Electric vehicle sales are exploding in China, thanks in large measure to aggressive rebates and incentives from the Chinese government. Interest in Tesla automobiles among Chinese customers has increased strongly since the company officially announced its new, less expensive Model 3. Tesla has gotten more reservations for the Model 3 from China than any other country outside of the United States, according to Ren Yuxiang, Tesla’s head for Asia Pacific.

 Tesla Model 3

Last week, Tesla co-founder and chief technical officer JB Straubel was in Leipzig, Germany, where he participated in a panel discussion at the International Transport Forum. While there, he told China Daily that as interest in the Model 3 increases, constructing a factory in China begins to make economic sense.

Last fall, Elon Musk set of a firestorm when he was quoted as saying all Model 3 cars would be manufactured in China. He was quick to point out that a translation error was responsible for the mix up, but tweeted that a Chinese factory was definitely being considered.

China is a tricky market for all manufacturers. Foreign companies are often required to partner with a local company. Such partnerships often involve more of a transfer of technology than Tesla may be comfortable with. However, in order to avoid significant import duties that drive up the price of cars made outside the country, other global manufacturers have found it necessary to form such alliances.

Tesla is said to be exploring partnerships with several Chinese automakers, but has not yet concluded an agreement. Nor has it decided the best place to locate its factory in China. Another unanswered question is whether it would only manufacture the Model 3 in a Chinese facility or also begin making its Model S sedan and Model X SUV in China as well.

Another factor to consider is that the incentives the Chinese government has put in place to encourage the sale of zero emissions vehicles are costing the country a lot of money. There is no guarantee China will be able to afford the same level of incentives indefinitely. It could decide to scale back its incentive program at any time.

There are lots of imponderables for Tesla as it seeks to sell its cars in China. Partnering with a local company and sharing proprietary knowledge could be dangerous. But more than 20 million new cars were sold in China last year. That is simply too large a market to ignore, and Tesla has never shown itself to be afraid of taking risks. A Tesla factory in China before the end of the decade seems almost a sure bet.

Source: Forbes