By Michael Martina and Chris Kirkham
(Reuters) – Washington's addition of CATL to a list of firms that say working with the Chinese military could put Tesla (NASDAQ: ) founder Elon Musk in a tight spot, challenging how he balances his role in the Trump administration and his relationship with China.
CATL, the world's largest battery manufacturer, is the main supplier of lithium iron phosphate (LFP) batteries to Tesla at its factory in Shanghai, the largest US automaker. 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 represent potential safety threats. The US market accounts for 4% and 35% of CATL for electric vehicle (EV) and energy storage systems (ESS) batteries, respectively, by 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 the Chinese military. While the designation does not include any restrictions on CATL's business, it could be a blow to the reputation of the companies involved and serves as a stark warning to US corporations about the dangers of doing business with them. It could add pressure on the US Treasury to bail out companies.
Tesla and CATL are working on an agreement to obtain CATL's battery manufacturing license in Nevada. A person familiar with the matter said the deal is expected to start in 2025.
CATL is set to supply battery cells and packs to Tesla's Shailand plant for Megapack, its energy storage product, people familiar with the matter said. The two are also in discussions about how CATL can increase its inventory as the Megapack business grows.
Tesla and Musk did not respond to requests for comment.
There is no near-term impact expected for Tesla, but Seth Goldstein, an analyst at Morningstar, said that “being excluded from the military contracts may give pause to anyone considering a partnership with CATL.”
Last February, under pressure from lawmakers, the US company that operated Duke Energy (NYSE:) said it will discontinue CATL-produced energy storage batteries at one of the nation's largest Marine Corps bases and will phase out CATL products in its civilian projects.
Goldstein added that he expects Tesla to continue its partnership with CATL because of the importance of the company's relationship with the Chinese government. Escalating that relationship “could be worse than any political impact in the US,” he said.
Since the 2021 legislation that created the requirement for the Pentagon's list of Chinese companies, Congress has passed measures that could block federal contracts with designated companies.
The 2024 Defense Authorization Act, for example, contained provisions that would have prevented the Department of Defense from contracting with companies on the CMC list or purchasing goods and services that include products from such companies beginning in 2026 and 2027, respectively.
The company's listing on CMC's US list also deals a blow to the company at a time when it has been expanding internationally and eyeing more sales in the United States. CATL on Tuesday called the designation a mistake, saying it was “not involved in any military-related activities.”
“The role of CATL in the battery sector reflects Huawei in telecom. It is a strategic bid for control with far-reaching consequences for national security,” said Craig Singleton, senior fellow at the Foundation for the Defense of Democracy.
CATL's deal with Tesla follows CATL's existing partnership with Ford Motor (NYSE:), which plans to begin producing low-cost lithium-iron batteries in 2026 using technology licensed from CATL at a plant in Michigan.
Goldstein said he wouldn't be surprised if Musk's good relationship with incoming President Donald Trump could allow Tesla some kind of waiver on future restrictions. Musk, the world's richest man, has been tapped by Trump to lead the new Department of State Operations, a body Trump has indicated will operate outside of government.
In November, Robin Zeng, chairman of CATL, told Reuters that the company would consider building a US plant if Trump opens the door to Chinese investment in the electric vehicle supply chain.