Why Tesla chose Germany for its new plant

FRANKFURT -- Elon Musk picked a glitzy event in Germany, a few hours' drive from the birthplace of the internal combustion engine, to drop the news that Tesla plans to open a factory in the country.

Tesla will round out its global manufacturing network with a factory near Berlin, along with an engineering and design center, Musk said at the Golden Steering Wheel awards ceremony in the German capital on Tuesday attended by the CEOs of Volkswagen, Audi and BMW.

"Everyone knows German engineering is outstanding for sure. You know that is part of the reason why we are locating Gigafactory Europe in Germany," Musk said at the event.

The news wasn't completely unexpected. Musk had said that Tesla would announce the location of its European factory before the end of the year and that Germany was a front-runner. Nonetheless, Tuesday's announcement bolstered the CEO's flair-for-the-dramatic reputation.

Fresh off a surprise profit report that sent the company's shares soaring, Musk threw down the gauntlet in front of rival executives that Tesla can no longer be dismissed as a niche automaker.

"Elon Musk has an ability to make a splash," said John Boyd, principal of a manufacturing site-selection firm based in Princeton, New Jersey. "Not only does Germany bring top-level manufacturing skill sets and positive supply chain dynamics to the table, but there is a cachet value to Tesla establishing a bricks-and-mortar presence in Germany, a nation synonymous with precision car manufacturing."

"The Berlin location serves two unique goals," said Gene Munster, a managing partner at venture capital firm Loup Ventures. "It's strategic to lure German automotive talent to Tesla, and it's a statement that Elon wants to one-up auto companies from that region."

The plant will be in Gruenheide, which is about an hour's drive east of Berlin, according to Berlin's Tagesspiegel newspaper.

Tesla has started hiring for the German project, according to job postings on its website that showed the automaker was looking to fill four roles from engineering to construction.

Berlin's minister in charge of economic affairs, Ramona Pop, told public broadcaster RBB there had been talks about creating 6,000 to 7,000 jobs in production alone, with hundreds or even thousands more in areas such as design, software or research.

Musk sent out tweets that said the factory will make batteries, powertrains and vehicles, beginning with the Model Y crossover. Reports said the Model 3 would be added later.

For Musk, choosing greater Berlin for a factory was "surprising but not fallacious," said Ferdinand Dudenhoeffer, director of Center for Automotive Research at the University of Duisburg-Essen. Battery-cell manufacturing requires space, infrastructure and subsidies, and the city is a good fit for a premium brand like Tesla, he said.

Musk has until now relied on a single auto assembly plant in Fremont, California, to build a $63 billion company. That facility is supported by the first of the company's so-called gigafactories near Reno, Nevada, that makes batteries.

Tesla is on the verge of starting sales of Model 3s produced at its latest production facility, near Shanghai.

While adding a European factory raises the stakes for established automakers already facing a serious threat from the electric upstart, it will take time for the plant to get up and running. Musk estimated earlier this year that Tesla's European gigafactory probably won't be operational until 2021.

Adding production in Germany and China will probably help Musk boost Tesla's sales in those regions, according to Kevin Tynan, a Bloomberg Intelligence auto analyst.

"The sustainability of the demand will be more the question," he said. "And if local competition becomes real competition, it will be more difficult," he said.

Chancellor Angela Merkel's government and local automakers have agreed to boost incentives for EVs, intensifying Germany's effort to move away from the combustion engine to reduce exhaust emissions.

Still, building vehicles in a country that has some of the highest labor and energy costs worldwide is bound to be a challenge.

European customers also expect a network of dealers and repair shops to reliably handle maintenance and repair work, which Tesla has struggled with lately.

German politicians welcomed Musk's announcement.

"Tesla's decision to establish an ultra-modern plant for electric cars in Germany is further evidence of the attractiveness of Germany as an auto industry location," Economy Minister Peter Altmaier said in a statement. "It's a milestone in the development of electric mobility and battery know-how."

"Tesla is coming to Brandenburg with a big investment," Dietmar Woidke, state premier of Brandenburg, which surrounds Berlin, said in a statement. "We lobbied for this for a long time in intensive talks and with good arguments."

Reuters contributed to this report