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Tesla-Panasonic Relation Strains Over Gigafactory 3 Production

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Tesla, Inc.’s (TSLA - Free Report) relationship with Panasonic Corp. (PCRFY - Free Report) has hit a rough patch, after the latter recently denied any plan to set up a new battery cell factory for Tesla in China. It also suggested that Tesla could either access battery cells from Gigafactory 1 in the United States, where Panasonic is the exclusive supplier, or can simply use cells produced in China by other manufacturers.

Reportedly, the joint venture between Panasonic and Tesla for Gigafactory 1 in the United States has not generated sustainable profits yet due to lower sales of Tesla Model S and Model X. Earlier this year, the two companies also shelved plans to widen Gigafactory 1 beyond its current capacity of 35 GWh.

Tesla’s supply-chain problems have been restricting its ability to hold back production of Model 3 sedan in China, as the company depends on Panasonic, its single-source supplier, for many components. The inability of Panasonic to increase volume in order to meet Tesla’s rising demand limits the automaker’s ability to expand production capacity.

Per Bloomberg, Tesla has signed an agreement with South Korea’s LG Chem Ltd. to source batteries for its Gigafactory 3 in China. LG Chem will provide Tesla with 21700 type battery cells, which will be used in Tesla’s Model 3 and Model Y cars.

Tesla has also entered into a preliminary agreement of battery supply with China’s biggest battery producer, Contemporary Amperex Technology Co. Limited (CATL). Per this agreement, the company will procure cells for Tesla’s Model 3 cars which will be manufactured in Gigafactory 3 in China.

China is the largest electric vehicle market in the world by a substantial amount, almost doubling that of the Unites States. Tesla's latest China plant will give the company direct access to this market and allow Tesla to cut costs substantially. In a letter to shareholders, Elon Musk said that this factory was 65% cheaper than any Model 3 factory built in the United States.

The Gigafactory 3 is currently in trial production and plans to make the plant fully operational by the end of this year. In Phase 1, Tesla expects to produce 250,000 cars for China annually and reach its capacity of 500,000 units in the years after.

Zacks Rank & Stocks to Consider

Currently, Tesla carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Auto-Tires-Trucks sector are BRP Inc. (DOOO - Free Report) and Spartan Motors, Inc. (SPAR - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

BRP has a projected earnings growth rate of 18.9% for the current year. Its shares have gained around 51.3% over the past year.

Spartan Motors has an estimated earnings growth rate of 85.42% for the ongoing year. The company’s shares have surged 119.2% in a year’s time

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