US electric vehicle manufacturer Tesla is looking to cut its Model 3 prices in China by 20% or more next year after local production gets under way, according to local reports citing sources close to the company.

Manufacturing and outsourcing costs are expected to be significantly lower than in the US at THE newly-built Shanghai plant, while producing locally will also allow the company to avoid Chinese import dutY.

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Major components for the Model 3 such as batteries, electric drivetrains, chassis and body parts are expected to be produced locally.

Substantial cuts in the Model 3 price are expected to be made in the second half of 2020 and will depend on local market conditions, according to the reports, from CNY356,000 (US$50,900) currently.

In China, Tesla will be up against BMW and Mercedes-Benz, which are aggressively broadening their electric vehicle ranges, as well as local startups such as Nio, Byton and Xpend.

Chinese demand for electric and plug in hybrid vehicles, or new energy vehicles, has declined sharply in the second half of 2019 following major cuts in government subsidies in June.

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After growing by almost 59% to 617,000 units in the first half of 2019, NEV sales in the country declined by close to 35% to 421,000 units in the five months between July-November according to data released by the China Association of Automobile Manufacturers (CAAM). 

With competition rising rapidly in this segment, other EV manufacturers will also be pressured into making price cuts to remain competitive.