Tesla Motors [NASDAQ:TSLA] today reported their earnings for the second quarter of 2014, beating many analysts expectations by delivering a record 7,579 Model S vehicles in the quarter as well as producing a record 8,763 Model S vehicles in the quarter. Non-GAAP earnings were $16 million dollars (broken down to $0.11 EPS), while GAAP earnings (loss) was a loss of $62 million or a loss of $0.50 cents per share. Tesla Motors also cautioned that they expect the third quarter revenue and overall production to be lower than initially expected due to the retooling of the Fremont NUMMI plant for higher volume Model S and new Model X production. They also said that this new Model S/ Model X assembly line is planned to begin operation next week. However, they did not change their guidance for the year, as they expect that the fourth quarter, Q4 2014, should make up for any lost production in Q3. As such, they are still on track for their expected figure of 35,000 deliveries in 2014.

They also talked about the groundbreaking at the Reno, Nevada site for the Tesla Gigafactory, however they still have made it clear that the site has not been finalized yet, even though they’ve broken ground in Nevada. On the topic of reduced production, they still expect to product 9,000 vehicles in Q3, and without the retooling they expect that they would be producing 11,000. They expect to deliver 7,800 vehicles in Q3, and without the retooling and production stoppage they expect that they would have delivered nearly 9,500 vehicles, which may explain investors’ current unhappiness with the stock. Tesla’s stock is currently down 2 1/2 percent, on top of being down 2 1/2 percent in normal trading. Obviously, most of this is not really news, but Tesla is now quantifying exactly how bad their expected retooling slowdown is. Elon Musk will very likely calm investors down with some news about the Model X deliveries or increased average sale price as a result of shipping the Model X in Q3 and Q4 of this year.

The news that Panasonic is also investing in the Gigafactory is also big news for Tesla Motors, but that officially came out yesterday which may partially have been to try to stem the blow from reduced Q3 product numbers. But even so, Tesla clearly expects to deliver as many vehicles as they had promised, which makes the long term outlook better than the quarterly one. Not to mention, Tesla Motors has already beaten earnings expectations for Q2 2014, even though they’re still technically operating on a GAAP net loss (which will likely change by the end of this year).

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As we all know, Tesla is looking to build a battery Gigafab somewhere in the southwest of the US. Tesla [NADSAQ:TSLA] has not quite decided on a location quite yet, however there is a very short list of a few states and that list continues to narrow. Obviously, many states would like Tesla to build their fab in their states, but the gigafab will have to be close enough to Tesla’s factory in Fremont that they can still get their own batteries into their cars reasonably easily. As such, I suspect that the gigafab will very likely be put somewhere in Nevada, Arizona, New Mexico or California. Originally, California had been out of the running for the battery gigafab but it appears to be back in the running once again.

Nevada and Arizona seem the most logical because they won’t be too far from the Fremont NUMMI plant and they will still be close enough to a major port that batteries can be shipped out or moved quickly. There are tons of factors in this equation, and one of them is how Tesla is going to fill this gigafab’s capacity. Because, right now, Tesla is only using about 50% of their capacity at the NUMMI plant in Fremont and they’ve been building cars there for years. Eventually, I suspect they will reach capacity once they start to produce the Model X in addition to the Model S. And there’s a very good chance that the upcoming Model 3 will very likely require an entirely new factory.

Now, getting to Panasonic’s involvement. Tesla and Panasonic have reached a deal for Panasonic to invest in Tesla’s gigafab (Tesla calls it a gigafactory). Nikkei reports that Panasonic says they will invest between $200 million and $300 million in the factory, and an official announcement is expected by the end of the month. Panasonic had already signed an LOI (letter of intent) to join the battery factory in May, but there were doubts it would go through as the company went under a major restructuring. Panasonic is already the main supplier of battery cells for Tesla, so this arrangement is not between two companies that are strangers. In fact, these two companies are very close partners and are already doing heavy business together. Tesla said that the total fab/factory cost could be as high as $5 billion, partially driven by its own sustainable design and the sheer size of the factory. Tesla expects that they will break ground on the gigafab/gigafactory later this year and expect to reach volume production by 2020, manufacturing enough battery packs for about 500,000 cars a year.

Update: Tesla has officially signed the agreement with Panasonic.

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Toyota has announced that they would be moving away from Tesla’s battery technology, which they were originally one of the first supporters in Tesla’s battery technology and took a 3% share (worth about $690 million) of the company in addition to adopting their battery technology. Keep in mind that currently, Tesla manufactures battery technology for Toyota and Mercedes and is in the process of building a $5 billion gigafab in order to increase their battery capacity. So, while Tesla is looking to expand their battery manufacturing capacity, one of their closest partners is moving away from Tesla’s tech.

Toyota is claiming that they are moving towards a new alternative energy standard which has long been considered to be less feasible than electric power, hydrogen fuel cell. Companies like Honda and Toyota have been toying with hydrogen fuel cell and electric car technology for the past few decades with a few prototypes here and there, but ultimately little to no commercial traction. However, it seems like Toyota isn’t particularly interested in the current model with electric cars where new charging stations need to be installed at users’ homes, work and places that they go. Toyota appears to be more interested in the ‘gas station’ model where people would simply refuel with hydrogen rather than waiting for a charge. So, Toyota recently created the FCV Concept which was announced at CES and ultimately showed where Toyota had been looking to move for 2014 and beyond.

Toyota FCV Concept

While I don’t think anyone can definitively say whether or not Toyota’s decision to move away from Tesla’s battery technology is necessarily a good one, Toyota is still the #1 seller of hybrid and plug-in hybrid vehicles and that’s still a whole lot of batteries that need installing. I personally understand why someone would look at electric cars as not-so-green technology considering the amount of energy necessary to create those batteries and the source of a lot of the power that charges them. However, I believe that we may ultimately see a combination of hydrogen fuel cell technologies alongside electric car technologies much like we have diesel and gasoline engines which ultimately are both combustion engines but they accomplish combustion via different types of fuel.

Hopefully this isn’t too much of a blow for Tesla, with Toyota moving away from their battery tech. Perhaps once Tesla launches a more affordable electric car and the Model X they will be able to spur enough battery demand on their own so that companies like Toyota aren’t as critical to them anymore.

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