By Yilei Sun and Adam Jourdan
SHANGHAI/BEIJING (Reuters) – Tesla Inc <TSLA.O> on Monday will break ground for its Shanghai Gigafactory where it will begin making Model 3 electric vehicles (EV) by year-end, Chief Executive Elon Musk tweeted ahead of the formal start of construction of the firm’s first Chinese plant.
The $2 billion (1.57 billion pounds) factory – long under discussion – marks a major bet by the U.S. electric vehicle maker as it looks to bolster its presence in the world’s biggest auto market, where it faces rising competition from a swathe of domestic rivals and its sales have been hit by increased tariffs on U.S. imports.
“Looking forward to breaking ground on the @Tesla Shanghai Gigafactory today!” Musk wrote in a post on Twitter.
Musk has said previously he would attend the event in Shanghai. Tesla officials in China declined to comment.
The carmaker, which currently imports U.S.-made vehicles to sell in China, is building the plant in an auto market that is set to contract this year for the first time in decades, though so-called new-energy vehicle (NEV) sales have been strong.
China raised the import tariff on U.S.-made cars to 40 percent in July, but cut it back to 15 percent from the start of this year as part of a ceasefire in a trade war with the United States. The lower tariff will last until the end of March pending trade talks.
A local plant will help Tesla lower prices in the market to compete with a new generation of local rivals including Nio Inc <NIO.N>, Byton and XPeng Motors.
“Affordable cars must be made on same continent as customers,” Musk said in another tweet.
“Shanghai Giga will produce affordable versions of 3/Y for greater China. All Model S/X & higher cost versions of Model 3/Y will still be built in US for WW market, incl China,” he later added, referring to the worldwide market including China.
Alan Kang, Shanghai-based analyst for consultancy LMC Automotive, said: “Tesla’s sales (in China) have dropped over the past few months because of high price caused by the tariffs. And the competition is getting more and more fierce.”
“With the construction of the Shanghai factory, the faster the better (for Tesla),” Kang said.
Tesla has been pushing forward its plans for the plant after it secured the site in October, hiring staff, starting procurement for building materials and setting up a financial leasing company in the city.
The so-called Gigafactory would also be China’s first wholly foreign-owned car plant, a reflection of China’s broader shift to open up its car market even amid the whipsawing trade war.
Tesla plans to produce its Model 3 and Model Y cars in the initial phase of production at the Shanghai plant, with an annual capacity of 250,000 vehicles.
“Aiming to finish initial construction this summer, start Model 3 production end of year & reach high volume production next year,” Musk wrote in a separate post on Twitter.
“Shanghai Giga production of Model 3/Y will serve greater China region,” Musk added in another one.
Shares in Chinese suppliers to Tesla, including Tianjin Motor Dies Co Ltd <002510.SZ> and VT Industrial Technology Co Ltd <300707.SZ>, rallied on Monday after Musk’s comments.
The Shanghai government last month said mayor Ying Yong had visited the site and urged Tesla to “accelerate” work on the factory. He said production would start to some degree in the second half of 2019.
China is the largest market for electric vehicles, and most forecasters predict EV sales in the country will accelerate rapidly as the government drives toward a goal of 100 percent electric vehicles by 2030.
(Reporting by Adam Jourdan in SHANGHAI, Yilei Sun in BEIJING and Gaurika Juneja in BENGALURU; Editing by Sunil Nair and Christopher Cushing)