Tesla Begins Lining Up Loans, Automaker to Borrow $2 Billion for China Gigafactory

Elon Musk ballparks that $500 million will be required to begin Model 3 production in China by the end of 2019.

byRob Stumpf| PUBLISHED Feb 28, 2019 11:30 AM
Tesla Begins Lining Up Loans, Automaker to Borrow $2 Billion for China Gigafactory

Tesla's newest Gigafactory has broken ground in China and is on pace to begin manufacturing cars by the end of 2019, but not before costing the automaker a large up-front investment to get the project rolling. In its fourth-quarter earnings report, Tesla made investors aware of its impending financing needs in order to complete Gigafactory Shanghai. Now, CNBC reports further details on how that money could be spent, along with corroborating information on how Tesla will arrange roughly $2 billion in financing.

New information available from JL Warren Capital, a research firm which focuses on the Chinese equity market, suggests that Tesla will receive backing from four separate financial institutions to fund Gigafactory Shanghai. The first quarter of its funding will supposedly help to get the new factory from foundation to production by the end of the year.

"As a ballpark figure, probably it's something about—something in the order of $0.5 billion in CAPEX to get to the 3,000 vehicle rates in Shanghai," said CEO Elon Musk during the company's fourth-quarter earnings call.

JL Warren Capital goes on to estimate that Tesla's first stage of financing will likely accrue an interest rate of 3.9 percent, well below the People's Bank of China's benchmark of 4.35 percent.

Tesla will not own the land that Gigafactory Shanghai is being built on, at least not yet. The land acquisition was part of a $141 million 50-year lease with the government of China. Deepak Ahuja, Tesla's current CFO (who is slated to be succeeded in the near future by VP of Finance, Zach Kirkhorn), confirms that Tesla does not consider this a capital expenditure, but rather part of an operating lease. It's unclear if the $2 billion in financing will be applied to the lease in any capacity; however, it will likely be used to help with the cost of equipment purchased towards tooling and other means of production.

The $500 million initial phase of Gigafactory Shanghai is slated to bring the factory into a state where it can produce at least 3,000 vehicles per week by the end of the year. This includes a facility which has the necessary tooling for stamping, body joining, painting, and general assembly. Tesla says that it is able to meet this "accelerated" timeline at a significantly reduced upfront cost thanks to lessons learned over the years at its production facility in Fremont, California.

Between production at its Fremont and Shanghai plants, Tesla expects to achieve its long-promised output goal of 10,000 vehicles per week sometime before the second half of 2020.