What happened?

Electric-car maker Tesla (NASDAQ:TSLA) said on Thursday that it's in talks with Shanghai Municipal Government regarding a possible factory in the region. The factory would serve the Chinese market, Tesla said. "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 said in a statement to the press.

In addition, Tesla reiterated that it will reveal details about plans for production in China by the end of the year.

Tesla vehicle production.

Tesla factory. Image source: Author.

The confirmation follows a report from Bloomberg earlier this week stating that Tesla was close to making final arrangements for a car factory with the city of Shanghai.

Does it matter?

A car factory for Tesla would be key for the company.

First, local production in China would allow Tesla to avoid a 25% import tariff on vehicles produced outside of the country. Given Tesla's aggressive pricing strategy to only increase prices in global markets by the amount of unavoidable taxes, customs duties, and transportation costs, the elimination of a 25% import tariff would mean Tesla could price its vehicles 25% lower.

Second, Tesla's sales in China soared in 2016, more than tripling  compared to sales in the market in 2015. With China sales now representing about 14% of total revenue, Tesla has good reason to focus on the market.

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.