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Tesla's Shanghai Factory is Gearing Up to Start Mass Production of the Model 3

Tesla's Shanghai Factory is Gearing Up to Start Mass Production of the Model 3

Author: Eric Walz   

A little over a year ago, electric automaker Tesla announced that it would built a factory in China, its first outside of the U.S. Over the past six months, construction of the factory has continued at a rapid pace, with the first Model 3s expected to roll off the assembly by the end of the month.

The $2 billion Shanghai factory is important for Tesla. By building cars in China, Tesla will avoid steep import tariffs in the world's biggest auto market. Shanghai authorities have even offered the electric automaker extra assistance to speed up construction, and China excluded Tesla models from a 10% car purchase tax on Aug. 30.

Tesla CEO Elon Musk has publicly praised China in the midst of trade tensions with the U.S. and thanked the Shanghai and national governments for their support.

The factory is the first wholly-owned auto production plant to open in China without a Chinese partner. In 2018, Beijing began to relax rules limiting automakers to no more than a 50% ownership in any joint venture with a Chinese automaker in an effort to become the world's leading producer of EVs.

Tesla aims to produce at least 1,000 Model 3s a week from the new factory by the end of this year. However, its still unclear if Tesla will hit its year-end production targets due to issues over orders, labor and suppliers, sources with knowledge of the matter said to Reuters.

The plant's production schedule is crucial for Tesla's hopes of reaching its total production rate at an annualized 500,000 vehicles by the end of this year.

"We aim to start some production in October, but the actual production volume depends on many factors including car orders we received, performance of newly hired workers, supply chain and so on," a Tesla source told Reuters.

Tesla has begun a new phase of construction at the factory in a sign of confidence in its strategy to break into the Chinese market. The automaker added additional facilities to produce battery packs, according to a company source and documents viewed by Reuters.

The expanded construction plans includes a production workshop and an energy center, the documents showed. Construction of the new facilities is scheduled to be completed by year end.

Tesla's website currently lists job openings for production workers, quality control inspectors and other staff for the Shanghai factory.

shanghai 3.PNG

A picture of Model 3s inside Tesla's Shanghai factory was posted on Chinese social media this week by an anonymous source.

Tariffs and the U.S.-China Trade War

The factory is opening amid growing tensions in U.S.-China trade war and China's cooling auto market. Sales of new energy vehicles (which include hybrids and EVs) slowed for a second month in a row in August, and are expected to reach 1.5 million vehicles, down from a previous forecast of 1.6 million, according to an industry association.

Despite China's cooling auto market, Tesla's vehicles remain widely popular there, Sales of the Model 3 rose 98% in the first seven months on strong demand, according to research firm LMC Automotive. All of the company's Model 3's are currently produced in Tesla's Fremont, California factory and shipped to China.

However, customers in China already pay a premium for the Model 3 even without the looming 40% tariffs. The Model 3 starts at 328,000 yuan ($45,884). Customers wanting a dual-motor Model 3 Performance will have to shell out 509,900 yuan ($71,330). For comparison, the top-of-the-line Model 3 Performance starts at $47,315 in the U.S.

The additional 25 percent tariff on U.S. made autos is set to resume Dec. 15, and that's on top of the 15% tariff that already levied, China said. 

China temporarily suspended the extra 25% tariffs on autos as a goodwill gesture so the two sides could resume trade talks. However since May 2019, the U.S. and China have yet to reach an agreement on trade and the trade war has only escalated since then.

Last month, China said that it will impose additional tariffs on a total of $75 billion of U.S. goods in retaliation for the Trump administration's additional tariffs on over $300 billion worth of Chinese goods.

On Sept 11, CNBC reported that President Trump will delay increasing tariffs on $250 billion worth of Chinese goods from Oct. 1 to Oct. 15 as a "gesture of good will" to China. On Twitter Trump said the postponement came "at the request of the Vice Premier of China, Liu He, and due to the fact that the People's Republic of China will be celebrating their 70th Anniversary."

For Tesla, the possibility of a 40% tariff on autos can be avoided when the automaker starts producing cars at the new factory, giving Tesla an edge over its competitors, including German automaker BMW, one of Tesla's biggest rivals in China. BMW imports the popular X5 SUV to China from its South Carolina factory. If no trade deal is worked out, tariffs on U.S. autos will rise on Dec 15, giving Tesla a big advantage in the market.

The Shanghai factory, which Tesla says will be more efficient and cost-effective than its existing Model 3 assembly line in California, will have 500,000 units of annual capacity after the second phase is completed, doubling the initial capacity of 250,000 vehicles.

State partners for the construction of the Shanghai Gigafactory project include Shanghai Construction Group, China Construction Industrial & Energy Engineering Group, State Grid and Power Construction Corporation of China.

Eric Walz
Eric Walz
Originally from New Jersey, Eric is a automotive & technology reporter covering the high-tech industry in Silicon Valley. Eric has over 15 years of automotive experience and a bachelors degree in computer science. These skills, combined with technical writing and news reporting, allows him to fully understand and identify new and innovative technologies in the auto industry and beyond. He has worked at Uber on self-driving cars and as a technical writer, helping people to understand and work with technology. Outside of work, Eric likes to travel to new places, play guitar, and explore the outdoors.
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