Tesla is boosting investment in China with plans to build a battery factory in Shanghai

Tesla has announced plans to build a factory in Shanghai to produce its Megapack energy storage system, as CEO Elon Musk fends off growing opposition in Washington to US tech companies investing in China.

Tesla’s Megapack system provides lithium-ion battery packs to help store renewable energy for electricity grids and is a key driver of its energy storage and generation business.

The electric vehicle manufacturer said at a signing ceremony in the Chinese city that its new factory is scheduled to be built in the third quarter of this year, and production is scheduled to start in the second quarter of 2024.

Tesla expects the plant to produce about 10,000 Megapack units annually — the equivalent of about 40 gigawatt-hours of energy storage — reflecting Musk’s decision to deepen engagement with China as his auto business struggles to fend off growing competition from Chinese rivals.

The United States is expected to launch a new screening mechanism for investment in China soon. The requirement would be one part of a wide range of new policies under President Joe Biden aimed at boosting US manufacturing and reducing US dependence on China for manufacturing and technology.

Musk previously pledged to expand the energy storage business to be on par with the company’s auto manufacturing operations.

The new Chinese investment comes at a tense moment for Musk’s relationship with clients in the world’s largest consumer market as well as the ruling Chinese Communist Party under President Xi Jinping.

Amid heightened tensions between China and the West, as well as concerns about supply chain disruptions, some manufacturers are increasingly using their manufacturing bases in China for the domestic market, rather than for export.

Tesla said the products produced at its new battery factory will be sold worldwide.

Tesla’s first factory in Shanghai, which opened in 2019, produced nearly 90,000 units in February, according to the China Passenger Car Association, and can produce about 1.1 million units annually.

Despite success in China — where Tesla generates about a quarter of its revenue — the rise of hybrid and electric vehicle competitors, including Warren Buffett-backed BYD, has seen Tesla lose market share.

While Musk is credited with playing a key role in jump-starting the electric vehicle supply chain, the tech entrepreneur has faced scrutiny from the corners of the national security establishment in Beijing over concerns about his rocket and satellite business, SpaceX.

Those fears were exacerbated after Musk last year began sending Starlink satellites to support Ukraine against invading Russian forces.

The billionaire has also faced questions about data security in China related to Tesla’s self-driving technology.

Musk is said to be looking to partner with Texas-based Chinese electric car battery maker Amperex Contemporary Technology Group, in a move that could give the Tesla supplier an important foothold in the US market.