Tesla Prepares for Gigafactory Opening in Germany

Tesla (TSLA) is taking the electric vehicle battle across the Atlantic to the home turf of the German giants. Over the weekend, Bloomberg reported that Tesla drafted a contract to buy about 3 million square meters of land near Berlin, the German capital. Last month, Tesla said that it was looking to build a Gigafactory in Germany. The factory could generate 10,000 jobs and can produce half a million cars per year. The Germany Gigafactory would start with the production of Tesla’s upcoming Model Y, batteries, and powertrains.

In terms of size, the Gigafactory in Germany would be Tesla’s largest so far. The company’s Gigafactory 1 in Nevada is spread over 1 million square meters and can employ 6,000 people when it is fully ready next year. The Gigafactory 3 near Shanghai is spread across 864,000 square meters and can produce 250,000 electric vehicles starting next year.

The news about Tesla’s Gigafactory comes at a time when the German electric vehicle market is heating up. In November, Germany saw electric vehicle (or EV) registrations increasing by 9.1% to 4,651. Norway, the previous EV leader in Europe, saw a 27% decline in EV registrations in November. During the first 11 months of 2019, Germany recorded 57,533 new EV registrations, toppling Norway, which reported 56,893 new EV registrations.

Being in Europe’s most populous country can help Tesla achieve this scale. Moreover, Germany is the richest country in Europe by nominal GDP. As a result, being in Germany may also help Tesla go mainstream.

Secondly, being in Germany can also help Tesla penetrate other markets in the region more efficiently. Because Europe has stricter emission norms, Tesla may win big business in the region by having a production base there. It could also help Tesla become immune to the auto tariff war between the US and China.

Thirdly, Tesla is staring at the end of EV tax credits in its home market of the United States. China has also reduced its EV tax credits. On the other hand, Germany recently increased the environmental bonus on electric cars to incentives of 6,000 euros per electric vehicle.

The Tesla Gigafactory in Germany can help the European giant in several ways. First, the factory can create thousands of jobs, boosting the country’s struggling economy. In the third quarter of 2019, Germany’s economy grew at a mere 0.1%, avoiding a technical recession.

Secondly, Tesla’s Gigafactory near Berlin helps the region diversify into electric vehicle manufacturing. The State of Brandenburg, where the Tesla Gigafactory would be based, is shifting its economic focus on renewables. The government recently agreed that there wouldn’t be new lignite mines coming up in the state. Brandenburg also lags in exports. While the state accounts for 2% of Germany’s GDP, it only accounts for 1% of Germany’s exports. Tesla’s Gigafactory may help the region become more competitive in exports.

Thirdly, Tesla’s Gigafactory in Germany can also drive innovation. So far, the established German automakers have lagged Tesla in terms of innovation. Mercedes-Benz recently announced a delay in the US launch of its Tesla Model 3 rival, EQC SUV. Tesla’s presence in the German luxury automaker’s home turf may force German automakers to accelerate their EV presence, also helping the German economy.

By choosing to build a Gigafactory in Germany, Tesla may be escalating the stakes in that market. For much of the global auto industry’s history, German carmakers have been a dominant force. In terms of car exports, Germany is unquestionably the world leader. In 2018, Germany’s car exports were worth $154.7 billion—20% of cars exported globally.

While German automakers are late to the EV party, they are going big. By 2023, German automakers plan to triple their EV offerings to over 150. Volkswagen, the world’s largest automaker, is putting its all-electric ID.3 on the roads next year, priced under 30,000 euros. We expect to see Volkswagen and Tesla fighting it out in China for market share in EVs in the near future.

Moreover, Tesla’s USP (unique selling proposition) is its extensive charging network. However, Tesla may be on its way to losing that advantage. In an EV push, Germany wants to have 50,000 charging stations within the next two years. Plus, 35,000 of those charging stations would be made available by the government. BMW plans to set up over 4,000 charging stations, with half of them open to the public. In our view, Tesla’s foray into Germany won’t be easy.

While Tesla is going global with its aspirations, Detroit carmakers are also gearing up in the EV battle. General Motors (GM) plans to develop 20 new electric vehicle models in the next couple of years.

Ford (F) recently launched the Mustang-based Mach-E, its first fully electric vehicle. Discussing Ford’s Mach-E, Credit Suisse analyst Dan Levy said, “Ford’s new [electric vehicle] should provide a more compelling alternative at the Model 3 price range than the other comps, especially given the performance focus.”

The upcoming Ford F-150 electric truck would challenge Tesla’s CyberTruck. Tesla CEO Elon Musk has already taken on the Ford F-150. When Musk launched the Tesla CyberTruck, he showed a video of the CyberTruck towing an F-150 pickup truck uphill.

While Ford and General Motors are focusing on going electric, Fiat Chrysler (FCAU) plans to merge with France’s PSA to drive innovation and cost synergies. Fiat Chrysler has also said that it’s open to buying technology from Tesla in its EV push.

The news about Tesla buying land for its Germany Gigafactory comes at a time when its Gigafactory in China is ramping up. Gigafactory 3 is producing Model 3 and plans to produce the Model U compact SUV next year. Gigafactory 3 could help the company reduce production costs and tap deeper into the world’s biggest auto market, China.

Oppenheimer analyst Colin Rusch was optimistic about Gigafactory 3. In a note, he said that “expectations for a relatively smooth (production) ramp of Tesla’s China facility are increasing.” Tesla plans to increase the prices of imported Model 3s to promote locally made cars in China. Rusch feels that the experience of ramping up the production of Model S and X, as well as Model 3 in the US, could help Tesla’s Gigafactory 3 ramp-up.

While Tesla’s ramp-up prospects look promising, China’s auto industry is lagging. China’s auto sales slid 3.6% in November, which marked a drop for the 17th consecutive month.

In November, new energy vehicles (or NEV, including fully electric vehicles) sales fell more than 43%. Tesla would have to push Chinese consumers to purchase Model 3 amid the slowdown. The company is encouraging Chinese consumers to buy made-in-China Model 3s.

Tesla has been winning new fans lately. Last week, CNBC Mad Money host Jim Cramer stated during the show’s lightning round, “I don’t want you to own Ford, I want you to own the stock of Tesla.”

Plus, Tesla and Credit Suisse analyst Dan Levy noted, “We believe Tesla is leading in the areas that will likely define the future of carmaking – software and electrification.”

While Tesla stock received a target price boost in recent weeks, it still looks overvalued according to average analyst expectations. The average target price of $295, according to Wall Street analysts surveyed by Reuters, points to a 27.3% downside to Friday’s closing. Tesla stock closed 0.38% up on Friday at $405.59—its all-time high. Tesla stock was up 0.84% to $409 in premarket trading at 4:17 AM ET today.

Among the Wall Street analysts surveyed by Reuters, 33% gave Tesla a “buy” rating. Meanwhile, 39% are bearish, and 28% are cautious with a “hold” recommendation. Thirteen analysts gave a “sell” rating on Tesla stock. Can Tesla win over its detractors? We believe that the answer lies in how its China and Germany forays go.