Tesla wants to move to a less expensive battery for its electric vehicles, but first needs to figure out how to overcome political tensions to get a Chinese partner to build the iron-based batteries near its U.S. factories.
The world's two biggest economies have yet to resolve disputes over tariffs, intellectual property rights and Chinese incursions into Taiwan's air defence identification zone. And China's sweeping regulatory crackdown, aimed largely at the technology sector, could pose yet another hurdle.
China adopted the technology early and makes 95 per cent of the world's Lithium Iron Phosphate LFP batteries, but key patents expire soon and Tesla said it plans to adopt LFP batteries in its fleet of standard-range vehicles globally and move battery production closer to its factories.
Our goal is to localize all key parts of the vehicles on the continent, said Drew Baglino, senior vice president of powertrain and energy engineering at Tesla, on Wednesday in an earnings call. Tesla is building factories in the United States and Germany.
We're working internally with our suppliers to accomplish that goal, and not just at the end assembly level, but as far upstream as possible. Tesla currently uses LFP batteries from China's CATL in some China-made Model 3 and Model Ys and has started sales of entry-level Model 3 sedans with LFP in the United States.
The company did not respond to a request for comment.
LFP technology is considered to be cheaper and safer than nickel-based batteries, although they lack the same energy density as nickel-based ones to allow cars to travel farther on a single charge.
The technology has garnered interest from EV makers and Reuters reported in June that Apple Inc is in early stage talks with China's CATL and BYD to get LFP batteries for its planned electric vehicles and wants them to build factories in the United States.
But CATL is reluctant to build a factory in the country due to political tensions between Washington and Beijing as well as cost concerns, people said at that time.
You cannot discount the whole geopolitical aspect of it, Sanjiv Malhotra, founder of battery startup Sparkz and former US Department of Energy executive, told Reuters.
Our customers, they do not want to be caught in this political crossfire, said the US startup, which is looking at setting up LFP production lines in the United States to challenge China's dominance.
CATL is probably better off manufacturing in China, where they have access to the world's lowest-cost materials, Roth Capital analyst Craig Irwin said.
A US facility would need a better US supply chain to get similar to the low cost available in China. President Joe Biden has made it a priority to support the rollout of electric vehicles to combat climate change, but battery constraints could remain a key hurdle to his ambitious plan.
China dominates the global EV market and dominates the supply chain for the manufacture of lithium-ion batteries, including the processing of minerals and raw materials.
I call LFP the battery of China, because you really only have CATL and BYD. So these are really the kind of pride and joy of China, said Taylor Ogan, chief executive of Snow Bull Capital.
Electric Last Mile Solutions ELMS, a commercial electric vehicle company that currently imports CATL battery packs, is in talks with the company about the possibility of sourcing batteries at CATL's potential US factory.
CATL said, We plan overseas investment based on factors including market demands, investment environment, supply chain, human resources and cost. A BYD spokesperson said the company has battery packing production facilities in the United States but does not currently make cells there.
Last year, CEO Elon Musk said Tesla would use LFP batteries for its China-made Model 3, saying the move would free up battery capacity for the Semi truck and other vehicles that require higher-density, long-range batteries based in nickel.
Since then, Musk has pledged to use the technology in more vehicles and energy storage systems. A Houston energy project will use LFP batteries.
The company is facing higher costs primarily due to cobalt prices rising around 70 per cent so far this year, with nickel up around 20 per cent and aluminium up around 50 per cent. Tesla uses these materials to make its batteries.