An ambitious plant in Shanghai, its first factory outside the U.S., would double the electric car maker’s global manufacturing.
Tesla has signed a preliminary agreement with Chinese authorities, marking a major milestone in its quest to open the first production facility in China wholly owned by a foreign carmaker. It is the right place at the right time for Tesla to grow its global manufacturing capacity, as the Chinese government wants to put China at the forefront of the automotive sector’s shift to electrification. It also loosened restrictions on foreign ownership of electric vehicle ventures earlier this year.
Construction on Tesla’s Shanghai factory is set to begin soon after approvals and permits are secured. The company plans to start rolling out cars within two years, then ramp up to the factory’s full capacity of 500,000 vehicles another two to three years after that. It is a bold plan. By comparison, most factories in the auto industry are designed to build 200,000 to 300,000 vehicles a year, which is about the planned annual production for Tesla’s auto plant in Fremont, California.
China is the world’s largest market for electric vehicles and Tesla’s second-largest market after the U.S. Having a plant in China will lower shipping costs and potentially make sourcing components more cost-effective, while allowing Tesla to avoid China’s import duties on U.S.-made cars amidst mounting trade tensions between the two countries. Tesla said its plans in Shanghai will not impact its U.S. manufacturing operations, Reuters reports.
The Shanghai government said it welcomes Tesla’s plan to invest not only in a new factory in the city, a hub of the Chinese auto industry, but also in research and development. China has long sought to capture more of the talent and capital that global automakers have invested in electric vehicle technology. However, it is not yet known whether Tesla will share its technology.
The bigger question, for many analysts, is where Tesla will get the capital to build the factory and get it up and running. CEO Elon Musk has said that Tesla will be cash-flow positive this year. Some analysts predict the company will raise capital to fund a list of new projects, including launching an electric semi-truck, pickup truck and compact SUV, as well as new battery and vehicle production facilities in China and Europe.
“I am sure that Tesla needs fresh money at the latest next year”, said Frank Schwope, an analyst with German bank NORD/LB. The Shanghai municipal government could help with some of the capital costs, and said in a statement that it “will fully support the construction of the Tesla factory.”