How Washington’s mark on China’s CATL could affect Tesla by Reuters

Written 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 Tesla (NASDAQ:) founder Elon Musk in hot water, challenging how to balance his role in the Trump administration with his ties to China.

CATL, the world’s largest battery maker, is the main supplier of lithium iron phosphate (LFP) batteries to Tesla Inc. for its factory in Shanghai, the largest US automaker. Tesla exports 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 security threats. The US market will account 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 being linked to the Chinese military. While the designation does not include any restrictions on CATL’s business, it could be a blow to the reputation of affected companies and serve as a stark warning to US entities about the risks of doing business with them. It could also increase pressure on the US Treasury to impose sanctions on companies.

Tesla and CATL are working on an agreement to license CATL’s technology for battery production in Nevada. The deal is expected to launch in 2025, a person familiar with the matter said.

CATL is also set to supply battery cells and packs to Tesla’s factory in Shanghai for the 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.

There’s no near-term impact expected for Tesla, but potential exclusion from military contracts could give everyone considering partnering with CATL pause, said Seth Goldstein, a Morningstar analyst.

Last February, under pressure from lawmakers, the American utility company Duke Energy (NYSE:) said it will retire CATL energy storage batteries at one of the nation’s largest Marine Corps bases and phase out CATL products in its civilian projects.

Goldstein added that he expects Tesla to continue its partnerships with CATL due to the importance of the company’s relationships with the Chinese government. He said that changing these relations “may be worse than any political repercussions in the United States.”

Since the 2021 law that created requirements for the Pentagon’s listing of Chinese military companies, Congress has passed measures that could block federal contracting with designated companies.

For example, the Comprehensive Defense Authorization Act of 2024 includes provisions that would prohibit the Department of Defense from contracting with CMC-listed companies or purchasing goods and services that include products from these companies beginning in 2026 and 2027, respectively.

The company’s inclusion in the US CMC list also deals a blow to the company at a time when it was seeking international expansion and looking for more deals in the United States. CATL on Tuesday called the designation a mistake, saying it “is not involved in any military-related activities.”

“CATL’s role in the battery sector mirrors Huawei’s role in telecoms,” said Craig Singleton, a senior fellow at the Foundation for Defense of Democracies. “It is a strategic bid for dominance with far-reaching national security implications.”

CATL’s deal with Tesla is modeled on CATL’s existing partnership with Ford Motor (NYSE:), which plans to begin production of low-cost lithium-iron batteries by 2026 using CATL-licensed technology at a plant in Michigan.

Goldstein said he wouldn’t be surprised if Musk’s positive relationship with incoming President Donald Trump might allow Tesla some sort of waiver for potential future restrictions. Trump has appointed Musk, the world’s richest person, to co-lead the newly created Department of Government Efficiency, an entity that Trump has indicated will operate outside the confines of government.

In November, CATL President Robin Zeng told Reuters that the company would consider building a US factory if Trump opened the door to Chinese investment in the electric vehicle supply chain.