Tesla Reaches Deal to Open Factory in China, Report Says

This could be a big win for Tesla.

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Tesla has reached a deal to build a factory in China, according to The Wall Street Journal. The automaker has made arrangements with the Shanghai government to locate a factory in the city's free-trade zone, The Wall Street Journal said, citing anonymous sources familiar with the matter. A Tesla spokesperson declined to comment.

Crucially, Tesla would operate the factory itself, according to the report, rather than partnering with a local automaker. China typically requires foreign automakers to partner with local firms in order to manufacture cars within its borders. That's been a nonstarter for Tesla, which is concerned that a partnership might compromise its trade secrets.

Tesla said in June that it was talking with the Shanghai government about an automotive factory. At the time, the company said that it would continue building the majority of its cars in the United States, even if it got approval to build them in China. Local production will allow Tesla to avoid the hefty shipping costs and import duties for cars sold in China, which represents a major potential market for the company.

China is currently the world's largest market for new cars, and sales of EVs in particular have skyrocketed over the last few years. That trend is likely to continue as China moves to enact stricter emissions standards for 2019. The new rules will establish sales quotas for so-called "New Energy Vehicles," including electric cars, plug-in hybrids, and hydrogen fuel-cell vehicles. The government has also hinted at plans to phase out sales of new gasoline or diesel cars.

As such, expansion into China is a smart move for Tesla. Yet the company will have to devote resources to a new overseas factory during the critical ramp up of Model 3 production. CEO Elon Musk wants Tesla to be producing 500,000 electric cars annually at its existing California factory by next year, and Tesla has a backlog of Model 3 orders to fill.