SHANGHAI—Tesla Inc. plans to build its Model Y compact sport-utility vehicle in China, the electric-car maker said Tuesday, in a move to expand the company’s production capabilities and boost sales in the world’s biggest auto market.

The Palo Alto, Calif., company said Tuesday that it is starting work related to production of the Model Y at Gigafactory Shanghai, Tesla’s first overseas plant. The company didn’t elaborate on the nature of the work being conducted, but Tesla’s Chinese website said that the first Model Ys could…

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