SEOUL -- South Korea's LG Chem is in the final stage of negotiations to supply lithium-ion batteries to U.S. electric vehicle maker Tesla Motors, which has until now sourced the key component almost exclusively from Panasonic.
This could deal a major blow to the Japanese electronics giant, which positions the automotive business as a growth pillar, because now it will be exposed to competition in serving a key customer.
Panasonic currently produces the electric-vehicle batteries for Tesla in Osaka Prefecture. The two companies are also building a massive battery plant in the U.S. state of Nevada. The $5 billion facility will be completed in 2020, with a portion of the plant to go online next year.
Panasonic is the global leader in automotive lithium-ion batteries, with a 46% market share, followed by 17% for Automotive Energy Supply -- a joint venture of Nissan Motor and NEC -- according to research company Techno Systems Research. LG Chem comes in third with a share of 11%.
But LG Chem supplies to more than 20 companies, including General Motors and Renault, and delivery under many contracts has yet to go into full swing.
On Tuesday, a new LG Chem facility was completed in Nanjing, China, becoming the company's third battery plant after sites in South Korea and the U.S. Combined annual production capacity has increased 40% to the equivalent of more than 180,000 electric vehicles.
LG Chem's battery business, including mobile phone batteries, generated sales of 2.85 trillion won ($2.55 billion) last year.
By adding LG Chem as a source, Tesla apparently seeks to stabilize battery supply and spur competition for better pricing and product performance.
To increase production of the high-end Model S sedan and the Model X sport utility vehicle, Tesla is working to expand its production capacity in California to over 50,000 vehicles annually by the end of the year, up from 35,000 at the start of 2015. Separately, the company's second plant opened in September in the Netherlands. So Tesla's global capacity will grow to nearly 100,000 units. To put this figure into perspective, the world's best-selling electric vehicle, the Nissan Leaf, sold 60,000 units last year.
Tesla's move symbolizes the intensifying competition Japanese manufacturers face from the Koreans. In liquid crystal displays and memory chips, Samsung Electronics, LG Electronics and other Korean manufacturers have surpassed Japanese companies. In 2011, the combined market share of South Korean manufacturers in lithium-ion batteries, including those for mobile phones, topped that of Japanese companies.
The automotive area has remained a strength of Japanese companies because the country's automakers have led in hybrids and electric vehicles. Nissan buys batteries for the Leaf from the joint venture Automotive Energy Supply, while Toyota Motor gets nickel-hydrogen batteries for its Prius hybrids from within the group.
As non-Japanese automakers beef up their hybrid and electric-vehicle offerings, competition from Korean companies and other battery makers likely will intensify.
Tesla is an important customer because its vehicles require many batteries to travel long distances between charges, and the company is enjoying sales growth despite lofty prices on some products.
In light of the Volkswagen emissions scandal, electric cars are drawing fresh attention as green vehicles. Battery performance is key to determining vehicle pricing and driving ranges, so suppliers are actively developing better technologies.