Will Tesla See Big Profits From China Growth?

Following an event earlier this week in which Tesla (NASDAQ:TSLA) delivered the first China-made Model 3 units to employees in the country, the automaker is now prepared to start delivering the vehicle to Chinese customers. Less than a month before Chinese New Year on Jan. 25, Tesla will celebrate the first deliveries to customers who are not employees at a Jan. 7 event at its new Shanghai factory, Reuters reported this week.

The move highlights how quickly Tesla has moved from factory construction to full-blown vehicle production. Even more, it leaves Tesla well positioned in the world's largest auto market.

Tesla's Shanghai factory

When Tesla broke ground on its factory in China on Jan. 6, 2019, few would have thought the automaker would start production at the factory just one year later. But that's exactly what happened.

Not only is Tesla ready to start delivering Shanghai-made vehicles to customers in China, but the company also said in its fourth-quarter vehicle delivery update on Jan. 3 that the factory has already "demonstrated production run-rate capability of greater than 3,000 units per week, excluding local battery pack production which began in late December."

Furthermore, Tesla said in its third-quarter update that it has already installed tooling in its Shanghai factory for a production volume of 150,000 units annually -- a level equal to about 40% of Tesla's current annualized global deliveries.

It takes time for vehicle production rates to reach full speed. But Tesla has achieved high-volume production before with its Model 3 at its factory in Fremont, California, so the company will likely be able to ramp up production of its Shanghai-made Model 3 faster than it did with the U.S.-made version.

Management indicated in its second-quarter earnings call that "Gigafactory Shanghai will be producing at scale" by the second half of 2020.

A massive opportunity

It would be difficult to overstate how important this Chinese factory is for Tesla. As the world's largest auto market, China represents an enormous growth opportunity for the electric car maker.

Even when Tesla achieves a production rate of 150,000 Model 3 units per year in China, it could be only the tip of the iceberg. CEO Elon Musk, who has been known to be overly ambitious with some of his targets, believes long-term demand for the Model 3 in China is 5,000 units per week. But even if he is off by 20%, this still translates to over 200,000 Model 3 deliveries per year in the country.

In a tailwind for Model 3 sales there, Tesla can bypass import tariffs by producing cars in China for Chinese customers. This allows the automaker to price its vehicles more competitively. Furthermore, they qualify for an electric vehicle subsidy in the market, helping the price come in at a competitive 299,050 yuan (about $42,900) after incentives.

This article originally appeared in the Motley Fool.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.