Elon Musk plays the long game. Back in July of 2011, his Tesla, Inc. announced the launch of a localized website for Germany. Ten years later, the innovative maker of electric vehicles is just months away from opening a Gigafactory outside Berlin, employing some 40,000 workers and with plans to produce batteries, drivetrains and half a million vehicles for world markets. But in his bid to extend Tesla’s dominance in EV production beyond the U.S., is Musk at risk of over-reaching?
As of the end of 2020, Tesla’s market capitalization exceeded $800 billion, roughly equal to that of the nine largest car companies in the world. More recently the number dropped to just over $700 billion, but it’s still enough to dominate Germany’s biggest automakers: Volkswagen, Mercedes-Benz, BMV and Audi. So one might assume that Tesla will roll over those venerable brands when the Gigafactory scales up to full production.
Not so fast. Recent reports suggest that Tesla won’t easily overcome customer loyalty to existing car brands in Germany, or even other parts of northern Europe. Volkswagen’s ID.3 was Germany’s top-selling EV in January, with Tesla not even showing up in the top five (with another VW and cars from Renault, Hyundai and BMW rounding out the list).
Tesla’s disappointing performance in Germany, of course, precedes the opening of its Gigafactory. But even that bold new project won’t necessarily catapult Tesla to the front of the EV line in Germany. The market is subject to fierce brand loyalty, according to Thomas Michal Hogg, owner of TMH Consulting & Investment Group, and an expert on Germany’s business culture.
“U.S. automakers cannot afford to underestimate the power of the local German market, legal conditions, and competitor responses,” says Hogg. “It’s a highly competitive environment, and the technology is constantly changing.”
Hogg acknowledges Tesla’s bold effort to drop a massive production plant into the heart of Germany’s automotive industry. “It’s a really good and strategic move,” he says, “but Germany’s market is different from any other in the world.” Strict labor regulations pose a challenge to outsiders who are accustomed to a more docile workforce.
Germany imposes tight limits on work-week hours, not to exceed an average of eight working hours per day over a six-month period. “It’s all about the company culture — how you treat your people,” Hogg says. “And there are different customs as well.”
Hogg cites the case of Walmart, which entered the lucrative German retail market in 1997 and was forced out just nine years later because it couldn’t compete with established German brands. Speculation about the reason for the debacle was rampant, touching on issues of environmental responsibility and German workers’ rejection of Walmart’s distinctly American culture. But the power of Germany’s labor force, backed by governmental regulation, was seen as a prime factor.
Walmart lacked a coherent strategy for dealing with German labor, and Hogg believes that Tesla is poised to make the same mistake in that country. “They don’t 100-percent understand the H.R. market.”
Tesla is experiencing similar slippage in Norway, a fast-growing market for EVs, if for different reasons. Its Model 3 was the best-selling EV in that country as recently as December of 2020. More recently, however, Audi’s electric SUV, the E-Tron, has surpassed Tesla in sales in Norway. Consumers there are fixated on quality and appear to trust German brands more, says Hogg.
German automakers will give Tesla a run for its money all over the world, Hogg predicts, noting that German brands are historically strong in China. That’s especially the case in China’s luxury car market, where Mercedes-Benz and BMW sell millions of units each year. Brand loyalty among Chinese consumers is likely to extend to the burgeoning market for electric cars, with the dominant players in gas-powered vehicles making a strong showing there as well.
With its sole focus on EV production, Tesla may yet beat out the big German brands, which have yet to commit fully to electric power. (General Motors, by contrast, recently announced its intention to sell only zero-emission vehicles by 2035.) But the direction for all major automakers is clearly one of going electric, and these days Tesla is far from the only game in town. Sales of Audi’s E-Tron grew 80% between 2019 and 2020, Hogg notes. So as Tesla seeks to extend its EV hegemony worldwide, it can expect to encounter stiff competition from popular and well-capitalized brands in each country where it attempts to plant its flag. Success will depend on more than a network of Gigafactories.
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