Elon Musk Opens Tesla’s First European Factory

“Every vehicle that we make will be another step in the direction of a sustainable energy future,” he said. “You should have hope in the future. This problem will be solved.”

German Chancellor Olaf Scholz welcomed the plant as an economic boost for eastern Germany, which is still catching up with the country’s wealthier west more than three decades after reunification.

Tesla shares rose 7.9% Tuesday to $993.98.

Two years in the making, the factory will allow Tesla to build cars for European markets, which currently rely on expensive imports from the U.S. and China, and to tailor vehicles to local tastes, analysts said. The plant aims to eventually employ up to 12,000 people and make up to 500,000 vehicles a year, starting with the Model Y, a sporty crossover.

One the eve of the plant’s opening, Mr. Musk tweeted: “Makes a huge difference to capital efficiency to localize production within a continent.”

In 2019, the state of Brandenburg competed with other locations in Germany and Europe to host the Tesla plant. Its proposed location, in Grünheide, a town surrounded by forests and lakes, won the bid thanks to its proximity to the German capital and the regional government’s pledge to achieve quick approvals for the plant. As part of the contest, German officials even hosted flights for Tesla executives in an Antonov plane called “Anushka” to survey the land where the factory was to be built.

At the time, Mr. Musk was in Berlin to accept the “Golden Steering Wheel” award from a German automotive industry group. He unveiled the news and said, “Everyone knows German engineering is outstanding for sure. You know that is part of the reason why we are locating Gigafactory Europe in Germany.”

The wait to start producing in Europe is over, but Tesla’s drive into the region could be slowed by Russia’s war on Ukraine, which has caused new shortages for car makers in the region. While Tesla has better managed the chip crisis than most of its rivals, it uses many of the same suppliers as German manufacturers.

“Tesla cannot fundamentally detach itself from the delivery bottlenecks,” said Stefan Bratzel, director of the Center of Automotive Management, a research institute in Germany.

Ferdinand Dudenhöffer, director of the CAR Center Automotive Research in Duisburg, Germany, said the new plant in Europe would likely help Tesla become even more competitive against German rivals such as BMW as it continues to lower costs.

“We assume that Grünheide will produce at least 100,000 new Tesla models this year, and in 2023 the curve will rise sharply,” he said.

Tesla has faced opposition to the Grünheide factory from environmental groups concerned about the amount of water the plant would require, and activists staged a protest on the sidelines of Tuesday’s opening. Still, Germany has generally welcomed Tesla as a sign that the country, which has high labor costs and strong unions, has remained an attractive place to invest.

Robert Habeck, Germany’s economic minister and a leader of the environmentalist Greens, praised Tesla’s “audacious corporate culture” for taking the risk to start building the factory before official approval had been completed. If final approval hadn’t been granted, the company would have had to take down the buildings and return the land to its original state.

“The beginning of production today in Grünheide is a special day for the region and a special day for the transformation of mobility in Germany,” he said. “The shift to electric mobility is another step away from oil imports.”

Tesla has built a dedicated following in Europe but faces a more competitive landscape today than when it started work on the plant. Volkswagen AG , which struggled with the software in its first mass-market all-electric model, has since overcome its growing pains to become the second-largest producer of EVs world-wide after Tesla, according to EV-Volumes.com, a research group that tracks EV sales.

In 2021, fully electric and plug-in hybrid-electric vehicles accounted for 18% of new car sales in Europe, up from 10.5% the year before. Overall, new car sales in the region are at their lowest level since 1985, analysts said.

S&P Global Mobility slashed its outlook for global auto markets after the Russia-Ukraine war disrupted supply chains. S&P analysts cut their outlook for global auto production by 2.6 million vehicles to 81.6 million vehicles this year, with more than half of the shortfall coming from Europe.

“The downside risk is enormous,” said Mark Fulthorpe, executive director for global production forecasting at S&P Global Mobility. “Our worst-case contingency shows possible reductions up to 4 million units [globally] for this and next year.”

Write to William Boston at william.boston@wsj.com