Cheap EVs are so hot right now. As America begins to enter its electrified era, consumers are beginning to see EVs become more affordable—but the prices are nowhere near what's debuting in the Chinese market.

So when Tesla announced that it was working to prepare a $25,000 EV, both consumers and investors went berserk. Only one question remained: how will Tesla pull that off? At least one part of that complex answer appears to revolve around using battery tech supplied by Chinese energy giant, CATL.

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America's Pushback on Chinese EV Tech

The U.S. has implemented protections against Chinese tech in new EVs sold in the U.S. This includes exclusions from the federal EV tax credit, as well as new attempts at blocking tariff circumvention from EVs built in Mexico.

Recent news indicates that CATL is supplying battery tooling to Tesla's Gigafactory in Nevada as part of a deeper partnership between the two companies. Rather than import battery modules or use the raw materials sourced by CATL, it is speculated that Tesla will instead lease the tooling from the Chinese company and collaborate on new battery chemistries. Robin Zeng, chairman of CATL, confirmed to Bloomberg that the companies are already working on new electrochemical structures that would allow for faster battery recharging.

The model could potentially allow Tesla to produce more advanced battery cells at a low price point and ensure that CATL still has its claws in the Western market without actually needing to export batteries to the U.S.

When Zeng spoke with Bloomberg on the topic earlier this week, he also noted that Tesla's upcoming $25,000 car could benefit from battery-related cost reduction depending on the use case of the automaker's cheapest vehicle yet:

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 already has a long-standing partnership with CATL for its made-in-China vehicles, as well as the Model 3 Standard Range vehicles built and sold in the U.S. Unfortunately, the cost benefits of the partnership likely feel some strain given the changes to the U.S. EV tax credit.

The EV tax credit hasn't been the easiest topic for consumers to digest. Complex and changing requirements have led to confusion amongst EV buyers, but one thing is glaringly apparent: the protectionist requirements for a vehicle to be eligible for the tax credit.

CATL is one of those foreign battery manufacturers hit hard, as battery sourcing requirements have resulted in various domestic and foreign automakers reaching the ultimatum of choosing between CATL-sourced batteries, or their vehicles qualifying for the $7,500 federal EV tax credit.

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Tesla's approach of leasing CATL's battery tooling and design is an approach that seems to transcend the limitations put in place by the EV tax credit. Battery materials are sourced and assembled within a preferential country, alleviating the protectionist requirements set by the tax credit.

"CATL is in talks with around 10 to 20 other automakers in the US and Europe regarding a similar arrangement," noted Zeng.

Adam Jonas, Head of Morgan Stanley's auto and space research, speaks to how Tesla's workaround could represent a breakthrough in how Chinese battery companies can break into the U.S. market:

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.

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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.

While CATL is looking to continue its global dominance in the EV battery market, the U.S. has become increasingly worried that other Chinese automakers will attempt to break into the States by building factories in neighboring countries with preferential trade agreements. Several lawmakers have called for a review of the United States-Mexico-Canada Agreement to protect against what some have called an "extinction-level event for the U.S. auto sector."

It would seem that CATL's model could be a good compromise to help automakers build more advanced and affordable batteries at a lower price while discouraging market penetration from foreign automakers that circumvent protectionistic tariffs. And if Tesla can use that framework to build its $25,000 EV, it means domestically-produced EVs will be more affordable than ever.

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