You can credit Tesla for many things, but building enough cars to support the massive demand for them isn’t one of them. Happily, however, the electric vehicle maker is taking a big step in that direction by reaching a preliminary agreement with the Shanghai government to build a factory there, Automotive News reported.

The city government said that the new plant will have a planned capacity of 500,000 vehicles a year, which would rival the company’s sole production facility in Fremont, California. Tesla had reportedly been working on setting up production in China for more than a year, even though United States president Donald Trump has been trying to bring manufacturing back to the US.

The move, which follows news of Harley-Davidson building a factory in Thailand, is seen as underscoring an urgency in which companies are moving overseas in order to safeguard against any impact from escalating trade disputes. The company stated a year ago that it was working with the Shanghai government to explore local manufacturing, and since then production in China has gotten even more attractive.

In response to tariffs imposed by the US, China raised the import tax on US-built vehicles to 40% last week, resulting in the Model S sedan and Model X crossover being pricier by up to US$30,000 (RM120,700). That puts Tesla’s vehicles beyond the reach of many consumers in what is its second largest market globally. A plant in China would also reduce shipping costs and could make sourcing components more economical.

The company is also looking to expand its capacity and reach global markets more efficiently. The company has already said it would reveal plans to build a plant in Europe towards the end of the year. Aside from the Fremont plant, Tesla also has a battery-producing Gigafactory in neighbouring Nevada.

Tesla is banking on ramping up manufacturing capacity to sustain itself financially, as the company pursues CEO Elon Musk’s mission to transition the world to battery-powered transportation. It accomplished a major milestone by building 5,031 units of the Model 3 in the last week of the second quarter, meeting a target that Musk had previously said was crucial to generating cash and earning a profit.

Musk said in November last year that the company was about three years away from starting production in China, where it would make a couple of hundred thousand vehicles a year for local buyers – and possibly for other parts of Asia. The billionaire entrepreneur said that it would likely build the smaller Model 3 sedan and the upcoming Model Y crossover there, rather than the more expensive Model S and X.

There’s a massive growth opportunity for electric vehicle sales in China, as sales of new energy vehicles – which consists of battery electric, plug-in hybrid and fuel cell vehicles – reached 777,000 units last year and could surpass the 1 million mark this year, according to estimates by the China Association of Automobile Manufacturers. The government is targeting 7 million of these vehicles a year by 2025.

Data from analyst LMC Automotive showed that Tesla sold 14,779 vehicles in China last year, giving it a three percent share of the battery electric vehicle market in the Middle Kingdom – making it the 10th largest brand in that segment. China accounted for 17% of Tesla’s revenue in 2017, according to a filing with US regulators.