A decade ago, Elon Musk coined the term ‘Gigafactory’. What used to be a fancy expression for the first large-scale Tesla sites has now evolved into a frequent investment pattern of many more companies in that space. Hence, we’re all starting to pay much more attention to Gigafactories as a major driver of foreign direct investment (FDI) and their potential economic opportunities.
There is no more doubt that essentially, these huge factories will power our future. As the world shifts up a gear in its energy and mobility transition, the demand for batteries has skyrocketed in major markets on a global scale. Automotive and battery manufacturers as well as producers of semiconductors face a difficult period of uncertainty in their supply chains, and many are turning to building their own battery and chip gigafactories or forming joint ventures to address squeezed supply.
In 2022, there’s a natural expectation that every company is run sustainably and with little impact on our environment, resulting in a massive demand for energy storage across various industries, including manufacturing and automotive. In future, we’ll still drive where we want to, but instead of damaging the environment, we’ll use greener technologies and electricity.
Battery & Semiconductor boom meets Germany
In Germany, the comeback of the gigafactory began in 2018 with Chinese CATL marking its first global expansion in EV battery manufacturing with an investment of EUR 240 creating 600 jobs in Erfurt, Thuringia. It was followed by several further projects as seen in the map below:
And there are more gigafactory projects on its way: Cellforce group, a joint-venture by Porsche and Customcells, announced a Gigafactory in Germany to supply Porsche with battery cells. Chinese manufacturer CALB is also planning a factory in Europe with an annual capacity of 20 GWh. Chinese manufacturer and Daimler-supplyer Farasis has been planning a battery factory in Bitterfeld-Wolfen (Saxony-Anhalt) for quiet some time.
Over the next ten years, we’ll likely see significant investment in Germany as well as other EU countries. For example, large OEMs such as Volkswagen have recently announced their plans to open up to six Gigafactories in the coming years in Europe through their new subsidiary PowerCo.
OCO Global has been paving the way for gigafactory investments in Germany
Just recently, OCO Global has developed FDI strategies for several German locations, including the Federal State of Schleswig Holstein (back in 2020), paving the way for investments into core sectors like energy storage (see Northvolt Gigafactory in Heide, mentioned above). Additionally, OCO Global developed an FDI Attraction Strategy for the City of Magdeburg in Saxony-Anhalt in 2021. Hugely successful, this arguably has played a role in paving the way for the investment of INTEL.
Key reflections for policy makers and investment promotion professionals
Reflecting on the discussions that we had with industry and economic development executives during these and other projects, there are several key take aways to share:
- Gigafactory-projects with clear sector focus on mobility applications and semiconductors
Corresponding to current industry trends and macroeconomic shifts, the main industry sectors driving gigafactory projects are automotive incl. battery cell production and semiconductors. The battery value chain is expected to increase by much as ten times between 2020 and 2030. In 2030, approximately 90% of the demand for lithium-ion batteries will come from mobility applications such as electric vehicles (EVs).
In addition, further digitalization and disrupted to supply chains have led to a global chip shortage. The global semiconductor industry grew by 25 percent in 2021 compared with 2020. As a consequence, in 2021, the EU even agreed upon a EUR 145 billion “European initiative on processors and semiconductor technologies”, a political initiative with the clear ambition to promote large-scale investments in the EU member countries. This growth in the battery and semiconductor market will lead to an unprecedented level of investment that manufacturers and actors of both supply chains must get right to stay competitive.
- Infrastructural requirements
Real estate for gigafactory projects need to be “future proof” regarding energy and water supply. Ongoing discussions on TESLA’s project in Brandenburg and potential water shortages in the region show the relevance of these topics. Northvolt has chosen Schleswig-Holstein as a preferred location for their third Gigafactory in Europe, mainly because of the availability of green energy by On and Offshore wind power. Just having a large site is not sufficient anymore. Locations in favor of a gigafactory better have a proof-of-concept infrastructural concept regarding energy and water supply, traffic flows and – maybe most important – talent attraction. Ensuring a sufficient supply of needed skill sets relative to industry activity in the area is the most critical decision factors for gigafactory investments. EDOs can respond to that need with targeted talent attraction campaigns that look beyond the local labor market.
- German bureaucracy and approval processes
Seismic macroeconomic shifts and consequences for industry sectors happen more quickly than we have ever thought, this has become evident again through the pandemic and Ukraine war, accelerating developments such as digitalization and energy transition. Approval processes and bureaucracy need to cope with the speed of industry trends. The TESLA, INTEL and NORTHVOLT investments in Germany have required speedy approval processes of the regional authorities which were crucial in securing these projects.
I remember my “old days” when working for a German EDO and there was a 140ha site available but just no demand in the market for a gigafactory project. At that time manufacturing investors needed smaller site plots for specialized functions because there was a trend towards even more international dispersion of GVCs, especially driven through Industry 4.0. Policy makers hence turned to the designation of smaller size plots for industry as it mirrored industry demand. Now a couple of years later there are more gigafactory FDI projects in the market than there are available sites. If approval processes for new land designation will take (much) longer than changing industry trends and patterns, it puts economic benefits at risk.
- Regional supply-chain-hubs
While significant investments across the battery and semiconductor value chain are expected globally, there is an increasing trend toward more local industry hubs that will localize i.e. battery manufacturing near EV manufacturing facilities or combine semiconductor manufacturing with R&D, testing and recycling. While clearly not the whole value chain can be transferred and localized, still the concept of a “circular economy” and life cycle strategies represent good approaches to leverage the economic opportunities of a gigafactory in the view of a regional industry ecosystem. These can be strategically supported through targeted investment attraction by economic development organizations.
The world is changing. No longer can companies rely on traditional energy to power their businesses. A clean energy revolution has already started in Germany – and the EU in general – and the rewards are great. You’ll help improve the climate crisis, create thousands of new jobs and have sustainability and resiliency built into the heart of your future operations.
OCO Global has its finger firmly on the pulse of current and future technologies, and we’d love to share that expertise with you.