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Tesla's next move in Chinese market: Localization of production

Tesla Model S at the Tilburg factory in Holland. Photo:

Although Shanghai Lingang Holdings Co and Shanghai Electric Group Co refuted a rumor that the two Chinese companies will be involved in Tesla's renewed plans to make its electric cars in Shanghai, the US electric-car maker still announced in a statement that it is working with the Shanghai government to explore the possibility of establishing a manufacturing facility in the region to serve the Chinese market.

Since entering the Chinese market in 2014, rumors about Tesla's selection of a location and local partners for a manufacturing facility in China have been afloat. But the rumors did not prove to be true. And Tesla's latest statement that it is in talks with the Shanghai government to manufacture its electric cars once again indicates its strong intent to localize manufacturing in the country, the world's largest and most lucrative auto market.

Growth momentum

If allowed by the authorities to open a factory in China, Tesla can steer clear of the hefty import tax and cut the transportation fees and purchase tax, which in turn makes its premium electric sedans more affordable to the Chinese buyers, thus theoretically helping it increase sales in the country.

Currently, the Chinese government imposes an import tax of 25 percent on Tesla cars, making the price tags of the Model S sedan and Model X sport utility vehicle sold in China much higher than that in the US. The sticker price for the most simple Model S in China is $104,972, compared with $69,500 in the US.

However, with the growing popularity among the status-conscious, wealthy Chinese consumers and helped by its efforts to open service centers and roll out fast-charging stations, Tesla made $1 billion in revenue from China in 2016, accounting for around 15 percent of its total revenue and tripling the figure from 2015.

The impressive figure will boost Tesla's ambition to establish a local factory to ensure affordability for the Chinese market, the automaker's second-largest market after the US, as its Chief Executive Elon Musk is committed to producing 500,000 cars a year by 2018.

Meanwhile, the move coincides with the Chinese government's bid to make new-energy vehicles a strategic emerging industry and increase the annual sales of plug-in hybrids and fully electric cars by 10 times in the next 10 years. As for Beijing, the local government has excluded the potential all-electric-car buyers from the car plate lottery, which is held once every two months, to encourage more applicants to purchase new-energy cars in the capital that is notorious for its persistent smog.

Yang Shuai, an analyst of the auto industry, said that the rumors that Tesla is considering the establishment of a manufacturing plant in China reflect the electric-car maker's determination to accelerate its localization in China. "It is certain that Tesla will open a local factory in China, but when and where the factory will be built is uncertain," Yang said.

Cui Dongshu, secretary general of the China Passenger Car Association, predicted that Tesla's sales in China would be boosted if it can localize manufacturing in the country, where sales of new-energy cars are expected to reach 2 million in 2020.

In March, China's technology giant Tencent paid $1.8 billion to acquire a 5 percent stake in Tesla in a deal that came as Tesla was planning to raise more cash for the production of the Model 3 sedan, a relatively low-cost electric car model that Tesla wants to use to penetrate the mass market.

According to trade blog CleanTechnica, Tesla's share of the Chinese electric car market remained marginal at just 2 percent as of June 2016.

Reaction from domestic players

If the production of the Model 3 sedan is localized, it would pose a big challenge to some domestic players such as BYD Auto and Chery Automobile which dominate the Chinese electric car market. The Tesla Model 3 sedan is priced at about $35,000 in the US, a more affordable price point for many Chinese white-collar workers.

In response to it, some Chinese electric car makers have started to take action.

Recently, Beijing Automotive Group launched its all-electric car EU400 with long battery life that enables the vehicle to run 460 kilometers nonstop. Helped by the government subsidies, the carmaker set the price of the EU400 at 158,900 yuan.

According to Liu Weidong, a vice general manager of Dongfeng Motor, a Chinese carmaker, the company will invest more in areas of power assembly and technologies of material and new energy in the next decade.

Dongfeng has made a huge progress in application of technology in car making, and the next five years will see a technological revolution in the auto industry that the past 20 years did not experience, Liu said. "As for car manufacturers, the biggest pressure comes from the ability to develop new technologies," Liu said.

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