The Wall Street Journal broke the news, reporting that the automaker won't form a partnership with a local company to build vehicles in the country, meaning it won't be eligible to avoid China's 25 per cent import tax.
The move will help reduce manufacturing and shipping costs, although Tesla will still be required to pay 25 percent import fees. As such, establishing a factory in China will be a major deal for Tesla as it works to ramp up its production around the world.
China is one of the biggest and fastest moving auto market in the world, and a factory in the region could assist the electric vehicle maker in gaining some traction in the country's EV market. However, that would mean sharing profits, and more importantly technology, with the local partner.
Tesla is brawling with production problems at its main factory in Fremont, California. "While we expect most of our production to remain in the USA, we do not need to establish local factories to ensure affordability for the markets they serve". It was also previously reported in June that Tesla was looking at Shanghai and Guangdong for a plant to expand in China.
If the carmaker were making its vehicles in the Shanghai area, there would be a strong incentive for it to purchase parts in China, which strengthens the suppliers' base in the country, for the rapidly growing industry of electric cars.
Crucially, Tesla would operate the factory itself, according to the report, rather than partnering with a local automaker. In August, Tesla announced a $1.5 billion bond offering purportedly to ramp up production on the Model 3. In 2016, 507,000 electric vehicles and plug-in hybrid electric vehicles were sold in China, a 53 percent increase on the previous year.
A representative of Tesla declined to comment to Bloomberg News other than to refer back to the company's statement from June. This is apparently the first time such a deal between the government and foreign vehicle makers was made.