It’s a major bet. But Tesla may not have had a choice if it wants to control its own destiny.

Constrained by the global supply of batteries, Tesla announced last week that it would build a battery factory that according to analyst research suggests that it will be bigger than all of the advanced batteries produced in the world in 2012.

To be fair, Tesla believes it will be constrained by the global supply of batteries and that by 2020 it will require a battery factory that can support a 500,000 cars per year production run.

A lot has been written about the jobs the factory will create, the sheer size of the factory, and the massive investment required. Those are all important issues and I’m particularly fond of the fact that the factory is slated to bring 6500 jobs to the U.S., and further establish the U.S. as a leader in electric vehicles (so much for the folks who predicted that nothing good would ever come from the DOE loans made to cleantech companies like Tesla).

But what interests me most is the reality that Tesla wants to forward integrate and get into the battery manufacturing business along with partners, possibly Panasonic and/or Sanyo. The move will involve raising up to $1.84 billion in convertible senior notes.

This move is a classic example of a company cutting others out of the supply chain and taking their margins. Margins are something Tesla has always been acutely aware of, particularly in relationship to Wall Street. Founder Elon Musk has always promised the street that his company could do a 25 percent margin on the Model S, a margin much higher than what’s typical in the automotive industry. Even higher end German and Japanese automakers expect margins in the 11 to 15 percent range, which is about where the BMW 7 series, a Model S competitor, sits.

Tesla says that the battery factory will drop its battery costs by 30 percent.  If what Tesla claims turns out to be true, this could be game over for other automakers trying to compete in the EV space. Not only are other companies playing catch up on the design front, but they’re already paying much more for their battery packs than Tesla is because Tesla used off the shelf technology while many automakers engaged in new battery design.

Last year The Wall Street Journal  reported that Tesla’s CTO JB Straubel was pegging its battery costs at a quarter to a half of competitors. If that figure gets even more imbalanced, it’ll start to get nearly impossible to compete against Tesla.

The battery pack is a significant part of the cost of an EV and as automakers attempt to crack the middle market in the next few years, Tesla’s competition could be facing major problems as everyone tries to sell into a much more price sensitive market than was true for the Model S.  In the Ford Focus EV, for example, the 23 kilowatt battery pack costs $13000 to $15000 on a car that has an MSRP of just over $35, 000. That’s around 40 percent of the retail cost of the vehicle. Battery pricing is a major issue for anyone building and EV.

If Tesla can provide lower cost vehicles due to battery pricing, coupled with better design, and longer ranges, it’s going to be a huge headache for anyone else that wants to compete.

Tesla’s timeline has the factory ready for production by 2017 with the intended 500K cars per year ready to go by 2020. A lot can happen in 6 years—a breakthrough in battery chemistry could shake things up—but at this point it sure looks like everyone else is going to be playing catch up.