Tesla signs agreement for China Gigafactory, doubling output
Tesla Fremont factory
Tesla's Fremont factory

Tesla signs agreement for China Gigafactory, doubling output

Tesla CEO Elon Musk has signed a preliminary agreement with the Shanghai government to build a Tesla factory in China. The new facility will reportedly manufacture 500,000 vehicles per year, effectively doubling the company’s electric vehicle production when combined with its existing factory in Fremont, California.

In 2017, Tesla announced that it was working with the Shanghai Municipal Government to explore the possibility of establishing a new facility in the region to serve the Chinese market, before stating last month that it intended to move ahead with its first non-US factory in Shanghai.

Given the growing trade war between the US and china, which has resulted in Tesla raising the price of its Model S and Model X vehicles by 20 percent in China, the electric car company will be eager to sidestep rising trade tariffs.

Tesla’s China factory

Tesla struggled to meet its production target of 5,000 Model 3s per week until recently, so it’s no surprise that the company is looking to build another facility to help meet demand.

While the company has announced that it plans to start construction in the ‘near future’, it will take up to five years after the facility’s completion for it to reach the planned 500,000 vehicles per year.

It is hoped that the first vehicles will emerge from the factory two years after construction begins.

According to the BBC, Elon Musk announced:

Shanghai will be the location for the first Gigafactory outside the United States. It will be a state-of-the-art vehicle factory and a role model for sustainability. We hope it will be completed very soon.

The move has been made possible by China relaxing its restriction on the sole ownership of carmaking facilities by foreign companies, with the change affecting electric vehicles this year, commercial vehicle firms in 2020, and the wider automotive market by 2022.

Internet of Business says

As the largest market for electric vehicles, China will be a key target for Tesla’s expansion ambitions, as will South East Asia more widely. New regulations mean that China aims to have 100 percent electric vehicles by 2030. With 28 million vehicles sold in the country last year, that is a huge market for Tesla to tap into.

Building a factory in the region is likely the only way the company can be competitive with local electric car manufacturers, such as BYD.

On the flip side, rising US-China trade tariffs may make shipping the Tesla vehicles back to the US prohibitively expensive. Despite this, Teslarati reports that Musk will likely task the China facility with the production of its new Model Y crossover SUV.

If the US and China continue to increase tariffs, the carmaker may be forced to manufacture its whole line in both factories, rather than optimising each factory for specific models, which is unlikely to be the most efficient approach for a company that has struggled to meet its current target of 5,000 Model 3 vehicles a week.

Tesla recently resorted to building a tent in one of the car parks of its Fremont factory, to house further manufacturing facilities, in order to reach the target, after having already delayed the milestone by multiple quarters.

Elon Musk himself has admitted that Tesla has over-automated certain manufacturing processes, creating bottlenecks in the production line.

The CEO recently boasted having produced 7,000 cars in seven days, to which Steven Armstrong, chairman and CEO, Ford Europe & MEA, pithily tweeted, “7,000 cars, circa 4 hours”. The response puts Tesla’s achievement into perspective, especially when the company may only be capable of producing that many vehicles in intensive bursts.

While Tesla looks to introduce factories in China and Europe, the productivity of Ford, a 115-year-old company famous for its early adoption of assembly line manufacturing, won’t be easily surpassed. Nonetheless, Ford’s quips are reminiscent of former Microsoft CEO Steve Balmer’s mocking of the first iPhone.

The automotive giants must commit themselves wholeheartedly to the electric and autonomous driving markets, or risk being left behind.