BEIJING (Reuters) - U.S. electric vehicle (EV) maker Tesla Inc TSLA.O has held talks with China's Tianjin Lishen to supply batteries for its new Shanghai factory, and two people with direct knowledge of the matter said the pair signed a preliminary agreement.

FILE PHOTO: Visitors are seen at the booth of Lishen Battery at a new energy expo in Beijing, China March 22, 2009. REUTERS/Stringer

The companies have yet to decide how large an order Tesla would place, and Lishen is still working out what battery cell size Tesla would require, one of the people said.

Details of the agreement were unclear. In Chinese, a preliminary agreement could refer to mere acknowledgment through to a statement of intent.

The talks come as Tesla looks to localize battery cell production in the face of mounting competition from a swathe of domestic EV makers in the world’s largest car market, where a Sino-U.S. trade war is increasing the cost of U.S. imports.

Tesla said it received quotes from Tianjin Lishen to supply batteries for the Shanghai plant but did not proceed further.

“We have not signed any agreement of any kind with them,” a Tesla spokeswoman told Reuters.

Lishen told Reuters that it had not signed any agreement with Tesla to supply batteries to the factory.

The first source reiterated that a preliminary agreement was signed. The second source said Tesla’s supplier certification process usually took a long time to be finalised. The people declined to be identified because the discussions were private.

Japan's Panasonic Corp 6752.T is currently Tesla's exclusive battery cell supplier. Its shares closed down 2.7 percent after the Reuters report. It also announced a joint venture with Toyota Motor Corp 7203.T on Tuesday to make electric vehicle (EV) batteries.

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

“Cell production will be sourced locally, most likely from several companies (incl Pana), in order to meet demand in a timely manner,” Musk said in a tweet in November.

Panasonic said in a statement it was studying various possibilities with regards to Tesla’s Shanghai plant, but nothing had been decided. It declined to comment on the possibility of losing exclusive-supplier status with Tesla.

Other battery makers in the running for contracts could include Contemporary Amperex Technology Co Ltd 300750.SZ and LG Chem Ltd 051910.KS.

Tesla broke ground on the $2 billion so-called Gigafactory, its first in China, earlier this month and plans to begin making Model 3 electric vehicles (EV) there by the end of the year.

Musk has said the factory will produce “more affordable” vehicles for the Chinese auto market.

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Lishen, which says its clients range from Apple AAPL.O and Samsung Electronics 005930.KS to Geely 0175.HK and Hyundai Motor 005380.KS, has joined other battery makers in aggressively pursuing contracts with the rapidly growing EV industry.

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The Chinese company started mass production of the same type of cylindrical battery made by Panasonic for Tesla’s Model 3 in 2017, in the city of Suzhou about 100 km (60 miles) away from Shanghai.

Panasonic and Toyota on Tuesday announced a joint venture that leverages the heft of one of the world’s largest automakers and one of the world’s biggest battery makers to expand their EV push.

The joint venture builds on the agreement that the pair announced in late 2017 on joint development of batteries with higher energy density in a prismatic cell arrangement.

It would also help Panasonic cut its heavy reliance on Tesla, whose production delays have weighed on the Japanese company’s earnings.

Panasonic planned to shift most of its prismatic battery-related equipment and facilities in Japan and China to the joint venture, while those producing batteries for Tesla would remain under the company, a source said.