Tesla Inc. (NASDAQ:TSLA) is set to launch its first factory in Shanghai, China. However, the launch comes at a time when the electric vehicle industry is grappling with softening demand for EVs. The electric carmaker has been constructing a factory in shanghai that it expects to be operational by the end of 2019.
Shanghai factory to help in cutting shipping costs
Elon Musk, the CEO of Tesla, confirmed on Tuesday that the company was assembling a remarkable engineering team in the country, focused on firmware and software for the factory and vehicles. With a factory in China, the company will be able to cut shipping expenses it incurs when sending vehicles to China. This could allow Tesla to reduce prices and thus appeal to more customers.
This ambitious move of increasing investment in China comes at a time when car sales are waning for the first time in 30 years. Equally, the Chinese government has indicated that it will cut subsidies for EVs. In the first half of 2019, passenger-car sales dropped by 10% in China relative to the same period in 2018. Last year China reported the first annual vehicle-sales decline in almost three decades.
Weakening auto market
According to UBS, the softening of the market is a result of declining economic growth, on-going trade conflicts, and the unavailability of government stimulus. The investment bank indicated that auto sales in China since the begoini9ng of the year have been weaker than anticipated.
However, the decline in vehicle sales is not only for fossil fuel-powered vehicles but also includes EVs. Over the years, the electric vehicle segment has been experiencing exponential growth, but for the first time, the segment experienced a decline. The drop-in china comes after the government indicated that it would pare the incentives that hybrid and electric vehicles have been enjoying. By the end of the year, the Chinese government expects to have phased out all these subsidies.
With indications of a softening market in China, it remains to be seen whether Tesla’s move can reap results.