Tesla's $7b Shanghai plant shifts into high gear

Electric carmaker Tesla's first plant outside the US, the Gigafactory 3 in Shanghai, is about to begin construction and partially start operating in the second half of 2019, one year ahead of its original plan, according to the official website of Shanghai Municipal Government, 21st Century Business Herald reports.

The gigafactory, with a total investment of 50 billion yuan ($7.25 billion), will have a production capacity of 500,000 units in two to three years. The first phase of the factory, with an initial investment of 16 billion yuan, targets 250,000 units of Model 3 and Model Y electric vehicles annually. The CKD (completely knock down) plant will enable production as soon as possible, said the report.

The plant, located in Shanghai's Lingang area, remains a critical step in Tesla's expansion. While China is the second-largest market of Tesla outside the US, the automaker still needs to pay a 15 percent tariffs for entering the market. The smooth launch of the gigafactory will provide a better environment for Tesla's development in China.

The Shanghai government is trying to introduce more enterprises in the industrial chain of new energy vehicles to foster an industrial cluster, and push forward Tesla's localization. But industry analysts are still concerned about the company's supplier issue.

"It is unrealistic to depend on US suppliers in a long run, and Tesla needs to cultivate its own suppliers in China, which is no easy task at all," said Jones Zhong, a veteran analyst of the industry, to 21st Century Business Herald.

In fact, insufficient production capacity problem has long haunted Tesla, and these problems may replay in its China journey.

Cash flow is another problem. The automaker has not realized annual profit in the past 14 years. As its expansion in the US continues, its new China plant will bring large financial pressure to the company.

Funding will mostly come from local debt, and the good news is that Tesla will enjoy preferential treatment in factory land, tax, and financing from local government.

The construction of Tesla's gigafactory generated concerns in domestic auto market as well. Industry analyst Cao He said the electric vehicle market in China will face a reshuffle in the next three years, with only one or two left. Jones Zhong, on the other hand, said Tesla's entrance will not shake the industry, as its position is higher than most newcomers domestically and does not belong to the same segment.

Zhang Junyi, Nio Captial co-partner, said Tesla's new plant will trigger intensive competition among Chinese automakers, especially the newcomers, which will benefit the whole industry.

"Tesla is very successful in the US, but it still has a long way to go in China. Traditional luxury carmakers, such as Mercedes-Benz, BMW, and Audi will also present mature new energy vehicle models in 2021 or 2022, and Tesla's achievement in China remains to be seen," Zhang added.