As Tesla begins ‘trial’ Model 3 production in China, it closes in on a European factory

Tesla has started trial production of its Model 3 vehicle in its new Shanghai factory, which CEO Elon Musk called a "template for future growth."

This trial basis includes all aspects of production, including body, paint and general assembly. Tesla said it is clearing final regulatory hurdles such as finalizing its manufacturing license. Once complete, the company will begin ramping production and delivering vehicles, the automaker said Wednesday in its third-quarter earnings report.

Tesla's factory capacity is poised to grow even larger as it gets closer to picking a location in Europe for its third factory. The company said Wednesday it's in the final stages of its site-selection process. The eventual European factory is expected to produce both Model 3 and Model Y, Tesla said.

For now, Tesla's future financial health is tied, in part, to its ability to ramp up sales in China, the world's largest electric vehicle market.

In July 2018, Tesla struck a deal with the Chinese government to build a factory in Shanghai. It was a milestone for Tesla and Musk, who has long viewed China as a crucial market. And it was particularly notable because China agreed for this to be a wholly owned Tesla factory, not a traditional joint venture with the government. Foreign companies have historically had to form a 50-50 joint venture with a local partner to build a factory in China.

Chinese President Xi Jinping has pushed forward plans to phase out joint-venture rules for foreign automakers by 2022. Tesla is one of the first beneficiaries of this rule change.

The opening of the China factory comes at a time of rising trade tensions between China and the United States. Tesla has been particularly exposed to relations between China and the U.S., and the resulting rising tariffs. Tesla builds its electric sedans and SUVs at its factory in Fremont, Calif. and ships them to China, which subjects the vehicles to an import tariff.

"We believe China could become the biggest market for Model 3," the company said in its third-quarter earnings report.

Tesla broke ground on the factory in China in January and it was constructed in just 10 months, including the installation of stamping and other equipment. Musk called the speed of construction "unprecedented."