The dilemma of Panasonic batteries: Avoiding competition in China, anxiety over North American demand

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Produced by Zhineng Auto

In the global power battery industry landscape, Panasonic is a veteran. As Tesla's earliest partner, while Chinese power battery companies were expanding aggressively, Panasonic chose to differentiate itself from its Chinese counterparts.

Leveraging its localized presence in North America and technological expertise, Panasonic has maintained its advantage in high-energy-density cylindrical small cells. However, its largest customer, Tesla, has seen slowing sales in the U.S. market, coupled with sudden policy shifts, leading to significant challenges for Panasonic's U.S. operations (new factory in Kansas).

Part 1

Challenges Facing Panasonic's Energy Battery Business

Panasonic's strategy is straightforward: under the encouragement of the U.S. IRA, it aims to ramp up profitable production capacity amid policy incentives and market demand. However, unforeseen policy changes and market uncertainties have become the most prominent risks.

In North America, EV sales grew rapidly in recent years but began to decelerate noticeably from 2024. Tesla, Panasonic's core customer, faces dual pressures in the U.S.: slowing consumer demand, especially after subsidy withdrawals, and reduced purchases by price-sensitive buyers. These uncertainties directly impact Panasonic's order forecasts.

Although the Kansas factory officially began operations in July 2025, Tesla's downturn persisted into 2026. This $4 billion-plus mega-factory, designed to employ 4,000 people, may struggle to operate at full capacity, making the investment-output balance alarming.

Two years ago, Panasonic's decision to build the Kansas factory was largely driven by the Inflation Reduction Act (IRA), which offered U.S. consumers up to $7,500 in tax credits for EV purchases (Section 30D) and substantial production subsidies for battery manufacturers (Section 45X).

With the enactment of the One Big Beautiful Bill Act (OBBBA), Section 30D will terminate by the end of September 2025, directly weakening demand-side momentum. Section 45X remains in effect until 2032, but its subsidies will phase down annually with stricter "Foreign Entity of Concern" (FEOC) restrictions.

Panasonic must contend with both weakened demand due to disappearing consumer subsidies and higher compliance costs in its supply chain, a double whammy.

For Panasonic, the over-concentration of its customer base is problematic. Compared to LG Energy Solution, Panasonic relies too heavily on Tesla in North America.

At the Kansas factory's opening ceremony, representatives from emerging companies like Lucid and Harbinger appeared, signaling Panasonic's intent to diversify its clientele. However, these companies' production scales are far from sufficient to sustain a mega-factory's stable operations.

Without deeper partnerships with established automakers like GM or Ford, Panasonic's North American strategy may appear fragile.

The gap with Chinese battery companies is widening. Chinese firms continue to expand their global market share, achieving rapid growth in Europe.

In contrast, Japanese and Korean battery makers, having avoided the Chinese market to bet on North America and Europe, now face challenges on multiple fronts.

In the energy storage market, Chinese companies, leveraging scale and cost advantages, have rapidly captured significant shares. Panasonic's cautious approach has caused it to miss some growth opportunities.

Panasonic's factories in Japan, such as those in Oizumi and Wakayama, are transitioning from 1865 cells to 2170 and 4680 cells. However, production line upgrades, customer certifications, and investment recovery cycles mean this process will take time.

The 4680 cell project, still in the final customer evaluation stage, has yet to achieve mass production. With Tesla's 4680 rollout lagging, Panasonic's bet on this product remains uncertain.

Part 2

The Survivor of Japan's Battery Industry

What Should Panasonic Do?

Panasonic's response focuses on four dimensions: maximizing policy resources, diversifying its customer base, upgrading technology and optimizing production capacity, and expanding into energy storage and consumer markets.

◎ In terms of policy utilization, Panasonic will continue to rely on Section 45X subsidies.

This section offers up to $45 per kWh in tax credits for cell and electrode active material production, providing strong cost support for the next five years.

To meet stringent FEOC requirements, Panasonic must accelerate supply chain localization, ensuring key minerals and components are not sourced from restricted countries. Its procurement strategy must further tilt toward North America and Australia, fostering deep collaborations with Canadian mining firms.

If the Kansas factory's new cell technology achieves a 5% production boost, it could yield economies of scale under the subsidy framework.

◎ To diversify its customer base, Panasonic must reduce its reliance on Tesla. While maintaining partnerships with emerging players like Lucid and Harbinger, it must also actively pursue traditional automakers.

◎ The rapid growth of the energy storage market offers Panasonic a new direction. With data center expansions and surging AI computing demand, U.S. energy storage system demand has exceeded expectations. Panasonic can leverage its cell expertise to enter this sector.

◎ In Japan, factories are accelerating the transition from 1865 to 2170 cells and preparing for 4680 mass production. By 2031, Japanese factories could increase capacity to 16 GWh, providing a solid backbone for the global supply chain.

◎ Cross-sector expansion is another necessary step. Despite weak consumer electronics demand, niche markets like e-bikes and power equipment are recovering. Leveraging its traditional strengths in small batteries, Panasonic can extend into light transportation and distributed energy markets, providing stable cash flow.

Panasonic Energy must accomplish two critical tasks in the next three years:

◎ First, ensure the Kansas factory's capacity utilization to avoid sunk costs;

◎ Second, drive the 4680 cell's successful mass production and market acceptance. These two milestones will determine Panasonic's path forward around 2026.

Summary

Panasonic Energy's predicament reflects the awkward position of Japanese and Korean battery makers in global competition. Having avoided the Chinese market to maintain margins, they now face slowing demand and policy shifts in North America, complicating the global landscape. The road ahead is indeed tough!​​​​