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Tesla has confirmed that it is now in talks with the Shanghai municipal government to build a Gigafactory and manufacture cars in the city’s tech sector, according to Reuters. “While we expect most of our production to remain in the U.S., we need to establish local factories to ensure affordability for the markets they serve,” Tesla said in a statement. [Photo credit: Tesla] Chinese regulations require Tesla to enter into a joint venture with a local company to manufacture vehicles in the country. While Tesla hasn’t announced a partner yet, all eyes are on Tencent Holdings, the Chinese internet company that holds a 5% stake in Musk’s company. The EV company has not said which vehicles it plans to produce in China if and when the deal goes through, but the Reuters report cites a supplier source who says the company is considering Model 3 and Model Y production there. The company plans to release more finalized plans by the end of 2017. Tesla has previously shared that it is looking to build vehicles and batteries in China which would allow the company to avoid a 25% tariff on vehicles it sold in the country. Last year, Tesla’s sales in China tripled to over $1 billion, or roughly 1/7th of its total sales. The company currently builds all of its vehicles in its Fremont factory in northern California and ships them worldwide, though the other half of its supply chain is firmly rooted in batteries. Tesla produces its newest 2170 lithium ion battery cells – the same cells being used in Tesla’s Model 3 – exclusively at Gigafactory 1 in Sparks, Nevada. Tesla shares popped 1.5% at the news of the talks, leading to $382 in midday trading.