SHANGHAI (Reuters) -Mercedes-Benz will develop smart driving cars for global markets equipped with Hesai's ( HSAI ) lidar sensors, a person with direct knowledge said, the first time a foreign automaker has sought to use such Chinese-made technology for models sold outside China.

It coincides with an increase in trade tensions as the U.S. intensifies efforts to restrict the adoption of Chinese components and software solutions in vehicles developed by global automakers.

At the same time German automakers, who are big contributors to their country's ailing economy, are anxious to be as competitive as possible.

The person, who declined to be named because the matter is private, said Mercedes had deliberated for months over the decision because of legal and geopolitical risks.

It eventually chose Hesai ( HSAI ), China's largest lidar maker, because of its lower costs and its ability to produce at scale, the person added.

A spokesperson for Mercedes-Benz said the carmaker does not comment on speculation on new suppliers.

Shares of U.S.-listed Hesai ( HSAI ) jumped 36.6% in early trading. On Monday it also forecast 2025 net revenues of 3-3.5 billion yuan ($415-484 million).

Hesai ( HSAI ), whose competitors include U.S.-based Luminar, announced on Monday an "exclusive multi-year" contract to supply its lidar products to a European automaker it described only as leading but did not name.

Lidar uses lasers to produce three-dimensional images of a vehicle's surroundings to help navigation around obstacles. The sensors are a component of many self-driving systems that automakers are developing.

COMMERCIAL DECISION

Hesai's ( HSAI ) Chief Financial Officer Andrew Fan told Reuters on Tuesday in an interview after its quarterly earnings that it was a commercial decision by the partner. He also declined to name the company.

"I assume the automaker has to find alternatives that can be comparable to Hesai's ( HSAI ) products on performance and price but the result is there is none," Fan said.

European makers have used Hesai ( HSAI ) as a lidar supplier for their models sold in China, he added.

Hesai ( HSAI ) has been expanding two production lines in China to achieve an annual capacity of more than 2 million units this year to meet the rising demand, Fan said.

It is also setting up production lines overseas with a target to launch them as early as next year to serve its clients out of China concerned about tariff and logistics risks, Fan said. He declined to say where the overseas factory will be located.

Demand for lidar is increasing in the highly-competitive Chinese market as automakers increasingly offer smart features on affordable models.

On Monday, Leapmotor started sales of its B10 SUV with an advanced smart driving feature from $17,950.

The car is equipped with Hesai's ( HSAI ) ATX lidar, which cost around $200 each, less expensive than safety belts and airbags, Fan said.

($1 = 7.2263 Chinese yuan renminbi)