Musk Says $500 Million Enough to Get Tesla Shanghai Production Running

(Bloomberg) -- Elon Musk told investors Tesla Inc. won’t incur a heavy financial burden to get production up and running in its first overseas factory, seeking to soothe investor concerns about capital requirements for the Shanghai facility.

Capital expenditure of about $500 million is needed for Tesla to reach a weekly production rate of 3,000 vehicles, the chief executive officer said on an earnings call Wednesday. A majority of the funding will be by local banks, and with competitive debt financing and “extremely compelling interest rates,” Tesla doesn’t expect the investment to be a capital drain on the company, he said.

“These are the biggest banks in the world,” Chief Financial Officer Deepak Ahuja said on the call. “And for them, $500 million is not a large amount of money in the scheme of things.”

Financing for the plant, which Musk earlier said would cost about $2 billion to reach an annual capacity of 250,000 vehicles in the first phase, was a source of intense speculation when the carmaker was bleeding cash until last year. The Palo Alto, California-based company has turned its performance around, with a healthier balance sheet and about $3.7 billion in cash and equivalents.

After years of negotiations with authorities in China, Musk broke ground on the plant in the outskirts of Shanghai on Jan. 7. The automaker aims to finish initial construction this summer and start Model 3 production by the end of the year. With the Shanghai plant in operation, Tesla expects to have a global weekly production rate of about 10,000 vehicles or close to it by the end of the year.

The capital expenditure that Tesla expects to incur is for the required equipment, Ahuja said, signaling costs such as land expenses aren’t included in the estimates.

For the cars made in China, Tesla will source battery cells from a combination of sources, including locally, its own Gigafactory in Nevada and Japan.

Production in China will offer a significant advantage and is “fundamental to the future of Tesla,” Musk said, adding the company is getting a lot of support from the Shanghai and central governments.

“Phase one is about 10 percent of what we think the Gigafactory will ultimately be,” he said. “So, it’s a major deal.”

©2019 Bloomberg L.P.