Tesla, the American electric vehicle manufacturer, is building a Megapack factory in Shanghai, China. The announcement, made on Sunday, signals Tesla’s increasing reliance on China, despite the US government’s efforts to encourage domestic production of electric vehicles.

The new factory, which will start construction later this year, will be capable of producing 10,000 Megapacks annually. The Megapack is a container-sized battery that can store enough energy to power about 3,600 homes for one hour. Tesla has built Megapack installations in a few locations around the world, including Texas and South Australia, and plans to sell the Megapacks it makes in China globally.

The decision to build the factory in Shanghai comes at a time when the US government is using economic policy to push automakers and other manufacturers to produce more of their products domestically. The Treasury Department recently issued updated guidance on the Inflation Reduction Act’s $7,500 EV tax credit, stating that companies must source the minerals in their car batteries from the US and other approved trading partners for the vehicles to qualify for the incentive.

Separately, the Biden administration has stated that CHIPS Act funding recipients must sign agreements promising they won’t expand production capacity in China. This move is part of the US government’s efforts to reduce dependence on China for critical technologies.

Despite these policy efforts, Tesla’s decision to build a Megapack factory in China underscores the country’s importance as a key market for electric vehicles and renewable energy technologies. China is the world’s largest EV market, and the country has been investing heavily in renewable energy infrastructure in recent years.

By building the factory in Shanghai, Tesla will be able to take advantage of China’s favorable regulatory environment for EVs and renewable energy, as well as its large and growing market for these technologies. The move also highlights Tesla’s commitment to expanding its presence in China, where it already has a significant manufacturing footprint.