Tesla Inc. said it is exploring with government officials in Shanghai the possibility of opening a facility to build electric vehicles for the Chinese market.

The Silicon Valley auto maker reiterated Thursday it plans to define its production plans for China by year’s end. China, the world’s largest market for new-car sales and a big consumer of luxury vehicles, is an important market for Tesla, especially as the government pushes for more electric vehicles.

“Tesla is deeply committed to the Chinese market, and we continue to evaluate potential manufacturing sites around the globe to serve the local markets,” Tesla said in a statement. “While we expect most of our production to remain in the U.S., we do need to establish local factories to ensure affordability for the markets they serve.”

Tesla didn’t mention a local joint-venture partner. China requires foreign auto makers to operate factories with local partners, though officials have signaled a willingness to relax such requirements. In May, Tesla Chief Executive Elon Musk, who had recently visited China, cryptically suggested such rule changes would be “good timing.”

By making cars in China, Tesla could cut the prices of its vehicles by a third by reducing shipping costs and avoiding import duties, Mr. Musk has said.

In afternoon trading in New York on Thursday, Tesla’s shares rose about 2% to $383.99. The stock is up about 80% this year.

China charges a 25% duty on all imported cars, but the hefty markup hasn’t deterred affluent buyers who regard a Tesla vehicle as a prestige item.

One Chinese Tesla owner, Chen Zhanchong, said he paid $176,000 for a Tesla Model S P90D in late 2015, well over the sales price in the U.S. But the 31-year-old Guangzhou resident, who recently left his job at an internet company, said it was still a good value for a high-performance electric car.

“If a cheap Model 3 is produced in China in large quantities, local companies won’t be able to compete,” Mr. Chen said. “Tesla will enjoy explosive growth.”

Tesla reported over $1 billion in revenue in China in 2016, a figure that analysts believe equates to around 11,000 vehicle sales. The company sold just over 76,000 cars globally last year.

And sales in China have accelerated in 2017: Tesla sold around 5,500 cars in China in the first four months of the year, according to EV Sales, a website that tracks the electric-vehicle market.

Yet while local manufacturing gives Tesla the opportunity to sell cars in far greater numbers, China’s fast-changing regulatory environment is creating uncertainty among foreign auto makers unsure about what Beijing’s requirements will be.

Current regulations also require manufacturers building electric cars in China to source all vehicle components locally. That presents a challenge for Tesla, which won’t be able to use batteries made in its U.S. “gigafactory” in its Chinese-built cars, said Bill Russo, managing director of Gao Feng Advisory, a Shanghai-based auto consulting firm. Tesla may be forced to form a joint venture with a local battery maker, as well as a car maker, he said.

Even so, Tesla has no choice but to manufacture vehicles in China, despite the regulatory uncertainties, in order to achieve scale and tap what is already the world’s biggest market for electric cars, Mr. Russo said.

“On a positive note, China is willing to allow the premier EV brand to plant its flag on Chinese soil,” he said, referring to Tesla. “Tesla needs China. And China needs Tesla — it wants to show they’re not a closed ecosystem.”

Recent events signaled that Tesla is moving closer to committing to opening a factory in China, analysts said. Chinese internet company Tencent Holdings acquired a 5% stake in Tesla for $1.78 billion in March, and Mr. Musk met with senior government officials in Beijing the following month.

By Tim Higgins
–Junya Qian contributed to this article.

Market Watch

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