Technology

Tesla Clinches Deal With China To Build Factory In Shanghai

Tesla, who has always wanted to increase its market in China, stated a few months back that it is in advance talks with the Shanghai government for opening a manufacturing facility. Now, The Wall Street Journal reports that the EV maker has cracked a deal with China to open a Tesla factory in Shanghai.

Tesla factory
Blomst / Pixabay

How a Tesla factory could help?

The report states that any Tesla factory that would start up in China would be in Shanghai’s “free trade zone.” Also, China would not do away with the import tariff of 25% on the Tesla vehicles. However, transportation costs would cool down once the factory is situated nearby, giving the U.S. firm better access to the Chinese supply chain. Post agreement, Tesla would also have control over its trade secrets, and would place the company in a better position to negotiate terms with Chinese suppliers.

“This arrangement, the first of its kind for a foreign auto maker, could enable Tesla to slash production costs, but it would still likely incur China’s 25% import tariff,” notes The WSJ.

Further, a local production facility could also help the U.S. firm win favors from the Chinese government, who has already made its intention clear of favorable policies for the electric vehicles compared to the combustion engine.

China is keen on replacing the combustion engine with electronic vehicles. Back in September, Xin Goubin, the vice minister of industry and information technology, stated that carbon emission reduction would be achieved as the country starts phasing out sales of fossil fuel vehicles, and the existing manufacturers will have to increase the capacity of building EVs in the future.

According to Bill Russo, the founder and chief executive of a Shanghai consulting firm, Automobility, China would continue to be the largest consumer and producer of electric vehicles in the world. “If Tesla hopes to compete as a global electric vehicle maker, it must tap the manufacturing and supply footprint of China to compete globally,” Russo told The New York Times.

Aligning interest of Tesla and China

Earlier, for establishing manufacturing capacity in China, foreign automakers were required to enter into joint ventures with the domestic companies, and share their profits and technologies with them. Now, it seems that China is considering relaxing those laws especially to produce electric vehicles.

Finally, it seems like the interests of Tesla and China are aligning as both are keen to expand the reach of electronic vehicles in China. In China, the revenue for Tesla has almost tripled to $1 billion over the past year. Chinese is also equally interested in Tesla with Tencent Holdings buying a 5% stake in Tesla for $1.78 billion, strengthening the position of the company in the country.

So far, there are no details on the production side, or what price point would be set for the Model S and Model X in China once the manufacturing is done locally.

Although Tesla is looking to complete the deal by the end of the year, the central government still has the final say in the matter. Going by the records, Beijing authorities are known for delaying the deals or asking for more concessions, notes The New York Times.