Elon Musk, Tesla, and the science of investment attraction (or not).

Elon Musk – the man who sold Pay Pal and who is now worth a reputed USD $14 billion – is a name spoken in revered terms. A pioneer of battery powered cars and powerpacks (Tesla); expanding space exploration (Space X) and solar energy (SolarCity) – he is widely regarded as a model business entrepreneur of the new economy. A standard bearer for sustainability and corporate responsibility, he owns the sorts of businesses many governments want to attract. How many cities in Australia, for example, wouldn’t want a Tesla research or production facility for the bragging rights alone? 

But a visit to his Tesla Gigafactory in the middle of the Nevada Desert last year prompted me to learn more about his operations. As I did, I went from believer to sceptic and had to shift my thinking on the theory of investment attraction and business development through the eyes of someone like Elon Musk.

The Tesla Gigafactory is a lithium-ion battery manufacturing plant in the middle of a desert. I had to see for myself if the stories were true. Surely ‘middle of the desert’ would prove an exaggeration? Every theory of new economy investment attraction and business development said that to attract skilled knowledge workers, you needed hip urban communities loaded with natural and man-made amenity. Middle of desert was not on any list of attributes I’d seen. But sure enough, a full day’s drive east of San Francisco brought me to Reno (a run down Casino town in Nevada that predates Vegas) for an overnight stop, and next morning it was a half hour drive (at a steady 120 kph) into the Nevada desert before reaching an inconspicuous turnoff which took me into a desert industrial estate with a smattering of buildings and lots of ‘for sale or lease’ signs (through Colliers) poked into the red desert dirt. A bit of hunting around took me to the gigafactory security entry where guards promptly chased me off, but not before I managed to snap a pic or two.

The building is huge. It’s reportedly the second largest roof structure in the world after the Boeing factory in Seattle. Why, I wondered, put it here? Literally a half hour from any sort of civilization and the nearest city - Reno – is hardly a new economy talent magnet. If a worker stepped outside for lunch, they’d be blasted by a desert sun and hot winds. There is nowhere to go, nothing to do. The staff canteen inside the gigafactory is your only choice (though the canteen is probably more than acceptable).

I was en route to speak at an American Planning Association conference in Utah and when I arrived I remarked to one of the Salt Lake City officials involved in economic development that I couldn’t understand why Musk had chosen the Nevada desert for his factory. Then I learned that Utah had missed out – as had many other equally attractive destinations. The reason? A bidding war, encouraged by Telsa according to some reports, saw Nevada hand him the equivalent of USD $1.3 billion in forgiven taxes, free land and cash grants to put it where he did. Nevada, flush with gambling taxes, bought the Gigafactory. It had nothing to do with modern theories of investment attraction or economic development: it was mostly greed on the part of Nevada (and arguably Tesla). Nevada has convinced its citizens the benefits will amount to $100 billion over 20 years but that figure is hotly contested.

Another curious feature of the gigafactory is the absence of solar panels. The second biggest roof structure by area in the world, it’s in the desert (where the sun shines a lot), owned by a company that produces solar tiles and electric cars and batteries for storing solar power, but no solar panels? A nearby conventional gas powered power station – visible form the highway – apparently provides the energy, while Tesla gets around to fitting a promised 70 megawatt solar farm to its roof. But why not do so from the beginning?

The more you dig into the Tesla story the more you realise that Elon Musk is a businessman first and foremost, who knows how to turn government grants to his benefit.  An investigative piece by Jerry Hirsch of the Los Angeles Times reports that Elon Musk’s various enterprises have tapped into USD$4.9 billion (AUD$6.5 billion) in government grants and incentives. The more notable businesses such as Tesla and Solarcity continue to report net losses even with government incentives, yet the share price behaves like it’s tethered to a SpaceX rocket.

Even the Tesla cars – beautiful looking machines which can set you back over USD$100k (AUD$130k) – attract a subsidy. Buyers (who have an average income of USD $320,000) receive a $7,500 tax credit from the US federal government and a $2,500 rebate from the State of California. Do the wealthy really need a subsidy?

The Tesla/Elon Musk story is nevertheless inspiring. The advances in technology being pioneered are remarkable. But as a story you’d invest public dollars into, I am now dubious. Locating a Gigafactory in the middle of a desert simply because the desert location won a bidding war with dubious long term economic benefits, doesn’t make a lot of sense to me. Most cities and regions looking to develop their economies couldn’t afford the short term cost of attracting an Elon Musk type venture, nor the long term costs of sustaining it. It is too easy to get caught up in the hype without considering the bottom lines of the business you’re trying to attract, and the extent to which it’s sustainable without your help. If it’s not, maybe it’s not worth having?

Footnote: Elon Musk has recently offered to ‘save’ the South Australian power grid by providing enough battery storage (to prevent further blackouts) within 100 days, or he’d do it for free. His offer was greeted with widespread enthusiasm from politicians to the media. By now, I was much more skeptical and wondered how a company so dependent on government grants could offer an Australian government an apparently low cost solution in under 100 days or do it for free. There’s no such thing as free in this world. Someone would be paying for it.