The partnership between Nevada and Tesla set into motion the creation of thousands of new jobs and developed opportunities for existing businesses with an infusion of millions of dollars into our economy,” Sandoval said in a statement this week. “It also helped revive our construction industry with a surge of new long-term jobs and refocused our local trades to prepare for the demands of the future.”

Tesla, additional employers, and a post-recession recovery have fueled speculation in real estate, developers and economic development officials said. “Since the announcement, the expectation of the job growth has really driven capital and investment from all over the place into the area,” said Ted Stoever, a senior vice president at Colliers International in Reno.

And land is becoming expensive, raising questions about affordability. “That’s one of our major weaknesses moving forward, providing affordable housing for the workers we have in the area,” said Brian Bonnenfant, project manager at the Center of Regional Studies at UNR.

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