Tesla Motors is in discussions to establish a factory in Shanghai, its first in China, a move that could bolster its efforts in one of its major markets even as it further lifts China's position as a builder of electric cars.
In a statement on Thursday, Tesla said it needed to set up more overseas factories to make cars that customers could afford. Such a strategy is a must in China, which like India charges steep tariffs for imported cars.
''Tesla is working with the Shanghai Municipal Government to explore the possibility of establishing a manufacturing facility in the region to serve the Chinese market,'' a company spokesman said, according to The New York Times. ''Tesla is deeply committed to the Chinese market, and we continue to evaluate potential manufacturing sites around the globe to serve the local markets.''
''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,'' the spokesman said.
China announced this weekend that it would set a deadline for automakers to end sales of fossil-fuel powered vehicles, which would make it the biggest market to take such a step. (See: China mulling deadline for ban on fossil-fuel vehicles)
While the move will mainly boost local electric car companies, including BYD Co and BAIC Motor Corp, Tesla clearly does not intend to be left behind.
China accounted for about 15 per cent of Tesla's revenue last year, nearly double the percentage it contributed in 2015.
Shanghai city officials did not respond to NYT's requests for comment. Bloomberg News reported earlier that Tesla and Shanghai had signed a preliminary agreement.
Tesla's negotiations do not guarantee that a plant will be built. Under Chinese law, such a project would require Tesla to find a Chinese joint-venture partner. While China is full of Chevrolets, Fords and Volkswagens, most are made in factories jointly owned by a foreign automaker and a local company.
The City of Shanghai houses the SAIC Motor Corporation, one of China's largest automakers and a partner for General Motors and Volkswagen. It was not clear whether Tesla's negotiations with the city government would steer the company to negotiate with SAIC.
Tesla could get around the joint-venture requirement by building a wholly owned factory in a foreign trade zone in China. But it would still have to pay the 25 per cent import duty for cars sold in China, as the factory would be treated as outside China for trade purposes.
Further complicating matters, China recently announced that it would issue no more business licences to make automobiles, including electric cars. Tesla does not have a licence, although it could form an alliance with a company that has one.
These are formidable obstacles. But some in the Chinese auto industry say that the economics of producing in China - a low-cost supply chain, especially for electric cars, as well as the ability to bypass the import tariffs - make the proposition attractive.
For China, a domestic Tesla factory could represent a big symbolic victory. Spurred by incessant pollution and increasing dependence on foreign oil, China for the last several years has pushed to be a leader in electric car development.
That has raised concern in Western countries. In March, the European Union Chamber of Commerce in China complained that Chinese law requires manufacturers who set up shop in China to transfer crucial technology to their Chinese partners.
The complaint coincides with a broader debate over China's plan - called Made in China 2025 - to become self-sufficient in some technology industries. That plan has led to concerns that China will nurture and subsidise domestic competitors to Western companies.
Still, it is not clear what arrangements Tesla would make in China. The battery is central to electric car technology. Tesla has already invested heavily in its huge, $5 billion Nevada factory, called the Gigafactory, to produce batteries.
Tesla models carry a hefty price in China. The Model S ranges from 723,500 to 1,399,800 renminbi, or about $104,000 to $203,000. The same model retails for $70,000 to $140,000 in the United States, before government incentives.