According to the news article by Bloomberg, Tesla Inc. has reached an initial agreement with the government of Shanghai to construct a factory that will be even bigger that US plant, making this the biggest step that the company has taken in its overseas expansion plans.
The work on the new factory will begin as soon as Tesla secures all the necessary permits. According to an emailed statement, this plant will be designed to produce 500,000 electric cars per year in the next two to three years. However, the neither the company nor the Shanghai government revealed any details on how much this new plant will cost.
Musk has stated two years ago that he was expecting that output level from the Tesla plant in California by 2018. However, the company had been unable to meet that target due to multiple delays and roadblocks to the Model 3 production.
The MoU (Memorandum of Understanding) with the Chinese government is a big win for Tesla, especially after the company has spent more than a year struggling to become the first wholly owned foreign company in China.
This agreement has become even more important now due to the escalating trade war between the US and China, where cars being imported into China are going to be heavily taxed. Like Tesla, Harley-Davidson Inc. is also looking at expanding its operations outside the US, following the increasingly tense situation in trade.
Last week, the US imposed even more tariffs on Chinese goods being imported into the country. In retaliation, China has increase the import duty on American made cars to 40%, the result of which is that Tesla has had to increase the price of its cars being exported to China. Now, the price of the Model S sedan and the Model X crossover has skyrocketed by more than $30,000 in Beijing. This means that Tesla cars are now too expensive for most customers in China, the company’s number two and also biggest growing market.
Thus, the agreement with the Shanghai government to explore options in local manufacturing becomes even more critical. This will not only reduce the cost of manufacturing, but it will also eliminate the cost of shipping the vehicles to China.
China is a huge opportunity for car makers across the world. This is because the Chinese government is actively promoting the adoption of new-energy vehicles and is taking measures to ensure that vehicles run on fossil fuels will eventually be phased out completely.
New energy vehicles include plug-in hybrid, battery powered and fuel-cell type vehicles. The market for these vehicles is growing exponentially, and according to data from the China Association of Automobile Manufacturers, sales crossed 777,000 units in 2017 and that number is expected to reach 1 million in 2018. The Chinese government is looking to push sales of new energy vehicles to at least 7 million per year by 2025.
In 2017, Tesla sold 14,779 of its electric cars in China, which is about 3% of the total electric car market in the country. This figure also places the American company in tenth position in the electric vehicle segment. For the company, though, China sales accounted for 17% of its revenue in 2017.
Tesla’s shares went up by 2.9% in trading in New York after this announcement was made. So far, for the year, the company’s stocks are up by 3.7%.
Tesla has been struggling to ramp up and mass produce its electric vehicles. It is imperative that the company do so, so that it can sustain itself financially and also achieve CEO Elon Musk’s dream of moving the world towards battery powered vehicles.