TOKYO (Reuters) - Japan’s Panasonic Corp on Wednesday reported a decline in quarterly profit far beyond what analysts estimated, as costs rose at the battery plant it jointly runs with U.S. electric vehicle maker Tesla Inc.

A man is seen next to Panasonic Corp's logo at Panasonic Center in Tokyo, Japan, February 2, 2017. REUTERS/Kim Kyung-Hoon

Business with Tesla has yet to contribute to profit. Yet Panasonic said it was in talks to add to its $1.6 billion investment and take capacity at the so-called Gigafactory over the 35 Gigawatt hours (GWh) it is set to reach by March-end.

Panasonic is the exclusive battery cell supplier for Tesla cars. As production of the automaker’s mass-market Model 3 accelerated in the July-September quarter, Panasonic had to send more engineers and spend more to increase cell production.

The higher costs, as well as slower demand for factory automation equipment in China amid an escalating Sino-U.S. trade war, pushed Panasonic’s July-September operating profit down 15 percent to 95.2 billion yen ($840.92 million).

The result compared with the 112.60 billion yen average of 7 analyst estimates compiled by Refinitiv.

Last week, Tesla reported a net profit, positive cash flow and wider-than-expected margins for the quarter. The automaker is averaging roughly 4,300 Model 3s a week which, though below its 5,000 target set for June, was enough to boost earnings.

The Model 3 was the best-selling car in the United States in terms of revenue in July-September, and fifth best-selling car in terms of volume, Tesla said.

Asked about any intention to invest in Tesla’s planned plant in China, Panasonic Chief Executive Kazuhiro Tsuga at an earnings briefing on Wednesday said the firm “will put priority on building additional capacity at the Gigafactory over China”.

Tsuga said Panasonic has been discussing details of the capacity hike plan with Tesla, but declined to comment further.

“Investment for capacity beyond 35 GWh means that Tesla would also need to make substantial investment in vehicle production, so we will closely align with each other,” he said.

He also said he had been worried about reports on the recent erratic behavior of Tesla head Elon Musk.

“But I don’t see the U.S. electric car maker’s business operations have been put into chaos.”

Musk’s behavior, which included smoking marijuana during a video interview, has raised concerns about his leadership, with some analysts and investors urging Tesla to appoint a strong second-in-command.

“Though Elon’s comments are unpredictable, we will continue to monitor Tesla’s operations to ensure no chaos there and will work in step with the company,” Tsuga said.

($1 = 113.2100 yen)