Tesla will begin delivering its Model 3 cars made at its Shanghai factory to Chinese consumers on Tuesday amid a cooling electric vehicle (EV) market in China. The U.S. carmaker's venture into the world's second largest economy has been welcomed by Chinese EV start-ups hoping to get a boost from interest in new energy vehicles. Tesla has put a lot of focus on China. Its Shanghai factory, which started production in October last year, is the company's first outside of the U.S. Tesla reportedly produces more than 1,000 Model 3 cars per week at the Shanghai factory, and hopes to grow that to 3,000 in the near future, it previously said.

Tesla's pricing strategy

When Tesla announced the opening of its Shanghai factory in 2018, Chinese electric vehicle sales were growing rapidly, propped up by government subsidies. Those subsidies have allowed Tesla to recently cut the price of its Model 3 in China. Starting production at its Shanghai plant also means Tesla can avoid import tariffs on its vehicles in China. Even with the price cut, Tesla's Model 3 starts at over 300,000 yuan ($43,133). Cars that cost less than 100,000 yuan account for almost half of total cars sold in China, according to Bernstein, making the Model 3 expensive in comparison. Tesla's recent price discount however has boosted orders, analysts at JL Warren Capital said, but warned that the company's pursuit of sales could hurt its margins.

The China-built Tesla Model 3 is unveiled at a Tesla store on November 22, 2019 in Shanghai, China. Zhang Hengwei | China News Service | Visual China Group | Getty Images

"(Tesla) China is obviously very focused on volume as opposed to margins, given its frequent price change to stimulate demand. Since locally sourced components are limited at this point and batteries are still imported from the U.S., the price cut to drive demand in China market will negatively impact (Tesla) profit," JL Warren said in a recent note, adding that the surge in orders is likely to taper off as Chinese New Year approaches. Furthermore, China has now begun reducing its incentives for electric vehicles. Sales of new energy vehicles fell 43.7% in November, according to the China Association of Automobile Manufacturers.

The Elon Musk factor

Some analysts believe that Tesla's higher pricing compared to its competitors will not hold the company back. "It will still be viewed as more premium purchase and you're paying ... more for the brand and that foreign vehicle cache," David Whiston, senior equity analyst at Morningstar, told CNBC's "Squawk Box Asia" on Tuesday. "But also there is only one Elon Musk and the only way to be associated with that, much like Steve Jobs and Apple, is to buy a Tesla vehicle," he said.

Shanghai-based market research firm Automotive Foresight forecasts that Tesla will be able to deliver 100,000 to 150,000 units of the Model 3 this year in China. "Tesla's positioning is unique, not much direct local competition so far. If there is no serious quality issue ... Tesla has no problem to hit the target in 2020 in China," Yu Zhang, managing director at Automotive Foresight, told CNBC.

Local competition

The government push towards electric vehicles, subsidies, and venture capital cash has helped spawn dozens of start-ups in China. Companies like Nio, Xpeng Motors and WM Motor are just a few names trying to make it in the electric vehicle race. Executives at those startups are hoping Tesla's entrance into the Chinese market will give them a boost too. "I think it is a good thing for Tesla to be in China for local production. It will attract more potential buyers to look into EVs," Freeman Shen, CEO of Chinese electric car start-up WM Motor, told CNBC. "Some of them will buy Tesla's cars and some will buy WM's cars. In EV market it is impossible that the winner will take all."

"I think having Tesla starting a big push in China will be both (a) challenge and opportunities for Chinese players. Everyone, especially the tech focused players, will benefit from increased consumer enthusiasm for smart, autonomous driving, capable EVs," Brian Gu, president of another Chinese electric car upstart Xpeng Motors, told CNBC. Tesla is much bigger than any of those companies in terms of market capitalization and the number of cars it has on the road globally. But competition in China is only heating up with both Xpeng and WM Motor looking to ramp up production. Meanwhile, other established automakers are looking to China for their own electric cars. Daimler launched its China-made Mercedes EQC SUV last year.

China a 'swing factor' for Tesla stock

Tesla's performance in China will be closely watched by investors, who see a big growth opportunity for the stock — it hit a record high of $454 last week. That performance has been helped by the fact that Tesla beat market estimates for vehicle deliveries in the fourth quarter, as well as recent excitement around the China story. "In a nutshell, we believe China remains the major swing factor in the stock and ultimately is worth between $75 to $100 per share to Tesla's valuation with Giga 3 the linchpin," Daniel Ives, managing director of equity research at Wedbush Securities, said in a recent note, referring to the Shanghai factory.