With Shanghai Factory, Tesla Hopes to Gain Ground in China's Electric Car Market

According to a new report from The Wall Street Journal, electric car maker Tesla Inc. TSLA reached a deal to begin building a factory in Shanghai’s free trade zone, which is the first Hong Kong-like free trade area in mainland China.

This particular kind of arrangement marks the first for a foreign automaker, and will allow Tesla to grow its footprint in the quickly-evolving Chinese electric car industry. The WSJ notes that Tesla would still have to pay the 25% import tariff, but the company would be able to retain full control, and could offset the tariff with lower shipping and production costs.

Tesla originally confirmed that it was talking to Shanghai’s government back in June about building a manufacturing facility. And apparently, CEO Elon Musk has been wanting to build a factory in China for a while now, believing that a locally-based Chinese plant could cut production expenses by as much as a third.

While the Silicon Valley giant has been selling its electric vehicles in China for years, sales have never really taken off, as the country has pretty strict rules for foreign automakers looking to sell.

Current rules state that foreign automakers must partner with local companies and brands for domestic production; General Motors GM has a joint venture with Shanghai’s SAIC Motor Group, for example, while Ford F is partnering with Chongqing-based Changan Automotive. There’s also the tariff mentioned above imposed by the government, as any good coming into the domestic market from a free-trade zone is considered an import.

However, Chinese officials have recently considered relaxing some of these rules as the country seeks to boost its own electric vehicle market. According to Bloomberg, the Chinese government debuted a new set of emission rules last month that would require all carmakers to produce zero- and low-emission vehicles beginning in 2019. This, in addition to a pledge to bump up plug-in hybrid and electric car sales, could be just the thing to push more Chinese consumers into buying a new Tesla.

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