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Electric cars in China

Tesla charges ahead in China as it burns through cash

Electric car maker plans world's second plant following relaxed ownership rules

Tesla has won the heart of the Chinese but currently ships all products from the U.S.

PALO ALTO, U.S. -- Tesla has chosen China for the location of its second vehicle assembly plant, gaining a foothold in the world's largest electric car market in a bullish expansion strategy that masks the company's precarious finances.

The U.S. electric car maker will soon announce the site of the Chinese plant, CEO Elon Musk said on a conference call Wednesday. Tesla's existing vehicle assembly plant is in Fremont, California. While batteries and vehicles are produced at different locations in the U.S., the Chinese site is slated to do both. A battery "Gigafactory" akin to the one Tesla launched in the U.S. state of Nevada will be set up alongside the assembly plant, Musk said.

Tesla will take advantage of deregulation in China designed to gradually eliminate foreign ownership limits on automotive businesses, currently set at 50%. For so-called new-energy vehicles including electrics, the cap will be jettisoned by the end of this year. Tesla is apparently seeking approval for a wholly owned plant, which could be the first project to benefit from the regulatory change.

Tesla had been considering Chinese production for some time. The company was previously in talks with the Shanghai government and others to compile a plan by the end of 2017, but the caps on foreign ownership posed a barrier.

"We're very appreciative of the fact that the government of China has announced that they will be allowing full ownership of manufacturing facilities in China," Musk said on the call.

Tesla has been a forerunner in electric vehicles, and the global tide has turned in its favor. 

China's homegrown automakers such as BYD and BAIC Motor have done well in the electric vehicle market there. Luxury maker BMW is leveraging its brand power in electrics as well. With the rise of such rivals, starting local production is crucial to Tesla, which has relied on U.S.-built imports.

But Tesla must also pay attention to its alarming cash situation at home. The company on Wednesday announced a $709.5 million net loss for the January-March period, its largest ever and more than double the $330 million loss a year earlier. The Model 3, which initially was supposed to be assembled solely by automated equipment, is responsible for the bulk of the red ink. The company stumbled in launching mass production, and upfront investment squeezed earnings. Tesla's cash on hand plunged by $700 million in the three months to $2.7 billion at the end of March.

The company in February announced plans to securitize auto-leasing claims to raise money, spurring concerns about Tesla's balance sheet.

Musk conceded during the call that the company is temporarily using manual labor to build the Model 3, noting that weekly production volume will reach the targeted 5,000 units in about two months. The model will turn a profit in the July-September quarter and boost Tesla's overall earnings, he said.

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