13:10 GMT29 January 2020
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    Electric auto manufacturer Tesla has announced its first overseas factory will be in China, a country that just imposes steep tariffs on imported US cars as part of an ongoing trade war between the world’s two largest economic powers.

    Bloomberg reported Wednesday that Tesla CEO Elon Musk is going to open the company's first overseas factory, a $5 billion investment, in the Chinese city of Shanghai, with cars to be rolling off its assembly line by 2021.

    China is already the world's largest market for electric cars, a trend that will only accelerate as wages (and thus buying power) in the country continue to rise and the socialist government rolls out new regulations that aim to have Chinese roads 100 percent electric by 2030. Sales of electric cars doubled in China last year to over 1 million, surpassing American sales. China is also Tesla's second-biggest market after the US, accounting for 17 percent of its sales, Reuters noted.

    Musk said the factory should double the company's total capacity and that he hopes the company will eventually produce half a million electric cars annually in China, Fortune noted. The company's lone production facility at present, in Fremont, California, only produced 88,000 cars last year.

    "In the long run, China will be the most important car market for Tesla by far, where the company will earn more than a third of its money," NordLB analyst Frank Schwope told Reuters.

    It's a huge gamble for the struggling carmaker, which continues to burn through cash in an effort to turn a profit.

    It's expected that Tesla will need to return to capital markets this year to raise more funds as it ramps up production of its Model 3 sedan, seen as crucial to the company's long-term profitability.

    The trade war between the US and China could be the determinative factor in Tesla's success. In recent months, the US has imposed tariffs on $34 billion worth of Chinese goods, to which China imposed equal tariffs in kind. US President Donald Trump has threatened even more trade barriers, including a 25 percent tariff on $200 billion in Chinese goods, and Beijing has promised to respond to those as well.

    Financial policy analyst Daniel Sankey told Sputnik Wednesday that "automakers are being hurt by rising steel prices, which are going up due to the recent tariffs imposed by the Trump administration," causing huge price increases in both imported and domestically produced steel.

    Thus, companies like Tesla are "shifting capacity overseas so as to try and obtain foreign steel at prices not inflated by the tariffs," the analyst said.

    But it's not just tariffs on steel: the Chinese also imposed a 40 percent import tax on automobiles made in the US, too. "A plant in China is the best way to avoid high tariffs. It's a kind of natural hedging," said Schwope, explaining another motivating factor behind Tesla's decision.

    However, Fortune observed that a factory in China, producing for the Chinese domestic market, wouldn't totally free Tesla from the costs associated with imported goods. While it could save money on local components, tariffs would still be included in its prices even if the factory were located in one of the Chinese state's free-trade zones.

    Only with special permission from the state, or by forming a joint venture with a domestic company, could Tesla avoid the price increase. Perhaps that is why Musk is coordinating with local partners to raise funds for the facility, although Fortune made no comment to that end.

    Still, even if the trade war gets called off, the damage done by tariffs may last a long time, since price increases are trickling through the global manufacturing supply lines and causing permanent changes in how cars and their parts are made.

    "These tariffs are disrupting that whole network," Sankey told Sputnik. "The automakers are strong and will recover, but not before reorganizing their production lines to minimize the impacts of tariffs, an expensive process. This means that, even if the tariffs are repealed, it will still be very expensive for automakers to revert to their pre-tariff production, and they will need to be heavily incentivized to do so. The US is risking losing its competitive advantage in these production lines for years to come."


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