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Tesla factory for Portugal?

Jochen Faget
December 20, 2016

US carmaker Tesla plans to build a Gigafactory in Europe. Portugal wants to host it. There are many arguments in its favor: big lithium deposits and good infrastructure on the ground, says Jochen Faget.

USA Tesla-Batteriefabrik Gigafactory
Image: picture alliance/dpa

It sounds like a Christmas fairy tale: A vision of Tesla electric vehicles rolling off the assembly line in Portugal, equipped with batteries made in Portugal. Thousands of jobs, flourishing supplier companies, Portugal's crisis is as good as over! But the fairy tale could become reality. All that's needed is for Tesla boss Elon Musk to give his approval.

Since the California-based carmaker confirmed last month that Tesla wants to build a factory in Europe, Portuguese politicians have been entertaining great visions. Several municipalities see themselves as an ideal location for the planned "Gigafactory," as Tesla calls its battery production factory. Wherever the next Gigafactory is built - the first one is nearing completion in Nevada (picture at top) - will see up to 17,000 direct and indirect new jobs created, on the back of about 5 billion euros ($5.2 billion) of investment.

Amsterdam Tesla Elon Musk
Tesla CEO and superhero technology entrepreneur Elon Musk, at an event in Amsterdam in 2014. Where the first European Gigafactory is built will be his decision in the end.Image: picture-alliance/ANP/J. Lampen

"The government is following the process and has already made contacts," said Economy Minister Manuel Caldeira Cabral. But he does not want to raise expectations yet.

Competitors and tax breaks

There's good reason for Cabral's restraint: Firstly, it's not yet known how large the European Tesla factory will be, or what exactly it will produce. Secondly, other countries are also in the running as possible sites, including neighboring Spain, France, the Netherlands, and some eastern European countries. And behind the scenes, far from the public eye, these competitors are likely to wage a fierce battle over tax breaks and financial aid to Tesla.

That's anything but unprecedented, as the case of Portugal's Volkswagen assembly plant shows, which was opened 25 years ago at a site south of Lisbon. In addition to some free infrastructure, the state had to offer ample EU subsidies and many years of tax exemption in order to induce the German carmaker to come to Portugal. A separate railway line and a loading port for the plant were built to connect it to transportation hubs. In the end, the plant that was built was smaller than what VW had promised, "because of the economic situation."

Good fundamentals

In regards to the poker game over which country gets to host the first Gigafactory in Europe, Portugal holds pretty good cards: Its auto parts supply chain industry meets European standards, and the cost of labor is significantly lower than in many countries. Its transport infrastructure is good: It has modern ports with spare capacity, and the motorways that have been built with EU subsidies all over the country are also relatively uncrowded. Above all, Portugal is the sixth-largest producer of lithium worldwide. The metal is a key ingredient in electric vehicle batteries.

The largest lithium mine in Europe is located at Guarda, a medium-sized Portuguese port, near the Spanish border. The local mayor is already feeling hopeful, because the European "Gigafactory" is meant to build battery packs as well as cars. But he has competition, even within Portugal: His colleague from the northern Portuguese city of Viana do Castelo is also dreaming of an e-car boom, since an Australian company wants to dig for lithium nearby.

Tesla Motors Elektroauto Model 3
Tesla expects to ramp up its EV production dramatically in coming years, as the more affordable Model 3 hits the market in late 2017 or early 2018. As a result, it will need to ramp up its production of EV batteries. That means building more Gigafactories. Image: Reuters/Tesla Motors

"In addition to good business conditions for companies and excellent transport connections, we also have the raw material for construction of car batteries," said Viana do Castelo's mayor, José Maria Costa.

Recent steps taken by the Portuguese government confirm that the country's Tesla fairy tale may have a chance of coming true. The Secretary of State for Energy, Jorge Seguro Sanches, has set up a working group tasked not only with making an inventory of the country's lithium deposits, but also with thinking about how the ore could be refined into metal in-country.

That way, the country's lithium resources could feed directly into a Gigafactory supply chain. However, Sanches doesn't want to comment on the Tesla project: "The potential is enormous, but now is not the time for euphoria."

Euphoria has nevertheless gripped many Portuguese over a possible Tesla investment. There's even a Facebook group called "Bring Tesla Gigafactory to Portugal." It has only been online since mid-November, but just one month later, it already has nearly 70,000 members. Whether that will help sway Elon Musk as he considers his options for siting Europe's first Gigafactory remains to be seen. It's expected that he will make the siting decision sometime in 2017.