Tesla strikes deal to open electric vehicle factory in Shanghai

Shares of auto parts suppliers jumped in Asian trading after the Wall Street Journal reported that Tesla Inc. reached an agreement with Shanghai's government to build a fully-owned manufacturing facility in the city's free trade zone.

Tesla, an American automaker, energy storage and solar panel manufacturer specializes in electric cars.

Tesla vehicle production. Image source: author.

The magazine's prediction that the Tesla Model 3, which has faced production bottlenecks, will have average reliability illustrates the challenges automakers face. Furthermore, Tesla recently announced that vehicles produced for the Chinese market will have a dual charging port that supports the GB/T domestic charging standard, along with Supercharging.

A wholly owned auto factory in Shanghai would be a first for a US auto manufacturer, WSJ noted.

In order to duck the 25 percent tariff on vehicles, the Chinese government requires automakers to find a local manufacturing partner, usually in the way of a fellow auto company.

Automakers usually enter into a joint venture. It will results in losing control over the finished product, sharing trade secrets with a local company and splitting profits.

But regardless of the cost, China is an essential market for Tesla. In September, China ordered all car-makers operating in China to start making EVs by 2019. However, that also means the 25 percent import tariff still applies to Tesla's vehicles. Unlike some other US automakers that hike the price of their vehicles beyond incremental shipping expenses, taxes, and customs duties for their sales in the market, Tesla has committed to only increasing prices enough to cover these mandatory costs.

Of course, the logic of competing for a foothold in China's domestic market - despite the myriad obstacles that remain for foreign companies, not the least of which are the PBOC's stringent capital controls, which make it hard for foreign corporations to repatriate profits - is unimpeachable. TSLA reached a deal to begin building a factory in Shanghai's free trade zone, which is the first Hong Kong-like free trade area in mainland China. However, this deal does get Tesla a foot in the door as China is predicted to become one of the world's largest markets for electric cars in the coming years. For growth-hungry Tesla, China is a massive opportunity.

Tesla's cars reportedly cost 25% more in China than it does in the US.

  • Eleanor Harrison