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Tesla is in talks with a Chinese battery maker to supply the cars it will manufacture at its soon-to-be-built Shanghai factory.
Qualifying a complex new part and ensuring that it matches the quality of Tesla’s originally sourced materials will take time and resources, according to an industry expert.

Tesla is in talks with Chinese battery maker CATL (Contemporary Amerpex Technology Co Limited) about supplying its currently-under-construction Shanghai plant with battery cells, according to Bloomberg.

CATL is part of China’s dream of building technology companies that rival those of the US, EU, and Japan. It is a national champion with international ambitions. And that is why, to play in China, Tesla has to source its cells from CATL.

This could complicate matters for Tesla, which has been adamant that it will be manufacturing cars in Shanghai by the end of the year. The company uses Panasonic battery cells for the rest of its cars around the world, and partners with the Japanese battery maker for its massive Gigafactory plant in Nevada — a plant CATL hopes to one day surpass in terms of capacity.

"While China may indeed have a material impact on near term volume expectations, we still recommend investors to keep medium/long-term expectations for Tesla’s ability to run a profitable Chinese business very low, due to a variety of technological and legal/regulatory factors," Morgan Stanley analyst Adam Jonas wrote in a note to clients on Tuesday.

This supply chain restructring is one of those reasons.

There is a process for this stuff

In order to successfully integrate CATL batteries into Tesla cars — specifically, the Model 3s that will be made in Shanghai — Tesla will have to do a lot of work behind the scenes to make sure they perform as well as the Panasonic batteries.

"So this is a big wildcard since now since Tesla has to qualify another battery manufacturer," Tu Le, founder of consultancy China Auto Insights, told Business Insider

He said that if Tesla doesn’t ensure that CATL’s batteries work exactly like Panasonic’s customers will figure it out and opt for the one that works better. Without studying Tesla’s qualification process and based solely on his experience, he estimated that integrating CATL’s battery could take 12-18 months "depending on the quality level of the battery and the compatibility with Tesla’s current systems."

"I don’t think they would’ve made that announcement unless they already had a fairly significant number of samples from CATL being tested right now in Fremont," he said.

Tesla’s timeline in China is already considered to be extremely ambitious across the industry, "but this could be one of the main bottlenecks," Le added. Tesla did not respond to Business Insider’s multiple requests for comment on this story.

Benchmark MineralsLe described CATL is a second-tier player in the global market, but as a state-owned entity, it is one of over a dozen companies the Chinese government pushes automakers to work with if they want to do business in the country.

This is how CATL — which Le says has been more known for making batteries for scooters than cars — has secured supply arrangements with companies like BMW and Volkswagen, according to the FT.

"They don’t have the capacity to meet the demand just yet but are adding. And their quality and reliability isn’t great, not like the Japanese," Le said.

The backdrop of all of this is that China is having its worst slump in car sales in decades, and the government is moving away from handing out subsidies and incentives to EV buyers and toward a cap and trade system with EV manufacturers further complicating the demand picture. Tesla needs to work fast.

NOW WATCH: We took the Tesla Model 3 for a test drive. Here are the best and worst features.

Source: Business Insider – llopez@businessinsider.com (Linette Lopez)