Tesla in Talks to Set Up Electric Car Factory in Shanghai

Shanghai city officials did not respond to requests for comment. Bloomberg News reported earlier that Tesla and Shanghai had signed a preliminary agreement.

Tesla’s negotiations do not guarantee that a plant will be built. Under Chinese law, such a project would require Tesla to find a Chinese joint-venture partner. While China is full of Chevrolets, Fords and Volkswagens, most are made in factories jointly owned by a foreign automaker and a local company.

The City of Shanghai controls the SAIC Motor Corporation, one of China’s largest automakers and a partner for General Motors and Volkswagen. It was not clear whether Tesla’s negotiations with the city government would steer the company to negotiate with SAIC. Calls to the Chinese automaker were not returned.

Tesla could get around the joint-venture requirement by building a wholly owned factory in a foreign trade zone in China. But it would still have to pay the 25 percent import duty for cars sold in China, as the factory would be treated as outside China for trade purposes.

Further complicating matters, China recently announced that it would issue no more business licenses to make automobiles, including electric cars. Tesla does not have a license, although it could form an alliance with a company that has one.

These are formidable obstacles. But some in the Chinese auto industry say that the economics of producing in China — a low-cost supply chain, especially for electric cars, as well as the ability to bypass the import tariffs — make the proposition attractive.

For China, a domestic Tesla factory could represent a big symbolic victory. Spurred by incessant pollution and increasing dependence on foreign oil, China for the last several years has pushed to be a leader in electric car development.

That has raised concern in Western countries. In March, the European Union Chamber of Commerce in China complained that Chinese law requires manufacturers who…

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