By David Z. Morris
October 22, 2017

Tesla has reached an agreement with the Chinese government in Shanghai to build a production facility in the city’s free-trade zone, potentially giving the carmaker a unique edge in the world’s largest market for electric vehicles.

Details of the deal, as reported Sunday morning by the Wall Street Journal, are still being worked out. But it is the first of its kind for a foreign car manufacturer, and could drastically cut production costs for Teslas sold in China – and the deal is expected to exclude the kind of technology-sharing agreements that can deter innovative international companies from setting up shop there.

Tesla has been pursuing a Chinese factory for years, and the Shanghai deal started to come into focus in June. That followed the announcements that Tesla sold $1 billion worth of cars in China in 2016, and that it had accepted a large investment from Tencent Holdings, a technology giant in China.

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But Tesla’s progress in China faced a big hurdle – thanks to in part to import duties, a Tesla sells for around 50% more in China than in the U.S. A plant in Shanghai’s free-trade zone would reduce labor and transportation costs (though the latter are generally a very small part of the total cost of goods). CEO Elon Musk said in 2015 that a factory in the country could cut the price of vehicles sold in China by a third.

The Journal writes, though, that cars produced under the new factory deal are still likely to be considered “imports” and face a 25% duty. In the past, foreign carmakers have only been able to avoid that tariff by forming joint ventures with local manufacturers, which often include technology-sharing provisions.

China is aggressively pursuing total electrification of its vehicle fleet, making it a vital market for Tesla. But according to some experts, Chinese manufacturers’ reliance on borrowed intellectual property could harm not just foreign companies looking to compete there, but innovation in clean vehicles more generally.

Tesla gaining an independent toehold in China, then, is not just good news for the company, but for the world – even if it means accepting a steep tariff.

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