We just got a little taste of how complicated things could get for Tesla in China

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We just got a little taste of how complicated things could get for Tesla in China

Tesla is in talks with a Chinese battery maker about supplying its currently-under-construction Shanghai plant with battery cells, according to Bloomberg.

Contemporary Amperex Technology Co. Limited, known as CATL, is part of China’s dream of building technology companies that rival those of the US, Europe, 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 it 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,” the Morgan Stanley analyst Adam Jonas wrote in a note to clients on Tuesday.

This supply-chain restructuring is one of those reasons.

Read more: 2019 was supposed to be easy for Tesla — now it’s a circus

There is a process for this stuff

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 wild card since now Tesla has to qualify another battery manufacturer,” Tu Le, the founder of the consultancy China Auto Insights, told Business Insider

He said that if Tesla didn’t ensure that CATL’s batteries worked exactly like Panasonic’s, customers would figure it out and opt for the one that worked better. Without studying Tesla’s qualification process and based solely on his experience, he estimated that integrating CATL’s battery could take 12 to 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 multiple requests for comment from Business Insider on this story.

Benchmark Minerals

Le 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 better known for its scooter batteries than for its car batteries — has secured supply arrangements with companies like BMW and Volkswagen, according to the Financial Times.

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

The backdrop of all 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 electric-vehicle buyers and toward a cap-and-trade system with electric-vehicle manufacturers, further complicating the demand picture. Tesla needs to work fast.

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