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October 21, 2020

Tesla's China factory is about to play an even bigger role in its global ambitions

Tesla began making cars in China about a year ago to bolster its presence in the world's largest auto market. Now the country is about to become an even more critical part of its global strategy.

The electric automaker will soon start exporting Chinese-made vehicles to Europe, Chinese state-run news outlet Xinhua reported Monday.

The company wants to start shipping Model 3 sedans from Shanghai as early as next week to Germany, Italy and Switzerland, among other destinations, according to Xinhua.

Tesla did not respond to a request for comment from CNN Business. But Song Gang, director of manufacturing and operations for Tesla's Shanghai Gigafactory, called the move "an important step in Tesla's global layout," according to Xinhua.

"Exporting to Europe means the quality of made-in-China Model 3 sedans has been recognized by the European market," Xinhua quoted him as saying.

Tesla's move may be temporary, since the company is already building another plant in Europe. It last year announced plans for a new Gigafactory in Berlin, which is expected to be completed sometime in 2021.

A 'template for future growth'

Tesla is not the only foreign automaker to lean on Chinese manufacturing to help drive global sales. Other players, such as BMW, also have plans to build and ship Chinese-made vehicles to Europe, noted Tu Le, founder of Beijing-based consulting firm Sino Auto Insights.

CEO Elon Musk has previously called the Shanghai Gigafactory, which first began churning out cars about a year ago, a "template for future growth."

The company has told shareholders that the facility was about 65% cheaper to build than its Model 3 production plant in the United States. And it is significantly less expensive to build a Model 3 in China than America, said Sofya Bakhta, a marketing strategy analyst at Daxue Consulting, a Chinese research firm.

"Compared with the American version, the production cost of the Chinese Tesla Model 3 has dropped by 20% [to] 28%," she estimated.

Labor costs alone are considerably lower in China than in the United States, noted Le.

Wedbush Securities analyst Daniel Ives said that Tesla's continued operations in China remain "the linchpin to [its] production and distribution."

"Tesla is using this as a strategic advantage to go after other regions and pockets of Europe," he said.

In a research note Sunday, Wedbush predicted that the company's "shining [Gigafactory] success in China" would help it deliver better-than-expected earnings this week.

Meanwhile, the Chinese auto market is predicted to become even more critical in the coming years. "Ultimately, we see China representing 40%+ of global sales for the company potentially by early 2022," Wedbush analysts wrote.

The Shanghai factory was also notable for how quickly it came together. The company beat its own deadline to start making cars there, kicking off trial production only 10 months after it had broken ground on the plant. That boosted confidence that the company had the ability to hit delivery targets as it grew.

Tesla was also the first foreign automaker to be allowed to open a factory in the country without a Chinese partner, putting pressure on local players. Later, the company won a tax break for some of its cars, which helped make its prices more attractive to customers.

"The Shanghai Gigafactory not having any significant issues really allows [Musk] to keep his foot on the gas," said Le, who added that because the factory's construction happened "quickly and seamlessly," there's more pressure on other cities to accommodate Tesla's expansion plans.

But the decision to export its Chinese-made cars also signals a shift away from the company's original intention to use the factory for local supply, according to Le.

This decision could suggest that there is increased demand in Europe, or "less demand in China," he said.

Tesla has become the largest seller of electric vehicles in China, according to Le. The company has cut prices of its Model 3 there several times, including once to qualify for government subsidies.

But "if 100% of their volume could be consumed domestically, then I'm pretty certain that they would sell it into China," Le said.

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