The new ‘2170’ li-ion battery cells, manufactured by Panasonic at Tesla’s Gigafactory 1 in Sparks, Nevada, are a key part of the Tesla’s Model 3 battery architecture.

The Japanese manufacturer now says that the batteries are costing them, but they expect to turn a profit next year.

It’s not exactly surprising since almost any new product undergoes a money losing period, but the company expects to quickly turn its Gigafactory venture into a profit center.

Hirokazu Umeda, Panasonic’s Chief Financial Officer, said today during the earnings call for the last quarter (via Reuters):

“For battery cells for the Model 3, costs outweighed profit in the first quarter. As production accelerates towards next year, we expect the business to contribute profit.”

During the last quarter between April to June, when Panasonic started production the Model 3 cells, the company saw its profit rose to 83.93 billion yen ($758.93 million). Panasonic now expects the cells to start contributing to those profits next year when they plan to be manufacturing 35 GWh of battery cells.

During a press briefing on Friday, Tesla CEO Elon Musk said that the 2170 cells, which were designed by both Tesla and Panasonic, were more energy dense than the cells in the Model S and Model X.

The bigger cell size also enables fewer cells per module and fewer overall modules. Musk said that there are only 3 modules in a Model 3 battery pack compared to the Model S’ 16 modules.

Beyond the cells themselves, the location where they are being made is just as important. The Model S and Model X cells are also manufactured by Panasonic, but they are made in Japan.

The Model 3 cells are manufactured at Tesla Gigafactory 1 in Nevada, where they can directly be put into Tesla’s battery packs and shipped a few hundred miles to Fremont, California. That’s a significant simplification of the supply chain.

Though the supply chain for Model 3 remains complex with about 10,000 unique parts, the battery cells are arguably one of the most important parts based on volume and weight. The shift also results in the vehicle being more American. Musk said that roughly 60% of Model 3 parts are made in the US and 70% in North America (adding Canada and Mexico), while only 30% are made overseas.

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