Leica has a long (and likely quite successful) history of partnering with less expensive camera manufacturers in Japan to either collaborate on or supply entire cameras to them. You have the original CL with Minolta, the Leica R bodies from R3 to R7 I believe, Fuji for some of the compacts, panasonic etc etc. I believe the Summarit M lenses were made in Japan as well, and certainly some of the T series lenses. This is nothing that new. Leica is smart about keeping their premiere products to themselves. Keep in mind that Leica had no trouble selling M cameras when Konica was making the Hexar RF alongside it...a camera which was far more technically advanced than the M cameras.
I grant you that the situation here is a little different, but I am sure Leica will be coming out with an SL2 which will offer something to Leica SL owners who want to upgrade, but prefer Leica's design and build. I expect that it will be comparable to Panasonic in resolution and EVF quality, while likely focusing more on build quality. It also remains to be seen how well the S1 and S1R support Leica M and S lenses, which will be another point of differentiation. To this point, as far as I am aware, only the SL supports S lenses, and it is the only mirrorless camera that M lenses work with as well (or nearly as well) as they do on an M camera. As an owner of an M10 and A7Rii, I can assure you that there is a night and day difference in lens performance when using the same lenses on the two bodies...at least with lenses 75mm and shorter.
That said, the S1 and S1R will light a proverbial fire under Leica...but I suppose that is another advantage to their collaboration, they have clearly been aware of the S1 and S1R for quite awhile since Panasonic needed their clearance to use the lens mount, and this has surely given them plenty of time to plan and adapt their strategy to deal with it. I think this partnership is going to be really positive for all concerned. Panasonic gets the professional cachet of a lens mount that is stocked with no compromise lenses, Leica gets more customers for their lenses and more ability to bring in "entry level" users and price sensitive users, adding to their ecosystem and bringing in potential future customers while also having some measure of control and planning over their competition, since they surely are coordinating their product releases. Customers get more choice and more price points. It seems like a good thing to me, especially when the pro camera market is getting increasingly competitive...Fuji and Hasselblad are pushing Leica hard at the MF end, and Sony, Fuji, Nikon and Canon are pushing hard from the 35mm and smaller end. I think this partnership is probably a good move to keep up.