In a major move for the lithium battery industry, global electric vehicle giant Tesla Motors has formally confirmed a partnership with South Korean battery manufacturer LG Energy Solution. The companies will jointly build a $4.3 billion (approximately 30 billion RMB) lithium iron phosphate (LFP) battery factory in Lansing, Michigan. This facility is intended to support the rapid expansion of Tesla's energy storage system business. The U.S. Department of the Interior officially confirmed the agreement in a statement.
The factory will produce LFP prismatic cells, with mass production scheduled to begin in 2027. The output will directly supply Tesla's Megapack 3 energy storage systems manufactured in Houston. This initiative is viewed as a critical step in strengthening the autonomy of the United States' battery and energy storage industry supply chain. The collaboration is also part of a series of energy and supply chain investment plans announced by the U.S. government, reflecting an accelerated push to localize key energy technologies and reduce dependence on overseas suppliers.
Reports of this cooperative agreement first surfaced in July 2025. At that time, LG Energy Solution had indicated it would supply LFP batteries but did not disclose the customer or the intended application. Notably, the factory was initially developed as a joint venture plan between LG and General Motors. However, the automaker decided to exit the partnership at the end of 2024 as part of a broader reduction in its electric vehicle investments, selling its stake to LG. LG subsequently retrofitted the facility last year for the production of LFP prismatic cells.
The U.S. Department of the Interior stated that "batteries made in the U.S. will power Tesla's Megapack 3 energy storage systems, creating a robust domestic battery supply chain." Although the majority of Tesla's revenue still comes from its automotive business, the company is increasing its investment in the faster-growing energy sector, driven in part by rising electricity demand from data centers.
Tesla's Megapack systems can store electricity generated from intermittent sources like solar or wind power, or store energy during periods of low demand for release during peak hours. Currently, Tesla offers the Powerwall backup battery for residential use with solar systems, alongside the larger Megapack and Megablock systems for utility-scale power storage. Last year, the company's energy business revenue grew by 27% to $12.8 billion, accounting for 13% of total revenue, even as overall revenue declined due to a 10% drop in automotive sales.
In a Q4 earnings call in January, Tesla CEO Elon Musk stated that the company expects its energy business to "grow at a very high rate for the foreseeable future." However, CFO Vaibhav Taneja cautioned that the energy segment is expected to face margin pressure from low-cost competition and tariff expenses.
According to Sam Adham, a battery expert at CRU Group, Chinese manufacturers like CATL produce the most advanced LFP batteries, but they are subject to high tariffs when imported into the U.S. He also noted that Tesla currently sources the majority of its storage batteries from China. Tesla's significant reliance on Chinese-made LFP batteries has led the company to actively diversify its supply chain to mitigate tariff impacts and reduce production costs. Tesla reported that tariffs negatively affected its energy storage business by approximately $200 million in the third quarter of 2025 alone, prompting the push for localized LFP battery production.
The joint venture with LG Energy Solution in Michigan is a central part of this strategy. Establishing production in the U.S. will provide a more cost-competitive supply base for the continued expansion of Tesla's energy storage operations.
For LG Energy Solution, this partnership is a key component of its strategy to aggressively expand into the energy storage market. As the transition in the U.S. electric vehicle market slows and competition from Chinese firms intensifies, the company is shifting its focus toward the rapidly growing energy storage sector. Along with domestic rivals Samsung SDI and SK On, LG is converting multiple electric vehicle battery production lines, aiming to increase its energy storage battery capacity to over 60 gigawatt-hours this year. This capacity transformation, led by South Korean battery firms, is reshaping the global energy storage supply landscape.
A core driver behind this strategic shift is the surge in electricity demand from data centers, fueled by the artificial intelligence boom. BloombergNEF predicts that energy storage demand from U.S. data centers will grow significantly starting in 2024, reaching 78 gigawatt-hours by 2035—more than double the 2024 figure. This would account for nearly 9% of total U.S. electricity demand by then, with growth rates surpassing those of the electric vehicle and hydrogen sectors. Samsung SDI forecasts that the U.S. energy storage market will expand from about 80 gigawatt-hours currently to 130 gigawatt-hours by 2030.
Given this robust demand outlook, the partnership between Tesla and LG Energy Solution aims to secure a strategic stronghold in the domestic U.S. energy storage supply chain.
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