If it has Giga, it must be China. Tesla announced big news to kick off the New Year. The company will set up its first manufacturing facility outside of the US in China. The Gigafactory 3 is going to be set up in Shanghai, China. Early January this year, Elon Musk arrived in Shanghai for the groundbreaking ceremony of this new Tesla facility. About 860,000 square meters (~210 acres) has been earmarked for the factory in Shanghai’s Lingang Industrial zone. According to Tesla CEO Elon Musk, the company will spend about $2 billion on Gigafactory 3.

The media frenzy around the event has been immense. Drone images of the massive new facility were up on the internet, where one could observe a perimeter covering the entire site. There has been significant activity already happening within the area. By December 2018, construction activity at the site was underway with site grading to level the foundation.

This news is not a sudden development if you’ve been following Mr Musk and Tesla. In July, pictures of Elon Musk eating Jianbing (a popular Chinese breakfast pancake) standing at a popular downtown street in Shanghai surfaced on the internet. It was amusing for locals and expats in the city alike for the deep localization Musk indulged in during his time in the city.

Perhaps then it was already a clear indication that Elon Musk had his heart set on Shanghai. This is the same man who wants to build a rocket to ferry passengers from New York to Shanghai in 39 minutes. Surely, he was there for more than the Jianbing.

Tesla Vice President for Worldwide Sales, Robin Ren was with Musk on the trip. It was then that the Shanghai Municipal People’s Government and Tesla signed a Cooperative Agreement, following which Tesla would be allowed to begin construction after getting approvals and permits. This agreement ceremony was signed by Zhou Bo, Executive Vice Mayor of Shanghai and Robin Ren, who will also serve as the China head for Tesla.

Within five months of signing the cooperative agreement, construction is already underway for the Gigafactory 3. This construction project will be handled by a subsidiary of the China State Construction Engineering Corporation (CSCES), the world’s largest construction company by revenue. It is a state-owned enterprise.

Tesla estimates that it will take about two years before production starts and another 2-3 years before “the factory is fully ramped up to produce around 500,000 vehicles per year for Chinese customers.”

Christened the Gigafactory for its potential impact Tesla’s global footprint as well as the more obvious GigaWatt unit of power (from batteries), Gigafactory 3 is the first Tesla facility outside of the US. Once it is up and running, the facility is expected to produce up to 500,000 vehicles in a year.

Tesla’s other two Gigafactories are based in the US. Gigafactory 1 can produce up to 500,000 electric cars annually. Whereas, the Gigafactory 2 is a photovoltaic (PV) cell factory primarily used to manufacture solar cells for Tesla vehicles. Once the Shanghai plant is up and running, Tesla will effectively double its global output.

Why is Tesla betting big on China?

Many foreign companies choose to manufacture in China. And a $2 billion investment for an electric car facility in Asia is no surprise. That’s because China is the biggest market for electric cars in the world. In 2018, annual electric vehicle sales stood at 361,307 units in the United States. In the same period, 1.26 million electric cars were sold in China.

China’s goal is to have 100% electric vehicles on its roads by 2030. Tesla is not the only provider for electric vehicles in China. Local car manufacturers such as BYD, compete for the same set of customers. BYD, an acronym for “Build Your Dreams,” is perhaps the biggest electric vehicle company you’ve never heard of.  The sturdy electric car from BYD is a common sight on Chinese roads. They’ve also pulled in Hollywood A-lister Leonardo DiCaprio to advertise its cars.

China is also the second largest market for Tesla, after the United States. However, considering shipping costs and the trade war volatility, they sell with heavy overheads in China. Tesla released in a statement, “Taking ocean transport costs and import tariffs into account, Tesla is now operating at a 55% to 60% cost disadvantage compared to the exact same car locally produced in China.” This was a primary reason why Tesla is in a hurry to get the Gigafactory 3 running.

In a country like China, being present locally as a manufacturer can make a remarkable difference. It appeals to the Chinese consumers much more if Tesla is going all the way and sets up a manufacturing facility in their country. And of course, the Made in China stamp can also potentially unlock government subsidies meant for local manufacturers. China’s big push for electric car adoption, fast-growing middle and upper-class consumers with a taste for luxe make Tesla a perfect fit for the market.

But perhaps the biggest motivation for Elon Musk to launch the Gigafactory 3 in China is the policy changes by the Chinese government. A foreign company is now allowed to set up a wholly-owned company in the country. Until now, every foreign manufacturer had to enter into a Joint-venture with a Chinese counterpart to begin operations. Now that the rules have changed, Tesla has an opportunity to have a 100% controlled company in China. The downsides of the JV approach in China for many foreign companies was the risk of technology leakage as well as the profit sharing required.

What is in it for China?

China has indeed welcomed Tesla warmly into their country. During Elon Musk’s visit for the ground-breaking ceremony for the Shanghai factory, Chinese premier Le Keqiang offered the Tesla CEO a “Chinese green card”.  It is a privilege that the country offers to an elite group consisting of several Nobel laureates and former NBA star.

In addition, considering the amount of land that has been earmarked for the Tesla plant in Shanghai, China sees Tesla as an important company. The Chinese East coast usually doesn’t accommodate such huge factories and it is a clear sign of soft diplomacy by the country. The Shanghai municipal government suggested it would help with some of the capital costs saying it would “fully support the construction of the Tesla factory”. Tesla is the first company to enter China as a 100% owned manufacturing setup. Many foreign companies are watching how this might turn out before they jump in with their own 100% entities.

Tesla’s manufacturing unit supports China’s 2025 industrial strategy to upgrade the manufacturing capabilities of Chinese industries. Tesla will not only be setting up a new factory in the city, but the plant will also incorporate a research and development facility. A R&D facility at a futuristic company such as Tesla provides great insights for a country targeting a green car future. In terms of re-tooling and training people, Tesla can be a significant opportunity as an advanced manufacturing company.

The beginning of 2019 has already been a very active month for Tesla China. Hiring has already started for the Tesla Gigafactory 3 and the response, as per Tesla, has been “overwhelming”. The company claims it was forced to extend its hiring hours due to the sheer volume of applicants keen to join the company. Many applicants had travelled from far away parts of the country to work at the Gigafactory 3.

For Tesla fans, this is certainly big news. The investment into the new plant is going to drag down the balance sheet, however, it offers Tesla an opportunity to be cash flow positive in the long run. By building a good network of charging stations, service centers and sales – it can significantly bring down the cost per unit of an electric vehicle.

At the same time, China is clearly going to be very supportive of this initiative to bolster its global standing as a world-class manufacturing destination. This is a move away from the “cheap” Made in China image for goods perceived by the world. Finally, Tesla firmly plants the foot for China to leapfrog towards an electric car future faster than any other country in the world.

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