US electric vehicle maker Tesla is in advanced talks with South Korea's LG Chem to source batteries for vehicles to be made in its Shanghai plant, a person familiar with the matter said.

The move represents a push by Tesla to diversify sources of the key component for its electric vehicles. Japan's Panasonic is currently Tesla's exclusive battery cell supplier for new cars.

Bloomberg reported on Friday that the California-based EV maker has agreed to buy batteries from LG Chem, citing people familiar with the matter. The batteries made by the South Korean chemical company will be initially used in Model 3 cars that are to be manufactured in the plant near Shanghai, the report said.

LG Chem is expanding its China battery capacities and modifying some manufacturing facilities for making a different type of auto battery, according to the source.

The company currently mainly makes pouch-type auto batteries and other types of batteries, but as a major battery maker, it is not hard to revamp facilities to make cylindrical auto batteries that Tesla uses, the source and separate people familiar with the matter added.

The source, who spoke on condition of anonymity as the talks are not public, said Tesla is still likely to use Panasonic batteries in the initial phase of production and source from other suppliers including local names in the future.

Tesla did not immediately respond to Reuters' request for comment. LG Chem declined to comment.

LG Chem has signed battery material supply agreements with China's Huayou and Tianqi, as the South Korean battery maker is trying to expand its foothold in China. It said it would set up a joint venture with a unit of China's Geely on batteries.

China has scrapped its so-called "white list" of recommended battery suppliers, which did not include foreign firms when it was first published in 2015 to spur a domestic battery sector, a decision foreign companies said could open up the world's biggest market for electric vehicle batteries.

Panasonic has said it could supply batteries to Tesla's Chinese plant either from Japan, the United States or China.

Tesla Chief Executive Elon Musk said in November the US company would manufacture all its battery modules and packs at the Shanghai factory and planned to diversify its sources.

© Thomson Reuters 2019