Tesla’s Gigafactory 3 in Shanghai
Many businesses have been impacted by the ongoing trade war between the US and China. Automakers aren’t an exception. Duties impacted automakers’ profitability. Waning demand among Chinese consumers also impacted automakers. Tesla (TSLA) is building a Gigafactory 3 in Shanghai, China, to offset some of the tariffs and expand its reach. The Gigafactory 3 will be the company’s first manufacturing facility outside the US. Tesla wants to supply its most affordable Model 3 to Chinese consumers. However, the company will still import higher-end variants from the US.
Gigafactory’s timeline and expected completion
According to CNBC, in July 2018, Tesla “signed a cooperative agreement” with Shanghai authorities to “start building Gigafactory 3, a new electric vehicle manufacturing facility in Shanghai.” In October 2018, the company obtained the 210-acre land for the factory. The construction work started in January 2019. Tesla’s CEO, Elon Musk, expects the Shanghai-based factory to start producing the Model 3 by the end of 2019. The production will likely increase to full capacity by 2020.
Vital government acceptance certificate
On Tuesday, China’s Global Times reported that Tesla’s Gigafactory in China received “its first comprehensive acceptance certificate on Monday.” The company got approval three days after submitting the application. Telsa needed the certificate in order to start production. Overall, the Chinese government supported Tesla’s efforts to build a factory in China.
So far, the factory construction time has been impressive. If the company can ramp-up the rest of the construction and production at the same pace, many Tesla naysayers who doubted the factory construction might be in for a hard time.
How will Gigafactory help Tesla?
The factory should help Tesla avoid a large part of the tariffs. Electrek reported that the vehicles made in the Chinese factory will have a 15% most-favored-nation tariff. However, the tariff will be much lower than up to 40% tariffs on US vehicles in China. Tesla adjusted its prices in China multiple times due to the trade war and tariff changes. In Tesla Might Raise Prices in China Due to Yuan Uncertainty, we highlighted that the company might increase its prices in China.
Lower production costs in China
In addition to tariff relief, the production costs in China will be lower than the costs in the US. In a press release in 2018, Tesla mentioned that it’s “now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China.” In Why Ron Baron Remains a Firm Long-Term Tesla Bull, Baron said that in China, Tesla is “building for 70% less than it would cost for the same cars to build in the United States.” A local factory would give Tesla a huge competitive advantage and improve its profitability.
Why China’s auto market is important
China is one of the most important markets for US automakers outside the US. In the first half of 2019, Tesla recorded an increase of 42% in Chinese revenues. Due to China’s size and potential, legacy automakers including General Motors (GM), Ford (F), and Fiat Chrysler (FCAU) increased their focus on their Chinese businesses in the last few quarters.
On Tuesday, Walmart (WMT) sued Tesla. The solar panels on Walmart roofs have caught on fire. Tesla stock fell 1.5% after the news. To learn more, read Walmart Suing Tesla for Alleged Solar Panel Fires.