(Reuters) -China's No. 1 automaker BYD considers Spain to be its top candidate for a third car factory to serve the European market, two people briefed on the matter told Reuters, as the company seeks to grow sales on the continent.

A BYD assembly plant, joining two other planned factories in Hungary and Turkey, would be a significant boost for the carmaker that competes with Tesla, and would also bolster Spain's aim of becoming a major hub for electric vehicle production.

One of the sources said Spain is favoured by BYD because of its relatively low manufacturing costs and clean energy network.

While it is known that BYD has been looking for a third plant to serve the European market, Spain's emergence as a frontrunner has been previously unreported.

ANY DECISION NEEDS SIGN-OFF IN CHINA

BYD country manager for Spain and Portugal Alberto De Aza told Reuters last month that Spain would be an ideal location for further expansion of BYD's European manufacturing footprint because of its industrial infrastructure and cheap electricity.

A third source cautioned that the company has not communicated any final decision and was still considering other countries besides Spain. A final decision on the plant, which should come before the end of the year, will need to be approved by Chinese regulators.

Reuters reported in March that BYD has looked at other countries including Germany, though that has been debated internally because of high labour and energy costs.

Both Spain's Industry Ministry and BYD declined to comment.

BYD AIMS TO MAKE ALL CARS FOR EUROPE LOCALLY IN THREE YEARS

BYD's sales in Europe jumped 280% in the first eight months of the year from the same period in 2024 after the automaker began selling plug-in hybrids as well as fully electric cars.

Reuters reported in April that BYD had overhauled its European operations to boost sales by hiring more managers and adding dealerships.

Diplomatic and business ties between Spain and China have warmed considerably in recent years. Last year, Spain abstained on a European Union vote on tariffs on Chinese-made EVs.

China's government privately told automakers to halt investments in European countries that supported those tariffs, Reuters reported last year. Germany voted against the tariffs.

Spain, Europe's second-largest car-producing nation, has attracted major investments including from Germany's Volkswagen and China's Chery and CATL since it announced a 5 billion euro ($5.8 billion) plan in 2020 to attract EV and battery manufacturing using EU pandemic relief funds.

BYD aims to produce all EVs for sale in Europe locally within three years, which would help it avoid EU tariffs.

Its planned factory in Hungary is currently under construction, though sources told Reuters in July that BYD has pushed back its timeline for mass production at the plant until next year. Its Turkish plant is due to open in 2026.  

($1 = 0.8618 euros)

(By Reuters Staff; Editing by Nick Carey and Jan Harvey)