Will China be the leading market for Tesla batteries and electric cars, or its top competitor?

A new study by Bloomberg Intelligence reports that Chinese companies are at work on plans to produce more than 120 gigawatt-hours a year by 2021. Demand for lithium-ion batteries is forecasted to radically increase in the next five years as plug-in electrified vehicle sales grow in markets including world-leading China, and power utilities install battery systems to manage wind and solar energy.

Tesla’s Gigafactory in Nevada is scheduled to have capacity for up to 35 GWh battery production annually by 2018 as the company prepares to increase vehicle production seven-fold in that time span.

Earlier this month, CEO Elon Musk said Tesla will be announcing by year’s end its plans to build three or four more Gigafactories. One of those locations is expected to be China.

Since then, Tesla has continued talks with Chinese officials about setting up a factory in China – for battery packs and possibly for its electric cars. Shanghai could be the ideal place for that to happen.

“Tesla is talking with the Shanghai Municipal Government to explore the potential of establishing a manufacturing plant in the country to serve the Chinese market,” a company spokesman said this week to Forbes.

But exploring “the potential” could see a wide gap to a deal being made.

In May, Tesla CEO Elon Musk met with Chinese vice premier Wang Yang. While there was speculation that the meeting was part of setting up a joint venture with a local Chinese automaker, Tesla denied that was the case. All the other foreign automakers with plants in China have JVs set up with Chinese automakers.

“Tesla is deeply committed to the Chinese market, however these rumors are not true,” the company said.

That could be a problem for China’s national government – and for competitor automakers and battery producers who do comply with Chinese guidelines and business practices. Shanghai-based SAIC Motor Corp., one of China’s largest automakers, has joint venture partnerships with two of the largest global automakers, General Motors and Volkswagen.

Tesla does have the option of setting up shop in one of China’s foreign trade zone, which would allow for bypassing the JV. However, Tesla would still have to pay the steep 25 percent import duty as it does now; that has meant adding significantly to car prices in China for Tesla, restricting its sales potential.

Last year, Tesla gained $1.1 billion in revenue from sales in China, about 15 percent of its worldwide revenue. The launch of the Model 3 is expected to grow that share, but Tesla likely would prefer to avoid the import duty and to keep the new car more affordable.

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China already has the strongest global presence in lithium-ion batteries. About 55 percent of that production takes place in China compared to 10 percent in the U.S. Bloomberg New Energy Finance forecasts China will own about 65 percent of global share by 2021.

Tesla’s Gigafactory has been credited with sparking much of the interest for battery production plants; and its Tesla Energy storage division has helped spur growth in energy storage. China has been paying close attention as it pushes to add more “new energy vehicles” – electric and hydrogen-powered – along with renewable energy power plants. Fighting severe air pollution and climate change is a top issue for China’s local and national governments.

“The Gigafactory announced three years ago sparked a global battery arms race,” said Simon Moores, a managing director at Benchmark Mineral Intelligence. “China is making a big push.”