Panasonic has penned a deal with Tesla Motors to help build the electric-car startup's "Gigafactory," which it hopes will produce half a million electric-vehicle batteries per year.

Last year, Panasonic extended a 2011 agreement to supply Tesla with automotive-grade lithium-ion battery cells. Panasonic increased its supply to nearly 2 billion cells over the course of four years.

The lithium-ion battery cells purchased from Panasonic will be used to power Tesla's Model S and Model X cars, as well as the more affordable models it plans to introduce beginning with the Model 3 sedan by 2017. The Model 3 is expected to be about half the cost of a Model S, which has a base price of $70,000.

A mockup of Tesla's Gigafactory (Source: Tesla).

Reducing the cost of the batteries will be crucial to lowering the prices of its cars, Tesla stated.

Tesla has said that it plans to initially spend $2 billion to construct the 10 million-square-foot factory, but it estimates the total investment, with machinery and labor, could be as much as $5 billion by 2020.

The term "Gigafactory" comes from the "gigawatt" electrical unit of measurement, which represents 1 billion watts of electricity.

Tesla founder and CEO Elon Musk said the Gigafactory will manufacture 500,000 lithium-ion batteries for electric vehicles per year by 2020 or the equivalent of 50 gigawatt hours of battery packs.

Several states are being considered as sites for the Gigafactory, most prominently Arizona, California, Nevada, New Mexico and Texas. Musk said during a June shareholder meeting that the company will choose the site by the end of the year.

Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery and other manufacturing tools based on mutual agreement with Tesla.

Tesla will use the cells and other components to assemble battery modules and packs. To meet the projected demand for cells, Tesla will continue to purchase battery cells produced in Panasonic's factories in Japan, the companies said in a joint statement.

Tesla expects its Gigafactory to exceed 2013 global production of EV batteries by 2020 (Source: Tesla).

Panasonic's cell technology will be combined with Tesla's electric vehicle battery expertise. Tesla will manufacture about 35,000 vehicles this year. The company produces about 700 cars per week.

Tesla and the battery boon

Tesla also plans to use the Gigafactory to build batteries that store power generated from solar panels used on homes and businesses. Musk is chairman of the solar installer SolarCity.

"The Gigafactory represents a fundamental change in the way large scale battery production can be realized. Not only does the Gigafactory enable capacity needed for the Model 3 but it sets the path for a dramatic reduction in the cost of energy storage across a broad range of applications," JB Straubel, Tesla's chief technical officer, said in a statement.

Tesla's quest to disrupt the trillion-dollar auto industry also opens up an equally profitable opportunity to gain from the electric utility industry, according to Morgan Stanley analyst Adam Jonas.

"If it can be a leader in commercializing battery packs, investors may never look at Tesla the same way again," Jonas said in a briefing. "We reflect the potential for lower battery costs through higher sales volume nearly doubling Tesla's share of the global car market."

Jonas also predicted that the combined sales of all Tesla models will exceed 1.1 million units annually by 2028.

Tesla's flagship sedan, the Model S

Lucas Mearian covers consumer data storage, consumerization of IT, mobile device management, renewable energy, telematics/car tech and entertainment tech for Computerworld. Follow Lucas on Twitter at @lucasmearian or subscribe to Lucas's RSS feed . His e-mail address is lmearian@computerworld.com.

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