LG Chem to double China battery capacity to meet Tesla demand

FILE PHOTO: The logo of LG Chem is seen at its office building in Seoul, South Korea, October 16, 2020. REUTERS/Kim Hong-Ji

(Reuters) – South Korea’s LG Chem Ltd plans to more than double production capacity of battery cells it makes in China for Tesla Inc electric vehicles (EV) next year, sources said, to keep up with its U.S. client’s growth in the biggest car market.

The firm, a supplier for Tesla’s Shanghai-built Model 3, will also ship its increased output from China as well as Korea to Tesla’s factories in Germany and the United States, said two people with knowledge of the matter, signalling an increased role in the supply chain of the world’s leading EV manufacturer.

The plan comes as Tesla, LG Chem’s primary customer, scrambles to secure cells as part of an aggressive global production expansion plan, as it targets soaring demand fanned by governments promoting EVs to curb air pollution.

LG Chem has already added production lines in South Korea this year mainly to meet demand from Tesla’s U.S. plant, the people said. Moreover, the automaker has asked Japan’s Panasonic Corp – which supplies the U.S. plant – to also supply its Shanghai factory, said one of the people, who declined to be identified as the matter was confidential.

“Tesla simply doesn’t have enough battery cells,” said the person. “So LG Chem is going to more than double China output.”

Tesla’s growth represents a boon for LG Chem, Panasonic and Chinese supplier Contemporary Amperex Technology Co Ltd (CATL), with Chief Executive Elon Musk revealing plans in September to increase purchases.

Still, Musk said supplies were insufficient and announced Tesla’s plans to make its own, cheaper battery cells – a prospect that could injure suppliers’ pricing power.

“We’re continuing to expand capacity for cylindrical battery cells in response to growing demand from automakers but we can’t comment on specific customers,” an LG Chem spokesman said.

LG Chem, whose battery cell business on Tuesday became an independent unit, in October said it would triple capacity of cylindrical cells to 60 gigawatt hours by 2023, without naming Tesla or disclosing other details. Its China plan and Germany and U.S. destinations are reported here for the first time.

Tesla was not immediately available for comment. Panasonic declined to comment.

LG Chem will invest $500 million over the next year to raise annual production capacity of 21700 cylindrical battery cells – a type used by Tesla – at its Nanjing plant by 8 GWh, the local government said last week, without disclosing current capacity.

The two people told Reuters the plan involved increasing the number of production lines to at least 17 from eight.

LG Chem, alongside CATL, supplies battery cells for Tesla’s Model 3 sedan built in Shanghai, where production began last year and whose current annual capacity is 250,000 cars. Tesla aims to start making its Model Y sport-utility vehicle at the plant next year, for which capacity will reach 250,000 by 2022, Morningstar previously reported.

Each model uses 4,416 battery cells, and each LG Chem line is able to produce up to 7 million cells a month, one of the people said. LG Chem’s 17 lines in Nanjing would therefore be able to cater for up to 323,000 vehicles a year, a Reuters calculation showed.

Initially, LG Chem will be the sole supplier for Shanghai-built Model Y cars, said one of the people. CATL was not immediately available for comment.

LG Chem’s China factory will also initially supply battery cells for Tesla vehicles in Berlin when production there begins, the person said. The automaker needs permission should it want to make its own cells locally.