Tesla starts building its huge Shanghai factory to make cars for China

Tesla’s new manufacturing plant in China is officially under construction.

CEO Elon Musk broke ground on the electric carmaker’s huge factory in Shanghai on Monday, kickstarting a plan to eventually make half a million vehicles in China every year.

The company is aiming to complete the initial construction work this summer and start producing its cheapest car, the Model 3, by the end of the year, Musk said in a series of tweets before the event.

The Gigafactory in Shanghai’s Lingang Industrial Zone is the biggest foreign investment in manufacturing the city has ever seen, the Shanghai government said in a statement Monday. The government also reiterated Tesla’s initial target to make 250,000 cars a year, eventually ramping up to 500,000. That’s about five times the number of vehicles the company currently produces in the United States.

Tesla is aiming to start production at its Shanghai Gigafactory by the end of this year.

The factory, Tesla’s first outside the United States, will produce “affordable versions” of the Model 3 and its yet-to-be-unveiled Model Y crossover for customers in China, Musk tweeted on Monday.

Pricier versions of the two cars, as well as Tesla’s other vehicles such as the Model S and Model X, will still be produced in the United States for global markets including China, he added.

“Affordable cars must be made on same continent as customers,” Musk had tweeted earlier.

Winding road ahead

Tesla (TSLA) is forging ahead in China at a tricky time for both the company and the country.

China’s slowing economy and its trade war with the United States have hit the auto industry hard, with companies including General Motors (GM), Ford (F), Jaguar Land Rover and Volkswagen (VLKAF) all reporting a slide in sales recently.

Tesla’s own prices in China have fluctuated wildly, with the company slashing prices several times last yeareven after China increased tariffs on imported US vehicles.

“We are absorbing a significant part of the tariff to help make our cars more affordable for customers in China,” a company spokesperson told CNN in November.

Those tariffs have since been temporarily reduced, as China and the United States try to hammer out a trade deal.

Tesla has also been forced to drop its US prices by $2,000, as the federal tax credit granted to its buyers gradually gets reduced and phased out. The price cut could lead to a decline of about $180 million in revenue every quarter, based on Tesla’s fourth-quarter sales.

Related article Tesla will cut prices to combat tax credit phase out

The carmaker will be hoping to make up some of that revenue by producing vehicles in China, allowing it to reduce prices further and compete with homegrown companies such as Nio (NIO) and BYD (BYDDY).

Monday’s announcement about the Shanghai factory “tells me that the additional pressure from the slowdown in the market has internal forecasts for Tesla China sales decreasing pretty substantially,” said Tu Le, founder of research firm Sino Auto Insights.

“A Tesla vehicle that can compete on price is a gamechanger for China and could be a huge headache for all the China EV startups that plan to launch in the next 18 months,” he added.

Daniel Shane and Chris Isidore contributed to this report.