Tesla confirms talks to build auto plant in Shanghai

Instead, Tesla will own the entire factory.

Shanghai is China's de facto automotive capital and a significant market for luxury vehicles of all kinds. Meanwhile, any cars shipped to the USA from the Shanghai factory would face a 25% tariff.

Shares of Tesla are up 0.76% in early Monday morning trading.

In a bid to gain traction in China's growing electric vehicle market, Tesla is setting up a manufacturing facility in Shanghai, according to the Wall Street Journal. 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. Despite being the first foreign vehicle maker to be granted the right of owning its own factory, it's unlikely that the company will be able to escape from the 25 percent import tariff. Could it be that the government was willing to do a deal with Tesla in terms of investment, employment, and local materials sourcing in return for no tariffs?

Neither Tesla nor Shanghai officials have yet confirmed report, but the automaker had previously said it was in discussions with the city and that it would have Chinese production plans "clearly defined" by the end of the year.

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Tesla will set up a manufacturing base in China without a local manufacturing partner in the country, sources close to the matter told The Wall Street Journal.

As WSJ points out, Tesla is still working out the details of the agreement. The move would be a major revision of a fundamental principle governing the country's auto industry policy since the 1990s that prohibits vehicle companies establishing operations in China without a local joint-venture partner. One of the options available is signing a joint venture, which means sharing their technology as well as profits with a partner in China.

Under current rules, the cars Tesla builds in the free-trade zone would still count as imports and incur the tariff. Negotiating with the Chinese government is not going to be an easy task.

It's hard for foreign auto makers to crack the Chinese market. According to a study published by the China Association of Automobile Manufacturers this week, Chinese buyers are expected to have purchased 700,000 electric vehicles by the year's end. Sales of EVs at BYD are even greater.

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