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Pentagon listing of CATL could impact future Tesla battery

partnerships

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Designation could deal a blow to CATL's reputation in U.S.

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CATL denies military links, calls U.S. designation a

mistake

By Michael Martina, Chris Kirkham

Jan 7 (Reuters) - Washington's addition of CATL

to a list of firms it says work with China's

military could put Tesla founder Elon Musk in a tight

spot, challenging how he balances his role in the Trump

administration with his ties to China.

CATL, the world's largest battery maker, is a major supplier of

lithium iron phosphate (LFP) batteries to Tesla for its Shanghai

factory, the U.S. automaker's largest. Tesla has been exporting

these cars equipped with CATL batteries to other markets such as

Europe and Canada.

Lawmakers have decried some of CATL's battery storage projects

across the United States, arguing they represent potential

security threats. The U.S. market accounted for 4% and 35% of

CATL's electric vehicle (EV) and electric storage systems (ESS)

batteries, respectively, in 2023, according to Citi estimates.

The U.S. Department of Defense on Monday designated CATL and

other Chinese companies including tech giant Tencent Holdings ( TCTZF )

as linked to China's military. While the designation

does not involve any restrictions on CATL's business, it can be

a blow to the reputations of affected companies and serves as a

stark warning to U.S. entities about the risks of doing business

with them. It could also add pressure on the U.S. 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 that the deal is expected to launch in

2025.

CATL is also set to supply battery cells and packs to

Tesla's Shanghai plant for Megapack, its energy storage product,

people familiar with the matter said. The two are also in talks

over 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 Seth

Goldstein, a Morningstar analyst, said "being potentially

excluded from military contracts may give everyone considering a

partnership with CATL a pause."

Last February, under pressure from lawmakers, U.S. utility

company Duke Energy ( DUK ) said it would decommission

energy-storage batteries produced by CATL at one of the nation's

largest Marine Corps bases and will phase out CATL products at

its civilian projects.

Goldstein added he expects Tesla to continue its

partnerships with CATL because of the importance of the

company's relationships with the Chinese government. Upending

those ties "could potentially be worse than any political

ramifications in the U.S.," he said.

Since the 2021 law that created the Pentagon's Chinese

Military Companies list requirement, Congress has passed

measures that could prevent federal contracting with designated

companies.

The sweeping 2024 defense authorization act, for example, had

provisions that would ban the Defense Department 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 inclusion on the U.S. CMC list also deals a

blow to the company at the time when it has been pursuing

international expansion and is looking for more deals in the

United States. CATL on Tuesday called the designation a mistake,

saying it "is not engaged in any military-related activities."

"CATL's role in the battery sector mirrors Huawei's in

telecom. It's a strategic bid for dominance with far-reaching

national security implications," said Craig Singleton, a senior

fellow at the Foundation for Defense of Democracies.

CATL's deal with Tesla is modeled after an existing CATL

partnership with Ford Motor ( F ), which plans to start

producing low-cost lithium-iron batteries by 2026 using

technology licensed from CATL at a plant in Michigan.

Goldstein said he would not be surprised if Musk's favorable

relationship with incoming President Donald Trump might allow

Tesla some kind of waiver 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 Trump indicated will operate outside the confines of

government.

In November, Robin Zeng, chair of CATL, told Reuters that the

company would consider building a U.S. plant if Trump opens the

door to Chinese investment in the electric vehicle supply chain.