Tesla to Build Plant in China

Tesla has moved closer to being the first foreign automaker to have a manufacturing operation that is wholly owned in China. This deal could put to the test the relationship norms between the government of China and a foreign carmaker.

For Tesla as well as other manufacturers, production options in China have been limited by the central government. One of the options available is signing a joint venture, which means sharing their technology as well as profits with a partner in China.

The other is manufacture in China, while protecting secrets but paying large tariffs.

Automakers usually enter into a joint venture. The fact Tesla is entering into a different deal is a reflection of the global ambitions of China to dominate the electric-vehicle industry.

The company entered into a preliminary deal with the municipal government of Shanghai that would give the automaker ownership of its manufacturing facility, said two people who are familiar with the dealings.

This operation would be inside one of China’s free-trade zones, said the people familiar with the situation, who have requested anonymity.

By being located within foreign free-trade zone, Tesla is able to negotiate special exemptions, although the vehicles could still have to pay steep tariffs like being treated as though they had been shipped from another country even though they were made in China.

The preliminary agreement offers Tesla control over trade secrets it has and might give it leverage to negotiate terms that are more favorable with the government of China down the road.

Tesla is hoping to complete this deal before the end of 2017.

Any arrangement would need the approval of Beijing. The authorities in Beijing have used their power at times to delays deals or to demand more concessions from foreign companies investing in China.

Persuading Tesla to manufacture cars within Shanghai, while at the same time pay tariffs on the same, would be a big coup for the government.

If the carmaker were making its vehicles in the Shanghai area, there would be a strong incentive for it to purchase parts in China, which strengthens the suppliers’ base in the country, for the rapidly growing industry of electric cars.

China has the world’s biggest market for electric vehicles. The dominance it has is due to the extensive subsidies the government offers, part of its broader plan of shifting from vehicles powered by fossil fuels.

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