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The Rules Even Elon Musk Can’t Break

Published 1 month ago
By Forbes

Unexploded World War II bombs, protests over trees, water and animal habitats, union scrutiny and a labor review have hindered Tesla’s Berlin Gigafactory plans — but the biggest hurdle may come in the form of strict German regulations.

By Alan Ohnsman, Forbes Staff & Sofia Lotto Persio, Forbes Staff

Tesla had hit its stride in November 2019 when Elon Musk announced a massive electric car plant in Germany, the heart of European auto-manufacturing. His Silicon Valley company was riding a booming share price fueled by the start of a string of quarterly profits and, more importantly, its Shanghai Gigafactory was coming together at an astonishing pace: It was about to begin making Model 3s just 11 months after the groundbreaking. 

Emboldened by that success and cash from an emissions credit sales deal with Fiat Chrysler to fund it, the carmaker’s billionaire CEO and cofounder aimed to replicate it in leafy Grünheide, Germany, site of the future $4.9 billion (€4 billion) plant 24 miles east of Berlin. “Giga Berlin will come together at an impossible-seeming speed,” Musk tweeted in July 2020. It hasn’t worked out that way.

Physical construction is nearing completion, but the plant may not start making Model Ys until 2022, months after an initial target of July 1–or even later, pending environmental approval from the state of Brandenburg. Tesla has had a much harder road than Musk envisioned. The company had to remove unexploded World War II shells at the site. It’s faced stiff opposition from environmentalists over chopping down hundreds of acres of trees, the plant’s voracious water needs and the disruption of bat and animal habitats. The plant is being eyed for organization by IG Metall, Germany’s biggest labor union. The project is also under scrutiny for a possible violation of labor laws during construction and may be fined for installing sewer pipes without permission.

“Although things looked good regarding the Tesla facility up to a few weeks ago, a different reality can lie behind a facade,” says Matthias Schimdt, an independent auto analyst based in Berlin. He sees the project unfolding much like the capital city’s new airport, which was built quickly but saw its opening delayed nearly a decade as it struggled to win final approval to operate from German authorities. “This mustn’t be a carbon copy situation for Tesla, which is located just a stone’s throw from the new airport that eventually came into service last year,” Schimdt says. “It just goes to highlight that things aren’t easy in ‘bureaucratic hell’ Germany.”

Delays fulfilling Musk’s quest to tap the lucrative European market complicate the electric-car impresario’s efforts to stay ahead of mounting competition in battery-powered vehicles, especially from German automakers like Volkswagen, Daimler and BMW. Tesla may be the world’s most valuable carmaker, but it’s far from the biggest, having just a fraction of the production capacity of German, U.S., Japanese and Korean auto giants, delivering just under 500,000 vehicles last year versus VW’s 9.3 million. And while the company’s plant in China was a critical addition to its long-time production base in Fremont, California, Tesla can’t meet Musk’s long-held goal of producing millions of electric vehicles annually without Giga Berlin and a second U.S. auto-assembly plant under construction near Austin, Texas.

“It just goes to highlight that things aren’t easy in ‘bureaucratic hell’ Germany.”

Auto analyst Matthias Schmidt

“Coming off the incredibly fast build of the Shanghai factory, they might have miscalculated how quickly they could get Berlin up and running–perhaps not fully accounting for the significant differences in regulatory and environmental standards,” says Garrett Nelson, senior equity analyst at CFRA Research. Construction also happened amid logistical and supply chain headaches related to the Covid-19 pandemic, he says. “Tesla is doing everything possible to stay on track with its guidance, but the reality is that first production could be delayed until early 2022.”

The company hasn’t confirmed reports that Musk agreed to a six-month delay for the plant a few days after reassuring investors and analysts on Tesla’s April 26 results call that “both Texas and Berlin are progressing well.”

“We expect to have initial limited production from those factories this year and volume production from Texas and Berlin next year,” Musk said on the call. But during a surprise visit to the Grünheide construction site Monday he told reporters “I think there could be less bureaucracy. That would be better.”

“There should be some kind of active process for removal of rules. Otherwise, over time, the rules will just accumulate and you get more and more rules until eventually you can’t do anything,” Musk said, according to Reuters.

Analysts have already adjusted their models for Tesla to reflect the slowdown. “Giga Berlin is an early 2022 story,” says Dan Ives, an equity analyst for Wedbush. “Given the red tape in Europe this timeline remains bumpy but needs to be running by March 2022–otherwise production issues would be hampered.” 

Germany’s role as a global auto powerhouse, with its strong parts supply base and reputation for high-quality engineering, lured Musk over other countries he eyed as sites for Tesla’s European plant. (He considered the U.K., but uncertainties related to Brexit ultimately proved too big a gamble.) Aside from selling vehicles in Germany, Tesla planted its flag there in 2016 with the acquisition of Grohmann Engineering, rebranded Tesla Grohmann Automation. The chance to square off against the country’s auto giants–which are also now aggressively focused on closing the electric vehicle gap with Tesla–on their home turf added to its appeal. For Economics Minister Peter Altmaier, Tesla’s decision to “build a highly modern factory for electric cars in Germany is further proof of the attractiveness of Germany as an automotive manufacturing base,” he said when the project was announced in 2019.

Given the headaches he’s run into, Musk may be “wondering whether that ‘Made in Germany’ stamp on the underbody of each model leaving the factory was worth it,” says analyst Schmidt.

Grünheide, in the state of Brandenburg, sits in what was East Germany, which remains poorer than the rest of the country since reunification 30 years ago. Local politicians were thrilled at the prospect of a project that would bring thousands of jobs and prestige to the area. “The whole region can look forward to new opportunities of development now thanks to the Tesla project which has really put Grünheide on the map globally,” Pamela Eichmann, chair of the Grünheide (Mark) local council, told Deutsche Welle this month.

While the town’s leaders might be rooting for the factory, plenty of others are not. The plant occupies a space between the A10 highway and Fangschleuse railway station, but it’s also a few miles from the Löcknitztal nature reserve that’s had protected status since 1984 and been registered as a fauna-flora-habitat area (FFH) since 1998. Grünheide literally translates as “Green Heath” from German.

So when one of the first steps to ready the 300-hectare site for Musk’s gigafactory was chopping down about 430 acres of forest, it wasn’t the best start–particularly for a company whose motto is “accelerating the world’s transition to sustainable energy.”

Environmentalists temporarily blocked tree-cutting operations in early 2020, but Tesla won court approval, initially to remove 92 hectares of trees, and then 82.8 hectares more. Musk downplayed the quality of the trees he cut down, tweeting in January 2020 that “this is not a natural forest—it was planted for use as cardboard & only a small part will be used for” the Berlin gigafactory. The company has also pledged to plant three times as many trees as it cut down, though scientists generally warn that planting new trees is not as effective as a carbon-capture strategy as maintaining existing ones. Local environmental groups were also concerned about the disruption deforestation would cause to animals inhabiting the forest. Site preparation in Grünheide included relocating bats and ants living in the forest and removal of seven unexploded bombs dropped by the U.S. during World War II.

The amount of water the plant will use and its impact on the region also concern local environmentalists, “because most of the factory ground belongs to a drinking water protection area and very close to the factory are two nature protection areas which are very sensitive to changes in the ground water level,” says Christiane Schroeder, managing director at the Brandenburg branch of NABU (Nature and Biodiversity Conservation Union), one of the oldest and largest environmental non-profits in Germany, and a leading opponent of the Gigafactory.

Making matters worse, Tesla ran afoul of the district’s water authority, which discovered water pipes that had been installed without its permission. Tesla was allowed to continue construction work on April 12 after a brief suspension, but still faces a potential fine for the infraction, the Brandenburg Ministry for Agriculture, Environment and Climate Protection tells Forbes. Separately, the State Office for Occupational Safety and other agencies are reported to be investigating whether Tesla violated rules for minimum wages, working hours, conditions and worker housing during plant construction.

Ultimately, the plant won’t be permitted to begin production until it has secured all necessary permits, a process that can grind on, Schmidt says.

“Very close to the factory are two nature protection areas which are very sensitive to changes in the ground water level”

Environmentalist Christiane Schroeder

IG Metall, Germany’s biggest labor union with 2.2 million members, represents workers at Tesla’s engineering unit there and initially welcomed the company’s gigafactory plan. It had previously attempted to organize Tesla’s Grohmann unit, but the company boosted salaries there to block the effort. The union intends to set up a works council and organize future employees at Giga Berlin, union chief Joerg Hofmann told Reuters this month

That’s anathema to anti-union Musk. In California he’s worked to keep the United Auto Workers out of Tesla’s Fremont plant–a union factory in its previous incarnations as both a Toyota-General Motors joint venture and GM facility. Tesla was found to have engaged in unfair labor practices by the National Labor Relations Board, including efforts to interrogate workers it suspected were part of the union push at Fremont. That 2019 ruling was upheld in March 2021 and Musk was ordered to delete a 2018 tweet discouraging Fremont workers from joining the UAW. (He has yet to do so.)

For now, IG Metall is waiting for operational details for the Grünheide facility, including whether Tesla intends to follow the round-the-clock, three-shift approach used in the U.S. and China, and adhere to German wage and working condition rules. “We give Tesla the benefit of the doubt regarding what the labor standards will look like in the long run,” says Birgit Dietze, IG Metall’s regional head. 

Long-time China auto analyst (and Tesla owner) Michael Dunne, whose ZoZo Go consultancy works with auto and parts makers across Asia, thinks Tesla’s exceptionally fast start in China led it to move too quickly in Germany. “I imagine Tesla thinking something like, ‘China is rife with regulations, licenses and government intervention, but we sorted that out in less than a year. Bring on Berlin!” he says. Powerful government allies eased the way for Tesla in China, that’s not an option in Germany, Dunne says. “One’s a democracy, the other one’s not. It’s rule by whim in China. Unlike in Germany, there’s no court of public opinion.”

“I imagine Tesla thinking something like, ‘China is rife with regulations, licenses and government intervention, but we sorted that out in less than a year. Bring on Berlin!”

Zozo Go founder Michael Dunne

In Germany, groups like Schroeder’s NABU have a right to make their opposition known. The environmental activist tells Forbes the group has discussed their concerns with Tesla, but that the company has only been receptive to some of the issues raised, the easiest to accommodate. “I think Elon Musk is more into his own business and into new technology than really in preventing climate change,” she says. “He sees a great opportunity to sell his inventions as ‘part of the solution’ but doesn’t realize that he creates new problems as a side effect.” 

In retrospect, Musk might have been better off building the plant in adjacent EU countries, says analyst Schmidt. “Perhaps they are slowly starting to ask themselves if they really should have looked just a few kilometers further east toward the Polish or Czech borders, where things would have have been more freewheeling,” he says. “There’s good reason Porsche decided to manufacture the Cayenne SUV–one of their most profitable models–in Slovakia!”  

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