Caixin
BUSINESS & TECH

Tesla to Open First Overseas Gigafactory in China

Tesla sold around 17,000 vehicles in China last year. Photo: VCG
Tesla sold around 17,000 vehicles in China last year. Photo: VCG

Tesla Inc. signed agreements Tuesday with Shanghai authorities to set up a vehicle assembly plant that will have the capacity to produce 500,000 all-electric autos a year.

The accords move the U.S. electric carmaker a step closer to its long-sought goal of producing vehicles in China, a market that contributes more than 15% of its revenue. China is the world’s largest and fastest-growing market for electric cars, reflecting favorable government policies.

Tesla’s Chief Executive Officer Elon Musk and Shanghai Mayor Yin Yong attended the ceremony, Caixin learned from sources close to the Shanghai Lingang Area Development Administration. The agreements are with the Shanghai municipal government, the Lingang administration and Lingang Group.

The plant will be Tesla’s first Gigafactory – as the company calls its battery and assembly installations – outside the United States. It will be a wholly-owned subsidiary of Tesla with integrated capacity for research and development, manufacturing and marketing.

A new government policy for automakers opened the door for foreign companies like Tesla to set up wholly owned electric vehicle-making plants. The Chinese government in April announced that it would scrap the 50% foreign ownership cap on new-energy vehicle makers by the end of this year as part of its efforts to liberalize China’s auto manufacturing market.

It is unclear when the new factory can start operation. Tesla still needs to complete a series of steps including land purchase and license application. The Chinese government is revising rules concerning auto industry investment. A draft version of the new policy requires that new electric car manufacturing facilities have annual capacity of no less than 100,000 all-electric cars. The major investors should have sales of more than 30,000 passenger vehicles or 3,000 commercial vehicles in the past two years.

An assembly facility in Shanghai will allow California-based Tesla to locally produce vehicles and avoid a tariff in the world’s largest auto market. The Chinese market has increasingly become strategic to Tesla, where it sold around 17,000 vehicles last year.

While the planned capacity of the Shanghai operation greatly exceeds Tesla’s recent sales, China’s demand for new energy vehicles is surging, fueled by generous government subsidies since 2010 as policymakers battle choking air pollution.

Chinese consumers bought about 777,000 new-energy vehicles last year, including hybrids and all-electric cars. That was a 53% jump from 2016 and accounted for more than half of global new-energy vehicle sales of 1.2 million, according to the China Association of Automobile Manufacturers.

China's government said last year that it intends for new-energy vehicles to make up at least a fifth of total vehicle sales in China by 2025, or 7 million of the projected total of 35 million autos a year.

Tesla’s agreement comes at a time when trade tensions between the U.S. and China have rattled the auto industry. In May, Beijing announced reduced import duties for select cars to 15% from 25%, prompting Tesla to cut the prices of its Model X and Model S vehicles sold in the country by about 6%.

However, Tesla jacked up the prices of its electric cars again after Beijing raised the auto levy from 15% to 40% last week as part of retaliation against the U.S. government’s new tariffs on $34 billion of Chinese goods.

A basic Model S sedan now costs about 849,900 yuan ($128,000) up from 710,579 yuan in May, while a Model X sport-utility vehicle costs about 927,200 ($140,000) yuan now, compared with 775,579 yuan in May, according to the Tesla website. The new China prices are as much as 75% higher than prices in the U.S.

Caixin reported in May that Tesla received tentative approval from the Shanghai government to manufacture cars in in the Lingang industrial zone in the city’s Pudong New Area.

Tesla established a new company — Tesla (Shanghai) Ltd. — in Shanghai in early May to offer services, including research and development, as well as engage in the import and export business. The establishment of the new company was widely seen as a preliminary step toward Tesla’s goal of producing cars in China.

Contact reporter Han Wei (weihan@caixin.com)

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