Elon Musk's China Factory--Now a Field, Soon a Plant--Aims to Pump Out Its First Tesla This Year

By Trefor Moss

SHANGHAI-- Tesla Inc. started construction of its new China factory, the first wholly foreign-owned car plant in the country and crucial to the Californian electric-auto maker's goal to scale up production.

With the ceremonial groundbreaking at the plant east of Shanghai on Monday, Tesla now faces a race to start local production to take advantage of robust demand for electric vehicles in the world's biggest auto market.

Chief Executive Elon Musk was on hand at the 210-acre site to press a button to "switch on" the plant, which at the moment is a field. Mr. Musk said he aims to build the plant "in record time." Initial production of the Model 3 could start by the end of the year, he said, with the factory "achieving volume production next year."

In China, Tesla has the opportunity to rev up, capitalizing on the government's support for electric vehicles and well-to-do Chinese car-buyers who are captivated by Tesla's technology and enamored of Mr. Musk's entrepreneurial risk-taking. At the same time, the plant is a costly gambit, some analysts said, especially if production delays pile up.

"It makes sense for Tesla to commit fully to becoming a leading EV brand in the world's largest EV market," said Bill Russo, chief executive of Shanghai-based consulting firm Automobility.

Tesla was the first foreign auto maker to take advantage of a recent rule change allowing foreigners to own their China business, instead of having to work with Chinese partners as previously required. That is a gamble, Mr. Russo said. "It will take billions of dollars to build a new footprint in China," he said. "As 100% owner, this burden falls on Tesla."

Sales for electric vehicles in China are thriving, topping 1 million for the first time last year, helped by government subsidies and other favorable policies. But the overall auto market is projected to have recorded an annual decline in sales last year for the first time in almost three decades, raising questions about the timing of Tesla's move.

China is central to Telsa's aim of graduating from niche startup to mainstream global auto maker. Tesla's existing plant in Fremont, Calif., is ramping up to produce 500,000 annual capacity. The Shanghai plant is designed to make another 500,000 cars annually--a massive step up for a company that sold fewer than 14,000 cars in China in the first nine months of 2018, according to LMC Automotive, which tracks the auto market. The plant will build the Model 3, and the yet-to-be-launched Model Y small crossover.

Tesla has poured resources into China even as President Trump piles pressure on U.S. auto makers such as General Motors Co. to manufacture more at home and less overseas. The trade fight between Washington and Beijing, however, has accelerated Tesla's plans for local Chinese manufacturing to reduce its vulnerability to trade disruption.

As the U.S. and China placed tariffs on each other's goods, Tesla's retail prices in China have yo-yoed. The company raised prices in line with China's imposition of a 25% tariff on U.S. autos in July, and then lowered them after its sales slumped, accepting a lower profit margin in return for restoring sales volume.

Tesla said last month it would cut prices again after China suspended its 25% tariff as part of a truce to try to end the trade dispute. A delegation of Trump administration officials opened two days of talks in Beijing on Monday to explore possible routes to a deal. If no deal is struck, the 25% tariff is supposed to be reimposed at the start of April.

Even without the trade penalties, imported Teslas still incur the 15% tariff that China levies on all foreign-built autos. Local production would enable Tesla to bypass the tariff entirely and reduce prices further in pursuit of volume sales. All of the major global auto makers build locally in China for that reason.

Being the first to go it alone will make Tesla a bellwether in the Chinese auto sector, as other companies weigh the costs and benefits of sticking with their established joint-venture partnerships.

Having control isn't likely to free Tesla from China's onerous bureaucracy nor safeguard its intellectual property, Mr. Russo warned. "Chinese authorities will likely try to influence everything from how Tesla stores customer data to its local supplier selections," he said.

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

(END) Dow Jones Newswires

January 07, 2019 08:08 ET (13:08 GMT)

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