China raised the import tariff on USA cars to 40 percent in July, but cut it to 15 percent from the start of this year as part of a trade war ceasefire. The Shanghai plant is created to make another 500,000 cars annually-a massive step up for a company that sold fewer than 14,000 cars in China in the first nine months of 2018, according to LMC Automotive, which tracks the auto market.
Tesla is eager to get the factory up and running as soon as possible so it can begin constructing select models locally.
Tesla's factory in China - the world's biggest auto market - will be its first outside the US.
The facility is expected to churn out about 250,000 vehicles annually in the first phase, and that capacity will double over time, the Shanghai government said in a statement Monday.
Tesla CEO Elon Musk tweeted earlier on Monday.
In July, Tesla raised the prices of the Model 3 and the Model Y by about 20 per cent in the mainland after Beijing slapped an additional 25 per cent tariff on American-made vehicles, a retaliatory measure against the USA administration as trade tensions between the two countries escalated.
The Shanghai venture comes as U.S. companies face pressure from President Donald Trump to keep manufacturing jobs at home, and as Beijing and Washington wage a trade spat that has seen both sides levy tariffs on hundreds of billions of dollars of products. China remains the world's largest market for vehicles, particularly green ones.
Other electric vehicle manufacturers in China include BYD Auto, BAIC Group, and government-owned Shanghai Automotive Industries Corp.
Musk added that initial construction on the factory is scheduled to wrap up this summer with Model 3 production beginning by the end of the year and "high volume production" kicked into gear in the following year.
But the pace of growth is expected to slow along with China's economy.
China typically requires foreign automakers to set up joint ventures with domestic firms when establishing manufacturing plants, which entails the sharing of profits and technology with local partners.
The factory is expected to double Tesla's electric auto production, beginning in two years. He provided no price figures for China-made cars.
But Tesla has said its Shanghai plant will be "wholly-owned" by the company.