The U.S. electric car maker Tesla is likely to source batteries from South Korea’s LG Chem for the electric vehicles it will produce in the China facility in Shanghai.  So far, Panasonic was its main supplier.

According to the Tesla news, the two sides are close to a supply deal.

Tesla is looking to start commercial production at the Shanghai plant later this year. The Gigafactory in China will make the popular car Tesla Model 3 and later on Model Y as well.

According to informed sources quoted in a Reuters' report, the supply deal with the South Korean company is part of Tesla’s push to diversify its supply sources.

Japan’s Panasonic Corp has been the long-standing battery supplier, mainly for the American production center in Nevada.

The supply deal is also abetted by China’s relaxation of supply norms which had earlier placed top priority for local Chinese companies in the matter of battery procurement.

Chin scrapped its “white list” that had kept out foreign firms. It was first published in 2015 to support the growth of the domestic battery sector.

What LG Chem will supply

LG Chem is considered the second-largest manufacturer of lithium-ion battery cells in the world, according to Bloomberg NEF.

Its core business has been pouch-type auto batteries. It is ready to offer cylindrical auto batteries sought by Tesla, according to sources quoted in the report.

LG Chem will supply Tesla 21700 type battery cells, having more capacity than older battery types. They will be made at LG Chem’s factory in Nanjing, 200 miles west of Shanghai.

LG Chem has supply agreements with China’s Huayou and Tianqi. It is expanding capacities in China and revamping manufacturing facilities in Nanjing to produce the latest auto batteries.

LG Chem also runs battery deals with Volvo Cars, Renault SA and General Motors.

Supplier base diversification is Musk’s new strategy

The supply deal between Tesla and LG Chem will not make the latter an exclusive supplier of batteries. Tesla will be free to procure batteries from any source it wanted.  

Tesla will also continue buying Panasonic batteries for the initial phase of production in China.

Bloomberg had reported in March that Tesla is talking to top Chinese battery producer Contemporary Amperex Technology Co for a supply deal.  

Tesla is also interested in procuring batteries from China’s CATL. Currently, the Chinese battery maker does not have much exposure in cylindrical batteries required by Tesla.  Tesla Logo This file photo shows the Tesla logo is seen outside of their showroom in Washington, DC, on August 8, 2018. - Tesla shares surged on Tuesday, October 23, 2018, after a high-profile stock short-seller shifted gears to say the electric car maker is 'destroying the competition.' Photo: Getty Images/Saul Loeb

Tesla Chief Executive Elon Musk is on record that he is aiming self-sufficiency in component sourcing and would work with multiple suppliers for battery modules for the Shanghai production.

Tesla’s China plans

CEO Elon Musk is betting high on China. As one of the largest EV markets in the world, China offers huge market prospects especially when incentives for EVs are waning in the U.S.

Though electric-vehicle sales are rising in China, there is a two-fold threat as well.

One is the government intends to phase out subsidies on EV purchases.

Second is China’s auto market itself is under a slump, with the industry’s sales showing a downtrend for more than a year.

Tesla’s rivals in China include BYD and NIO.  BMW and Daimler will also join the crowd with their electric models and add more competition in the months to come.

Tesla stock was down 1.11 percent at 6.25 am ET on Friday.  But LGChem stock jumped.