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Tesla eyes Shanghai factory as electric car company looks to expand manufacturing base

Alan Tovey
Tesla founder Elon Musk has said adding global factories could cut the cost of his electric cars

Elon Musk’s Tesla electric car company is reported to have struck a deal with Chinese authorities to build a factory in Shanghai, opening up the world’s largest automotive market to the fast-growing business.

Tesla is reported to have agreed to set up a plant in the city’s free-trade zone. This will be a first for Western manufacturers who have so far had to partner with a Chinese business to establish manufacturing operations in the country.

Billionaire Mr Musk has previously hinted that building Tesla cars in China could reduce their price by a third, with local taxes and shipping costs meaning they cost up to 50pc more than identical vehicles sold in the US, where the company currently has its only production line.

Such a deal would likely reduce Tesla’s manufacturing costs, though it would still have face the 25pc import tax levied on foreign vehicles sold in China.

However, it would allow Tesla to maintain control of profits and crucially its electric car technology and manufacturing processes, without the worry that proprietary information could leak out into Chinese industry.

cars Tesla Model 3 explainer puff

China is the world’s fastest-growing market for alternatively fuelled vehicles (AFVs) – a category which includes Tesla’s battery-powered cars – as the Beijing government looks to reduce pollution in the country’s smoggy cities.

Last month the Chinese government said all car manufacturers in the country will have to produce some electric vehicles by 2019, with the state offering subsidies to encourage their development.

Some forecasts suggest demand for AFVs in China could hit between 6m and 7m a year by 2025, with two-thirds of these being all-electric.

The Chinese government is encouraging development of electric cars to reduce pollution in the country's cities Credit: Getty

The country is already the world’s largest automobile market with 25.5m cars and light commercial vehicles sold there in 2016, out of global total of 84.2m.

Tesla refused to confirm that it would build a factory in China, saying only that was “working with the Shanghai municipal government to explore the possibility of establishing a manufacturing facility in the region to serve the Chinese market”.

The company has previously said it “expected to more clearly define our plans for production in China by the end of the year”.

Tesla said it was “deeply committed to the Chinese market” and continues to look at opportunities "to establish manufacturing sites worldwide to serve local market".

In a nod to the financial advantages of establishing a Chinese factory, a spokesman for Tesla added: “While we expect most of our production to remain in the US, we do need to establish local factories to ensure affordability for the markets they serve.”

Tesla Model 3 in pictures

The company produced fewer than 100,000 vehicles last year and is a relative minnow in the sector, especially when compared to giant such as Ford which delivered 6.6m vehicles over the same period. 

Despite its small size – and massive losses – Tesla is an investor favourite and seen as likely to be a winner in the industry which is facing more change over the next few years than in the past century thanks to technology such as electrification and self-driving systems.

For this reason Tesla has a market value of $57.6bn (£43.6bn), compared with Ford at $48bn.