China Agrees to Tesla Remedy for Model 3 Customs Block

China’s customs authorities have accepted Tesla Inc’s plan to remedy problems with the clearance of imported cars, a source familiar with the matter told Reuters on Tuesday.

Financial publication Caixin reported earlier that authorities had suspended customs clearance for the electric carmaker’s Model 3 sedans, citing various irregularities, including improper labeling of the vehicles. The source did not give further details on how the issue had been resolved. Tesla shares, which fell more than 5 percent in early trading on the Caixin report, were last down less than 3 percent.

Making inroads in China, the world’s largest electric vehicle market, is crucial for the Silicon Valley carmaker as it seeks to offset softening demand in the United States and convince investors of its ability to become consistently profitable. “Selling into China has clear hurdles and this is a reminder of the pitfalls when betting on growth in the region,” Wedbush Securities analyst Daniel Ives said.

Tesla did not immediately respond to Reuters requests for comment.

Chief Executive Officer Elon Musk has played up the support Tesla is getting from Chinese authorities as the company invests in the country’s first wholly foreign-owned car plant in Shanghai, due to come online later this year. Until then, Tesla has to import U.S.-made cars with substantial customs duties, putting it at a disadvantage against locally-made, government-subsidized electric vehicles from rivals such as Nio Inc, Byton and XPeng Motors.

Caixin said the Shanghai customs authority told Tesla in an official notification on March 1 that it should not sell or use Model 3 vehicles that had already been cleared. The authority has also urged inspectors at all ports responsible for importing vehicles to step up inspections of other imported Tesla models and suspend their release if similar problems are uncovered, the report added.

A total of 1,171 Model 3 sedans arrived at north China’s Tianjin Port, after 84 such cars were imported via the port in February, China’s state news agency Xinhua reported on Tuesday. The first shipment of Model 3 cars arrived in Shanghai on Feb. 22, and deliveries started at the end of the month, according to media reports. Tesla’s Shanghai factory, made possible by raising funds from local banks at low interest rates, plans to start making Model 3s at the end of this year and eventually produce cars at a rate of 10,000 per week.

Tesla has cut prices in China several times in the last few months to make its cars “more affordable” and revive sales hit by Sino-U.S. trade tensions. To cut costs and support its drive to generate profit, Tesla last week launched a $35,000 version of its Model 3 sedan and said its global sales would now be online-only.

(Reporting by Yilei Sun, David Stanway, and Sonam Rai in Bengaluru)

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