Brexit uncertainty drives auto industry towards Germany

Tesla’s first European 'Gigafactory' will be built near Berlin. The site, located near Berlin Brandenburg airport, is scheduled to begin manufacturing batteries, powertrains and the Model Y car in 2021. Tesla CEO Elon Musk also announced an engineering and design centre will be constructed in Berlin, due to the city’s reputation as a cultural centre.

Mr Musk declared to industry website AutoExpress in 2014 that the UK was considered as a potential site for their first European factory, but uncertainty over the UK’s future relationship with the EU made this untenable. “Brexit made it too risky to put a Gigafactory in the UK,” said Mr Musk.

The announcement is part of a wider trend in the international automotive industry to increase EU investment outside of the UK due to uncertainties linked to Brexit. Germany has increasingly benefitted from this trend, as government incentives to focus on new markets, such as electric vehicles (EV) have attracted international greenfield investment.

Tesla first entered the German market in 2016 with the purchase of Grohmann Engineering, a small firm in Prüm specialising in robotics and automated manufacturing systems. Grohmann Engineering’s founder Klaus Grohmann left the firm in 2017, reportedly due to disagreements with Mr Musk over discontinuing production for Tesla competitors.

Sixteen major companies have relocated facilities from the UK to Germany since the UK’s referendum on EU membership in June 2016, according to crossborder investment monitor fDi Markets. This represents $246.1m total estimated investment leaving the UK. Companies from UK-based cosmetics company Lush to Russia-based bank VTB cited Brexit as a key motivation in the decision to relocate.

Tesla’s decision could have been influenced by the German government increasing incentives for consumers to purchase electric vehicles. Several German cities - Frankfurt, Berlin, and Munich - have already banned older diesel vehicles due to their lower fuel efficiency. Tax incentives for EV purchases and a $3.5m investment in EV infrastructure were also announced by the German government in September, aiming to hit the targets for 10m electric cars and 1m charging stations to be on German roads by 2030.

However, Tesla’s new factory could struggle to compete with other EV manufacturing. China-based battery manufacturer Contemporary Amperex Technology announced a $1.72bn expansion of its lithium-ion battery factory near the city of Erfurt in June. The facility is expected to manufacture 14 gigawatt-hour batteries by 2022. The 23-hectare factory would supply BMW, Volkswagen, Daimler, Volvo and Bosch as the companies shift production to EV.

Tesla’s largest competitor in this market, Germany-based car manufacturer Volkswagen, plans to produce more than 22m EV in the next decade, potentially threatening Tesla’s market share. The first vehicle on its modular electric platform, the Volkswagen ID.3, was announced in September, and the Porsche Taycan, a potential competitor to Tesla’s high-end Model S, will be available to consumers in 2020.

Non-European automotive manufacturers also increased their presence in Germany in 2019. Korea-based car manufacturer Hyundai opened their third CRADLE venture capital centre in Berlin in April. The centre targets European start-ups which are developing mobility services, smart city technology, and eco-friendly technologies. The centre’s head, Edvin Eriksen, cited Berlin’s reputation as a digital innovation hub as a key motivation for the move.

In October, Japan-based manufacturer Honda announced the closure of its car factory in Swindon, UK, after a senior executive cited Brexit as a potentially severe supply-chain disruption in September 2018. Following the closure, Honda released a press statement, which said: “It is true that a ‘no-deal’ scenario would cause a number of challenges for our operations. However, no one single event has led to the proposal to cease production at Swindon.

“Honda is on record as stating that its preferred scenario following Brexit is one that delivers frictionless trade, access to talent and regulatory alignment,” the company said.