Investopedia/Deborah DSouza: Tesla Signs Deal to Build Wholly Owned Plant in Shanghai

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Tesla Signs Deal to Build Wholly Owned Plant in Shanghai

By Deborah DSouza | Updated October 23, 2017 — 6:15 AM EDT

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Electric car manufacturer Tesla (TSLA) has signed a deal with Shanghai to set up a manufacturing plant in the city's free-trade zone, according to a Wall Street Journal report published on Sunday. The stock is up 2 percent in pre-market trading on Monday.

People familiar with the matter said the facility will be wholly owned by Tesla, a first for any foreign auto maker with operations in the country. Tesla would not have to share its profits or technology with a Chinese partner. However, it would most likely have to pay China's 25% import tariff and would not qualify for local subsidies.

The timing of the official announcement is still being discussed, but a spokesman reiterated that production plans in China would be clearly defined by the end of the year. The deal would still need the approval of Beijing, noted The New York Times.

Tesla tripled its sales in China to over $1 billion in 2016, even though its cars cost roughly 50 percent more in the country than they do in the U.S. Import duties increase the cost and shipping adds another $3,600 to the price tag, according to the company. Last month, a Piper Jaffray analyst said China could become Tesla's biggest source of revenue if it is allowed to manufacture in the country without a partner. “Undoubtedly, authorities envision an army of Chinese companies emerging to dominate the global EV market. But dig deeper and the landscape appears less daunting," wrote Alexander Potter in a note to clients. "We find most of China's EVs are chintzy in comparison to Tesla's products … and realistically Tesla's most capable global peers are probably years away from releasing locally-built luxury EVs.” (See also: Tesla Will Thrive if China Relaxes Rules: Piper Jaffray)
In June, Bloomberg reported that the car company had signed a preliminary agreement with Shanghai's government. China is the world's largest electric vehicle market, with half a million electric cars and buses sold in the country last year. The government provides attractive incentives to buyers and producers. It has been keen to promote the technology because it is looking to reduce dependence on oil imports, and it has been struggling with severe air pollution. It is also eyeing global market dominance in the industry.
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