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Tesla to build its first overseas “Gigafactory” in Shanghai
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Tesla has signed a landmark agreement with Chinese authorities to build its first overseas “Gigafactory” in Shanghai with an expected annual capacity of 500,000 vehicles. The project, announced as China begins to impose higher tariffs on American imports including electric cars in retaliation to Trump administration’s heavier punitive duties on Chinese goods, is known to be the biggest-ever foreign-funded manufacturing project in Shanghai.

In a bid to offset the cost of new tariffs, Tesla has recently raised prices of automobiles it sells in China by 20 percent. Although local production would enable the electric car maker to evade the duties, its expansion in China, now the second-largest market for the auto maker after the US, could hardly be achieved in short term.

According to a statement issued by the company, the construction of the Shanghai plant would take two years and then another two to three years would be needed to expand it to the expected production capacity.

China has become the largest market for electric cars, with analysts predicting that electric vehicle sales in the country will be further raised to realize the goal of 100-percent electric vehicles by 2030.

More than 28 million vehicles were sold in China last year, with annual sales expected to top 35 million by 2025. That would be more than double the size of the current US market, reported Reuters.

The Shanghai Municipal Government has long hoped to attract global automakers like Tesla which boast talent and cutting-edge technologies in the field, reported 36Kr.com, a Chinese news website focusing on technology and start-ups.

As early as in 2014, the electric car maker was granted favorable conditions to ‘settle down’ in Shanghai’s Pudong New Area. However, Tesla claimed its production capacity in North America were sufficient and it would consider setting up a plant in China five years later.

36Kr.com pointed out that the company had missed the best timing to enter the Chinese market, although it’s obvious that it did spend a lot of time convincing Chinese authorities to allow it to set up a wholly-owned factory in China. The market leader has apparently succeeded in its efforts to achieve this goal.

For a long period, foreign car makers were required to set up joint ventures with local partners and their shareholding was capped at 50 percent. Such rules would have forced Tesla to share a large amount of its profits and technologies with local Chinese partners, which has discouraged it from producing locally.

It’s widely reported by Western media that worries about the limit on foreign ownership and ensuing “forced technology transfer” accused by the Trump administration are claimed to be the main reasons for the US punitive duties on Chinese goods.

Earlier this year, the Chinese government announced to scrap foreign auto ownership limits phase by phase amidst escalation of trade tensions with the United States. The National Development and Reform Commission (NDRC), China’s top economic planner, announced on April 17, 2018 that foreign ownership cap in the automobile sector would be completely removed. To start with, the cap on foreign ownership in the new-energy and special purpose cars would be scrapped first in 2018.

Although opening up the market has been a long-standing policy, according to 36Kr.com the new development is interpreted by many observers as a move to “give Tesla a green light”. Later, Tesla made the high-profile announcement about the construction of the “Gigafactory” in China.

Elon Musk had thanked the Chinese government during a teleconference on May 2.

Musk previously said that Tesla will be cash-flow positive this year, although analysts believed it will try to gain financing for some new projects like launching an electric semi-truck, a pickup truck, and a compact SUV. The Shanghai Municipal Government has recently issued a statement, offering to provide help to the company in this respect. Meanwhile, the government vowed to give its full support for Tesla to build its Shanghai plant.

Several days ago, China raised tariffs on imported cars from the US to 40 percent. Based on a formula used by Tesla to calculate prices on cars it sells in China, local production of a Model X priced at 1 million yuan could bring the cost down by over 100,000 yuan.

Besides, the Yangtze River Delta where Shanghai is located is known to have housed the country’s many auto parts enterprises. After its plant was built, the company could also cut its cost on acquiring auto parts and transportation.

All in all, China’s huge market has proved to be a temptation that Tesla could hardly resist. The electric car maker nearly doubled its sales in 2017, exceeding $2 billion and accounting for up to 20 percent of its global sales.

At present, Model 3 is priced at $35,000 (or 230,000 yuan) in the US, while it’s forecasted the model’s price in China could range between 350,000 and 400,000 yuan. It’s obvious the localization of the production would lower its price in China and thus sharpen its competitiveness.

But for Chinese auto makers the move by Tesla doesn’t augur well. From product design to interactive experience, many Chinese players are just following the American market leader’s steps. Once it realizes local production in several years and lowers prices on models for the local market, the local players would be the first to feel the impact.  

 


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