The advantages for Tesla for a large local production facility are pretty significant: China is banking heavily on "new energy" vehicles -- hybrids and electrics -- and demand for such vehicles is expected to grow substantially in the next decade. A factory in China would also allow Tesla to operate free of various tariffs and other current and future trade measures between China and the U.S., which are currently moving in the direction of a trade skirmish if not an outright trade war. Avoiding tariffs would deliver a significant boost for Tesla, as just last week the country's government raised the import duty on U.S.-made vehicles to 40 percent.
A plant in China would not only allow Tesla to cut vehicle manufacturing costs significantly but also to set up battery production, taking advantage of the proximity of China's massive mining and battery-production operations. Local production would also allow Tesla to reach a wider audience of buyers in China and in the Asia-Pacific region, offering lower prices and tailoring the vehicles' offerings to the tastes of the local market.
Last November Tesla CEO Elon Musk indicated that the automaker will probably produce the Model 3 and the upcoming Model Y crossover in China, rather than the more expensive models, aiming to offer volume models as opposed to pricey luxury models at the top end of its lineup.
News of a preliminary agreement in China comes just days after Tesla barely reached a crucial production milestone at its Fremont, California, plant that produces the Model 3, reaching the 5,000-cars-per-week target just hours after the self-imposed deadline. Model 3 production had gotten off to a significantly slower start than predicted 12 months ago when it began, delivering the most stressful (and expense-filled) year for the electric automaker.
