In a major move to reduce dependence on Chinese imports, South Korea’s LG Energy Solution (LGES) has reportedly secured a $4.3 billion deal to supply Tesla with lithium iron phosphate (LFP) batteries for energy storage systems. As the U.S. ramps up tariffs on Chinese goods, the agreement marks a strategic pivot for Tesla, which has heavily relied on China for its battery needs.
Reuters disclosed that neither company has confirmed the deal publicly, but a source familiar with the matter said that the LFP batteries will be produced at LGES’s Michigan factory, which recently began production.
The contract, among LGES’s largest to date, will run from August 2027 through July 2030, with an option to extend for up to seven additional years and increase volumes based on future discussions.
LG Energy Solution’s (LGES) Power Shift: From EVs to Energy Storage
CNBC reported that LG Energy Solution had earlier disclosed a $4.3 billion contract to supply LFP batteries globally over three years, but did not name Tesla as the customer or clarify whether the batteries would be used for electric vehicles or energy storage systems (ESS). However, growing signals point to Tesla’s booming energy business as the likely focus.
With EV demand slowing, LGES has shifted gears toward energy storage. The company is betting on a surge in demand fueled by the rapid expansion of AI data centers and renewable energy installations.
Liz Lee, Associate Director at Counterpoint Research, confirmed to CNBC that the deal is expected to be closely linked to LGES’s Michigan facility, which now serves as its first North American ESS battery manufacturing hub.
This strategic shift comes as LGES considers repurposing some of its U.S. EV battery lines for ESS production in response to weakening EV market dynamics.
Strong Q2 2025
The company recently posted solid second-quarter earnings for 2025, even without North American production incentives. The company reported revenue of KRW 5.6 trillion, down 11.2% from the previous quarter. However, operating profit surged 31.4% to KRW 492.2 billion, with an 8.8% margin. Notably, North American incentives contributed KRW 490.8 billion to the operating profit.
CFO Chang Sil Lee stated,
“In the second quarter, we secured stable EV battery sales and also started production at our new ESS battery facility in North America. However, constrained customer purchase sentiment, coupled with the reflection of metal price decline to our average selling price (ASP), affected our quarterly revenue.”
Moving forward, LGES anticipates a short-term slowdown in EV demand due to new tariffs and cost pressures on automakers. Yet, the company remains optimistic about mid- to long-term growth, driven by advances in autonomous driving and energy storage.
To adapt to this shift, it is focusing on maximizing output at existing production lines, particularly for ESS batteries. It plans to expand its annual production capacity for ESS to 17 GWh by year-end. The company also aims to reduce fixed costs by scaling back investments while securing a competitive supply chain.
Sustainability Goals
Beyond profits, the company is committed to achieving carbon neutrality across its value chain by 2050. One major step involves converting 100% of its power use across all global sites to renewable energy by 2030.
LGES is also working on creating a closed-loop battery ecosystem. With millions of tons of used EV batteries piling up, the company is actively exploring ways to reuse them for energy storage and recycle production waste. These initiatives aim to minimize environmental harm while securing critical raw materials.
Tesla’s Push for U.S.-Made Batteries Gains Momentum
The global battery market is shifting rapidly, driven by policy changes like the U.S. Inflation Reduction Act (IRA) and similar initiatives in Europe and the UK. These regulations are encouraging companies to diversify supply chains and reduce reliance on Chinese suppliers. For LG Energy Solution (LGES), this creates a clear advantage. With operational plants in Michigan and an upcoming facility in Arizona, LGES is well-positioned to meet growing U.S. demand while staying aligned with evolving trade rules.
China has long dominated the lithium iron phosphate (LFP) battery space, but LGES is emerging as one of the few manufacturers building significant LFP production capacity on American soil. Its Michigan plant began operations in May, and the Arizona plant is set to further strengthen its U.S. presence.
CEO Elon Musk reinforced the importance of this shift, noting that energy demand is booming despite ongoing tariff and supply chain pressures.
He said during the company’s latest earnings call,
“Not many people realize just how massive battery demand has become.”
While Tesla plans to open its own LFP cell manufacturing facility in Nevada by the end of the year, it’s expected to cover only a fraction of the company’s overall battery needs. That’s where LGES comes in.
Its new U.S.-based capacity provides Tesla with a critical, non-Chinese alternative. The partnership aligns perfectly with Tesla’s goal to localize its battery supply chain—offering both strategic location and advanced manufacturing capability.
Battery Demand Powers Growth Outlook
Tesla’s energy generation and storage division, which includes its Megapack and Powerwall products, continues to play a growing role in its business. Despite overall revenue falling 12% in Q2 2025 to $22.5 billion, the energy segment generated more than $2.8 billion. However, this was a 7% year-over-year drop due to pricing pressure and supply chain challenges.
Still, the segment stands out as a growth area amid softening EV sales. Tesla has stressed that battery demand is growing at an unprecedented pace, making partnerships like the one with LGES essential to scaling operations.
The Rise of Solid-State Batteries
As lithium-ion battery innovation continues, solid-state batteries are emerging as the next frontier in battery technology. These advanced batteries utilize solid ceramic or polymer electrolytes, providing enhanced safety, higher energy density, and longer lifespan.
The global solid-state battery market is expected to grow from $0.26 billion in 2025 to $1.77 billion by 2031, with a projected CAGR of 37.5%, according to MarketsandMarkets.
Solid-State Battery Market Size
Solid-state batteries are ideal for electric vehicles, medical devices, and industrial sensors due to their resistance to leakage and thermal runaway. Primary solid-state batteries, commonly used in smart packaging, RFID tags, and medical patches, will likely dominate the market in the short term.
North America is set to lead in both research and commercialization. U.S. companies like Solid Power, QuantumScape, Sakuu Corporation, and Excellatron are spearheading innovation, with Mercedes-Benz and Factorial Energy collaborating on a technology that could offer EVs over 600 miles of range on a single charge.
Other major players like ProLogium (Taiwan), Ilika (UK), and Blue Solutions (France) are also advancing the global rollout of solid-state battery technologies, signaling a strong future for energy storage innovation.
The LGES-Tesla deal signals a major shift in the energy market. As EV demand slows and energy storage rises, resilient, tariff-friendly supply chains and advanced battery tech are taking center stage. With new U.S. plants and strong sustainability goals, LGES is emerging as a key player in powering Tesla’s energy growth amid global trade and policy shifts.
