A couple of days ago, we reported that Tesla was close to signing an agreement to explore the production of its vehicles in China, the world’s biggest car market. Now there are reports that Tesla has signed a preliminary agreement with the city of Shanghai to do it.

Tesla Signed

Tesla close to producing cars in China

The agreement that Tesla signed on Thursday in Shanghai will help the automaker lower its manufacturing and shipping costs, says Bloomberg, citing people familiar with the matter. Such a move will allow the U.S. firm to avoid the 25% tariff applied to imported vehicles. The agreement reportedly allows the U.S. firm to set up production facilities in Shanghai’s Lingang development zone.

Though Tesla signed an agreement, it will still have to set up a joint venture with at least one Chinese company to be entitled for the manufacturing permits. According to Electrek, Tesla is not planning to partner with other Chinese automakers; instead, it could enter into a joint venture with Shanghai Electric Group and the Shanghai Lingang Port.

In March, China-based Tencent, best known for the mobile app WeChat, invested about $1.78 billion in Tesla. This investment and a local production facility will prove to be a game-changer for the U.S. firm in China, especially with the mass market Model 3 hitting the markets pretty soon. The company is expected to start production of the Model 3 next month.

As of now, there has been no comment from Tesla on the matter.

Will Trump intervene?

Though opening a production facility in China will help Tesla, it may not be good for the U.S., and thus, it may invite some reaction from President Trump, notes The Street. The U.S. President has vowed to impose heavy border taxes on companies moving production facilities overseas and then importing products back to the U.S.

In January, Trump said, “A company that wants to fire all of its people in the United States, and build some factory someplace else, and then thinks that that product is going to just flow across the border into the United States – that’s not going to happen.” He also said, “They’re going to have a tax to pay, a border tax, substantial border tax.”

Nevertheless, a production facility in China would help Tesla in a big way to capitalize on the fastest growing markets for electric cars globally. According to research from Nielsen, about 27% of Chinese buyers are now interested in buying an electric car, compared to just 1% in 2012. New-energy vehicles are seen as a strategic emerging industry in China, which hopes to increase the sale of fully-electric and plug-in hybrids cars by ten-fold in the next decade. According to the China Association of Automobile Manufacturers, in 2016, the country witnessed sales of 507,000 new-energy vehicles, which includes electric vehicles.

Tesla tripled its earnings in China last year to over $1 billion. And according to equity research firm JL Warren Capital, the company sold about 10,399 cars in the country last year, representing a year-over-year increase of 182% or about 14% of global deliveries.

At 10:40 a.m. Eastern, Tesla shares were up 1.59% at $382.40. Year to date, the stock is up almost 79%.