Toyota Motor Corporation and the Shanghai Municipal Government signed a strategic cooperation agreement on April 22, establishing a significant partnership to see the Japanese automotive giant develop new energy vehicles in China’s economic hub. The deal’s centrepiece is a wholly-owned Lexus electric vehicle factory to be built in Shanghai’s Jinshan District.

The agreement marks a pivotal moment for both Toyota and Shanghai. It represents the second major foreign automaker to establish a wholly-owned manufacturing facility in China after Tesla’s Shanghai Gigafactory and the first such venture by a Japanese automaker.

According to officials at the signing ceremony, Toyota will invest 14.6 billion yuan (2.02 billion USD) in the project, with an initial land acquisition of 1,692 mu (about 277 acres). The facility will integrate research and development, manufacturing, and sales functions, focusing on producing Lexus-branded electric vehicles and advanced battery technology.

The localisation strategy appears extensive, with reports indicating that domestic component usage in the Lexus vehicles will exceed 95%, significantly reducing costs and potentially allowing price reductions of 15-20% compared to imported models.

This move represents a dramatic shift in Toyota’s China strategy, which has historically relied on joint ventures. The decision comes amid increasing competition in China’s electric vehicle market, where Toyota’s electric models account for less than 1% of its sales. Meanwhile, while maintaining its position as the top imported luxury brand with 18 million units sold in 2024, Lexus has seen a dramatic decline in its three-year value retention rate from 87.5% in 2021 to 59.35% last year.

For Shanghai, the Lexus project becomes its second globally influential new energy vehicle project after Tesla’s Gigafactory, further strengthening the city’s position as a global new energy vehicle industry cluster.

The agreement comes as Toyota aims to expand its global electric vehicle lineup to approximately 15 models by 2027, with a production target of about 1 million electric vehicles annually. The Chinese market is considered “absolutely core” to Toyota’s goal of selling 1 million pure electric cars globally by 2030.

As both Toyota and Lexus race to catch up with Chinese manufacturers and other international competitors in the electric vehicle space, the success of this project could determine Toyota’s future direction in the rapidly evolving automotive landscape.