Tesla Inc has agreed to buy batteries from South Korea’s LG Chem Ltd to be used in electric vehicles (EV) produced in China, people familiar with the matter said.
Batteries made by LG Chem are initially to be used in Model 3 cars manufactured in a plant near Shanghai, Tesla’s first outside the US, said the people, asking not to be identified discussing a private matter.
LG Chem batteries would also be used in Model Ys produced there once the compact crossover car is released, they said.
Shares of LG Chem jumped.
The supply agreement is not exclusive to LG Chem, the people said, meaning Tesla could procure batteries from other suppliers as the Model 3 maker prepares to start production in China this year, part of the EV pioneer’s push into what is the world’s biggest market for new-energy vehicles.
Tesla plans to use multiple battery suppliers for its China-made vehicles, the people said.
It has also been in talks with top Chinese battery producer Contemporary Amperex Technology Co (CATL, 新能源科技) about a supply deal, Bloomberg reported in March.
Tesla has a long-standing relationship with Japan’s Panasonic Corp, which makes batteries with the automaker in Nevada.
Securing battery supply is a key step in Tesla chief executive officer Elon Musk’s plan to expand in China, an increasingly important market for the loss-making company as incentives for EVs in the US wane.
While Tesla has a strong following in China, local rivals have a head start thanks to significant support for the sector from Beijing.
Imported vehicles are made costlier by tariffs, while locally built EVs enjoy Chinese government incentives.
For Seoul-based LG Chem, winning an order from a high-profile customer like Tesla bolsters its profile as one of the world’s emerging battery-making powerhouses.
A spokesman for LG Chem said that the company does not comment on issues related to customers.
Representatives for Tesla in China did not respond to multiple requests for comment.
A CATL representative declined to comment.
Talks with CATL are continuing, but are taking time as the two sides discuss technical specifications, the people said.
LG Chem was more flexible in meeting Tesla’s technology requirements, one of the people said.
LG Chem is to provide Tesla with so-called 21700-type battery cells, which have more capacity than some older battery types, one of the people said.
They are to be made at LG Chem’s factory in Nanjing, about 320km west of Shanghai.
A unit of South Korea’s fourth-largest conglomerate, LG Chem is the world’s second-biggest manufacturer of lithium-ion battery cells, according to BloombergNEF.
The company is seeking to reduce its reliance on chemical production by boosting sales of electric-vehicle batteries.
It has supply deals with Volvo Cars to Renault SA and General Motors Co.
Tesla broke ground on the factory outside Shanghai on Jan. 7 after years of negotiations with Chinese authorities to become the first foreign automaker to wholly own a manufacturing facility in the country.
Tesla plans to start producing vehicles at the factory by the end of the year.
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