Top States for Business

A state battle is brewing for Elon Musk's new Tesla SUV factory

Ronald Grover, special to
Key Points
  • Western states, including California, Texas, Nevada, New Mexico and Arizona, are likely to make bids to win a Tesla Model Y crossover SUV plant planned for 2019.
  • In 2014, Nevada won the bidding for Tesla's electric battery Gigafactory, with a package of incentives worth near-$1.4 billion.
  • Tesla's electric-car plant in Fremont, California, has received incentives from the state to purchase equipment and create jobs.
  • Musk has proved to be an aggressive negotiator, reportedly once pulling workers off the planned Nevada site while he demanded $500 million in cash from the state. He also signed a deal with New Mexico, only to walk away when California offered more.
Tesla is building a new factory and here's why you should care
Tesla is building a new factory and here's why you should care

Here he goes again.

Serial entrepreneur Elon Musk built his space, solar and electric-car empires with the help of federal and state incentives. Now Tesla Motors is gearing up for what's likely to be another bidding war among state governments: a manufacturing plant for the Model Y crossover SUV the company hopes to introduce in 2019.

In June the Telsa CEO told shareholders that the electric-car maker is "bursting at the seams" and needs a new factory to build the Model Y SUV. Musk didn't provide details on where and when it will build the factory, or it's price tag, but state governments throughout the West and beyond are already angling to throw millions of dollars Tesla's way for the right to host the plant.

"Jobs are very politicized right now," said Greg LeRoy, the executive director of Good Jobs First, a nonprofit organization that tracks government subsidies and economic growth incentives. "And states are more likely to overspend when one of these megadeals comes along."

Musk knows how to stoke that interest. The last time Tesla decided to build a new plant, he fanned a bidding war in 2013 among five states — California, Texas, Nevada, New Mexico and Arizona. The states climbed over one another to offer free land, tax incentives and other benefits to become the home to a $5 billion Gigafactor, which produces lithium-ion batteries for homes with solar systems and for the $35,000 Model 3 sedan.

Members of the media tour the Tesla Gigafactory in Sparks, Nevada, which produces lithium-ion batteries for the electric-car maker.
James Glover II | Reuters

In September 2014, Nevada won the bidding with a package of near-$1.4 billion in tax abatements, land, road improvements and energy discounts for the plant that was built near Reno. The state also included cash in the form of $195 million in transferable tax credits set aside for filmmakers and insurance companies, and which Tesla could sell to other companies.

"It's an established MO for Musk," LeRoy said. "He's very aggressive about getting tax breaks and subsidies from state governments, and he's brilliant at public media. He knows how to play them off against one another."

It's unclear how much it might cost to build Tesla's new plant. In 2014, Honda spent $800 million to build a new facility in Celaya, Mexico, to make Honda Fit subcompacts and HR-V sport utility vehicles.

A Tesla spokeswoman had no comment on the company's plans.

He's very aggressive about getting tax breaks and subsidies from state governments, and he's brilliant at public media. He knows how to play them off against one another.
Greg LeRoy
executive director of Good Jobs First

Tesla makes its current fleet of sleek, quiet Model S sedans and Model X SUVs at a plant in Fremont, California, that Musk bought in 2010 for a mere $42 million when General Motors and Toyota decided to pull out. It has just started producing the Model 3 sedan there as well.

In its most recent annual report, Tesla estimated that through 2016 it had received $100 million of an estimated $198 million in tax breaks from California to purchase manufacturing equipment for the plant. Tesla also received a tax credit in 2015 to hire 4,400 new workers in California through 2019, according to the Governor's Office of Business and Economic Development. The credit has been valued at another $15 million. There's little doubt the state would be happy to entertain prospects for a new or larger Tesla plant in California.

"We have had an ongoing conversation with them for years," said Sid Voorakkara, the office's deputy director for external affairs, who wouldn't discuss whether the state has been in contact with Tesla about its new plant. "As a general rule, our office does not publicly discuss specific company projects," he wrote in an email.

Musk: Article on subsidies 'misleading & deceptive'
Musk: Article on subsidies 'misleading & deceptive'

States know that large manufacturing plants mean jobs. Telsa's plant in Fremont employs more than 10,000 workers, the company said in a recent blog.

The benefits for a state go beyond just the jobs created inside the new plant, says Timothy J. Bartik, senior economist for the W.E. Upjohn Institute for Employment Research, who has studied the impact of state incentives on state economies. For every job created by the plant, there will be a total of two new jobs created in local suppliers and retailers due to the dollars flowing into the community, he says.

A hardened negotiator

"States are likely to step up again," Bartik said in an email. "I don't know if there will be a visible bidding war, but someone is likely to bid; then others will counterbid."

If so, they'll find a hardened negotiator on the other side of the table. In 2014, with its deal for the Gigafactory in Nevada nearly complete, Musk suddenly added a new demand for a $500 million cash payment instead of some of the tax breaks, according to a report in Fortune. When the state balked, the company abruptly sent home 240 construction workers who were preparing the site. Eventually, the two sides reached an agreement, but only after Tesla failed to entice Texas to pay the upfront cash.

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New Mexico has been around the track with Musk before and knows the pain of being left at the altar by Tesla. In 2007 the state offered $20 million in tax credits and other incentives, including upfront cash, for the carmaker to build its first plant in Albuquerque. The $35 million plant would employ 400 workers to make 10,000 electric cars a year, the state said in a release. Tesla ended the deal before the plant could be built and instead began talks with California, which upped the ante with its richer incentive package.

Musk's use of tax incentives has put him on the defensive before. In 2015 the Los Angeles Times calculated that Musk's controlled companies — Tesla, SpaceX and SolarCity — benefited from an estimated $4.9 billion in government support. A SolarCity solar panel manufacturing plant in Buffalo, New York — scheduled to go online this year, though it has experienced delays — came to the city in western New York state through a $750 million incentive package.

In a telephone interview on CNBC's "Power Lunch" shortly after that story, Musk argued that his companies are not "getting some huge check." Instead, he noted that the incentives are spread out over years, generate jobs and require his companies to meet certain milestones to collect them. "What the incentives do is, they are catalysts," he told CNBC. "They improve the rate at which a certain thing happens."

The SolarCity Gigafactory in Buffalo, New York
Source: SolarCity

Calandra Cruickshank, president and CEO of StateBook International, which provides online location intelligence data used by corporations in making expansion and investment plans, said incentives allow a company to secure their profits early on, especially when a company is rolling out a new product like Tesla. "It makes the business case look more profitable if you have offsets for everything from workforce training costs to subsidized electricity rates, tax abatements, etc.," she said.

But Cruickshank said incentives are only the deciding factor once other items on a shortlist have been met. For a high-tech auto manufacturer, that would likely mean quality of labor — pipeline of skilled manufacturing labor, labor costs, workforce training opportunities, proximity to customers and suppliers, transportation and shipping infrastructure, corporate taxes and electricity rates.

State governors have stopped at nothing to win Tesla plants — even when they lose. Former Texas Gov. Rick Perry personally led negotiations with Tesla over the Gigafactory that went to Nevada. Perry even drove a Tesla Model S through California's state capital back in 2014 in an attempt to stand out from the other state bidders.

Musk told Tesla shareholders at the June annual meeting that the Model Y plant will include "many major manufacturing improvements that allow us to build the car in a way that a car has never been built before."

Nothing will stop New Mexico from joining the bid for a new Tesla plant, says Ben Cloutier, director of communications for the New Mexico Economic Development Department. "We've been finalists on two of their previous projects and know New Mexico is perfectly suited to meet Tesla's needs," he said. "Our improved tax environment, our closing fund and other nationally renowned job-training programs would make New Mexico the best possible fit."

The current state enthusiasm to tout sites like a Tesla plant may be limited in the future by a factor other than politics or Musk's negotiating power. "Manufacturing jobs are changing dramatically, so where they used to provide a tremendous number of jobs, they now require fewer, higher-skilled (and higher paid) technology jobs to run iPads and robots on the plant floor," Cruickshank said.

By Ronald Grover, special to

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