Tesla is reportedly experiencing a backlog of preorders due to the immense interest generated by its upcoming Model 3 electric vehicle. As the company scrambles to meet the demand, it is poised to achieve an incredible feat in the process, which is the reduction of the battery cost by as much as 35 percent.

Economies Of Scale

Reports reveal that Tesla CEO Elon Musk has ordered to speed up the construction of its first Gigafactory in Reno, Nevada. As a result, the facility will be opened two years behind schedule. The primary goal is to meet the Model 3 preorders, which has already breached half a million mark at this point.

The massive capacity of the Gigafactory, however, will significantly reduce the cost of the batteries due to economies of scale. For context, Tesla cited that in its opening year, it will be able to exceed lithium ion batteries than what was produced by the entire world in 2013.

The Gigafactory itself would be the largest building on Earth in terms of footprint as it will cover 10 million square feet of manufacturing space. By 2020, the facility is also going to be capable of producing 500,000 Tesla EVs per year. The Tesla Model 3 EV will also be assembled here.

Tesla Battery Price

In a statement posted in February 2014, Tesla has indicated that the Gigafactory will drive down the cost of its battery pack by more than 30 percent. A recently leaked video, however, shows that Tesla is now claiming that the cost reduction will be at least 35 percent.

It is important to note that Tesla has not released any specific information regarding the amount required to manufacture its battery module. The company, however, has previously stated that the cost is below $190/kWh. So if we factor in the latest 35 percent cost reduction claim, then Tesla could be making batteries for $124 or even lower.

Following the economies of scale argument, Tesla can further reduce that cost down as another Gigafactory will be constructed in Europe this year.

Battery pricing is important because it is considered the most expensive module inside a Tesla EV. Using the latest $124/kWh estimate, for instance, a 55kWh battery pack could be worth around $6,875.

If Tesla manages to bring the cost down to the $100/kWh range, then its EVs, especially the Model 3 will get even more competitive with mainstream cars running on fossil fuel.

"If you can get anywhere near this cost target, then you change the world," Michael Aziz, a professor at Harvard, said. "It becomes cost effective to put batteries in so many places."

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