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Electric cars in China

Tesla to produce 500,000 cars a year in Shanghai

Wholly owned factory reduces concerns about technology leaks

Tesla's Model S electric sedan. The American automaker plans to open a Shanghai plant capable of turning out 500,000 vehicles annually.

SHANGHAI -- Tesla will build its first non-U.S. auto factory in Shanghai, with plans to turn out up to 500,000 electric vehicles per year for sale in the world's largest car market.

The American electric carmaker has signed a memorandum of understanding with Shanghai to build a development and production hub on the outskirts of the city, the municipal government announced Tuesday.

The facility is expected to incorporate a "gigafactory" for vehicle batteries and handle everything from production of motors and other core components to final assembly. 

"We expect construction to begin in the near future. From there, it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up to produce around 500,000 vehicles per year," Tesla said in a statement on Tuesday. "Tesla is deeply committed to the Chinese market, and we look forward to building even more cars for our customers here," It said.

The statement added: "Today’s announcement will not impact our U.S. manufacturing operations, which continue to grow.”

A Goldman Sachs analyst report from May predicted that the opening of a wholly owned plant in Shanghai "would likely require $4 billion to $5 billion of investment from Tesla," with spending on manufacturing seen at about $2.5 billion.

While the total investment amount has not been made public, Tesla is expected to foot the entire bill and operate without a Chinese capital partner -- freedom the company has long said would be necessary for it to expand into China.

Forced transfer of technology through local business partners has been a longstanding issue for international companies hoping to set up shop in China.

"With today’s announcement of this wholly owned factory, however, concerns about tech leakage have been significantly reduced," said Mary Lovely, professor of economics at Syracuse University and a nonresident senior fellow at the Peterson Institute for International Economics.

"Some technology will likely still leak out, via employee movement from firm to firm or through reverse engineering, but these risks appear to be acceptable to Tesla," Lovely told the Nikkei Asian Review in an email interview.

The central government announced early this year that it would abolish a 50% cap on foreign ownership in automotive companies. Seeing an opening, Tesla set up a Chinese subsidiary in Shanghai in May.

Government support for the electric vehicle industry has also sweetened the deal for Tesla, Lovely said.

Tesla "may expect a lower corporate tax rate on Chinese operations, since electric vehicles are an 'encouraged industry' by the central government’s catalog of foreign investment," Lovely said, citing reports that suggest the Shanghai government will support construction of the plant itself.

"The Chinese market is significant now and will almost certainly be more significant for Tesla in the future," Lovely said. "We could, absent trade barriers in other countries, one day see Tesla exporting its vehicles from China, even as it will continue to serve the U.S. market from its U.S. factory."

The electric car maker stepped up efforts to open the production facility as the U.S.-China trade battle escalated, culminating in each side imposing 25% tariffs against the other last week. Motorcycle maker Harley Davidson is likewise expanding production outside the U.S. to circumvent these duties and others that could arise in ongoing trade disputes.

With the tariffs taking effects on both sides last week, Tesla raised prices on its vehicles in China. The price of some Model S sedans climbed roughly 30% to around 940,000 yuan ($142,000). Chinese sales, at 15,000 units, accounted for roughly 15% of Tesla's global sales in 2017.

Nikkei staff writer Ariana King in New York contributed to this report.

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