Tesla Gigafactory 3: A Step Closer to Model 3 Production

Tesla (TSLA) is one step closer to producing China-made Tesla Model 3s through its China Gigafactory, also known as its Gigafactory 3. It has received comprehensive acceptance of the site from Chinese officials. Before we discuss this achievement in detail, let’s see how the production at Tesla’s Gigafactory 3 will help it address some of its issues, including trade war tariffs and higher production costs.

Tesla is trying to move one step away from the ongoing US-China trade war by expediting the building of its Gigafactory 3. The company has had to adjust its car prices in China several times in the last few years due to the changing tariff structure and trade war uncertainty. Most recently, on August 29, Tesla increased its car prices in China due to Chinese yuan–related uncertainty.

Other US and foreign automakers are also struggling to operate successfully in China amid rising trade tensions and weakening demand. In 2018, Ford’s (F) China sales fell 14.3% YoY (year-over-year), while General Motors’ (GM) sales fell 9.8% This year hasn’t been any better in terms of revenue or profitability for these companies.

Tesla, however, is trying to avoid tariff-related issues through its China Gigafactory. At this facility near Shanghai, Tesla is expected to start producing Tesla Model 3s in the fourth quarter. This local production is expected to benefit Tesla in two main ways.

First, the production cost for Tesla’s Model 3 in China is expected to be much lower than in the US. Secondly, Tesla will be able to avoid tariffs on importing these vehicles into China. Currently, Tesla imports all the vehicles it sells in China. Investors should, however, note that the company’s other models will still be imported and subjected to tariffs. We’ve detailed Tesla’s plans for its China Gigafactory in Could Tesla’s China Gigafactory Be Its Secret Weapon?

Last year, Tesla said it was “operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China.” The company expects its manufacturing costs in China to be lower because it’s made optimizations and learned from its experiences in US manufacturing. Labor and supply costs are also lower in China than in the US. Moreover, the Gigafactory 3 is expected to be more efficient than Tesla’s Fremont facility.

As reported by Teslarati, Tesla will perform vehicle assembly, produce batteries, and drive units at one site at the Gigafactory 3. In comparison, the same process is split between its Fremont and Nevada facilities in the US. This process is also expected to drive efficiencies for the company.

The progress at Tesla’s Gigafactory 3 has been impressive. Tesla signed a cooperative agreement with Chinese authorities to build Gigafactories in July 2018. It obtained the land for the plant in October 2018. In January 2019, it started construction. After only eight months, Tesla had ramped up the facility to a level that left analysts and Tesla bears surprised. On August 19, the Gigafactory 3 received its first comprehensive certificate. In a record achievement, the company received the certificate within just three days of applying for it.

Now, the factory has achieved yet another milestone. According to Beijing News Finance, on September 12, Tesla held a meeting regarding Phase I of its Super Factory Project. During this meeting, the Gigafactory 3 achieved comprehensive acceptance. As a part of this process, “Each professional line has checked and accepted the project site and verified the relevant construction materials on the site, and agreed to pass the acceptance.” This acceptance brings the plant one step closer to producing China-made Model 3s.

As per Teslarati, as inspections for the Phase 1 have been completed, Tesla could start the trial production runs of Model 3 soon. Another benefit that Tesla may have received through its Gigafactory 3 is the exemption from a 10% purchase tax in China. According to CNN, 34 carmakers are exempted from this tax. The exemptions, however, mostly apply to cars made via joint ventures between Chinese and foreign automakers. Tesla is the only solely foreign-operated company that has received it. We discuss this topic in more detail in China Did for Tesla What Trump Didn’t.

Along with this exemption and domestic roll-out of Model 3s, the cost of ownership for Tesla’s cars is expected to come down significantly in China. The decrease should help the company achieve its volume and margin goals in the country. Market observers have long dismissed the potential of Tesla’s Gigafactory 3. However, with its impressive ramp-up, the market might finally have to give Tesla credit where it’s due.