By Michael Martina and Chris Kirkham
(Reuters) – Washington’s addition of CATL to a list of companies it says work with China’s military could put Tesla (NASDAQ: ) founder Elon Musk in a tight spot, raising questions about how he balances his role in the Trump administration with his connections with China.
CATL, the world’s largest battery manufacturer, is the main supplier of lithium iron phosphate (LFP) batteries to Tesla for its Shanghai plant, the US carmaker’s largest. Tesla exported these cars equipped with CATL batteries to other markets such as Europe and Canada.
Lawmakers have condemned some of CATL’s battery storage projects across the United States, arguing they pose a potential safety threat. The US market accounted for 4% and 35% of CATL’s electric vehicle (EV) and electric storage system (ESS) batteries in 2023, respectively, according to Citi estimates.
The U.S. Department of Defense on Monday designated CATL and other Chinese companies, including tech giant Tencent Holdings (OTC: ), as having ties to China’s military. While the designation does not include any restrictions on CATL’s operations, 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 to manufacture batteries in Nevada. A person familiar with the matter said that the start of work is expected in 2025.
CATL is also to supply batteries and packs to Tesla’s factory in Shanghai for the Megapack, its energy storage product, people familiar with the matter said. The two also discuss how CATL can increase its inventory as the Megapack business grows.
Tesla and Musk did not respond to requests for comment.
No short-term impact on Tesla is expected, but Morningstar analyst Seth Goldstein said “the potential exclusion from military contracts could give pause to anyone considering a partnership with CATL.”
Last February, under pressure from lawmakers, the U.S. utility company Duke Energy (NYSE: ) said it will decommission CATL-manufactured energy storage batteries at one of the nation’s largest Marine bases and phase out CATL products on 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. Severing those ties “could be worse than any political consequences in the US,” he said.
Since the 2021 legislation that created the Pentagon’s requirement to list Chinese military companies, Congress has passed measures that could prevent federal contracting with certain companies.
For example, the Comprehensive Defense Authorization Act of 2024 contained provisions that would have prohibited the Department of Defense from contracting with companies on the CMC list or procuring goods and services that include products from such companies beginning in 2026 and 2027, respectively.
The company’s listing on the US CMC list also dealt a blow to the company at a time when it was seeking international expansion and looking for new business in the United States. CATL on Tuesday called the appointment a mistake, saying it “does not engage in any military activities.”
“CATL’s role in the battery sector mirrors Huawei’s role in telecommunications. It is a strategic bid for dominance with far-reaching national security implications,” said Craig Singleton, senior fellow at the Foundation for Defense of Democracies.
CATL’s deal with Tesla is modeled after CATL’s existing partnership with Ford Motor (NYSE: ), which plans to begin manufacturing 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 President-elect Donald Trump gives Tesla some sort of exemption from possible future restrictions. Trump has tapped Musk, the world’s richest man, to co-head the newly created Department of Government Efficiency, an entity that Trump has indicated will operate outside the confines of government.
In November, Robin Zeng, chairman of CATL, told Reuters the company would consider building a U.S. factory if Trump opened the door to Chinese investment in the electric vehicle supply chain.
