Tesla is gearing up to build the world’s largest battery production factory later this year.

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The American electric vehicle manufacturer announced plans to raise US$1.6 billion ($1.8 billion) in a convertible debt offering to construct the 'Gigafactory', which will sit on a 929,000-square-metre area in an as yet undisclosed location.

The total cost of the project is expected to be around US$5 billion ($5.6 billion) with partners such as Panasonic set to chip it.

The factory will produce enough batteries for 500,000 pure-electric vehicles by 2020, with construction set to start later this year and the first battery to be built by 2017.

Tesla CEO Elon Musk says the new factory will drive down the kilowatt-hour price cost of batteries by a substantial 30 per cent, while also creating employment for 6000 workers.

Tesla is following Apple’s model of development, seeking to own and control the crucial components of its vehicles rather than relying on third-party suppliers. With this factor, it’s cementing its ability to vertically integrate, or possibly seeking to partner with a controlling stake with Japanese firm Panasonic.

Given the success of Tesla in North America, the battery manufacturing process will bring about scale, something the company currently lacks.

Tesla plans ship more than 35,000 Model S units in 2014, which would see it claim 55 per cent year-on-year growth.

Currently, the manufacturer can only make around 600 cars per week, but that is likely to increase to 1000 per week by year’s end, with battery supply being a key constraint.