TSLA Tesla Inc

SHANGHAI -- Tesla Inc. plans to build its Model Y compact sport-utility vehicle in China, the electric-car maker said Tuesday,in a move to expand the company's capabilities as it seeks to grow in the world's biggest auto market.

The Palo Alto, Calif., company said Tuesday that it is starting work related to production of the Model Y at Gigafactory Shanghai, Tesla's first overseas plant. The company didn't elaborate on the nature of the work being conducted, but Tesla's Chinese website said that the first Model Ys could be produced as early as 2021.

Unlike the Model 3 sedan, which Tesla has been producing at its Shanghai plant for several months, the Model Y, introduced at a March event in California, is an SUV -- a popular vehicle segment both in China and the U.S.

The Model Y targets a broader spectrum of buyers and holds the key to increasing Tesla's production volumes -- as well as Chief Executive Elon Musk's ambitions to transform Tesla into a mass-market car company.

"Probably even more people prefer an SUV than a sedan," Mr. Musk said at a Tuesday event, which took place exactly a year after the Shanghai plant's groundbreaking. "Ultimately, Model Y will have more demand than probably all of the other cars of Tesla combined."

At the ceremony, an ebullient Mr. Musk sashayed on stage as he peeled off his suit jacket, tossed it aside and unleashed a few dance moves. He then greeted 10 customers who had purchased Tesla's made-in-China Model 3.

Tuesday's handover came after last month's delivery of Tesla's first batch of 15 Shanghai-produced Model 3 sedans to customers, all of whom were Tesla employees.

Mr. Musk also said Tesla plans to build a design-and-engineering center to develop China-designed vehicles for the global market. "We intend to continue making a significant investment and increasing the investment in China," he said.

Mr. Musk's confidence mirrors rising investor faith in Tesla, following many challenges that weighed on the company last year. Those included Model 3 production troubles and investigations by the Securities and Exchange Commission over Mr. Musk's tweets.

While adding the Model Y to the Shanghai plant's production models increases the company's range in China, it also adds to the manufacturing pressure Tesla faces there. The car maker struggled with production of its Model 3 at its Fremont, Calif., plant after the sedan's launch in 2017.

Tesla has a production capacity of 150,000 vehicles at its China plant, though it says it ultimately plans to build 500,000 vehicles a year in Shanghai. Producing vehicles locally helps Tesla save on shipping costs and avoid tariffs. Tesla doesn't disclose how many vehicles it sells in the country, but LMC Automotive estimates that the company sold 16,360 imported models in China last year.

Tesla's Chinese website lists the Model Y's estimated starting price at 444,000 yuan ($64,000). The company is awaiting regulatory approval to complete the pricing.

In China, the Model Y is likely to compete both with SUVs made by Chinese electric vehicle startups and with foreign luxury SUVs sporting conventional engines, said Yale Zhang, managing director of Shanghai-based consulting firm Automotive Foresight.

One domestic rival, the Chinese startup NIO Inc.'s EC6 coupe-SUV, was unveiled last month, with delivery set to begin in September. Luxury SUVs such as Audi AG's Q5, Bayerische Motoren Werke AG's x3 and Daimler AG's Mercedes-Benz GLC could also face competition from the Model Y, Mr. Zhang said.

--Yin Yijun and Yoko Kubota

(END) Dow Jones Newswires

January 07, 2020 07:49 ET (12:49 GMT)

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