Tesla is looking at China to build a big factory

8 years ago - Published in Finance, Fundamental Analysis

Tesla has confirmed it’s in talks with the Chinese government to open a factory in the Shanghai region, as the company aims to fulfill a promise by its CEO Elon Musk to produce 500,000 cars a year by 2018. 

“Tesla is deeply committed to the Chinese market, and we continue to evaluate potential manufacturing sites around the globe to serve the local markets,” the company said in an emailed statement. 

The announcement follows more than a year of speculation that the electric-vehicle maker would set up shop in China, and confirms that Tesla is altering its China strategy away from merely exporting vehicles in order to reach more Chinese consumers. Earlier this year, Musk made a stealth visit to China to visit Wang Yang, one of the nation’s highest-ranking officials, to discuss Tesla’s plans.

It isn’t immediately clear if Tesla would take on a local partner as part of a joint venture in China, a long-held requirement for foreign companies wanting to set up shop there.

Yet while local manufacturing gives Tesla the opportunity to sell cars in far greater numbers, China's fast-changing regulatory environment is creating uncertainty among foreign auto makers unsure about what Beijing's requirements will be.

Current regulations also require manufacturers building electric cars in China to source all vehicle components locally. That presents a challenge for Tesla, which won't be able to use batteries made in its U.S. "gigafactory" in its Chinese-built cars, said Bill Russo, managing director of Gao Feng Advisory, a Shanghai-based auto consulting firm. Tesla may be forced to form a joint venture with a local battery maker, as well as a car maker, he said.

Today, Tesla produces all of its cars in the US. However, if the company hopes to increase its production to 500,000 vehicles a year — that’s a six-fold increase over 2016 numbers — and reach more consumers in Europe and Asia, it will have to open factories closer to those customers.

Speaking to the strategic importance of China, the company in 2017 sold $1 billion worth of cars in the country in 2016 alone.