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Tesla (TSLA) to Open First European Gigafactory in Berlin

Zacks Equity Research

Tesla’s TSLA electric revolution continues. The pioneer in the electric vehicle (EV) space has garnered reputation as the gold standard. In less than three weeks of commencement of trial production at the Shanghai Gigafactory, it has announced the location of its second factory outside the United States.

During the third quarter, Tesla stated that it would announce the location of its European Gigafactory before the end of this year and the company’s CEO Elon Musk kept the promise. He announced his decision to build the company’s first European factory at Berlin during the German car awards ceremony on Tuesday. Musk also made a more official announcement by tweeting “GIGA BERLIN.” The plant would build batteries, power trains and vehicles, starting with the Model Y sports utility vehicle.Car production in the Berlin Gigafactory is expected to begin in late 2021.

Tesla’s Germany Plans Seem to Make Much Sense

While the United Kingdom was Tesla’s original choice for the factory, uncertainty over the nation's exit from the European Union made matters risky.

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Germany seems to be a logical choice for Tesla’s European Gigafactory as the country is the biggest market for EVs with huge potential. As we know, Germany is the automotive hub with engineering prowess, and is home to various auto biggies like Volkswagen VWAGY, Daimler AG DDAIF and BMW BAMXF. Reportedly, German carmakers and suppliers are likely to build around 150 EVs by 2023.

Per Bloomberg, Germany is far ahead of the rest of the European nations in terms of electric vehicle registrations in the first nine months of 2019. The country is increasing incentives for buying EVs to further promote adoption. It recently increased subsidies for the buyers of EVs from 4000 to 6000 euros, which will run through 2025. Further, constructing a factory in Europe would help Tesla avoid the complexities of exporting its cars to the nation, and avoid uncertainty around trade and tariffs.

Having said that, making a foray into the land of biggest carmakers and treading on some of the legacy automakers’ toes might be viewed upon as quite a bold move. But the question is can Tesla maintain its lead in the EV market once Volkswagen and other big automakers step up their game. Reportedly, some European EV models like Renault Zoe and BMW i3 have had more new registrations in Germany than Tesla models in the first nine months of 2019.

Especially, Volkswagen has been making the most aggressive investment plans in the EV space, with a planned investment of $33 billion to electrify its entire product lineup by 2023. The companyhas just begun producing the new ID.3 electric car series and announced a deal with Sweden's Northvolt to develop a battery factory in Germany. One of its popular luxury brands, Audi, is already building electric SUVs, which are set to give Tesla tough competition. Competition with deep-pocketed German challengers on their home turf will definitely be an interesting watch.

Last Words

Markedly, Berlin Gigafactory will be Tesla’s fourth Gigafactory after Nevada, New York and Shanghai. Tesla's new Shanghai plant will give the company direct access to this market and allow it to cut costs substantially. With the Zacks Rank #3 (Hold) company set to begin producing vehicles in China and then Europe, it is on track to achieve global automotive domination. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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