What happened

Tesla's (TSLA -1.39%) factory in Shanghai, China is its most productive plant. It has been upgraded to have an annual production capacity of about 1.1 million units. So it's not a surprise to see investors moving the stock lower when there are clouds on the horizon in China. As of 1 p.m. ET, Tesla shares were near the day's lows, down 2.6%. 

So what

That is likely because of another resurgence of COVID-19 cases and restrictions in China. Tesla generates approximately one-fourth of its sales from its China plant. So when news surfaced that Chinese electric vehicle maker Nio has temporarily suspended operations at two of its plants due to local virus-related restrictions, some investors are betting it will also impact Tesla.  

Now what

Today, Reuters reported that Nio has halted its production due to efforts to stem the virus' spread. The company confirmed that deliveries and production have both been affected. Nio's facilities are in Hefei, approximately 300 miles from Shanghai. But production at Tesla's Shanghai plant was already interrupted earlier this year from COVID-19 lockdowns in China. And Tesla's suppliers could also be impacted by lockdowns. 

red Tesla Model 3.

Image source: Tesla.

Tesla doesn't provide monthly sales data, but Nio missed expectations for deliveries in October partly due to the COVID-19-related impacts. And Reuters has also reported that Walt Disney's Shanghai theme park resort has closed with visitors being required to test negative for the virus to exit. 

Tesla's Shanghai plant is an important one for the company. Until its new German factory ramps up to full capacity, the China plant has also been supplying European customers. So it makes sense for investors to be concerned if production at the Shanghai factory is limited. That helps explain today's stock drop, but investors should know that the company's long-term potential won't likely be affected by these short-term issues.