By Trefor Moss 

SHANGHAI -- Tesla Inc. will build a factory in Shanghai, the city government announced on Tuesday, a move expected to boost sales in the world's largest auto market but one that could also draw fire as U.S. manufacturers face political pressure to keep jobs at home.

The electric-car maker will set up a plant with an annual capacity of 500,000 vehicles, the Shanghai authorities said in a statement. Tesla Chief Executive Elon Musk was in Shanghai to sign a memorandum of cooperation with Mayor Ying Yong, it said, confirming that the facility will be wholly owned by Tesla.

"We are delighted to have a strategic partnership with Tesla, and we welcome the development, manufacture and sale of pure electric vehicles in Shanghai," the Shanghai government statement said. Telsa didn't immediately respond to requests for comment. The Shanghai authorities released pictures of Mr. Musk and the mayor signing the deal.

Tesla is doing something that no foreign auto maker has attempted before: Build a factory and a network of suppliers in China without the support of a local joint venture partner to help navigate China's bureaucratic labyrinth.

The announcement also comes as the U.S. and China lock horns in a trade dispute, posing some risk to Tesla if the issues should create long-term consumer backlash against American products.

Even so, China also offers unmatched opportunities for growth -- especially with electric vehicles -- and building its own plant allows Tesla to keep all the revenue it generates, instead of having to share it with a Chinese partner, said James Chao, Asia-Pacific automotive director at IHS Markit.

"To produce in the market where you want to grow, that's still got to be their long-term plan," Mr. Chao said. "The pros clearly outweigh the cons. They'll be able to control the process far more tightly than a JV operation. It frees them to build this the way they want to."

China is already Tesla's second-biggest market after the U.S., selling about 17,000 cars here last year, compared with roughly 50,000 in the U.S., and 103,000 globally.

But those volumes are relatively small, and building locally, rather than importing, would enable Tesla to realize its full potential in China, where sales of electric vehicles are growing fast, boosted by government policy.

The Wall Street Journal reported last October that Tesla had reached an agreement with the Shanghai authorities to build a wholly owned plant in the city, but formal confirmation of the deal was slow to come amid regulatory uncertainty.

Beijing finally confirmed plans in April to phase out rules that effectively forced foreign makers to manufacture cars with Chinese partners to avoid paying steep import tariffs. EV makers are the first to benefit from the new policy, paving the way for Tesla to move ahead.

Tesla does already have at least one local ally, with internet giant Tencent Holdings Ltd. having spent $1.7 billion on a 5% stake in the EV maker last year, and raising local capital to help build the Shanghai plant shouldn't be a problem.

"If there were an opportunity for Chinese investors to go into Tesla, they'd do it in a heartbeat," Mr. Chao said.

Imported Teslas just got more expensive in China after Beijing slapped a 40% tariff on cars imported from the U.S. last week in retaliation for new tariffs imposed by Washington. That problem won't be resolved any time soon: It will take three years for locally produced Teslas to start rolling off the Shanghai production line, auto analysts say.

"Tesla may benefit from China's relaxation of auto industry investment regulations, but plenty of other industry sectors remain restricted, particularly services," said Kenneth Jarrett, president of the American Chamber of Commerce in Shanghai. While Tesla may view China as "an indispensable market," other U.S. companies might invest elsewhere "if China doesn't open up its market to fair competition," he said.

President Donald Trump has put pressure on American manufacturers to invest in domestic production rather than build plants in places like China or Mexico. Last month, Mr. Trump publicly berated motorcycle company Harley-Davidson Inc. over plans to shift some production from Kansas to Thailand. Tesla, though, has no plans to move any production out of the U.S.

Mr. Musk appealed directly to Mr. Trump via Twitter back in March for help persuading China to reduce its then-25% tariff on auto imports, which he described as a handicap akin to "competing in an Olympic race wearing lead shoes." China then granted Mr. Musk's wish, lowering its tariff on autos to 15%, only for Mr. Trump's decision to place tariffs on Chinese goods inducing Beijing to hike its own tariff on U.S. cars on July 6.

Tesla still has its ace card: Exceptional brand cachet in the China market, boosted by Mr. Musk's own celebrity.

"He's my hero," said Huang Xianchang, the manager of a Tesla store in Shanghai. Nine out of 10 customers buy a Telsa because they're inspired by Mr. Musk's reputation as an innovator, Mr. Huang said, adding that Tesla has no real competition in the luxury EV segment.

That will have changed by the time locally built Teslas are on sale by 2022, but analysts say the growth of the market more than justifies Tesla's bet on China. Chinese customers will buy 3.5 million electric passenger cars in 2022, IHS Markit forecasts, up from 580,000 last year.

Chen Shengyi, who works for a trading company in Shanghai, bought a Tesla Model S last year, having previously driven an Alfa Romeo. Ms. Cheng said she would never swap her imported Tesla for an EV built in China -- including a locally assembled Tesla.

"I've heard that when a foreign brand is localized, its quality deteriorates," she said.

Mr. Huang said that locally built Teslas -- most likely the Model 3 -- would be targeted at mass-market customers, while high-end imports would still be available to more affluent buyers.

--Chunying Zhang contributed to this article.

Write to Trefor Moss at Trefor.Moss@wsj.com

 

(END) Dow Jones Newswires

July 10, 2018 10:08 ET (14:08 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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