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Tesla to build China plant with goal of producing 500,000 cars a year

Still scrambling to sort out production problems at its electric car factory in California, Tesla is taking on another big challenge: building a vast new plant and development center in China.

[NEW YORK] Still scrambling to sort out production problems at its electric car factory in California, Tesla is taking on another big challenge: building a vast new plant and development center in China.

The automaker said Tuesday it had reached an agreement with Chinese authorities to build a battery and automobile factory in Shanghai — its first plant outside the United States — that would eventually be capable of producing 500,000 electric vehicles a year.

The company did not disclose how much it planned to invest in the venture, but it said it would be the sole owner. Other foreign automakers, including General Motors, Volkswagen and Toyota, have been required to form joint ventures with local partners to produce cars in China. But the Chinese government recently said it would ease that requirement.

Tesla said it expected to begin construction as soon as it had obtained the necessary approvals and permits. "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," the company said in a statement.

Setting up a plant in China will not be easy, and one of the toughest parts may be finding executives to manage the effort, said Ron Harbour, an auto-manufacturing expert at Oliver Wyman, a consulting firm. "They are trying to get going in California, so who are they going to send overseas to do the same thing?" he said. "That is the question in my mind. You usually want to get it right at home first."

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The investment in China is the latest initiative that Tesla's chief executive, Elon Musk, has announced with lofty ambitions, some of which he has fallen well short of achieving.

Two years ago, Mr Musk predicted the company's plant in Fremont, California, would churn out close to 500,000 cars by this year, but the effort has been hampered by overreliance on automated machinery and by production bottlenecks. By the end of June, about 40,000 had been delivered or were in transit.

Last fall, he unveiled a battery-powered semitruck that he said Tesla would begin producing by the end of 2019. The truck is now being redesigned, and no plans have been announced for a factory to produce it.

And Mr Musk has also promised that Tesla would produce a version of its first mass-market offering, the Model 3 sedan, costing US$35,000. So far, the only versions available sell for US$49,000 and up.

The Model 3 is a critical vehicle for the company. Mr Musk has said Tesla needs to be able to produce at least 5,000 Model 3 cars a week to become profitable in the second half of this year. Earlier this month, Tesla said it reached that level in the final week of June, after setting up a new assembly line in a giant tent just outside the Fremont plant.

Tesla has reported losses every year since it was founded in 2003. In recent months, analysts have become worried about its finances and the slow pace of Model 3 production. Moody's Investor Service downgraded Tesla's credit rating over concerns about how much cash the company is using up.

China is a key growth market for Tesla, and the world's largest market for electric vehicles. The government there subsidises and promotes the production and sale of electric cars as part of its efforts to improve air quality and cut tailpipe emissions.

Tesla began selling cars in China in 2013 and has set up 35 sales centres and some 1,200 charging stations in the country. It sold about 15,000 cars there last year, according to estimates by LMC Automotive.

Tesla said its Shanghai-based initiative would include a research-and-development centre and a sales operation. The local government said it would be the largest manufacturing project backed by foreign investment in Shanghai's history.

A Tesla spokesman said the plant would not affect the company's US operations and was not a response to the escalating trade dispute between the United States and China. But a Tesla factory in China is most likely not something the Trump administration wants to see.

The White House began a trade fight with China partly to discourage US companies from shifting operations there. The administration has argued that China often uses unfair methods to either encourage companies to move there or force them to give up or share technology with Chinese companies to access its market.

Even before the recent escalation in trade tensions, China's tariffs were an issue for Tesla. "The current rules make things very difficult," Mr Musk lamented on Twitter in March about the 25 per cent tariff on cars imported from the United States. "It's like competing in an Olympic race wearing lead shoes."

China later agreed to scale the tariffs back to 15 per cent, but in the most recent tit-for-tat, they were raised to 40 per cent. The price of a new Model S in China has risen by about one-fifth, to nearly US$130,000.

Chinese leaders, worried about skies choked with pollution and the country's growing dependence on foreign oil, have championed electric cars as a possible solution. A Tesla manufacturing plant in China could aid Beijing's effort to take a strong global position in producing electric cars and other technologies of the future, a vision outlined in the Made in China 2025 plan.

For Tesla, building cars in China would inoculate it against the effects of a trade fight and put the company close to China's huge automotive supply chain. Even more important, it would provide a firmer foothold in a potentially vast market. China is the company's second-largest market after the United States; its revenue there doubled to US$2 billion last year.

China has a number of electric-car makers, but they tend to make smaller, more affordable vehicles that lack the polish of Tesla's offerings. The American-made cars can frequently be seen in some of the more upscale areas of Beijing and Shanghai.


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