Challengers get a three-year window to catch up as Tesla shelves plan for China factory

With plans for a Tesla factory in Shanghai pushed back, Chinese carmakers salivating over the growth potential of China’s electric vehicle market may have reason to cheer amid their ambitions to challenge the US leader.

On the flip side, the expected three-year wait for local production of Tesla might represent a setback for Shanghai as the mainland’s commercial capital strives to boost its languishing free-trade zone.

Elon Musk, chief executive of Tesla, said on Wednesday that the company was three years away from making cars on the mainland, playing down speculation that it could soon reach an agreement with the Shanghai government to set up its local plant.

Tesla, a global leader in electric cars, was expected to start making vehicles in Shanghai’s Lingang New City, part of the city’s free-trade zone, after both parties admitted they were in talks.

For Tesla, a local factory effectively helps the Silicon Valley-based company slash transport and production costs to better tap the world’s largest auto market.

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Shanghai could get a leg up on its domestic rivals in developing the free-trade zone into a flourishing business since a Tesla plant would require a complete industry supply chain - which would bolster the city’s ambitions of becoming a global innovation hub.

Two sources with knowledge of the local government’s thinking said that the local partner for a potential joint venture was a sticking point during the negotiations.

China allows foreign carmakers to produce vehicles under their brands only through joint ventures with domestic partners.

SAIC Motor, the mainland’s largest carmaker and Shanghai Electric, China’s biggest producer of coal-fired power generating equipment, were among the candidates to set up ventures with Tesla.

Late in October, The Wall Street Journal reported that Tesla would set up a wholly-owned factory in Shanghai, but a local government official denied the news.

The delay gives other players “a great opportunity and enough time to develop their new generation of electric cars”, said Peter Chen, a Shanghai-based engineer with US components maker TRW. “When Tesla eventually lands in the market in three years or even later, [competitors] may be able to churn out cars that can compete.”

On the mainland, a number of carmakers including Nio and Future Mobility Corp (FMC) are aiming to become Tesla challengers with their own designs.

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FMC said its car will feature the kind of entertainment options that can be found in a living room.

Global auto company Volvo also launched its Polestar brand recently that focuses on new-energy vehicles.

Volvo and its mainland parent Geely Holding set up a joint venture with an investment of 5 billion yuan (US$753 million) to build high-performance electric cars.

It is expected that Tesla will manufacture its Model 3 sedan and upcoming Model Y crossover in China.

The Tesla 3, with a starting price of US$35,000, is targeted by potential rivals because the mid-priced cars are increasingly well received by Chinese drivers’ increasing affluence and penchant for bigger vehicles.

Thomas Ingenlath, CEO of Polestar, talks about the company’s first car during its unveiling in Shanghai on October 17. Photo: AP “If Tesla does make cars locally, it will definitely achieve good sales,” said UBS analyst Hou Yankun. “China’s auto market is extremely huge and sales volume of electric cars could reach 700,000 to 800,000 units a year.”

A mainland plant would produce “a couple of hundred thousand” Tesla vehicles a year, Musk told analysts on Wednesday.

Beijing has been drastically encouraging the development, production and sales of new-energy vehicles to reduce pollution.

Government subsidies and other incentives such as free car licenses have largely spurred sales of electric cars over the past three years.

The Chinese government will probably allow foreign companies to set up wholly-owned factories soon in the country’s free-trade zones, according to the China Association of Automobile Manufacturers.

It is still unknown whether Tesla will secure approval to do so in the near future.

“Tesla is not only an electric car with high performance and high quality,” said Yu Zhe, a Shanghai-based white-collar clerk planning to buy an electric car. “Its brand awareness and its role as a status symbol attract people like me.

“I am willing to spend about 300,000 yuan to own a best-in-class electric car, and if a locally-made Tesla is within the budget, it will be an easy decision for me to buy it.”

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