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Tesla to Build 500,000 Cars Annually at German Plant

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Tesla (TSLA) is reportedly aiming to build 500,000 electric cars annually at its newly planned factory in Germany. Citing reports of German newspaper Bild, Reuters revealed yesterday that Tesla would open a facility in the outskirts of Berlin.

Tesla plans to invest approximately $4.41 billion in the factory to build its Model 3 and Model Y vehicles, reports Reuters. Citing planning documents, Bild revealed that the facility would be as large as 420 soccer pitches, and create 10,000 jobs. The construction of the factory is likely to begin in 2020 and expected to get completed by the end of 2021.

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Tesla’s fourth Gigafactory

The German facility is set to be Tesla’s fourth Gigafactory. Tesla’s first Gigafactory, in Nevada, produces lithium-ion batteries. Its second Gigafactory, in Buffalo, New York, makes photovoltaic cells for solar roofs. At its third Gigafactory in China, the company builds its Model 3 sedans.

The latest revelations by Bild show how aggressively Tesla is moving toward building its first factory in Europe. Last month, Tesla CEO Elon Musk announced that the company had chosen a site in Grünheide, Brandenburg, for its new facility. And within a month, reports state that the facility might be building vehicles by late 2021.

Tesla’s mega plans for Germany depict the rising demand for its Model 3 electric vehicle. Notably, the Model 3 is Tesla’s bestselling car to date. Moreover, Musk thinks that the Model Y, which was launched in March this year, has the potential to become the company’s most popular car.

The Model 3 costs between 43,000 euros and 62,000 euros in different parts of Europe for different models. However, the company hasn’t set prices for the Model Y in the European market yet. Tesla plans to launch the Model Y in fall next year.

Tesla might raise the Model 3’s price in China

In another report, Reuters has stated Tesla might raise the Model 3’s price in China. According to Reuters, the increase would apply to imported Model 3 versions with longer range and higher performance. However, the report didn’t disclose how much Tesla might hike prices.

The longer-range and high-performance variants are currently available at 439,900 Chinese yuan and 509,900 yuan, according to Reuters. The reported price hike for the Model 3 would be the second hike in China this year. In August, Tesla raised the price of the imported basic Model 3 by 2% to 363,900 yuan.

The August price hike was in anticipation of the possible imposition of a 25% tariff by China on US imported cars. However, a second hike would be surprising, given that the US and China are trying to reach a trade deal.

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The price hike report is also surprising because Tesla has already begun production for its Model 3 electric car in China. Tesla started building Model 3 cars at its Shanghai facility, its third Gigafactory, in October this year. The electric car maker has invested $2 billion in the facility to produce 250,000 vehicles per year by 2020. Currently, Tesla intends to achieve output of at least 1,000 Model 3s per week by the end of December.

China factory would lower costs

Tesla’s aggressive plans for China align with its long-term strategy of reducing production costs and enhancing margins. In October last year, Tesla said that it is “operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China.”

It added, “This makes for a challenging competitive environment, given that China is by far the largest market for electric vehicles. To address this issue, we are accelerating construction of our Shanghai factory.” The company expects the Shanghai facility “to be a capital efficient and rapid buildout.”

The third Gigafactory in China would help Tesla avoid hefty import tariffs in one of the world’s largest electric vehicle markets. Furthermore, Tesla is a favorite electric car brand in China. Therefore, by localizing production, Tesla could make its Model 3 more affordable to Chinese consumers.

The strategy would also help Tesla better compete with other US carmakers on price. Ford (F) and General Motors (GM) are also pushing hard to grab market share in the Chinese electric car space.

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Tesla stock’s performance

Tesla stock gained 1.1% yesterday after the two Reuters reports. The stock has been gaining altitude after Tesla reported a surprise profit in the third quarter on October 23. Since the last earnings results, Tesla stock has gained 38.5%. Nonetheless, its year-to-date return is a mere 6%. Investors were cautious on the stock until September after two back-to-back quarters of dismal financial performance.

However, Tesla’s robust bottom-line results for the third quarter changed the stance of investors and analysts. Before the company’s third-quarter results, about 32% of the 34 analysts covering TSLA had a bullish view on the stock. That proportion has slightly improved, to 33%. Analysts’ average target price on the stock has also gone up, from $249.69 to $286.81.

Last Thursday, Morgan Stanley analyst Adam Jonas raised his near-term bullish target price for TSLA to $500 from $440. The new target price implies an upside of 42% from its closing price of $352.70. An optimistic scenario for the Cybertruck and sales in China were the main reasons behind Jonas’s upward target price revision.

On December 2, Piper Jaffray analyst Alexander Potter also raised his target price for TSLA stock. His new target price for TSLA is now $423, $51 higher than his earlier prediction of $372.

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