SHANGHAI/BEIJING -- Tesla's planned vast factory in Shanghai furthers China's ambition to grow from the world's largest auto market into a true automotive heavyweight, bringing key technologies and opportunities for local parts makers.

Shanghai's Communist Party chief Li Qiang rolled out the welcome mat for Tesla CEO Elon Musk on Tuesday, when the American electric vehicle maker signed a memorandum of understanding with the city to build an enormous production and development hub.

"Tesla's China operations will further grow with its entry into Shanghai," a beaming Li said. Local television networks showed footage of the two men riding in a Tesla electric car, with Musk explaining the car's features.

The Tesla plant's annual production capacity is intended to reach 500,000 vehicles over the course of several years. Vehicle assembly and manufacturing operations will sit alongside a huge battery plant -- businesses Tesla has kept separate in the U.S.

The construction timeline and costs have not been made public. But Tesla will pay for the project itself and operate without a local partner, after the Chinese government said earlier this year it would lift a 50% cap on foreign ownership in the automotive sector.

Of the roughly 103,000 vehicles Tesla sold in 2017, around 15% are thought to have gone to China. These were shipped from the U.S., home to Tesla's only vehicle assembly plant currently. When the Chinese plant goes online, the American automaker will be in a better position to compete on cost with electric vehicle makers there.

Tesla CEO Elon Musk was greeted with open arms in Shanghai on Tuesday.   © Reuters

China stands to benefit as well. Tesla has proved its ability to reach markets around the world, and Beijing is eager to pit the company against its local producers such as BYD. If foreign automakers develop and build electric vehicles in the country, its domestic industry has the chance to absorb new, advanced technologies, helping China transform from a mere market into an automaking heavyweight.

This strategy never fully succeeded with internal combustion vehicles, where Japan, the U.S. and European nations still hold the technological lead. But electric vehicles involve fewer components than their conventional counterparts, giving manufacturers a relatively even footing on which to begin development and compete to lead the field.

Starting in 2019, China will mandate that a certain portion of the vehicles automakers produce or import be so-called new-energy vehicles, a designation including full electrics and plug-in hybrids. In response, companies including Japan's Toyota Motor and Honda Motor plan to produce electric vehicles in China through local joint ventures. Germany's BMW and General Motors of the U.S. also are looking to follow this path.

Enticing Tesla required the extra step of scrapping auto-sector investment restrictions, as the automaker has long said the freedom to operate alone would be necessary for it to expand to China. But this liberalization could also work in China's favor in trade talks with the U.S. by signaling a commitment to open markets.

In the meantime, China has slapped tariffs on American-made vehicles, retaliating against duties imposed by the Donald Trump administration. This has forced Tesla to raise Chinese retail prices by 20% to 30% and made local production even more urgent -- a fact thought to have pushed the company to reach a deal with Beijing.

But the scope of the Shanghai plant suggests Tesla's ambitions stretch beyond the Chinese market. While electric vehicle demand there is strong, it is not enough to absorb 500,000 autos per year. The American company seems to view the plant in part as a second export hub. China expects it will serve the broader Asian market, according to an official at the Ministry of Industry and Information Technology.

Beijing's strategy for full electric vehicles is being replicated in the battery field. Contemporary Amperex Technology Co. Limited, known as CATL, has grown into a leading supplier of automotive batteries under the auspices of the government. Now the country is reaching out to Japanese and South Korean manufacturers, seeking technology that will improve quality and safety.

But some question remains as to whether Panasonic, which operates a gigantic battery plant with Tesla in the U.S. state of Nevada, will follow its partner to China. "We have not received any specific production requests," the Japanese company said when asked to comment on Tesla's plans.

Expanding the Nevada plant is a high priority for Panasonic, as is ensuring a stable supply of batteries for Tesla's new Model 3. The automaker announced in early July that it had reached its production target of 5,000 of the cars per week.

Panasonic is still waiting cautiously to see whether Tesla can maintain that pace and generate the funds needed for its next investment. But the company appears open to discussion: "If asked, we're willing" to lend a hand, Panasonic President Kazuhiro Tsuga said.