- Elon Musk said the company will be opening its new Gigafactory in Germany.
- Manufacturing in Germany is expensive and European car sales are weakening.
- Tesla doesn’t have enough cash to fund its product pipeline.
In typical Elon Musk fashion, the billionaire tech mogul took to Twitter to announce that Tesla will be setting up a Gigafactory in Berlin.
Everyone knows that German engineering is outstanding, for sure. That’s part of the reason why we are locating our Gigafactory Europe in Germany. We are also going to create an engineering and design center in Berlin, because Berlin has some of the best art in the world.
Musk has mastered the art of creating a buzz around his announcements. This is probably the reason why he refers to the Tesla manufacturing plants as Gigafactories despite the fact that there is nothing “Giga” about them. They are just average-sized manufacturing plants. That being said, the Tweet did have the desired effect as the Berlin Gigafactory has been the talk of the Tesla town. However, there are multiple reasons why there’s a good chance a Gigafactory in Berlin may never come to fruition.
Germany Won’t be the Best Location for Tesla
Elon Musk said Brexit uncertainty made it too risky to establish a factory in the UK and instead opted for Germany. Tesla currently operates on the West coast of the U.S. and has to transport cars on the East coast before shipping them to Europe. Opening a factory in Germany will eliminate these transport costs. As a result, the news of the German Gigafactory has been well received among Tesla loyalists.
However, there are other additional costs that have not been taken into consideration. In an elaborate thread on Twitter, ardent Tesla skeptic @Fly4dat who has ~2,200 followers pointed out that no carmaker has opened a manufacturing plant in Germany since 2005.
@Fly4dat, who believes that Tesla will go bankrupt, also pointed out that the last American company to venture into Deutschland was Ford when it opened a plant in Saarlouis in 1970.
As compared to China, or even the US, operating a manufacturing plant in Germany is considerably tougher. The high wages of the employees, strong unions and stringent labor laws eat into the already-slim margins of the manufacturers.
To make matters worse, Germany also has the highest electricity price in the world. High electricity price serves as a double whammy as it makes manufacturing expensive and also dampens the demand for electric vehicles.
Germany will especially be a challenge for Tesla as the company has a history of getting into trouble with labor unions.
Weak Demand in Europe
Car manufacturers have been cutting jobs on the back of weak demand. Even BMW is finding it hard to operate out of Germany. Amid dwindling demand, the luxury carmaker recently announced that it is planning to cut 6,000 jobs in Germany by 2022.
Tesla Doesn’t have Enough Money
Tesla posted a surprise profit in the third quarter of 2019 and also saw its cash and cash equivalent balance jump to $5.3 billion. The $5 billion dollars on it balance sheet won’t be enough to fund Tesla’s product pipeline that consists of Robo taxis, a Gigafactory in Berlin, Model Y, Cybertruck, Roadster, and an electric pickup truck.