By Michael Martina and Chris Kirkham
(Reuters) – Washington’s addition of CATL to a list of companies it says are working with China’s military could put the founder of Tesla (NASDAQ 🙂 in a difficult situation, challenging how he balances his role in the administration Trump with his ties to China.
CATL, the world’s largest battery maker, is a major supplier of Tesla’s lithium iron phosphate (LFP) batteries for its Shanghai factory, the American automaker’s largest. Tesla has been exporting these cars equipped with CATL batteries to other markets such as Europe and Canada.
Lawmakers have criticized some of CATL’s battery storage projects across the United States, arguing that they pose potential safety threats. The US market accounted for 4% and 35% of CATL’s electric vehicle (EV) batteries and electric storage systems (ESS), respectively, in 2023, according to Citi estimates.
The US Department of Defense on Monday designated CATL and other Chinese companies, including tech giant Tencent Holdings (OTC:), as linked to China’s military. While the designation does not imply any restrictions on CATL’s business, it may be a blow to the reputation of the affected companies and serves as a stark warning to US entities about the risks of doing business with them. It could also increase pressure on the US Treasury Department to sanction the companies.
Tesla and CATL are working on an agreement to license CATL technology for battery production in Nevada. A person familiar with the matter said the deal is expected to launch in 2025.
CATL will also supply cells and battery packs to Tesla’s Shanghai plant for Megapack, its energy storage product, people familiar with the matter said. The two are also in talks about how CATL can increase its supplies as the Megapack business grows.
Tesla and Musk did not respond to requests for comment.
No near-term impact is expected for Tesla, but Morningstar analyst Seth Goldstein said that “potentially being excluded from military contracts may give pause to anyone considering a partnership with CATL.”
Last February, under pressure from lawmakers, the US utility Duke of energy (NYSE:) said it would dismantle energy storage batteries produced by CATL at one of the largest Marine Corps bases in the country and phase out CATL products in its civilian projects.
Goldstein added that he hopes Tesla will continue its partnership with CATL because of the importance of the company’s relationships with the Chinese government. Changing those ties “could potentially be worse than any political ramifications in the United States,” he said.
Since the 2021 law that created the Pentagon’s Chinese military company listing requirement, Congress has passed measures that could prevent federal contracting with designated companies.
The sweeping Defense Authorization Act of 2024, for example, had provisions that would prohibit the Department of Defense from contracting with companies on the CMC list or acquiring goods and services that include products from such companies beginning in 2026 and 2027, respectively.
The company’s inclusion on the US CMC list is also a blow to the company as it seeks to expand internationally and seek more deals in the United States. CATL on Tuesday called the designation a mistake and said it “does not engage in any military-related activities.”
“CATL’s role in the battery sector mirrors that of Huawei in telecommunications. It is a strategic bid for dominance with far-reaching implications for national security,” said Craig Singleton, senior researcher at the Defense Foundation. Democracies.
CATL’s deal with Tesla is modeled after CATL’s existing partnership with Ford Motor (NYSE:), which plans to begin producing low-cost lithium iron batteries by 2026 using technology licensed from CATL at a plant in Michigan.
Goldstein said he wouldn’t be surprised if Musk’s favorable relationship with incoming President Donald Trump could allow Tesla some type of exemption from potential future restrictions. Musk, the world’s richest person, has been tapped by Trump to co-lead a newly created Department of Government Efficiency, an entity that Trump says will operate outside the boundaries of the government.
In November, Robin Zeng, president of CATL, told Reuters that the company would consider building a plant in the United States if Trump opens the door to Chinese investment in the electric vehicle supply chain.