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German tortoise and Tesla hare in electric car race

Tesla Model S 90D electric vehicles sit on display.
SeongJoon Cho | Bloomberg | Getty Images
Tesla Model S 90D electric vehicles sit on display.

Silicon Valley is fast disrupting the future of cars, forcing established groups to invest in technology to make their vehicles electric, connected to the internet, and equipped with self-driving sensors and software.

But in the coming years, Germany hopes to unleash its own weapon: Silicon Saxony. The country's easternmost region is shaping up to play a lead role in the electrification of cars.

Porsche makes all of its hybrid cars in the state while Volkswagen, BMW and Daimler have focused their efforts there to answer Tesla, the US and Silicon Valley start-up that offers the most advanced and broadest range of electric cars.

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"Saxony is the pioneer with regards to changes in vehicle production," says Martin Dulig, the state's economics minister. "Our Free State has everything required for these future technologies."

He rattles off a series of research institutes and an array of specialist companies that give Saxony, he says, a unique competitive advantage in making battery cells, producing lightweight cars and equipping vehicles with semiconductors that can handle floods of data essential for autonomous driving technology.

With Europe's largest known deposit of lithium, the key chemical for making batteries, also sitting beneath the Saxon-Czech border, the region has the chance to again be a "hotbed for future technologies", he says.

Saxony has a history of innovation. The German steam engine was invented there in 1839, it was the birthplace of Audi in 1909, and an array of items from toothpaste, modern bras and coffee filters all got their start in the region.

But the two world wars were disastrous for the region. Dresden, the capital, was devastated by firebombing in 1945, and the whole state was then annexed by the Soviets.

It was only in the 1990s after German reunification that the state started to flourish again. Although Silicon is overused as a prefix, in the case of Saxony it rings true with some of the biggest technology and chip companies, such as Infineon and GlobalFoundries, based there.

For carmakers, Saxony is also attractive because of lower wages. Government subsidies play a role too, as taxpayers across the country pay a "solidarity tax" introduced in 1991 to help unify Eastern and Western Germany.

Volkswagen has begun making its e-Golf in Dresden and by 2020 its plant in Zwickau will be churning out the I.D., a highly-automated electric car to be sold "on par" with its Golf models.

The I.D. will be the first model built on VW's "MEB" platform — a high-volume production system central to the company's efforts to introduce 30 new electric car models by 2025. The platform, still in development, aims to offer mass-market, long-distance electric cars costing below €30,000.

"The start will come from Zwickau," says Kai Siedlatzek, VW's finance chief for the region.

BMW builds its two electric models, the i3 city-car and the i8 sports car, in Leipzig. The Munich-based company chose the area in part because the Saxony mindset is considered more open to innovation."In Leipzig you can feel the openness to innovation and to new developments," says Hans-Peter

"In Leipzig you can feel the openness to innovation and to new developments," says Hans-Peter Kemser, head of BMW's Leipzig plant.In Kamenz, outside Dresden, Daimler has been producing lithium-ion batteries for its hybrid cars since 2012.

On Monday, it will host German chancellor Angela Merkel in a ceremony to open its second, 20-hectare battery factory in the same spot to supply batteries for the 10 electric models Mercedes is bringing out in the next nine years. "By 2020 we will have one of the largest battery plants in the world," says Markus Schaeffer, Daimler's head of production.

Each of these efforts is more focused on the future than the present, as the approach of German carmakers to electrifying cars has the characteristics of the tortoise in comparison to Tesla's hare.

Instead of electrification, German carmakers have been focused on selling cars to a booming market in China. That has allowed Daimler, for instance, to "more than double capacity" from making 1m cars in 2010 to 2.25m last year, Mr Schaeffer says.

Together the German carmakers sold nearly 15m cars last year and generated combined revenue of €464bn. Each posted record operating profit. Tesla, which overtook GM by market value last month, produced 76,000 cars, generated €7bn of revenue and posted an operating loss of €667m.

VW chief executive Matthias Müller reflected on Tesla's share price last month and concluded: "This has little to do with the reality on our streets . . . the fact is, electro-mobility continues to be a niche."

But, he told shareholders last week: "There is no doubt electric cars are the future."

He added VW would, over the next five years, triple its investment in "alternative" drive technologies to €9bn. Tesla's R&D budget last year was €834m.

Still, electrification will be a major challenge for the German groups.

Stefan Bratzel, director of the Germany-based Center of Automotive Management, says that what Tesla plans — to scale up from making 76,000 cars last year to 1m cars next year — is easier than what the Germans must do.

The Germans must overhaul their operations to make electric cars, while continuing to invest across the board in clean and efficient petrol and diesel technologies.

"That's a rucksack that makes them slower," he says. "Scaling up is possible with the right people on board. But transforming the company in the direction of mobility and autonomous driving is the much more challenging task."

Richard Gaul, a consultant and the former communications chief of BMW, agrees that Saxony will play a central role electrifying Germany's car industry.

But the real future, he says, is in China. He projects that by 2030, up to 20m electric cars will be produced per year, globally, with 15m of them made in China. That is when the value of building a brand in China will become most evident.

"The wave of electric cars will come," he adds. "[The Germans] are not late. Up to now, there is not a single business case, including Tesla, where they earn money on an electric car."

In the end, the focus of the German carmakers on China may prove significant. Like the Aesop fable, the German tortoise could overtake the Tesla hare.