Why Tesla is Expanding Production Into China

Tesla Model S

Source: Tesla

If any automaker knows how to grab headlines, it’s Tesla. From the ever more powerful Model S to the futuristic Model X SUV, the Silicon Valley startup has firmly positioned itself at the vanguard of the electric car movement, and when company chief Elon Musk speaks, the world listens. But even with recent successes, there have been loud failures too, and to some, it seems like they’re beginning to mount. With the good — the aforementioned Model X, the self-driving Autopilot program — has come the bad: namely, losing its Consumer Reports “Recommended” rating for the Model S, and tumbling stock prices. Taken as a whole, it’s enough for former BMW, Chrysler, and GM executive Bob Lutz to publicly wonder whether or not this is the beginning of the end for the company.

It may not be that dire, but the reality is this: The Model S, no matter how much more refined the car is going to get, isn’t getting any younger, and it’s likely to face competition from one of the major automakers sooner rather than later. While the Model X is a gadget-laden marvel, its theorized $80,000 base price isn’t exactly going to put a huge dent in Chevy Equinox sales. That leaves the Model 3, the sub-$35,000 entry-level vehicle Tesla plans on launching in 2017.

Tesla_Model_X

Source: Tesla

We don’t know much about the Model 3 yet, but it’s likely to be 20% smaller than the Model S, come in both a sedan and crossover guise, and will be unveiled in March. And while the S and X are incredibly important to the company, the 3 is the whole ballgame. Musk has said time and again that the company predicts it will be selling 500,000 cars a year by 2020, and he knows full well that it won’t be accomplished by $75,000-plus luxury models. This figure won’t be cracked in the U.S. alone, either. Tesla needs to break big in China, and to accomplish this, Tesla will be building the Model 3 locally, with a Chinese Tesla factory coming online as early as 2018.

Tesla Motors Factory Model S

Source: Tesla

Shortly after making the announcement, Musk took to Twitter to clear up the miscommunication: The Model 3 would largely still be built in Tesla’s California and Nevada facilities; only Chinese-market cars would be built there. The company is currently in negotiations with the Chinese government to find a partner to produce its cars, which could potentially slash the price of its models by one-third in the world’s largest auto market. It’s a much-needed step, considering that Tesla’s initial projections for the Chinese market have proven to be wildly optimistic, and despite stronger sales in the third quarter this year, it still has a very long way to go.

While a manufacturing partnership in China is a big step for Tesla, it also works to the Chinese government’s advantage too. The country is looking to build an infrastructure that can charge five million cars daily, and having Tesla and its Supercharger technology in the country certainly couldn’t hurt.

Tesla Motors Factory Model S

Source: Tesla

Like many growing automakers, Tesla is realizing that localizing production instead of shipping cars around the world is a way to both establish a presence in a market and keep costs down. The company already has two satellite plants in the Netherlands for the S and X and is negotiating to build a battery plant in Belgium. A plant in China will only help it in the Asian markets. This announcement may not be as sexy as Autopilot, but it could make the difference between success and Bob Lutz’ bleak forecast.

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