According to the original plan, Tesla was supposed to start production in China after 2020.
“Initial capacity is expected to be roughly 250,000 vehicles and battery packs per year, and will grow to 500,000, with the first cars expected to roll off the production line in about three years,” CEO Elon Musk wrote in his second quarter 2018 Shareholder letter.
Musk did give us some indication that the company’s Gigafactory 3 plans are evolving fast. In October, Elon Musk told analysts that the company will definitely start local production in China and they are racing in that direction.
He said, “So we’re driving to have Model 3 production for the China market or the Greater China market active certainly next year. It will be happening next year.”
A recent report from Bloomberg now confirms that Tesla is planning to start production in China in the second half of 2019.
Why Tesla is rushing to start production in China:
Local production in China will significantly lower costs for Tesla.
The company said in its Oct. 2 earnings report that since it does not have access to the same cash incentives as local Chinese manufacturers, the company is operating at a 55% to 60% cost disadvantage compared to domestic players.
Thanks to the trade war, Tesla was forced to increase its price by 20% in July causing Tesla’s third-quarter revenue in China to decline by 27.37%. Tesla slashed its price by 12% to 16% in November, but the current listed price of the Model S and Model X is still higher than the sale price in May.
Tesla has decided to build Model S and Model X exclusively in the United States, which means Tesla is planning to build Model 3 in China.
Model 3, Tesla’s cheapest sedan will be at a significant cost disadvantage against locally built cars, shrinking its potential market size by many folds.
40% tariff pushes Model 3 out of reach for China’s growing Middle class. Local production is the best way to reduce tariffs
The Gigafactory 3 Timeline
Musk secured a preliminary agreement with Shanghai’s government to build Gigafactory 3 in Shanghai during his three-day visit in July.
In October Tesla acquired a massive 864,885-square meter land in Shanghai’s Lingang area for 973 million yuan ($140 million).
By November Tesla was busy, hiring architects, design engineers, finance managers, and even recruiters.
How will Tesla pay for it?
Tesla has announced that the company will raise debt from Asian markets to fund the construction of Gigafactory 3. Tesla plans to invest $2 billion for a planned capacity of 250,000 units annually.
“For China, I think our default plan will be to use essentially a loan from local banks in China and fund the (Gigafactory) in Shanghai with local debt, ” Elon Musk said in the company’s third quarter conference call.