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Tesla has faced a meaningful cost disadvantage versus domestic manufacturers in the Chinese electric vehicle market, but that is changing.

Generous government subsidies for locally produced EVs and steep tariffs on imported vehicles have made the already pricey Tesla (ticker: TSLA) models even more expensive compared with less flashy offerings from the likes of China’s BYD (BYDDF). But with those subsidies coming down and Tesla’s Chinese factory set to start churning out cars by the end of the year, one analyst sees a meaningful opportunity for Tesla sales to boom in the world’s largest auto market.

The back story. Chinese passenger-car sales reached 23.7 million in 2018, of which 583,880 were domestically produced electric vehicles, according to China Automotive Information Net. Tesla doesn’t disclose its unit sales in China, but the company earned 8% of its $22.6 billion in revenue there last year.

Those domestically built EVs had been generously subsidized by the Chinese government until last week, when the subsidies were heavily reduced. Tesla is building a so-called Gigafactory in Shanghai, which it expects to be operational by the end of 2019. On Tesla’s first-quarter earnings call in late April, CEO Elon Musk said that initial production volumes would be in the range of 1,000 to 2,000 cars a week.

What's new. By the time Tesla ramps up production in its Chinese factory, the subsidy of 50,000 yuan per vehicle (about $7,300) will have been long gone, reduced to 25,000 yuan—but so will the 40% import duty Tesla has been paying since last summer.

In addition to avoiding the steep tariff, Tesla’s China sales will benefit from local competitors’ less attractive offerings losing half their subsidy, which Piper Jaffray analyst Alexander Potter calls a “recipe for falling sales.”

“Most of China’s EVs lack differentiation, with dozens of ‘me too’ products susceptible to price hikes now that subsidies are evaporating,” Potter wrote in a report on Tuesday. “Other than Tesla’s Model 3 and a handful of other models, we believe most of China’s EVs cannot sustain their own existence without aggressive subsidization.”

Other than the most environmentally conscious car buyers, consumers tend to be most swayed by price and features when shopping for a new ride. A locally-made electric vehicle that is lower quality and less inspiring is a hard sell against a cheaper and more reliable gas-powered car from an established car maker like Toyota (TM) or Volkswagen (VWAGY). But a Tesla is a legitimately attractive car on merits other than the fact it runs on battery power—and could be worth a premium price anyway.

Looking ahead. Beginning in 2021, the Chinese government plans to move to a system under which all car makers in China must sell a minimum quota of electric vehicles per year. That could lead to more competition for Tesla from companies such as BMW (BMWYY) or Daimler’s (DMLRY) Mercedes-Benz, which will effectively be required to move a certain number of plug-in cars in China. But Tesla’s singular focus on EVs and its head-start on its Shanghai Gigafactory will give it a leg up, Potter says.

“This is because Tesla employs a strategy that, until recently, has been foreign to most other brands (namely: building electric vehicles that consumers actually want to buy),” Potter wrote. “As a result, regardless of what happens to China’s EV policies, we expect Tesla’s volume to ramp materially once the company’s Shanghai facility opens in late 2019.”

While the S&P 500 index was roughly flat on Tuesday morning, Tesla stock was down 1.8%, adding to a nearly 33% drop so far in 2019.

Potter has an Overweight rating and $396 price target on Tesla shares, about 77% above their recent $223.45. Wall Street remains split, however: Tesla stock has 12 Buy ratings and 15 Sell ratings among large brokerage firms, with price targets ranging from $140 to $530.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com