Tesla has signed an agreement to build a factory in Shanghai

Key Points
  • Tesla said it will build a "Gigafactory" in China to make electric cars. 
  • Tesla had been planning the move since at least last year, but now have signed an agreement with the Shanghai Municipal People's Government. 
  • The company still needs to secure permits, and it could be 5 years or more before the factory is operating at its full capacity of 500,000 vehicles. 
Tesla to open new plant in Shanghai

Tesla said Tuesday it signed an agreement to build a factory in China to make its electric cars.

The news comes days after the automaker has had to raise prices 20 percent in China to respond to import tariffs.

Tesla said it expects construction to begin "in the near future, after we get all the necessary approvals and permits." From there, it will take about two years before Tesla can start making cars, and another two to three years before the factory is fully ramped up to its capacity of 500,000 cars.

Shares of the company climbed nearly 2 percent Tuesday morning.

“It is always interesting to see how the shares react," CFRA analyst Efraim Levy told CNBC. "A lot of times it seems news is good news for them.”

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The pop in Tesla's share price is striking, he said, because the already cash-strapped Tesla just essentially made another financial commitment.

"Even though a Gigafactory in China has been anticipated, now they have an agreement to finance the building of it," he said. "That will put pressure on an already stressed balance sheet.”

Even prior to Tuesday's announcement many on Wall Street expected Tesla will need to raise capital sometime in the near future. Excluding its new commitments in China, Tesla will still have to raise $2 billion-$3 billion as an operational cushion some time around the first quarter of next year, Levy said.

On the other hand, China is on its way to becoming the world's largest market for electric vehicles, and Tesla stands to sell a lot of cars there, he said.

Here is a full statement from Tesla:

"Last year, we announced that we were working with the Shanghai Municipal Government to explore the possibility of establishing a factory in the region to serve the Chinese market. Today, we have signed a Cooperative Agreement for Tesla to start building Gigafactory 3, a new electric vehicle manufacturing facility in Shanghai.
We expect construction to begin in the near future, after we get all the necessary approvals and permits. From there, it will take roughly two years until we start producing vehicles and then another two to three years before the factory is fully ramped up to produce around 500,000 vehicles per year for Chinese customers. Tesla is deeply committed to the Chinese market, and we look forward to building even more cars for our customers here.
Today’s announcement will not impact our U.S. manufacturing operations, which continue to grow.”