While Tesla would reportedly not be able to skirt the 25% tariff China imposes on foreign auto imports by manufacturing cars in Shanghai, the deal would likely still be a boon for the company's bottomline by lowering production costs.
In March, Tesla won an investment worth $1.78 billion from Tencent Holdings, a major internet company with close ties to the Chinese government, to use as funding for its expansion in China.
The move will help reduce manufacturing and shipping costs, although Tesla will still be required to pay 25 percent import fees.
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Halfway through 2017, Tesla sales in China reached almost $1 billion, compared to $2.8 billion in its home market of the United States.
The new facility will be Tesla's first real footprint in China's fast growing electric vehicle market, with the company's current presence only coming in the form of sales offices.
One way they can circumvent these restrictions is to team up with a local company, but that would mean they will have to share their technologies and give up profits.
Tesla is wrestling with production problems at its sole factory, in Fremont, California. Until now, U.S. carmakers like GM hoping to sell cars in China's domestic market have been forced to work (and more importantly share profits and technology) with a local partner. The proposed plant in Shanghai which is China's de facto automotive capital will be manufacturing Tesla models for Asian markets.
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Tesla is looking forward to becoming the first auto company from another provenance to build its factory in China.
The company's well known vehicle models included Tesla Roadster, Tesla Model S, Tesla Model x and Tesla Model 3.
"Tesla is now working with the Shanghai government about details of the deal's announcement, such as timing", the WSJ added. According to Bloomberg, the Chinese government debuted a new set of emission rules last month that would require all carmakers to produce zero- and low-emission vehicles beginning in 2019. These zones have been established to encourage more production of electric and hybrid vehicles - which the government calls "new energy vehicles" - to meet ambitious sales quotas.
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