February 22, 2018

Tesla Building Electric Car Factory In China

24 October 2017, 12:41 | Kenneth Drake

Customers look at a Model X at Tesla’s showroom in Shanghai China on Tuesday Sept. 12 2017. Source Qilai Shen Bloomberg via Getty Images

Customers look at a Model X at Tesla’s showroom in Shanghai China on Tuesday Sept. 12 2017. Source Qilai Shen  Bloomberg via Getty Images

Shanghai is China's de facto automotive capital and a significant market for luxury vehicles of all kinds. According to the news report, Tesla would likely still face 25 percent import duties on its factory-produced cars sold in China. The Chinese government wouldn't set such a precedent without careful consideration, though it did circulate a proposal on possibly allowing foreign EV makers to circumvent the partner rule if they build their operations in the country's free trade zones.

Current rules require foreign vehicle makers to have joint ventures with local companies for domestic production.

Although confirmation is still pending, the deal would allow Tesla to build a plant in Shanghai's free trade zone, where it will be able to cut production costs to better compete in the local market. That involves profit sharing and giving away some technology.

The WSJ report specified that any future factory would be set up in Shanghai's "free trade zone", and Tesla vehicles would still be subject to an import tariff of 25 percent. China typically requires global companies operating in its territory to form a joint venture with a local manufacturer.

Persuading Tesla to manufacture cars within Shanghai, while at the same time pay tariffs on the same, would be a big coup for the government.

Tesla managed to secure an additional $500 million in funding to help with lease deals for its vehicles.

"We expect to more clearly define our plans for production in China by the end of the year", Tesla said in a statement via WeChat.

Tesla is wrestling with production problems at its sole factory, in Fremont, California.

By working with local suppliers and making products close to its end customers in the region, Tesla could significantly reduce supply chain logistics costs and delivery costs.

More than half a million "new energy" vehicles were sold in China last year and the government is targeting sales in the millions in the coming years.

The country has also been leading the charge when it comes to producing "green" electricity and has one of the world's largest solar and wind farms.

To put two and two together, those factors are the roots of the problem why the electric auto maker hasn't had the chance to establish a stronger presence in the country.

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