Tesla’s Berlin plant sets up ‘duel’ with German carmakers

Government’s delight contrasts with warnings over Musk’s bold move

© Hannibal Hanschke/Reuters

November 15, 2019 5:51 pm by Guy Chazan in Berlin

Elon Musk has long wanted to eat the German carmakers’ lunch, but no one thought he would have the audacity to do it in their own staff canteen.

When he announced this week that Tesla would build its first European production plant near Berlin, there can be no doubt that was his intention.

The German government was exultant. Peter Altmaier, economics minister, said it provided “further proof of how attractive Germany is as a place to make cars”, and was a “milestone” on the country’s path towards electromobility.

But there was also shock at Mr Musk’s chutzpah. Here was an upstart entrepreneur throwing down the gauntlet to some of Germany’s most successful and long-established companies on their home turf. The conservative Frankfurter Allgemeine Zeitung newspaper called it a “declaration of war”.

Mr Musk “is challenging Germany’s automakers to a duel right in front of their own castle gate,” said Jan Burgard, partner at Berylls Strategy Advisors and a former manager at carmaker Audi. “You have to respect the guy, he really is fearless.”

Others said the move would shake the German industry out of its complacency. “They’ve been sitting in their own diesel la-la-land for far too long,” said Arndt Ellinghorst, an analyst at investment advisory Evercore ISI. “It’s good that someone’s coming in to challenge them.”

Tesla provided scant details of its plans, but authorities said the new “gigafactory” would be built in Grünheide, a small town south-east of Berlin, near its new international airport. Tesla also said it would open a new engineering and design centre in the capital.

Some were surprised that Mr Musk had chosen to locate the facility in Brandenburg, the state surrounding Berlin, which does not have a carmaking tradition. It is hundreds of miles from Baden-Württemberg, home to Daimler, Bosch and Porsche, and from Wolfsburg, the town in Lower Saxony where Volkswagen is headquartered.

[German carmakers] have been sitting in their own diesel la-la-land for far too long. It’s good that someone’s coming in to challenge them

Arndt Ellinghorst, Evercore ISI

But the symbolism of locating near Berlin, one of Europe’s hippest cities with a huge pool of technical talent, is significant. “Berlin rocks!” Mr Musk said when he unveiled the gigafactory plans.

“As a production site, Berlin sounds a lot cooler than some out-of-the-way place in Poland, Hungary or West Germany,” said Ferdinand Dudenhöffer of the University of Duisberg-Essen’s Centre for Automotive Research.

In the 30 years since the Berlin Wall fell, ending the separation between the Soviet-controlled East and the western-aligned Federal Republic, the city described by a former mayor as “poor but sexy” has become a huge draw for young tech entrepreneurs and software developers. Its start-ups raised €2bn in financing in the first half of this year alone — 20 per cent more than in 2018.

Tesla’s Model Y car, which Mr Musk said would eventually be produced at the company’s planned German plant © AP

Tesla’s decision is “spectacular proof of Berlin’s international appeal,” said Stefan Franzke, head of Berlin Partner for Business and Technology, an agency that promotes investment in the city.

The country’s own car giants were the first to recognise this trend. Daimler and BMW announced last year they would locate their new mobility services joint venture in Berlin, while Volkswagen launched “WeShare”, its first fully electric car-sharing service, in the city this year.

“The OEMs [car groups] have sensibly decided to bring the jobs to the skilled workforce that still wants a hipster lifestyle, rather than expecting the programmers to go knocking on head office doors in Munich, Wolfsburg or Stuttgart,” said Matthias Schmidt, an independent automotive analyst.

Brandenburg also fit the bill because of its abundance of renewable energy. “We have more installed wind turbines per head of population than any other region in Germany,” said Jörg Steinbach, the state’s economy minister, in an interview. “That means that in Brandenburg, Tesla can achieve its goal of CO2-neutral production.”

As a production site, Berlin sounds a lot cooler than some out-of-the-way place in Poland, Hungary or West Germany

Ferdinand Dudenhöffer, University of Duisberg-Essen

Tesla’s gambit is just the latest electric car-related investment in East Germany. Earlier this month, VW began production of its first mass market battery-powered car, the ID. 3 hatchback, in the eastern city of Zwickau, while China’s CATL is building a battery plant an hour-and-a-half’s drive away in Erfurt.

Mr Steinbach said the East was attractive to investors because it was “more open to new technologies” than Germany’s auto-heartlands in the south. “The traditional car industry is not changing as fast as it should,” he said.

Several German cities, for example, wanted to follow Hong Kong in switching to buses that run on hydrogen fuel cells “but they can’t find any German models with that technology,” he said.

German companies have been galvanised by Tesla’s example. Battered by the diesel scandal, VW plans to invest €44bn in electric cars, autonomous driving, mobility services and the digital retooling of its factories over the next five years, and says it will produce more than 22 million battery-powered cars by 2028.

This momentous switch is being driven by tough EU emissions regulations which will be phased in from 2020 and have clouded the combustion engine’s future. German government policy is also a factor. Berlin recently increased subsidies for electric vehicles and pledged to install 50,000 new charging points across Germany over the next two years. The government says it wants as many as 10 million electric cars on German roads by 2030 — up from 220,000 now.

This transition will cause huge disruption in Germany. In a foretaste of the ructions to come, Daimler warned on Thursday that it would slash €1.4bn in personnel costs and 10 per cent of managers worldwide. Germany narrowly avoided a technical recession in the third quarter, and many economists have blamed the strain the car companies are going through as they shift to an electric future for the downturn.


German car executives call for electric-vehicle backing

With traditional companies making big bets on electric, Tesla will soon face serious competition. The VDA, the main German auto lobby, was blasé about Mr Musk’s gigafactory announcement.

German carmakers, said VDA head Bernhard Mattes, were already investing in electromobility and “will increase their electric model range fivefold by 2023” to more than 150. “We don’t shy away from competition — quite the contrary,” Mr Mattes said.

As Germany becomes a main player in electric vehicles, Tesla’s gambit makes sense because the company needs to be where the action is, say experts.

“There’s no question that Europe will be at 20-30 per cent fully electric vehicles by the end of the 2020s, and be the biggest market after China,” said Evercore’s Mr Ellinghorst. “And if Musk wants to play in Europe, he needs to produce in Europe and be seen as a European player.”

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