What's next for planned Tesla Gigafactory in China?

A sales person attends his customers near the Tesla electric vehicles at a showroom in Beijing, Thursday, April 5, 2018. [Photo: AP/Andy Wong]

Debate is now underway in China, as to where in the country Tesla intends to open its new manufacturing facility later on this year.

Observers are suggesting the company is now being faced with a number of new factors to consider.

Tesla CEO Elon Musk said the company would announce the location for its Gigafactory in China later this year. The factory would become a new manufacturing base for Tesla's two mass-market electric cars, the Model Y and the Model 3.

Tesla currently exports cars to China from its plant in Fremont, California. The company accounts for around 9 percent of sales in China's booming electric vehicle market. Despite the popularity of the brand, for many young people, the high prices of the cars put them out of reach.

"For young adults like me, a Tesla is way too expansive," said one young man in Shanghai. "If Tesla can bring down the price, with its reputation, I do see it becoming more competitive," commented another. 

In China, domestic brands are in the driver's seat, with BYD and BAIC Motor occupying the top two spots in the electric vehicle market. Jiang Jun, General Manager at EVBUY, said that an overseas brand like Tesla might not be the first choice for the average Chinese consumer.

"For most customers, electric cars are something that is brand new to them. Many buyers don't have an adequate understanding of electric cars. Most of them would choose a local brand for their first purchase. Maintenance requests are usually responded to more quickly," said Jiang. 

Tesla sells 800 to 1,000 units a month on average in China, and its vehicles are subject to a 25 percent import tariff. By starting local production, Tesla can potentially lower its prices, as well as raise its profits.

But in April, President Xi Jinping vowed to lower import tariffs on cars, and lift limits on ownership for foreign automakers who want to manufacture vehicles in China. Dr. Xu Yun, a researcher at Shanghai's Academy of Social Sciences, says the company will have to consider this change carefully.

"I think Tesla will have to think twice and do their math again. If the Tesla Gigafactory is built in Shanghai's Free Trade Zone with a tariff exemption, they'll have to calculate the production capacity and the land price. It could be very costly and lots of work to negotiate with the Shanghai government. So there are a lot of cost factors to consider. If the import tariffs are lowered, given the high cost of building the plant, whether they keep importing or build a plant is something Tesla will need to do more work on to evaluate," said Xu. 

Dr. Xu said that Tesla's expansion into the Chinese market could be beneficial for the country, as it could increase competition with domestic brands, and provide a boost to the development of China's electric vehicle market.

China's Association of Automobile Manufacturers predicts that sales of fuel cell hybrid and battery powered vehicles could top 1 million units in 2018. China would then account for around half of the world's market in electric vehicles.