Tesla has secured a deal to become the first fully-foreign brand to build cars in China, announcing a deal with the Shanghai government this week.
The deal has been in the works for three years but comes as the trade war between the US and China heats up and has caught-out car makers who now face higher tariffs on their products in the world’s largest car buying market.
The introduction of the Chinese tariffs against US-made products has seen the cost of the brand’s Model S and Model X increase by more than $40,000 in some cases.
However, the move into China could also help alleviate the pressure on the company’s Fremont factory in California, which is its sole production facility producing the Model S, Model X and Model 3. Tesla CEO Elon Musk admitted in the recent past that it had been in “production hell” getting the factory up to speed to build its target of 5000 Model 3s per week.
The Chinese factory is expected to be operational in two years and, according to a Bloomberg report, could produce up to 500,000 cars per year at its capacity. However, that timing depends on when the company gets its final permits and approvals from the Chinese government to build a factory without a local partner. Previously all automotive brands had to form a joint-venture with a Chinese company to build and sell vehicles in the country but that regulation has now been relaxed.
Then there is the question of paying for the factory. Tesla hasn’t provided any details on how it will fund the new production line amid reports that it is burning through cash, reporting huge losses for six consecutive quarters as it ramps up Model 3 production.
The company also laid off nine per cent of its workforce in June in a bid to become profitable.
"Given that Tesla has never made an annual profit in the almost 15 years since we have existed, profit is obviously not what motivates us,” Musk wrote in an email to staff explaining the cuts.
“What drives us is our mission to accelerate the world's transition to sustainable, clean energy, but we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable."
While Model 3 production has finally increased, Tesla still has plans to expand its range in the short-term with the Semi, new generation Roadster and smaller Model Y SUV. It is unclear where the company will build those new models.