Tesla founder Elon Musk’s comments captured and recently posted to Youtube about the battery pack for the mid-market EV Tesla has planned is pretty telling in terms of understanding why Tesla is charging ahead with its massive battery factory.

Musk noted that the battery pack for the next Tesla sedan will be 20 percent smaller than the Model S. But to get to the targeted goal of a $35,000 sedan with a minimum range of 200 miles, the specific goal that many have believed is the sweet spot for a mid market EV and which Musk confirmed is Tesla’s goal, the battery costs have to drop by 50 percent.

That means Tesla has to shave off another 30 percent of the cost of the current battery in the Model S. 30 percent happens to be the magic cost reduction figure that Tesla quoted when it announced its new battery factory. It’s fair to say that Tesla didn’t believe it could get to such a cost reduction without squeezing margins from its battery suppliers and getting into the business of manufacturing batteries at very large economies of scale.

The other news here is that the cost of the Model S could also drop in the next five years, should Tesla decide to become more competitive. Unlike the internal combustion engine where it’s hard to drop the cost any further, batteries should be subject to continued price reductions as technology improves and manufacturing scales. We see this parallel in energy generation where solar is dropping in price while coal and natural gas produced power remains fairly constant, vulnerable to the underlying price of fossil fuels.