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Tesla, Panasonic sign Gigafactory battery deal

With its lower-priced Model 3 on the way, Tesla's likely to see higher demand -- and if it's going to crank out more electric cars, it'll need lots more batteries.

Tesla Model S CNET

Electric car maker Tesla and Panasonic have reached a deal to make batteries at the upcoming Gigafactory.

The companies announced the agreement Thursday, saying that Tesla will build and manage the facility and utilities, and Panasonic will produce the lithium ion cells that go into the battery production. Tesla will then take the lithium ion cells and other required components produced elsewhere by other partners and complete the battery assembly.

Rumors surfaced earlier this week that the companies had inked a deal on cell production. At that time, it was believed that Panasonic was willing to invest between $194 million and $291 million into the Gigafactory. The companies on Thursday declined to say how much each would invest in the facility.

The Gigafactory is lined up to become an integral part of Tesla's strategic plan over the next several years. Beginning in 2017, Tesla is expected to start production on the $35,000 Model 3 sedan, a car that will hit a far more affordable price point than the higher-end Model S. The lower price point is expected to boost demand for Tesla vehicles, requiring extra capacity to produce batteries.

To satisfy that demand, the deal with Panasonic is important, Tesla said. However, the company will still need more cells and plans to continue to buy them from Panasonic's own factories in Japan in addition to what it's getting out of the Gigafactory.

The Gigafactory, which will employ 6,500 people by 2020, will house Panasonic in half of the manufacturing space. The other half will be home to Tesla and "key suppliers." At its height in 2020, the Gigafactory is expected to produce 35GWh of cells and 50GWh of packs per year.

CNET has contacted Tesla for more information on the deal. We will update this story when we have more information.