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Tesla signs agreement to build cars in China

Tesla signs agreement to build cars in China


The third Gigafactory will be in Shanghai

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Image: Tesla

Tesla has signed a “cooperative agreement” with the Shanghai Municipal Government to build its third Gigafactory and the first in China, the company announced today. Tesla says it aims to be able to make 500,000 cars per year there in what is the biggest market for electric vehicles in the world, though the company says it will be a while before the factory is up and running.

“We expect construction to begin in the near future, after we get all the necessary approvals and permits,” the company said in a statement. “From there, it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up to produce around 500,000 vehicles per year for Chinese customers.”

Tesla says it will start construction “in the near future,” and production can begin in “roughly two years”

A Gigafactory in China would be Tesla’s first outside the United States. The original Gigafactory is still technically being built in the Nevada desert, and a second one is under construction, but operational, in Buffalo, New York. While the Nevada Gigafactory primarily focuses on producing batteries for Tesla’s cars (in partnership with Panasonic), Tesla CEO Elon Musk has said that the ultimate goal for his giant factories is to produce the company’s cars there, too. Musk also said earlier this year that he plans for Tesla to eventually open 10 to 12 Gigafactories around the world, with an announcement in Europe likely following behind China.

Producing cars in China has been a goal of Tesla’s for a while. The company first confirmed that it was in talks with the Chinese government to open a factory there in the summer of 2017. It was said to have reached a deal later that year, but the Chinese government’s insistence that foreign automakers partner with local companies in order to manufacture cars inside the country reportedly stalled the deal.

Earlier this year, though, China announced plans to relax those rules regarding foreign manufacturers, starting with ones that make all-electric vehicles. Other major manufacturers, like GM and Ford, already produce cars in China under the joint venture rules.

Tesla has exported cars to China for years now, and despite the Chinese government’s 25 percent import tax on cars, the company was able to pull in $2 billion in revenue in 2017 alone. China moved to lower that import tax earlier this year, but Beijing wound up increasing the tariff to 40 percent in response to the spiraling trade war started by the United States. As a result, Tesla raised its prices in China earlier this week.

China holds great opportunity for Tesla, but we don’t know much about the fine print yet

Producing cars in China provides Tesla with a way around these tariffs, and it could help the company dampen the impact of any further escalation between the US and China. It also gives the company more direct access to its second biggest market in the world. Tesla will have to work with local governments and at least one state-owned company, though. According to a statement from the Shanghai Municipal Government, which was provided by Tesla, the company signed an “electric vehicle Investment Agreement with the Lingang Management Committee, [and the] Lingang Area Development Administration,” which are local development agencies, and the “Lingang Group,” which describes itself as a “state-owned enterprise” that invests in industrial development.

Still, Tesla says says it’s the sole investor and owner of the new Gigafactory, which raises questions about where it will get the money for such an endeavor, according to Jeffrey Osborne, a senior research analyst at Cowen. “With the tariffs in place, there probably is more urgency to announce something,” Osborne says. “But the key is how it gets financed in my view.”

Tesla has spent billions on the production of its first mass-market car, the Model 3, and with $2.7 billion cash on hand at the end of the first quarter of 2018, some analysts believe the company will need to raise more money before the year is through. Musk has denied this, citing an increase in Model 3 production, which he says will help the company turn a profit now that it has passed his goal of making 5,000 of them in one week. But it’s unclear if Tesla has been able to repeat that production rate since announcing the news at the beginning of July. Getting production up and running in China won’t be cheap, either. Goldman Sachs analysts recently pegged the price of building a Gigafactory there at between $4 and $5 billion.