It’s happening! After much speculation, Panasonic Corporation and Tesla Motors have struck a formal agreement over the Japanese company’s manufacture and supply of lithium-ion batteries for the electric vehicle (EV) manufacturer’s first Gigafactory. Under the terms of the deal, Panasonic will make initial investments of between $200–300 million, with eventual investment reaching around $1 billion of the anticipated $5 billion cost of the project.

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The Tesla Gigafactory is intended to reduce the cost of long-range EV lithium-ion batteries through economies of scale. The batteries currently account for about half of the retail cost of a long-range EV, making them prohibitive for many potential purchasers and uncompetitive with conventional vehicles. Currently, Tesla Motors also faces supply issues for the batteries, as current world production cannot keep up with demand. The Gigafactory is a crucial component in Tesla Motor’s plan to make EVs a mass-market product.

Related: Tesla CEO Elon Musk Expects ‘200 Gigafactories’ Will be Needed to Meet Electric Vehicle Demand

Under the terms of the agreement, “Tesla will prepare, provide and manage the land, buildings and utilities. Panasonic will manufacture and supply cylindrical lithium-ion cells and invest in the associated equipment, machinery, and other manufacturing tools based on their mutual approval.” The Gigafactory will be managed by Tesla with Panasonic being the principal partner responsible for manufacturing lithium-ion battery cells, the production of which will take up approximately half of the planned manufacturing space. Other key suppliers and Tesla’s own battery pack assembly line will occupy the rest of the Gigafactory floorspace.

While Tesla Motors is still deciding on the location of the first Gigafactory, once up and running it is projected to produce 35GWh of cells and 50GWh of battery packs per year by 2020. The Gigafactory will produce cells, modules and packs for Tesla’s electric vehicles as well as stationary storage batteries. Tesla anticipates the factory will employ about 6,500 people by 2020. Tesla CEO Elon Musk has recently speculated that 200 Gigafactories would be required to fulfill worldwide demand if all conventional vehicles were replaced with EVs.

Via Treehugger and Forbes

Photos by Tesla Motors and Panasonic Corporation