Tesla in talks with Jinqiao Group to open production facility near Shanghai, sources say

United States electric car maker Tesla is close to forging an agreement for its first production base in Shanghai, a person with knowledge of the matter said.

Jinqiao Group, which operates and develops commercial and residential properties, is nearing an agreement with Tesla to build production facilities in the Shanghai municipality, a source said on Tuesday.

Shanghai has emerged as the front-runner as the municipal government will likely provide more policy incentives, the source said, without providing more details.

Jinqiao Group, a Shanghai government-owned company, has signed a non-binding memorandum of understanding with Tesla on building its production facilities, Bloomberg reported Tuesday, citing an unnamed source with knowledge of the matter.

Each party may invest about 30 billion yuan (HK$35.4 billion,) in the partnership, with Jinqiao Group putting up land for most of its share, the report cited the person as saying.

The Shanghai-listed unit of Jinqiao Group, said in a statement Tuesday that it’s controlling shareholder has not signed an MOU agreement with Tesla.

In addition to Shanghai, Suzhou and Hefei are among the cities actively seeking to win the investment from Tesla, Bloomberg reported.

Tesla’s spokeswoman said the company would not comment on rumour or speculation. Calls to Jinqiao Group went unanswered on Tuesday.

China has become the second-largest market for Tesla after the US. Tesla recently launch its first sport utility vehicle Model X in the China, adding to line up that includes the Model S sedan and the mass-market car Model 3. China ranks as the largest market for the Model 3 outside the US based on pre-orders for the vehicle since April

As its first model targeting the mass market, the car is priced at US$35,000.

Zhang Yu, an analyst at Shanghai-based consultancy Automotive Foresight, said production localisation would allow Tesla to significantly lower its prices.

“Tesla can avoid a 25 per cent import levy and also reduce delivery costs, making its cars more competitive in the Chinese market,” Zhang said.

“Shanghai should welcome Tesla to build its production facilities as it is the government’s policy to promote the use of new energy vehicles. And for Tesla, Shanghai will be able to provide a wide variety of automotive talent,” he added.

Currently, Tesla’s marketappeal is limited to affluent Chinese because of high prices, Zhang said. Although the carmaker has introduced the mass-market Model 3, the price in China is still expensive for average buyers. The vehicle is expected to retail in China for significantly more than in the US due to the tax levy, he added.

John Zeng, an analyst with LMC Automotive in Shanghai, said localising production would help boost Tesla’s competitiveness in China againstrivals such as BMW, Mercedes-Benz and Audi.

“However, Chinese consumers are hesitate to turn to electric vehicles considering the current charging facilities and maintenance. Even if Tesla can lower its prices after localising its production, it may not help significantly boost sales in China,” Zeng said.

He added it will take three to five years for Tesla to start mass production of its vehicles in China.

Zeng said it would be better for Tesla to partner with a local carmaker in operating the production base for better technical support.

Foreign automakers seeking to set up manufacturing plants in China have to do so through joint ventures in which they can own up to 50 per cent. The Ford Motor Co. has partnered with Changan Group in Chongqing and Japanese carmaker Nissan is working with Dongfeng Motor headquartered in Wuhan in Hubei province.

Additional reporting by Daniel Ren