Cheaper Model Y and Model 3 may be in store as Tesla completes American LFP battery factory with help form China's CATL

Before President Biden's administration rolled out federal tax credit subsidies for made-in-US batteries and electric vehicles, Tesla used to offer its cheapest standard-range vehicles with Chinese batteries.

Sourced by the world's largest battery maker, those CATL iron phosphate (LFP) cells made vehicles like the base Model 3 ineligible for the federal tax credit as they were only assembled into packs in Fremont, but the components were made in China.

Tesla then decided to build its own LFP battery factory, as the affordable LFP technology goes not only in mass market electric vehicles, but is the building block of energy storage products, from popular mobile power stations in the Anker Solix line, to Tesla's big Megapacks.

While Biden's clean energy tax credits may now be on the chopping block with the so-called Big Beautiful Bill federal budget that has been put up for voting, Tesla is still going ahead with its LFP battery factory.

It announced that the LFP cell production line installation in Nevada is "nearing completion," which means that its first products with made-in-US LFP batteries should be just around the corner. Tesla currently ships its cheapest RWD Model Y with 2170 cells which are not made with the affordable iron phosphate chemistry, so the LFP factory could bring an even cheaper Model Y RWD and resurrect the standard-range Model 3 as the cheapest Tesla vehicle.

It remains to be seen how competitive the new Tesla LFP battery will be, though. Tesla wanted to go around the made-in-US tax credit requirements the way Ford did it for its own LFP cell plant. Instead of directly buying Chinese cells, they simply probed CATL for production line equipment and know-how.

While this approach nominally qualifies the Tesla LFP batteries for the $45/kWh federal subsidy on the finished pack, the tax credit may be going away as soon as this year, and Tesla will be left with comparatively dated equipment. CATL's modern LFP cells that power direct Model Y competitors like the Xiaomi YU7 sport some of the highest energy density in their class and offer fast 12-minute charging. The equipment it sold to Tesla, however, will be two years old by the time the Nevada factory starts churning out made-in-US cells en masse.

Tesla is also unlikely to apply the cheaper but complex dry electrode manufacturing from its 4680 Cybertruck battery to the LFP ones, as CATL uses different form factor and production method for its iron phosphate cells.

Still, while the American-made Tesla LFP batteries may not be cost competitive to those sourced directly from CATL, they will lower its dependence on China for the Megapacks, and may allow it to introduce cheaper Model Y and Model 3 versions to the US market, too.