Tesla commits to 500,000-car factory in China as tarrifs kick in

Image Source RUNGROJ YONGRIT  EPA-EFE  REX  Shutterstock

A day after it announced price hikes for the Model S and Model X in China, in response to new tariffs on imported electric cars in the country, Tesla has finalized a deal to build a new factory in Shanghai, according to a Bloomberg News report.

Tesla CEO and wannabe cave diver Elon Musk was in Shanghai on Tuesday to secure a deal with Chinese authorities to build an ambitious new vehicle plant, Tesla's first outside the U.S., and a sign that President Trump's rapidly-escalating trade war might be having an unintended effect.

An announcement by Shanghai's government said an agreement had been reached to build the plant in the commercial hub's Lingang district.

Tesla chief executive Elon Musk will meet with Chinese officialsBeijingnghai and Baijing this week.

Tesla has had an eye on China for a while now, with talks to build a factory in Shanghai first heard about back in June 2017. A Tesla representative in China didn't immediately respond to a request for comment.

Tesla (NASDAQ:TSLA) shares tumbled below $300 in early trading Thursday, July 5, to bring their three-day loss to almost 17%, as several Wall Street firms remain skeptical about the quality of the carmaker's Model 3 cars and its ability to meet weekly production targets profitably. Musk added that he wants the Tesla factory to add to what he called "the beauty and energy of Shanghai". A Tesla spokesperson said in a prepared statement that after the plant opens, it would take an additional two to three years to sniff that mark of 500,000 vehicles manufactured annually.

Musk's visit to China and a potential deal on a Chinese factory for Tesla is coming at a crucial moment for the U.S. EV maker, which has reportedly had to significantly raise the retail prices of the vehicles it sells in China, due to the latest tit-for-tat trade tariff spat between the United States and China.

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At the top of the range, the most expensive Model X crossover is now 1.57 million yuan ($240,000) up from about 1.32 million ($200,000) before.

The youngest publicly held USA automaker is looking to expand its capacity and to more efficiently reach global markets.

Global automaker Daimler (DDAIF) warned last month that the new Chinese tariffs would hit its profits, resulting in "fewer than expected SUV sales and higher than expected costs", which won't be completely passed on to customers.

Tesla sold 14,779 vehicles in China a year ago, according to data from LMC Automotive. The company ships more than 15,000 cars a year to China.

China has emerged in recent years as the world's largest market for electric vehicles. Musk's company got around the encouraged/required partnership with a local Chinese company by opting to build in Shanghai's free trade zone.

By building another factory in their second-largest market, Tesla could bypass the tariff war between the U.S. and China.

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