Domestic production would help shield Tesla against import duties as the USA and China find ways to wriggle out of the tariff quandary.
Cheaper Model 3 versions will be produced in Shanghai for the Chinese market amid a pinched auto market and Chinese automakers such as BYD and Geely building their own electric vehicles.
Tesla signed a preliminary agreement with the Shanghai government a year ago to build the 500,000-unit factory in the Chinese city.
The Shanghai government last month said mayor Ying Yong had visited the site and urged Tesla to "accelerate" work on the factory.
Tesla plans to produce its Model 3 and Model Y cars in the initial phase of production at the Shanghai plant, with an annual capacity of 250,000 vehicles.
Gigafactory 3 will be China's first wholly foreign-owned auto plant and should allow Tesla to minimise the impact of the trade war which has seen Beijing impose big tariffs on USA vehicle imports.
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The push into China comes amid simmering trade tensions between Beijing and Washington.
Musk was in Shanghai Monday to mark the official groundbreaking of Gigafactory 3, Tesla's first auto- and battery-assembly plant outside the U.S. Chinese consumers who have reserved the Model 3 can now configure it online, and the company expects deliveries for newly placed orders to start in March.
Tesla, based on Palo Alto, California, global automakers including General Motors Co., Volkswagen AG and Nissan Motor Corp. that are pouring billions of dollars into manufacturing electric vehicles in China. A key China PMI index fell below 50 in December to its lowest reading since May 2017, signaling weakening demand in the $12.2 trillion economy. "Aiming to finish initial construction this summer, start Model 3 production end of year & reach high volume production next year".
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.
Construction begins just three months after Tesla secured a land parcel at Lingang, Shanghai for the Gigafactory 3, its first plant outside the United States.
China has raised import duties on US-made cars as part of the broader trade fight with the US.
Tesla has said it plans to use mostly local debt to fund the factory.