Tesla Agrees to Buy LG Batteries for EV Made in China

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Informed sources

According to foreign media reports, electric car manufacturer Tesla has reached an agreement with South Korea’s LG Chem Co., Ltd. (LG Chem) to agree to purchase batteries for Chinese-made electric vehicles.

It is told by the Informed sources that the battery produced by LG Chem will be used first for the Model 3 car produced at a factory near Shanghai, which is Tesla’s first factory outside the US. In addition, when Tesla’s compact crossover Model Y is released, LG Chem’s battery will also be used to support this model. After the news came out, the stock price of LG Chem rose.

Informed sources pointed out that this supply agreement is not unique to LG Chem, which means that Tesla may purchase batteries from other suppliers because the Model 3 manufacturer is preparing to start production in China later this year. It is Tesla’s most important move to enter the world’s largest new energy vehicle market.

He/She also said that Tesla plans to find a number of battery suppliers for its Chinese-made cars and has been negotiating a supply agreement with China’s top battery manufacturer, Contemporary Amperex. Tesla has a long-standing relationship with Matsushita, which produces batteries in Tesla, Nevada.

Key Initiatives

Ensuring battery supply is a key step in Tesla’s CEO Elon Musk’s expansion plans in China. As the US incentives for electric vehicles have gradually weakened, China is becoming an increasingly important market for this company that is still losing money.

Although Tesla has many supporters in China, thanks to the Chinese government’s strong support for the industry, local competitors have taken the lead. Imported cars become more expensive due to tariffs, while locally-made electric cars enjoy government incentives.

For Seoul-based LG Chem, winning orders from high-profile customers like Tesla will strengthen its image as one of the world’s emerging battery manufacturing giants.

The Korean company’s share price rose by 3.9%, Panasonic’s decline in Tokyo was 0.9%, and Shenzhen’s CATL fell by 4.9%. A spokesperson for LG Chem said the company would not comment on customer-related issues. Tesla’s representative in China did not respond to multiple requests for comment, and the CATL representative declined to comment.

According to people familiar with the matter, Tesla’s negotiations with CATL are still going on, but because the two sides are discussing technical specifications, they need more time. One person familiar with the matter said that LG Chem is more flexible in meeting Tesla’s technical requirements.

Larger capacity

One person familiar with the matter said that LG Chem will supply Tesla with the so-called 21700-type battery, which has a larger capacity than some older battery types. They will be produced at LG Chemical’s Nanjing facility, which is approximately 320 kilometers west of Shanghai.

According to media reports, as a subsidiary of South Korea’s fourth-largest corporate group, LG Chemical is the world’s second-largest lithium-ion battery manufacturer. The company is seeking to reduce its reliance on chemical production by promoting sales of electric vehicle batteries, and it has reached an agreement with Volvo Cars to supply car batteries to Renault and General Motors.

On January 7 this year, Tesla broke ground in a factory on the outskirts of Shanghai. Previously, Tesla had been negotiating with the Chinese government for many years, hoping to become the first foreign automaker to have a manufacturing plant in China. Tesla plans to start producing cars at the plant by the end of 2019.

In this period of uncertainty for Tesla and China, Tesla has redoubled its efforts to enter the Chinese market. Although China’s electric vehicle sales are rising, its growth has been curbed as a result of the government’s phasing out of subsidies for electric vehicle purchases. China’s overall auto market is experiencing a historic downturn, and the industry’s total sales decline has been going on for more than a year.

Tesla is also facing fierce competition. Electric car giant BYD, backed by Warren Buffett’s Berkshire Hathaway, and other domestic competitors, such as NIO, are using Chinese-made cars to win User’s favor. High-end competitors such as BMW and Daimler AG are also beginning to bring their electric models to the market.

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