Elon Musk’s Tesla aims to deliver 500,000 cars and sport-utility vehicles this year, though the company said economic uncertainty will make that more difficult.

Photo: Ringo H.W. Chiu/Associated Press

Elon Musk’s plan to build Tesla Inc.’s TSLA -6.35% fourth vehicle assembly factory represents the next phase in his effort to reshape the auto maker to rapidly increase the number of electric cars it can sell each year as it races to compete with global rivals.

The chief executive’s announcement Wednesday that work has already begun to prepare building a factory on more than 2,000 acres outside of Austin, Texas, marks one of the few new major car assembly plants to be built in the U.S. in the past decade, and comes while the rest of the auto industry is navigating through a global pandemic and fears of a prolonged recession.

The factory, slated to begin production next year, would employ at least 5,000 workers and build the Cybertruck pickup and other vehicles. The truck, revealed last fall, drew enthusiasm—and some jeers—for its “Blade Runner”-inspired appearance.

The Texas factory continues a building boom for Mr. Musk, who opened a second assembly plant in China late last year, as he looks to turn Tesla into a major auto maker. In 2017, Tesla sold about 100,000 vehicles. This year, the company aims to deliver 500,000 cars and sport-utility vehicles, though it cautioned on Wednesday that economic uncertainty from the pandemic will make that more difficult.

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Beating out Tulsa, Okla., for the new factory, Texas Gov. Greg Abbott cheered the more than $1 billion in planned investment and jobs that the new assembly factory would bring to the area. His office said Tesla didn’t receive any state incentives to locate in Texas, while local authorities have approved tax incentives totaling about $60 million over several years.

Tesla’s China plant allowed the company to continue building cars during the second quarter when its lone U.S. assembly plant in Fremont, Calif., was shut down for several weeks as part of an effort to slow the spread of Covid-19.

The company is working to expand the China factory so it can assemble the Model Y compact sport-utility vehicle, Tesla’s latest offering. The Model Y began U.S. deliveries in March and is expected to overtake the Model 3 as its bestseller.

Earlier this year, Tesla began work to build a third assembly plant outside of Berlin.

The added capacity could allow Tesla to build more than 2 million vehicles annually by the middle of the decade, according to a note to investors from Emmanuel Rosner, a Deutsche Bank analyst. BMW AG ’s namesake brand, for example, sold about 2.2 million vehicles last year.

Tesla critics, some of whom are betting against the company by short selling its stock, question if there is truly enough demand for so many Tesla vehicles, noting recent price cuts.

On Wednesday, Mr. Musk was adamant that wasn’t a concern. “Demand is not a problem,” he said.

During a public conference call with analysts, Mr. Musk was joined by Jerome Guillen, president of Tesla’s automotive division, in talking about the need to hire additional workers to help with manufacturing. “We want more people,” Mr. Guillen said.

Mr. Musk became deeply interested in improving and automating the car-building process after painful struggles to increase production of the company’s first SUV, the Model X, in 2016.

In a rare public acknowledgment of error, Mr. Musk conceded in 2018 that he went overboard with his automation attempts for the Model 3. That mistake snarled the company’s efforts to ramp up production in 2017 and 2018—a dark period that shook investor confidence in his ability to execute on his vision for Tesla to evolve from a niche luxury brand into a mainstream electric-car company.

That confidence has never been stronger. Shares this month have risen almost 50%, though they dipped on Thursday along with the rest of the market. For the year, Tesla’s market value has nearly quadrupled.

The factory expansion is a further acknowledgment by Tesla that some of its founding assumptions were off. The original business plan for the company, founded in 2003, was to create a car company resembling more of a personal technology company, rather than a traditional auto maker, by outsourcing vehicle assembly much like how gadgets were made.

Electric vehicles at a Tesla charger station in Fremont, Calif., July 20.

Photo: Nina Riggio/Bloomberg News

But that effort was eventually abandoned as Mr. Musk began to realize the importance of controlling more of a company filled with complex logistics and manufacturing nuances.

He has since brought in-house more of his supply chain than is normal for a car maker, including seat manufacturing, and developed greater expertise in battery cell manufacturing.

Mr. Musk said Wednesday that a lack of battery cells at an affordable price is limiting the company’s growth. Tesla is expected to provide an update on its evolving battery strategy in September.

He also said the Fremont factory, outside of San Francisco, will continue to be important, despite suggesting in May he might close it down and relocate the company’s Palo Alto headquarters amid frustration with local California authorities over the plant’s closure.

In fact, on Wednesday, Mr. Musk said the Fremont factory will continue to be part of the company’s plans, saying assembly will continue there of its large sedan and SUV along with the Model 3 and Model Y for the western half of North America.

He also teased that the coming Roadster sports car might be made in California. “We will continue to grow in California,” he said.

Records filed with local authorities in Texas show Tesla plans to build a manufacturing facility of four million to five million square feet there over a period of two to three years. Mr. Musk later described the plant as the company’s biggest property when asked what kind of production volume to expect. Tesla plans to begin operations in the fourth quarter of next year, the records show.

In picking Austin, Tesla is joining tech companies, such as Facebook Inc. and Apple Inc., in seeking a location with a lower cost of operating compared with Silicon Valley. Mr. Musk touted the factory’s location near the Colorado River, saying the company planned a boardwalk and trails for hiking and biking.

“We’re going to make it a factory that is going to be stunning,” Mr. Musk said. “It’s going to basically be an ecological paradise—birds in the trees, butterflies, fish in the stream.”

Write to Tim Higgins at Tim.Higgins@WSJ.com

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