By Michael Martina and Chris Kirkham

(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 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 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.

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