Tesla (TSLA) will break ground on battery factory next month. But where?

Tesla (TSLA) reported first-quarter earnings Wednesday, and Elon Musk said the company could break ground on its factory producing lithium-ion cells as early as next month. Tesla is still evaluating four states, including California, as potential locations.

Tesla Motors released its first-quarter earnings this afternoon, logging revenue of $713 million on deliveries of 6,457 Model S electric cars.

That's essentially the number it had said it would sell in the quarter, but the total is slightly down from the record 6,892 sold in the prior quarter.

It built 7,535 Model S cars in the quarter, however, building inventories as it began shipping cars to China--where sales started last month--and continuing to roll out sales in various European countries.

The number of Tesla electric cars produced in the first quarter was roughly 2 percent above the prior guidance of 7,400 cars. During the quarter, net orders in North America grew 10 percent.

Production for the second quarter is expected to increase to a level of 8,500 to 9,000 Model S cars, with projected global deliveries of 7,500.

And Tesla expects to deliver 35,000 cars during all of calendar 2014, CEO Elon Musk said, as it continues to be limited not by demand but by production capacity.

By the end of this year, according to the shareholder letter, the company expects to be building 1,000 electric cars each week in its Fremont factory.

On a conference call for financial analysts and media, Musk noted that the company had made dozens of running changes to the Model S over the last year and half--and promised "some very exciting software updates" in the months to come.

Tesla will also launch the right-hand-drive version of the Model S next month in the United Kingdom--it opened a London store last October--and in both Hong Kong and Japan sometime during the summer.

China enthusiastic

Analysts were eager to hear anything the company has to say about early demand for the Model S electric car in China in the two weeks since it went on sale.

In its shareholder letter, Tesla wrote:

Our entry into China has been greeted enthusiastically. After working for more than a year to secure proper government approvals, licenses and facilities, we delivered the first cars in China at customer events in Beijing and Shanghai last month. Each event enjoyed ample media coverage, complete with delighted Model S owners receiving their cars.

Tesla received further media attention thanks to the Shanghai government’s announcement that Model S drivers in the city will be entitled to free license plates, thereby avoiding the usual public auction price of $10,000 to $15,000 per plate. Since Model S pricing in China was already very competitive, this makes the car’s value proposition even more compelling.

Government support crucial

In response to a question about what the "order book in China" looks like, and what volume China sales would contribute, CEO Elon Musk said he was "blown away" by the enthusiasm at all levels--from consumers to government officials--that he had experienced in China.

That enthusiasm is important to opening its sales and service facilities, too. The shareholder letter noted:

With the help of the Shanghai government, for example, we were able to construct a Supercharger station within just a few weeks of site selection. At the start of China deliveries we had three Supercharging sites open, each powered by clean electricity from solar panels.

"I really don't think we'll be demand-limited" in the country, he said. And, he said, "I really think we'll have to limit the number of cars we send to China" to avoid starving the rest of the world.

Musk also noted that Tesla had said it expected to build cars in China in three or four years, especially once its current Fremont, California, plant had reached its maximum production.

"Our biggest issue in China with unhappiness is that customers aren't getting their cars soon enough," he concluded, with wait times of four to five months, especially in mid-size cities where Tesla had not yet opened facilities.

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"We didn't do as good a job as we should have done in some of our prior market launches," Musk said, and it had learned from that lesson.

That said, speed is of the essence in China. "My instructions to the team in China are to spend money as fast as they can without wasting it," Musk said, to roll out Tesla Stores and service centers as rapidly as possible.

One analyst said he'd talked to several Chinese customers who'd placed orders for Model S cars and then canceled them because the wiring in their buildings wasn't capable of supporting a Tesla electric-car charging station.

Musk responded that the company is not seeing a lot of cancellations, but also noted that Tesla was planning to install Supercharger locations in central cities as well as on highways--unlike North America.

And, CTO JB Straubel added, the company's experience in China had been that much of the wiring in many new Chinese buildings was actually quite up-to-date and capable.

Model X on the way

Tesla said in its letter that it expects to have "production-design prototypes" of its Model X crossover utility vehicle ready in the fourth quarter of this year.

Once they're ready, the company needs a period of validation testing to make sure the cars are properly validated for all climates and road types--because, Musk said, the production ramp-up for the Model X will be far quicker and steeper than it was in late 2012 for the Model S.

That means that production ramp-up won't start until "Spring 2015" in the words of the shareholder letter--although no Tesla executives gave more precise timing on the call.

"There's no question that we are delayed on the Model X," Musk said, saying that wasn't "new news." The company had to spend more time than it planned updating the Model S, which he said is now "in good shape."

Musk promised that the Model X would not be introduced until every detail was just right--and that the company's goal was to make a production car that was even better and more impressive

One example, he said, was getting the seal on the Model X "falcon door" to work just right, stay watertight, reduce road noise, last for many years, and not be too visible.

Gigafactory: groundbreaking next month?

Another popular topic was the proposed Gigafactory that is to produce huge volumes of lithium-ion cells starting in 2018.

After announcing the four states it was evaluating as locations, Tesla has been relatively silent of late on the gigafactory--and Musk predictably got questions from analysts on any progress.

Musk announced on the earnings call that Tesla has a letter of intent signed with Panasonic. "With us, that's actually not that big of a deal," he said, since Panasonic had always been the designated partner.

And, he said, it hopes to break ground on the first location "probably next month"--and the second location probably a month or two after that.

Slide showing Tesla Motors gigafactory statistics, from Feb 2014 presentation

And, he added, California is back in the running, no matter how "improbable" that may have seemed--due to strong efforts by Governor Jerry Brown and his staff. The issue had been time to completion, with California having a complex and lengthy approval process for building on green-field sites.

The gigafactory must be up and running by the time the company's third-generation electric car goes into production in 2018, or Tesla will be building cars for which it has no battery packs.

Mining companies responsive

Tesla CTO JB Straubel said the two companies had created a joint working team in touch almost daily to answer mutual issues. He said they were working constantly to make sure both companies were staying "on the same page,"

They are "quite comfortable," Straubel said, that the two companies are heading toward a final agreement "sometime later this year" to partner on the Gigafactory.

"We are talking to various different people in parallel," Straubel said, noting that Panasonic "doesn't do" many different parts of the process of making not only cells but also the precursor materials--meaning those potential partners would be "complementary" rather than competitive with Panasonic.

And, Musk added, "we are cautiously optimistic" that the factory will produce the 30-percent cost reduction in lithium-ion cell costs it has targeted.

There is a lot of opportunity for innovation in the precursor materials, he said; Tesla has had interesting discussions with some of the big mining companies, including large nickel mines in Canada.

"We are really positively surprised" by the potential for cost reductions in raw materials from those suppliers, Musk said--adding that the mining companies had said, "No one ever calls us" to ask about price cuts in what is otherwise a commodity material.