At a ceremony at the site of the plant on the outskirts of Shanghai, Chief Executive Elon Musk joined the city's mayor and other local government officials to formally begin construction of a factory that Tesla has said will cost around two billion U.S. dollars.

Tesla broke ground earlier this week on Tuesday for its Shanghai Gigafactory, where it plans to begin making its Model 3 electric vehicles by year's end, a first step in localizing production in the world's largest auto market.At a ceremony at the site of the plant on the outskirts of Shanghai, Chief Executive Elon Musk joined the city's mayor and other local government officials to formally begin construction of a factory that Tesla has said will cost around two billion U.S. dollars.

Tesla announced recently that a total of 90,700 cars were delivered in 2018, a quarter-on-quarter growth of 8 percent.

According to the International Energy Agency, China topped the world in sales volume of new energy vehicles (including battery electric and plug-in hybrid), three times more than that of America.

China has a huge market for new energy vehicles, which encouraged Tesla to launch its Shanghai factory.

Currently, Tesla owns two electric car factories and a battery factory. The assembly factory at Tilburg covers only 1/10 the area of Lingang factory in Shanghai; another super factory at Fremont delivers 6,800 cars every month; the Gigafactory at Nevada is under construction and covers an area of 600,000 square meters, 260,000 square meters smaller than the Shanghai factory.

The recently launched Shanghai factory covers an area of 860,000 square meters and is expected to deliver an annual capacity of 500,000 vehicles.

China has been the largest overseas market for Tesla. However, its high prices may leave many Chinese consumers hesitant to buy its vehicles.

The price gap of the Model 3 sold in China and the U.S. could be as high as 18,187 U.S. dollars, so localization is the only way out for Tesla.

Domestic new energy carmakers are the main force in the Chinese market. Thanks to government subsidies, most of the domestically made new energy cars are sold below 44,000 U.S. dollars.

The direct benefit of building a factory in Shanghai for Tesla is the declining costs. Tariffs will be exempted and transport costs will significantly be reduced.

In 2014, the transport and offloading costs of each Model S were as high as 3,600 U.S. dollars.

Cui Dongshu, Secretary of China Passenger Car Association, said that Tesla might cut its price by over 40 percent after localization.