In line with the company's goals to dramatically increase production of its vehicles in the coming years, electric-car maker Tesla Motors (NASDAQ: TSLA) is reportedly working on a deal to begin a $9 billion joint venture in China to build a factory for local production in the country, according to Bloomberg , which cites "a person with knowledge of the matter."
Tesla factory in Fremont, Calif. Image source: Tesla Motors.
"Shanghai has emerged as the front-runner to become the production base for Tesla Motors Inc. in China," reports Bloomberg.
The report continued: "Jinqiao Group, a Shanghai government-owned company, has signed a non-binding memorandum of understanding with Tesla on building its production facilities in the municipality, said the person, who asked not to be identified because the negotiations are private. Each party may invest about 30 billion yuan ($4.5 billion) in the partnership, with Jinqiao putting up land for most of its share, the person said."
Importantly, the factory will help Tesla dodge a 25% import levy, according to Bloomberg. This, of course, would make Tesla's vehicles more affordable in the world's largest automobile market.
Why Tesla needs a China factory
While a factory in China would undoubtedly be a large and important milestone for Tesla, it also wouldn't be a surprise. Tesla executives, including CEO Elon Musk, have previously expressed interest in eventually building a factory to produce its vehicles locally in the country.
"Model 3 is due in [approximately] 2 years. A China factory for local demand could be as soon as a year after," Musk wrote on Twitter last October.
Notably, Musk shared this timeline before the company announced its plan earlier this year to double down on its production goals, moving its 2020 target for a build rate of 500,000 vehicles per year to 2018. Higher-than-expected demand for its March-introduced Model 3, Tesla's lowest-cost vehicle yet, spurred the company to step up its production ambitions.
Model 3. Image source: Tesla Motors.
However, in a CCTV interview, Jon McNeill, Tesla's president of global sales, weighed in on the topic after the company's accelerated production plans were announced, suggesting Tesla is still seriously considering a China factory.
We've doubled production capacity each of the last several years and we'll continue doubling. And one of the focus points for the entire company is making sure that we are ready to deliver Model 3 on time. And so we'll have production capacity ready to do that. We have a factory in California that is sized for about 600,000 vehicles a year, but in addition -- as I mentioned -- we are looking for an additional factory as well. That could very well be in China.
Addressing Tesla's biggest problem
When it comes to Tesla's ability to increase vehicle sales, production -- not demand -- is Tesla's issue. Indeed, Tesla's constrained production is probably its biggest problem.
As of last count , 373,000 customers made deposit-backed reservations for the Model 3. And, as Tesla has emphasized, this level of reservations has been achieved with very little information about the car and without any advertising. Indeed, Tesla went as far as to say in an SEC filing earlier this year that the company believes it "could further increase the number of Model 3 reservations with minimal effort" if it wanted to.
A new factory in one of Tesla's fastest-growing markets could help alleviate Tesla's production bottleneck.
Tesla is probably particularly interested in building a factory in China after seeing the geographic breakdown of its Model 3 reservations. China represents the company's second-largest market for Model 3 reservations -- second to the U.S.
This report of a China factory, or course, is still nothing more than speculation. But it does highlight a problem Tesla will eventually need to address. And the solution won't be as cut-and-dry as it might seem; recently turning to the market to raise capital with equity, Tesla's growing number of large investments make capital hard to come by.
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