Exclusive: Tesla in talks with China's Lishen over Shanghai battery contract - sources

By Yilei Sun and Tom Daly

BEIJING (Reuters) - Tesla Inc has signed a preliminary agreement with China's Tianjin Lishen to supply batteries for its new Shanghai car factory, as it aims to cut its reliance on Japan's Panasonic, two sources with direct knowledge of the matter said.

The companies had yet to reach a decision on how large an order the U.S. electric car company would place, and Lishen was still working out what battery cell size Tesla would require, one of the sources said.

While Panasonic is currently Tesla's exclusive battery cell supplier, Tesla Chief Executive Elon Musk said in November the U.S. company would manufacture all its battery modules and packs at the Shanghai factory and planned to diversify its sources.

"Cell production will be sourced locally, most likely from several companies (incl Pana), in order to meet demand in a timely manner," Musk said in a tweet in November.

Other battery makers in the running for contracts could include Contemporary Amperex Technology Co Ltd and LG Chem Ltd.

Tesla broke ground on the $2 billion so-called Gigafactory, its first in China, earlier this month and plans to begin making Model 3 electric vehicles (EV) there by the end of the year.

Musk has said the factory will produce "more affordable" vehicles for the Chinese auto market, the world's biggest, where the firm is facing mounting competition and risks from U.S.-China trade tensions.

Tesla declined to comment, while Lishen did not immediately respond to a request for comment.

Panasonic said in a statement it was studying various possibilities with regards to Tesla's Shanghai plant, but nothing had been decided. It declined to comment on the possibility of losing exclusive-supplier status with Tesla.

The sources declined to be identified because the discussions are private.

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Lishen, which says its clients range from Apple and Samsung Electronics to Geely and Hyundai Motor, has joined other battery makers in aggressively pursuing contracts with the rapidly growing EV industry.

The Chinese company started mass production of the same type of cylindrical battery made by Panasonic for Tesla's Model 3 in 2017, in the city of Suzhou about 100 kms (60 miles) away from Shanghai.

Reuters reported on Monday that Panasonic and Toyota Motor Corp were set to launch a joint venture next year to produce EV batteries in an effort to compete with Chinese rivals.

A joint venture would build on the agreement that the pair announced in late 2017 on joint development of batteries with higher energy density in a prismatic cell arrangement.

It would also help Panasonic cut its heavy reliance on Tesla, whose production delays have weighed on the Japanese company's earnings.

Panasonic planned to shift most of its prismatic battery-related equipment and facilities in Japan and China to the joint venture, while those producing batteries for Tesla would remain under the company, a source said.

(Reporting by Yilei Sun and Tom Daly in BEIJING; additional reporting by Makiko Yamazaki in TOKYO; Editing by Brenda Goh and Stephen Coates)