Elon Musk is relieved that Tesla’s sprawling factory near Berlin, built on 165 hectares of formerly forested land, is finally beginning production of Model Y electric hatchbacks for Europe. But the timing is tricky as Russia’s invasion of Ukraine drives up costs of materials for Tesla’s batteries, a global computer chip shortage grinds on and tight local water supplies threaten to check Musk’s big ambitions for the plant.
“We’ll make sure that this is a gem, a gemstone area for Germany for Europe and for the world,” the billionaire entrepreneur said at an opening ceremony for the plant, joined by German Chancellor Olaf Scholz. “Every vehicle we make will be another step in the direction of a sustainable energy future.”
Tesla’s CEO had planned to begin assembly operations at the $5 billion facility in Grünheide, Germany, in July 2021, and then by last fall after missing that deadline. Tesla aims to eventually build 500,000 electric vehicles a year and battery packs at the plant but will be at the mercy of supply chain and other issues beyond Musk’s control for now. He cautioned in January that “supply chain will continue to be the fundamental limiter of output across all factories” and that “the chip shortage, while better than last year, is still an issue.” Weeks later, war and water for use in plant operations both look like added headaches.
The water authority in Germany’s Brandenberg region finally gave Tesla a green light to open, but voiced concerns about the plant’s future growth as the water situation “remains tense” in the area. “This means: No further development in the association area without additional funding approvals from the state authorities,” the Wasserverband Strausberg-Erkner, said in a statement.
Despite headwinds, the German plant should become a key asset for Tesla in Europe and help meet Musk’s goal of growing its sales volume by 50% annually. It also moderates the Austin-based company’s growing reliance on China, which last year became Tesla’s biggest source of production and profit. The world’s biggest EV market offers lower labor and parts costs for Tesla’s Shanghai plant, but China’s authoritarian government and increasingly tense relations with the U.S. are also a potential source of risk for a company that lacks a diverse global production footprint.
“Makes a huge difference to capital efficiency to localize production within a continent,” Musk tweeted Monday.
“Red tape and headaches” delayed the opening, but “we cannot stress the production importance of Giga Berlin to the overall success of Tesla’s footprint in Europe and globally,” Dan Ives, an equity analyst for Wedbush Research said in a note Monday. “The current Rubik’s Cube logistics of producing cars in China at Giga Shanghai and delivering to customers throughout Europe was not a sustainable trend. The Berlin factory establishes a major beachhead for Tesla in Europe with potential to expand this factory to production of ~500k vehicles annually with Model Y front and center over the coming 12 to 18 months.”
“The current Rubik’s Cube logistics of producing cars in China at Giga Shanghai and delivering to customers throughout Europe was not a sustainable trend.”
Demand for lithium, cobalt, nickel and other raw materials needed for batteries for electric vehicles has been rising over the past year, and nickel has had an unusually big price surge this month owing to concerns about supply of the metal from Russia. Tesla, as the top producer of electric vehicles, is directly impacted by that, which may be why the company just raised prices for its vehicles in the U.S. and China. Given that the company’s current entry-level Model Y sells for about $62,000 before taxes both in the U.S. and Germany, its pricing keeps it in the lucrative but lower-volume premium vehicle market. Musk has said Tesla intends to begin introducing vehicles with cheaper lithium-iron-phosphate batteries, which could improve the brand’s affordability.
The economic impact of the war in Ukraine goes far beyond Germany and Tesla, and is likely to impact global auto production, S&P Global Mobility said in an updated industry forecast last week. This year overall global auto production may be 81.6 million units, down from S&P’s earlier expectation of 84.2 million, with most of the decline occurring in Europe. “In 2022, 1.7 million units are cut from Europe alone, which broadly includes just under 1 million units from lost demand in Russia and Ukraine,” the industry researcher said, also citing the impact of semiconductor supplies and raw material costs.
While those could ease over time, water is a longer-term concern for Giga Berlin, according to Deutsche Bank equity analyst Emmanuel Rosner. “The EV maker will need to provide evidence of appropriate water usage and air pollution control in order to truly ramp volume,” he said in a research note. Tesla has access to enough water to expand to 500,000 units of annual volume, but “will need additional extraction permits in order to expand its capacity any further in the future.”
Still, opening the plant in highly regulated, bureaucratic Germany is a big achievement for Musk, said Matthias Schmidt, whose consultancy tracks the European auto market. “To give credit to Tesla, even if the project does come a year later than planned, that is still a quantum leap in terms of German construction pace, where fax machines can still be seen lining some office buildings and not gathering dust!”
Shares of Tesla rose nearly 9% to close at $993.98 in Nasdaq trading on Tuesday.
