Tesla Chooses Berlin for Its Next Gigafactory, Challenging Europe’s Auto Giants on Their Home Turf

November 13, 2019, 4:02 PM UTC

Ever the showman with a gift for picking backdrops with maximum effect, Elon Musk saved up his latest big announcement for perhaps the most prestigious red-carpet event the German auto industry knows.

At the annual Golden Steering Wheel awards in Berlin on Tuesday, surrounded by top executives from around the country, the Tesla CEO divulged that his much anticipated European Gigafactory would be coming to the German capital, together with a research and development center. 

Just as carmakers like Mercedes-Benz struggle to decarbonize their fleets ahead of Europe’s impending CO2 caps, they now face renewed pressure from a company with a substantial headstart in electrification, an innovation that’s transforming the automotive sector. Investors have rewarded this, giving Tesla a bigger market cap than BMW, for example. But zoom out, and Tesla holds just a 0.3 percent overall market share of all autos sold in Germany.

For Tesla to be successful in Europe longterm, the carmaker must increase its marketshare in Germany, analysts say.

“Musk wants to signal that he can take on the (domestic competition) in the largest market in Europe,” Stefan Reindl, Director of the IfA institute for automotive industry in Geislingen, told Fortune. “While it’s true that he will not be able to defy the domestic industry’s laws of physics, such as the high-wage and energy costs, it is nonetheless a very bold and symbolic decision.” 

Model Y, then the Model 3

Sharing the news with the rest of the world a short time later, Musk tweeted the company “will build batteries, powertrains and vehicles, starting with the Model Y (midsize crossover).” The Model 3, a nearly identical sedan, is scheduled to follow.

Tesla shares were up 0.8% an hour into the trading day on Wednesday. Volkswagen, Daimler and BMW, meanwhile, were all lower going into the final hour of the trading day in Germany.

The Gigafactory will be situated close to the new BER airport under construction in nearby Brandenburg and will be fed with renewable energy from a combination of wind, solar and other sources to ensure it operates without leaving behind a carbon footprint. The 300-hectare property in Grünheide that the regional government plans to sell to Tesla has been barren ever since BMW decided nearly 20 years ago not to invest in a site there. Sources say up to 3,500 jobs could be created directly at the factory in a first stage of expansion.

“Poor but sexy”

“Poor but sexy”—in the words of popular former mayor Klaus Wowereit, Berlin is known for setting trends in the country. It has a lively mobility startup scene, is tech-savvy and attracts young, creative minds due to its Bohemian flair, so it is a good fit for Tesla’s image.

For Germany’s capital, it would be a coup as Berlin looks to attract major employers and the industries of the future.

“With Berlin/Brandenburg as the site he differentiates himself from the established competitors in Germany,” noted IfA’s Reindl. “The Tesla Gigafactory decision could serve to eliminate doubts about the future of electric vehicles and boost confidence in the technology, both among the customers of German carmakers as well their own employees. The resulting pull effect could even have a positive effect on the German auto industry.”  

The timing is auspicious as industry statistics published earlier this month showed Germany eclipsed Norway during the third quarter as Europe’s largest BEV (battery electric vehicle) market for the first time. 

But Tesla bears warned Musk’s plans pose risks for the region as well. His Gigafactory 2 in Buffalo, which focuses on solar panels, received $750 million in aid from New York State, but so far has been beset by problems. Fortune contacted the Brandenburg state government to ask about whether subsidies or tax breaks were involved. Officials were not immediately available for comment. 

With a plant in Germany, Musk would even be able to join Germany’s clubby VDA, the influential industry association for domestic carmakers and suppliers that for years has shaped government policy to its liking. Most recently it helped to free up additional taxpayer funds to pay for an expansion of charging infrastructure through 2025 to reduce barriers to EV adoption. 

“Situating Tesla here strengthens Germany as an automotive center, so the VDA welcomes the decision,” said its president, Bernhard Mattes, in a statement, before adding “should the plans be implemented in a few years time.” 

But where there are winners, there are invariably losers.

Speaking to the ceremony organizer’s British partner publication Auto Expresson Tuesday, Musk explained that the UK’s planned exit from the European Union disqualified it from his search. 

“Brexit made it too risky to put a Gigafactory in the UK,” he told the publication as Britons prepare to go to the polls next month in what is seen as a proxy second referendum. 

UPDATE: This story was updated to include the number of jobs the Gigafactory is expected to employ in paragraph 8.

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