Tesla has reached an agreement with the Shanghai Municipal Government to set up a factory in the region, according to a report by the Wall Street Journal. Under the new deal, the California-based electric carmaker will be able to build a factory in China without needing to partner with a local manufacturer if it agrees to operate within the city’s free-trade zone.

Having a manufacturing presence in China will not only allow Tesla to lower its production costs and streamline its Asia supply chain, but also strengthens the company’s relationship with the Chinese government, which may open new doors. Vehicles produced in the country’s free-trade zone would still incur a 25% import tariff.

While Tesla did not comment on WSJ’s report, the Elon Musk-led company did reaffirm its interest in establishing a factory in China by pointing to a statement it made in June. “[Tesla] is working with the Shanghai Municipal Government to explore the possibility of establishing a manufacturing facility in the region to serve the Chinese market. As we’ve said before, we expect to more clearly define our plans for production in China by the end of the year.”

China represents a major market for Tesla. The country is working on plans to phase out the use of petrol and diesel vehicles, while shifting manufacturing focus to electric cars and “new energy vehicles”. With Tesla sales crossing $1 billion last year, the country’s ever-growing middle class is seen as a prime demographic for Tesla’s Model 3. Having a factory presence in China could be seen as only a good thing.

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