CATL’s Role in Tesla’s Quest for an Affordable $25,000 Electric Car

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CATL's Role in Tesla's Quest for an Affordable $25,000 Electric Car

Affordable EVs are the current trend, marking a significant shift as the U.S. begins embracing its electric future. While electric vehicles (EVs) are becoming more budget-friendly in the American market, their prices still don’t compare to the lower costs seen in China.

The buzz escalated when Tesla announced its plans for a $25,000 electric car, sparking excitement among consumers and investors alike. The big question on everyone’s mind is how Tesla plans to achieve this price point. A significant piece of the puzzle involves leveraging battery technology from CATL, a leading Chinese energy company.

Reports suggest that CATL is providing battery-making equipment for Tesla’s Nevada Gigafactory, highlighting a deeper collaboration between the two entities. Instead of importing battery modules or raw materials from CATL, Tesla is expected to rent the manufacturing equipment and work jointly on developing new battery technologies. Robin Zeng, CATL’s chairman, has been quoted by Bloomberg stating that the two companies are focusing on innovations in battery chemistry to enable quicker charging times.

This strategy could enable Tesla to manufacture cutting-edge battery cells affordably while maintaining CATL’s influence in the Western market, bypassing the need to directly export batteries to the U.S.

In his discussion with Bloomberg, Zeng highlighted that Tesla’s initiative to create a $25,000 vehicle stands to gain significantly from reductions in battery costs, depending on how Tesla plans to position its most affordable car yet in terms of usage scenarios:

There’s always room for cost reduction depending on what the $25,000 car’s aim is. If it’s for robotaxis, we don’t have to worry about the cost reduction for each cell as our batteries have a longer life cycle and so their average cost is actually lower.

Tesla’s collaboration with CATL, which supports its vehicles manufactured in China and the Model 3 Standard Range versions sold in the U.S., is experiencing pressure due to modifications in the U.S. EV tax credit system. The evolving nature and complex criteria of the EV tax credit program have confused many consumers. However, one clear outcome has been the introduction of protectionist measures concerning eligibility for the tax credit.

These measures have significantly impacted CATL, a major international battery producer, because of the stringent battery sourcing requirements. As a result, automakers are faced with a critical decision: continue using CATL batteries and potentially forfeit the opportunity to offer customers the $7,500 federal EV tax credit, or shift their battery sourcing strategies to meet the criteria and maintain eligibility for the incentive.

Tesla’s innovative strategy of leasing battery tooling and designs from CATL presents a solution that overcomes the challenges posed by the U.S. EV tax credit’s protectionist measures. This approach allows for the sourcing and assembly of battery materials in countries that comply with the tax credit’s criteria, circumventing the restrictions that could limit Tesla’s access to the credit.

Zeng mentioned that CATL is expanding this model beyond Tesla, engaging in discussions with about 10 to 20 other automakers in both the U.S. and Europe for potential similar partnerships. This indicates a growing interest in finding creative ways to navigate the complexities of international trade and regulatory requirements, ensuring that automakers can benefit from advanced battery technology while still qualifying for valuable incentives like the EV tax credit.

Adam Jonas, at the helm of Morgan Stanley’s auto and space research, suggests that Tesla’s collaboration with CATL could be a pivotal moment for Chinese battery companies aiming to break into the U.S. market, stating:

We’ve long writtean about the need for the U.S. to engage with (‘on-ramp’) Chinese EV technology to drive higher EV penetration. In our view, this will require a degree of ‘westernization’ of Chinese tech to be palatable in the U.S. given the rising protectiost sentiment.
[…]
In our view, Tesla is in a very strong position to ‘on-ramp’ Chinese EV tech to the US. In leveraging Chinese manufacturing know-how, Tesla can deliver a $25,000 EV (Model 2) and drive EV adoption in the US.

As CATL aims to maintain its leadership in the global EV battery market, there’s growing concern in the U.S. over the possibility of Chinese car manufacturers entering the American market by setting up production in countries that have favorable trade deals with the U.S. This apprehension has led some lawmakers to propose revisiting the United States-Mexico-Canada Agreement, aiming to safeguard the U.S. auto industry from what is perceived as a potentially devastating impact.

The approach adopted by CATL presents a potential middle ground, enabling car makers to develop more sophisticated and cost-effective batteries without enabling foreign manufacturers to sidestep import tariffs through strategic factory locations. If Tesla can leverage this model to produce its $25,000 electric vehicle, it would signify a significant shift towards making domestically-produced electric vehicles more accessible and affordable than ever before.

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