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Tesla builds car factory in Shanghai



Shanghai

Tesla
Inc.


TSLA 1.91%

will build a factory in Shanghai, the city government announced Tuesday that a move to boost sales in the world's largest auto market should see US manufacturers subjected to political pressure to keep their jobs at home.

The manufacturer of electric cars will build a plant with an annual capacity of 500,000 vehicles, said the Shanghai authorities. Tesla CEO

Elon Musk

was in Shanghai to sign a memorandum of cooperation with Mayor

Ying Yong,

"We are pleased to have a strategic partnership with Tesla, and we welcome the development, manufacture and sale of all-electric vehicles in Shanghai," said the Shanghai government statement. The Shanghai authorities released pictures of Mr. Musk and the mayor who signed the deal.

In a prepared statement, a Tesla spokesman said it would take about two years for the factory to start producing vehicles, and another two to three years before the facility would reach its annual capacity of 500,000 vehicles. "Today's announcement will not affect our US manufacturing, which continues to grow," the spokesman said.

Tesla is undertaking something that no foreign automaker has attempted so far: building a factory and network of suppliers in China without support from a local joint venture partner to navigate China's bureaucratic maze.

The announcement also comes as the US and China intervene in a trade dispute and pose some risk to Tesla if the problems trigger a long-term consumption reaction against American products.

However, China also offers unsurpassed growth opportunities ̵

1; especially in electric vehicles – and building its own facility will allow Tesla to retain all the revenue it generates, rather than sharing it with a Chinese partner

James Chao,

Asia Pacific Automotive Director at

IHS Markit
.

"To produce in the market where you want to grow, that still has to be your long-term plan," Chao said. "The advantages clearly outweigh the disadvantages, they will be able to control the process much more accurately than a JV operation, giving them the freedom to build as they please."

China is already behind Tesla The United States, the second largest market, sold about 17,000 cars last year, compared to around 50,000 in the US and 103,000 worldwide]. But these volumes are relatively small, and building on-site instead of importing would allow Tesla to reach its full potential in China to realize where the sale of electric vehicles is growing rapidly, driven by government policy.

The Wall Street Journal reported last October that Tesla had reached an agreement with the Shanghai authorities to build a wholly-owned factory in the city, but formal confirmation of the agreement was slow to come under regulatory uncertainty.

Beijing finally confirmed its plans in April to phase out the rules that force foreign manufacturers to produce cars with Chinese partners in order to avoid high import tariffs. EV manufacturers are the first to benefit from the new policy and pave the way for Tesla.

Tesla already has at least one local ally with internet giants

Tencent Holdings
Ltd.

After spending $ 1.7 billion last year on a 5% stake in the EV maker, sourcing local capital to build the plant in Shanghai should not be a problem.

"If there was a chance for Chinese investors to go to Tesla, they would do it right away," Chao said.

Imported Tesla's became more expensive in China after Beijing hit a 40% tariff on cars imported from the US last week in retaliation for new US-imposed tariffs. This problem will not be solved in the foreseeable future: It will take three years before the locally produced Teslas roll off the production line in Shanghai, say auto analysts.

"Tesla could benefit from China's loosening of investment rules for the auto industry Many other industries remain limited, especially services," said

Kenneth Jarrett,

President of the American Chamber of Commerce in Shanghai. While Tesla might view China as "an indispensable market," other US companies could invest elsewhere, "if China does not open its market to fair competition," he said.

President

Donald Trump

Pressure on American manufacturers to invest in domestic production instead of building plants in China or Mexico. Last month, Mr. Trump publicly cursed the motorcycle company

Harley Davidson
Inc.

about plans to move some production from Kansas to Thailand. However, Tesla has no plans to relocate production from the US

. Musk turned directly to Mr. Trump

Twitter

in March for help to convince China to lower its then 25% duty on car imports, which he described as a "handicap" competing with lead shoes in an Olympic race ". China then granted Mr. Musk's request to lower his 15% duty on cars, only for Mr. Trump's decision to set tariffs on Chinese goods causing Beijing to raise its own tariff on US cars on 6 July.

Tesla still has his Ace card: Exceptional trademark in the Chinese market, reinforced by Mr. Musk's own celebrity.

"He's my hero," said

Huang Xianchang,

the manager of a Tesla store in Shanghai. Nine out of ten customers buy a Telsa because they are inspired by Mr. Musk's reputation as an innovator, Mr. Huang said, adding that Tesla has no real competition in the luxury EV segment.

This will change over time locally-built Tesla's will be sold by 2022, but analysts say the market's growth more than justifies Tesla's bet on China. Chinese customers will buy 3.5 million electric vehicles in 2022, IHS Markit predicts, compared to 580,000 the previous year. Chen Shengyi,

Anyone working for a trading company in Shanghai bought a Tesla Model S last year after driving an Alfa Romeo. Ms. Cheng said she would never exchange her imported Tesla for an EV built in China – including a locally assembled Tesla.

"I've heard that the quality of a foreign brand is deteriorating," she said. Huang said locally-built Tesla – most likely the Model 3 – targeted mass-market customers, while high-end imports would still be available to wealthier shoppers.

Write to Trefor Moss at [email protected]


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