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Tesla Inc.’s TSLA oldest battery supplier Panasonic Corp. PCRFY believes its ability to produce a next-generation battery will play a crucial role in the electric vehicle maker’splanto launch a $25,000 electric vehicle, BloombergreportedThursday.

What Happened: While Tesla plans to make the new 4680 cells in-house, it has alsoasked Panasonicto begin producing them.

Last September, Tesla announced thedesign of the tabless 4680battery cell, which increases power by six times and energy by five times. The design supposedly boosts the range by 16%.

The new 4680 cells, named after their dimensions of 46-millimeter diameter and 80-millimeter height, are larger than the cells currently supplied by Panasonic to Tesla.

While the larger capacity of the new cells will enable Tesla to reduce the number of battery cells and result in fewer parts for its electric vehicles, it also makes the cells more difficult to produce, according to Bloomberg. In addition, the cells are prone to overheating and susceptible to particle contamination, which are frequent causes of EV battery fires.

However, Yasuaki Takamoto, Panasonic’s EV battery head, told Bloomberg that the company’s ability to produce 2.5 billion cells a year without major safety issues and Panasonic’s production expansion only at a pace at which it can maintain safety standards gives it an advantage in producing the new cells. Panasonic is reportedly working to set up a prototype production line to make the cells.

Why It Matters: Production of the new battery is crucial for Tesla and will enable it to accelerate the manufacture of new vehicles like the Tesla Semi truck and the Plaid Plus S, in addition to the new planned $25,000 electric car. Tesla CEO Elon Musk said in March thatbattery cell constraintshave impacted the Tesla Semi rollout.

For Panasonic, the production of the new battery is expected to generate more revenues as the company seeks to reduce dependence on its core, low-margin consumer electronic business. Tesla’s electric vehicles have enabled Panasonic’s battery business to rake in profits.

It wasreportedin March that South Korean battery supplierLG Energy Solutions– a unit of LG Chem, is in talks to make Tesla’s new battery in the U.S. and Europe.

Price Action: Panasonic OTC shares closed 2.1% lower on Thursday at $12.57. Tesla shares closed 1.9% higher at $683.80 and further rose almost 0.5% in the after-hours session.