Photo/Liu Ling (NBD)

Jan. 23 (NBD) -- U.S. electric vehicle (EV) maker Tesla held talks with Chinese battery maker Tianjin Lishen Battery Joint-Stock Co Ltd (Lishen) to supply batteries for its new Shanghai factory, and two people with direct knowledge of the matter said the pair signed a preliminary agreement, reported Reuters.

But when reached by news outlet Caijing.com.cn (Caijing), Tesla said it has received quote from Lishen but denied any agreement. An insider at Lishen also told Caijing that currently, there is no cooperation with Tesla.

Although Tesla hasn't made up mind which battery maker to work with, the company needs to cooperate with local suppliers to lower prices if it was to expand in China.

It is noted that Tesla aims to produce 500,000 vehicles a year in China, which is two times of its global sales in 2018. To ensure stable battery supply, it has to work with other suppliers.

A mid-level employee with a large battery company told Caijing that if a car maker only has one battery supplier, it is likely to face challenges such as shortage, complicating its car production in the end.

Another reason is that Tesla has to cut down costs so as to produce more affordable vehicles for the China market. Although it has cut down prices several times, its price is still relatively high.

As one of the most important component of a car, battery becomes critical in cost-cutting. However, its Shanghai factory won't produce batteries itself. Making battery will cause certain pollution and Shanghai's environmental regulation is strict, reported Caijing citing a person familiar with environmental regulation.

To meet its production goals, it's urgent for Tesla to find battery suppliers who can offer quality products at more reasonable prices.

However, Tesla's choice is limited as the cylindrical battery is not a mainstream product in China.

Statistics show that the installed capacity of square-shaped batteries totaled 6.3 GWh in November last year, accounting for over 70 percent of the total in that month, while the installed capacity of cylindrical batteries stood at 1.28 GWh, representing only 14.3 percent of the total.

In China, major cylindrical battery makers are numbered, which are mainly Guoxuan High-Tech, BAK Battery, Lishen, and First Battery in terms of installed capacity.

Lishen is the first battery maker in China able to mass produce the same type of cylindrical battery 21700 made by Panasonic for Tesla. In 2017, Lishen released 5 types of 21700 battery and won intentional contracts of over 5 billion yuan (735.4 million U.S. dollars). By the end of 2018, its daily output of 21700 batteries has exceeded 400,000 units.

BAK Battery and First Battery started mass production of 21700 battery only from the second half of 2018.

But Guoxuan High-Tech, the largest cylindrical battery maker by installed capacity, once revealed that it has no production plan for 21700 batteries.

Given that, Lishen seems a very good candidate.

Email: tanyuhan@nbd.com.cn