The plant will be Tesla's fourth Gigafactory, adding to its existing sites in Nevada and NY and another one which is nearing completion in Shanghai.
So now Tesla's European factory will be built in the outskirts of Berlin, where it will be responsible for building batteries, trains, and vehicles.
With Musk reportedly aiming to have his factory up and running in Germany in 2021, the electric race between the U.S. upstart and Germany's legacy carmakers is officially on.
The government in Berlin has already earmarked financial support for manufacturing electric vehicle battery cells in a bid to counter the dominance of Asian firms, though it is unclear whether Tesla would receive similar German support.
The original Gigafactory was Tesla's massive battery factory in Nevada.
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Musk said that the plan is for the factory to be built near Berlin's new airport, which is located just outside the city limits in neighboring Brandenburg state and now slated to open next year after years of delays.
At an awards ceremony in Germany, Musk added that the plant will be set up near the Berlin Brandenburg Airport, and will be supported by an engineering and design centre in the city, Reuters reports. "This strengthens Berlin as an industrial location and creates jobs".
"Tesla is coming to Brandenburg with a big investment", Mr Dietmar Woidke, Premier of Brandenburg state, which surrounds Berlin, said in a statement.
Batteries are made in Nevada and then shipped to Tesla's auto factory in Fremont, California, for final assembly.
"So far, subsidies haven't been discussed", he told reporters in Berlin. It will compete with electric cars from local contenders such as NIO Inc. and Xpeng Motors, as well as global manufacturers including BMW AG and Daimler AG.
German giants are behind in adapting fleets to meet new European emissions limits, and have left it until late to commit to electric drive in a big way. The other two Tesla models, X and S, sold a lot less, confirming the Model 3 as the flagship vehicle it was conceived as: the affordable luxury EV that would turn Tesla into a mainstream carmaker.