Tesla Model S automobiles stand on raised cradles at the Tesla Motors assembly plant in Tilburg, Netherlands.
Photograph by Jasper Juinen — Bloomberg via Getty Images
By David Z. Morris
May 22, 2016

Speaking at the International Transport Forum in Leipzig on Thursday, Tesla CTO JB Straubel said that it will make sense for the carmaker to build a factory in China when local demand reaches “critical mass,” China Daily reports. It’s hard to say just where that threshold lies, but Chinese customers made up the 2nd biggest group of preorders among the broader flood of demand for the upcoming Model 3.

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Straubel’s comments follow statements from Tesla’s John McNeill that suggested a Chinese factory could be part of the ramp-up in production capacity for the Model 3. Last year, Elon Musk suggested that a Chinese Tesla factory could happen around 2019. And there are reports that Tesla has already scouted factory locations there.

Tesla (TSLA) has had a bumpy road in China, though, missing regional sales targets and cutting jobs in 2015. And expansion there would entail a variety of risks.

China is aggressively ramping up its own electric car sector, supported by large government subsidies aimed at solving the country’s air pollution crisis. NextEV has become the most prominent Chinese player, but Foxconn and Tencent are also part of an alliance looking for a piece of the market.

For more on Tesla’s Model 3 production strategy, watch our video:

If Model 3 production remains centered in Tesla’s California factory, Chinese customers will likely have a longer wait for their cars than U.S. buyers. That presents the threat that, even with its newly-aggressive production schedule, Tesla could see would-be Model 3 customers in China turn to local competitors instead.

But building a factory in China to try and forestall that threat could present its own problems. Most foreign companies wishing to do business in China must work with local partners, deals that often entail sharing technology. That could put one of the 21st century’s most technologically innovative companies at very real risk for damaging intellectual property theft, and even more Chinese competition.

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