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German Gigafactory To Be The Final Piece In The Puzzle For Tesla

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About: Tesla, Inc. (TSLA)
by: Nick Cox
Nick Cox
Long/short equity, value, Growth, growth at reasonable price
Summary

German Gigafactory (GF4) looks set to be fast-tracked in the same way that Shanghai was.

Europe should become the company's largest market.

New figures released show Tesla made significant inroads into many different European countries in 2019.

Europe likely to be the fastest-growing region in the world for EVs in the next few years.

The importance of Shanghai to Tesla (NASDAQ:TSLA) was detailed in my article in December. GF4 will be of similar if not greater importance. Europe is set to join Asia as the world's most important EV markets. China is the world's largest single EV market. The greater affluence of Europe may however benefit Tesla even more than the Shanghai plant.

Plants in the USA, in Asia and in Europe allied to energy storage will mean Tesla should be at a mature stage by mid-2021. The timing could have been slightly late for Shanghai and the same could be said for the German plant. In China, Tesla was perhaps fortunate in that the surge in EV sales slowed down in 2019 due to a change in government policy. It is expected that sales will surge again there in 2020. That would be perfect timing for Tesla's factory in Shanghai.

New figures being released show how strongly Tesla performed in Europe in 2019. The German facility will not be on-stream this year. However, Tesla should still be able to continue to increase its market share strongly. It should also be able to maintain its technological lead over its rivals in Europe. The oft-repeated mantra of "Tesla killer" competition has been proved false time and again. The European factory should help the company maintain its technological lead.

Plans For The German Gigafactory

The Shanghai GF3 proved the cynics totally wrong by the speed with which it set up operations. Tesla will hope Germany tells the same story.

Work is already starting on the site as illustrated below:

teslarati

Indeed it needs to be rapid and effective. The local government has given Tesla certain timetables with which to comply for tree-clearing and wildlife protection over the huge 300-hectare site. Indeed at the time of writing all local approvals have not yet been finally signed and sealed. The company is mandated also to re-plant three times the number of trees it needs to remove for construction. So a small note of caution should be interposed in that regard. Local authorities have just given approval for the sale price of the land, although even that is subject to review.

Located in Brandenburg State close to Berlin, the area has the advantage of lower labour costs than most of the country. Additionally the state is, even by Germany's progressive standards, very environmentally conscious with its focus on green energy. According to unconfirmed reports, Tesla bought the land for 40.91 million Euros (US$45.4 million). This works out to a bargain price of 13.52 Euros (US$15.00) per square metre. The low cost however will be partially offset by the need to put in a lot of infrastructure. This will include roads, electricity supply, and water supply. So that could make completion on time still slightly uncertain.

In an interesting commentary, analysts at Baird recently point out how the initial costs of the factory will effectively be met by the agreement with the fleet-pooling deal with Fiat-Chrysler (NYSE:FCAU) for Europe. Due to FCAU's failure to get anywhere near the EU's Co2 requirement of 95g per km by 2020, they will be paying Tesla sums in the billions in order to comply.

The factory should be up and running by July 2021. An 18-month timeline would be slower than GF3 but probably more practical for this facility. The company is already advertising for staff. Upon opening, it aims to produce 3,000 autos per week. At full capacity, the plant is targeted to produce 500,000 autos, which would probably comprise a mixture of Model 3 and Model Y product.

Apart from the auto manufacturing, GF4 is slated to have a battery facility, a design studio, a train station, and a test track. The company's energy storage business should receive a substantial boost from GF4. Battery energy storage is a key initiative by the German government. Elon Musk has said he looks forward to working with German engineering and design expertise.

Tesla's Attraction In Europe

Germany is the auto capital of the world for highly engineered quality autos. It was thus very impressive that the Model 3 was declared the "Best Midsize Car of the Year" in Germany in 2019. Manufacturing in Germany will only further enhance Tesla's brand equity and recognition of quality. This should not be under-estimated in a continent where American brand cars are rightly regarded as far inferior to European cars. The motor industry in Stuttgart has, like Detroit, been slow to invest in EV models. It is now playing catch-up with Tesla.

The Model 3 has driven sales of Tesla in 2019. The Model Y is likely to have a similar impact in 2020 and 2021. Worldwide the Model 3 has three times the sales of its nearest rival, the Chinese built BAIC EU series. BYD (OTCPK:BYDDF) was the world's second largest manufacturer in general in 2019. Neither BYD nor BAIC are likely to gain much traction in the European market for quality perception reasons. Both the Model 3 and the Model S have won the highest safety accolades in Europe, an issue that is very important with consumers there. Both models received "best in class" safety awards in the Euro NCAP programme.

As of end November 2019, social media reports indicated that Tesla already had a backlog of orders for the Model 3. No delivery was available in any European market until February 2020 at the earliest. Lead times had also edged out for most Model S and Model X configurations. This bodes well for Tesla's Q1 and Q2 2020 sales figures. It also suggests that reports of the death of the Model S and X have been much exaggerated.

One area which may need further investment from Tesla is in the roll-out of Superchargers. The map below shows the current impressive network:

tesla

The rapid pace of sales will need more Superchargers. This has particularly been the cry of users on social media in the U.K.

The EU has instituted new rules for emissions in 2020 which will make it harder for ICE vehicles to operate. Independent reports show that the cost of owning an EV is now equal to that of owning an ICE vehicle in more and more European countries. Approximately 319,000 EVs were sold in the EU in 2019. This figure is conservatively forecast to rise to 540,000 in 2020 by the well-regarded New Bloomberg Energy. Other forecasters see sales of 1 million in 2020 and a tripling of EV sale between 2019 and 2021.

Forecasts are forecasts, but the ramping up of EV production by all the major European auto manufacturers show they have no doubt about which way the wind is blowing.

Not surprisingly, Europe's automakers are ramping up their own production to match Tesla. New models coming out early in 2020 include the ID.3 from Volkswagen (OTCPK:VLKAF), an electric Mini from BMW (OTCPK:BMWYY), an electric Fiat 500E and a Corsa-E from Vauxhall.

Both manufacturers and European governments are cognisant of the recent much-respected report by BNP Paribas. This talked of the "irreversible decline" of oil as a fuel for autos. To compete with EVs, oil will need to be supplied at a price of US$10 per barrel. This awareness in Europe is in huge contrast to the attitudes in the USA which are driven by an administration which is strongly backing the fossil fuel industry for its own reasons. This is likely to drive faster growth in Europe than in the USA.

Country By Country

The potential is tremendous for Tesla throughout the continent. Bloomberg New Energy Finance forecasts that EV sales will grow by 35% in the first 9 months of 2020. They confidently see Europe leading the boom in sales worldwide in 2020, followed by China, with the USA the laggard.

Full-year figures are coming in now country by country. The graph below of sales in the first 11 months of the year however clearly shows the breadth of the market:

elektrek

It is further evidence of how Tesla bears are mistaken when they say Tesla only does well in certain small countries during limited periods of government subsidies.

* Norway: Tesla had 11% market share in 2019, in a country where fully electric EVs totalled 42.4% of sales. This percentage of 42.4% is targeted by the government to be 100% EV sales by 2025. This seems quite likely to be achieved without much mandating from the government. The Model 3 was the most popular single model in the country last year. Its sales were approximately 50% ahead of the second best-selling car, the Volkswagen Golf.

It has been speculated that 20 to 30 new EVs will be launched in Norway in 2020. Brands likely to be competitive include Volkswagen, Audi and Polestar. It will be interesting to see how well Tesla does in the face of new competition there. It may well be that the Model Y will give the brand fresh impetus.

Encouragement to consumers has been driven by a combination of factors. These include lower taxation, use of bus lanes and lower road tolls. Such incentives will start to be phased out by 2021 as the transition from ICE to EVs consolidates. Petrol car sales were down 31.4% in the country in 2019.

Tesla bears often state erroneously that EVs will not operate in cold climates. The success in Norway shows how false this claim is. The picture below is an example of local conditions for apparently happy Norwegian Model 3 owners:

electrek

Tesla Superchargers are currently being installed even in the Arctic Circle.

* UK: EVs made up 3.4% of sales in 2019. In 2020, this is forecast to rise to 5.5%. That is, an increase from 80,000 vehicles to 130,000 vehicles. It is forecast the figure will hit 20% of the market by 2026.

The arrival of the Model 3 in the U.K had a startling effect. In August, Tesla went from being listed under "Others" in car sales to the Model 3 being the country's 3rd best-selling vehicle (against much lower-priced competition). In the year to end-September 2019, Tesla sold 5,500 Model 3s. That made it the best-selling all-electric car in the U.K. It replaced the Nissan "Leaf" in this regard with the BMW i3 in 3rd place. There is still a slight preference for hybrids in the country. The Mitsubishi "Outlander" was the best-selling new energy vehicle in the broadest sense of the word.

Figures released by the SMMT (Society of Motor Manufacturers and Traders) show the startling decline in diesel vehicles last year. This looks set to continue. Official government policy is for ICE vehicle sales to be phased out by 2040 in England, Wales and Northern Ireland, and by 2032 in Scotland.

* Germany: The arrival of the Model 3 had a similar effect in Germany to that in the U.K. Germany ended the year with the largest number of EV sales of any European country. Tesla sold 10,719 units in 2019. This made it the largest purely electric vehicle seller in the country. Renault was in second place, and BMW in third place. Tesla was the No. 1 imported brand of any type of auto.

There is a strong tendency towards SUVs in the German market. The emergence of the Tesla Y should enable Tesla to ramp up sales even more rapidly than it has done with the Model 3.

Chancellor Angela Merkel instituted a wide-ranging policy for EVs in September last year. Substantial incentives have been put in place for cars costing no more than 40,000 euros (US$44,400). The German government has laid the groundwork by financing a nationwide network of fast-charging stations. They aim to have one million charging stations in place by 2025. This includes incorporating charging into street lamp-posts.

Throughout Europe, Tesla has had a niche market in taxis using the Model S. The Model 3 is accelerating this trend rapidly. As a typical example, one German taxi company is buying 50 Model 3s to add to their existing two Model S vehicles. Annual costs for the Tesla taxis comes to 420 euros (US$466) per annum. This compares to 6000 euros (US$6,600) per annum in gas and maintenance costs for an ICE vehicle.

This points to one key advantage not often cited for Tesla in Europe. It is a continent where petrol and diesel costs are very high compared to the USA where oil and gas costs are effectively subsidised by the government. So the improved economics of an EV over an ICE vehicle is happening more rapidly in Europe.

The much-vaunted engineering might of Stuttgart has been caught somewhat on the hop. For instance, the highly marketed Mercedes EQC from mighty Daimler (OTCPK:DDAIF) sold just 55 units in its first few months. The more EV focused Audi is likely to provide more of a challenge. However, the figures for the Netherlands, for example, illustrate the huge advantage Tesla enjoys over the competition. Domestic giant BMW was eclipsed by the Tesla Model 3 in Germany in 2019.

* France: The leading product in the market is the Renault "Zoe." This sells at about half the price of a Model 3. The higher category Tesla product is the second best-seller with the Nissan "Leaf" the 3rd bestseller.

* The Netherlands: Tesla was far and away the biggest supplier in the country with 30,882 registrations. Toyota (NYSE:TM) was in a distant second place with 14,824 units. The illustration below shows Tesla's dominance:

teslarati

It is a key indicator that Tesla, through their Model 3 imported from the USA, was able to take on and beat the world's best other EVs in an affluent European country. Such market domination is likely to increase when they can bring in the Model Y and autos made in China. Then the market position should be consolidated when the German plant is up and running. The Netherlands government plans to have only EVs on the nation's roads by 2050.

* In Switzerland, the Model 3 was the 7th best-selling car in the first 9 months of 2019. It was the best-selling EV there.

* In Sweden, the Model 3 was the 2nd best-selling new energy vehicle in the first 9 months of 2019. As in the U.K., the hybrid Mitsubishi "Outlander" was the best-selling non-ICE vehicle.

* In Belgium, the Model 3 was the best-selling EV in 2019, followed by the Volvo XC60 PHEV. EV sales increased 32% in 2019 with a big surge at the end of the year. This was probably due to Model 3 availability and is a good sign for the coming year for Tesla.

* Denmark is a small market but typical of the continent. Sales of EVs there have soared in recent years. The Model 3 is by a long way the best-selling EV in the country. Probably about 2,000 units were sold there last year. As happened in many countries in 2019, the Model 3 won the car of the year award in Denmark. It was the first EV to do so and the first American car to do so. Details can be seen here.

The government allows tax rebates for cars under Danish Kronor 400,000 (US$59,000). This is inside the Model 3 price range but would exclude the price points of the Model S and X. Originally, the government had planned to raise taxes on EVs in 2020 but pulled back on the proposal.

Southern European countries such as Italy, Spain and Greece have been slower than their northern European countries to ramp up EV sales. This is likely to change in the next couple of years as EU-wide rules get implemented.

Conclusion

In Europe, Tesla has the most advanced and best-selling product in a market which is growing rapidly. That is any company's dream scenario. Figures are coming in almost daily showing this.

The only question seems to be that of timing. As always with Tesla, the issue will be supply constraints rather than demand constraints. Figures clearly show that the demand for Tesla cars is spread across the European continent. It is not, as some Tesla skeptics have wrongly claimed, dependent upon temporary subsidies from individual countries.

It is a fair question to ask whether the company can meet the European demand. It needs to produce sufficient quantities at the right price point of its Model S, Model X, Model 3 and Model Y.

European demand for EVs is seen as ramping up rapidly in 2020. Availability of product from China will benefit Tesla, although product ex-Germany would have been ideal. The fact that Tesla has been able to sell models manufactured in high-cost USA seems to indicate that the picture can only improve for Tesla. Further supplies presumably from China and then subsequently from Germany should deepen and strengthen Tesla's position as other automakers still play catch-up.

Disclosure: I am/we are long TSLA BYDDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.