The Ford CATL licensing agreement at BlueOval Battery Park Michigan in Marshall is now a federal political fight. According to Headlight.news, Transportation Secretary Sean Duffy sent a letter to Ford CEO Jim Farley on Sept. 8, 2026, saying he was "deeply alarmed by Ford's continued reliance on licensed technology from Chinese battery manufacturer CATL" and citing "supply chain exposure, and reliance on technologies of foreign adversaries." Ford called the letter "a wrongheaded attempt to capture headlines." Farley, in comments to the Wall Street Journal reported by Fox Business, described the Marshall arrangement as "a limited technology-licensing and services agreement."
Whatever happens between Ford and Washington, the rules behind the argument apply to any plant that makes battery cells or components with licensed Chinese technology, Chinese equipment or Chinese service support. This guide lays out what the letter said, which three rules matter, and a seven-step audit a plant manager, purchasing lead or controller can run before a customer, auditor or regulator asks.
What is the Ford CATL licensing agreement?
It is the arrangement under which Ford builds lithium iron phosphate (LFP) cells in Marshall, Michigan, using technology licensed from CATL. Ford says it owns the plant, runs it day to day and is the employer of record for the roughly 1,700 jobs planned there, according to WWMT.
In a June 17, 2026 update, Ford said it had hired more than 500 employees with 800 targeted by year-end, that the plant makes LFP prismatic cells "from slurry to coating and formation, all the way through aging and final inspection," and that production is being verified to CATL practices. Cells ship in 2026 for the midsize electric truck on Ford's Universal EV Platform. InsideEVs coverage has described the licensed scope as the cell chemistry, product design and manufacturing process.
Note the two words in Farley's description: technology and services. For an audit, those are separate exposures. A license governs what you are allowed to do with the know-how. A services agreement governs who is in your building, on your network and in your process.
Why did Duffy object to Ford's deal?
Headlight.news reports that the letter raised three concerns: the licensed CATL technology in Marshall, a new Geely deal to build vehicles at Ford's plant in Valencia, Spain, and Ford's plan to wait until 2030 to move some Lincoln production from China to the United States. The Department of Transportation also posted a press release on the letter. Farley told the Journal that Duffy's claims reflected "basic misunderstandings, mistruths."
For suppliers, the useful question is not who wins the exchange. It is whether your own contracts would survive the same reading.
Which rules apply to Chinese licensed battery technology?
Three rules do most of the work. Each one asks a different question, so a single "China exposure" checkbox will not satisfy any of them.
1. FEOC rules for the 45X credit
The 2025 OBBBA tax law added prohibited foreign entity rules (often still called FEOC rules) to the 45X advanced manufacturing production credit. Two tests matter on a battery line.
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Effective control through a license. According to Baker Tilly, a prohibited foreign entity can hold effective control through a license that gives it the right to: specify or direct the sources of components; direct the operation of the facility or production unit; limit the use of the licensed intellectual property; receive royalties beyond the 10th year; or withhold the technical data, information and know-how needed to produce independently. Foley Hoag notes these rules reach licenses entered into or modified after July 4, 2025, so amending an older license can pull it in. As of July 2026, Treasury had not issued guidance defining effective control.
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Material assistance and the cost ratio. IRS Notice 2026-15, issued Feb. 13, 2026, addressed only material assistance. The FEOC restrictions generally took effect Jan. 1, 2026, and the IRS said more guidance would come in separate notices.
Ownership and financing count too. Baker Tilly lists foreign-influenced entity tests that include a specified foreign entity's authority to appoint a board member or executive officer, 25% ownership by a single specified foreign entity, 40% combined ownership by such entities, or 15% of debt held by them.
2. The Pentagon's Section 1260H list
The Defense Department added CATL to its list of Chinese military companies operating in the United States on Jan. 7, 2025, UPI reported. CATL called the listing a mistake and appealed. The list itself is the document to screen counterparties against.
3. Section 154 of the FY2024 NDAA
Starting Oct. 1, 2027, Pentagon funds cannot be used to buy batteries produced by CATL, BYD, Envision Energy, EVE Energy, Gotion High-tech or Hithium, per OpenSanctions' summary of Section 154. "Produced" covers a company that assembled or manufactured the final product or supplied the majority of its components. If any of your cells, packs or modules could end up in a defense program, this is a procurement question for your customers, not only a tax question for you.
How do you audit a battery line for Chinese licensed technology?
Run it as a structured register, not a legal memo written from memory. The seven steps below assume a cell or component plant, but the same approach works for a pack assembler or a materials supplier.
Step 1: Define the scope
List every place a Chinese-linked party could touch the line. At minimum:
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Process, chemistry and product-design licenses
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Production equipment and tooling (mixing, coating, calendering, winding or stacking, formation and aging, inspection)
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Control software, firmware and remote access to machines or the MES
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Commissioning, maintenance and technical-services contracts
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On-site technical staff employed by a licensor or equipment maker
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Materials and components that go into a 45X-eligible product
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Ownership, board rights, executive appointment rights and debt
Step 2: Build the exposure register
One row per contract or asset. A workable column set:
| Field | Why it matters | | --- | --- | | Counterparty and ultimate parent | Lists are screened by entity, and subsidiaries hide parents | | Contract type (license, equipment, software, service, materials, financing) | Each rule tests a different kind of relationship | | Signing date and every amendment date | Licenses signed or modified after July 4, 2025 fall under effective control | | Direct cost | Feeds the Notice 2026-15 cost ratio | | Touches a 45X product? (yes or no) | Separates tax exposure from general commercial risk | | 1260H hit, Section 154 hit, PFE or FIE test hit | Shows which rule is in play | | Owner and review date | Someone has to keep it current |
Step 3: Screen names against the lists
Check every counterparty and its parent against the 1260H list and the six Section 154 manufacturers. Then apply the ownership and financing tests: board or executive appointment rights, 25% single-entity ownership, 40% combined ownership and 15% of debt. Record the source and date of each check so the result can be repeated when the lists change.
Step 4: Read each license for the five trigger rights
Pull the actual agreement, including side letters and amendments, and mark whether each right exists:
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Can the licensor specify or direct where components come from?
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Can the licensor direct how the plant or production unit operates?
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Does the license limit how you can use the licensed IP?
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Do royalties run past year 10?
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Does the licensor hold back technical data, information or know-how you would need to produce without them?
The fifth question is operational, not only legal. Ask your process engineers directly: if the licensor's staff left tomorrow, could the line keep running to spec? "Production is verified to the licensor's practices" is a reasonable quality approach, but the audit should record whether the documentation to do that verification lives in your systems or theirs.
Step 5: Calculate the material assistance cost ratio
Notice 2026-15 sets the ratio as (A minus B) divided by A, where A is the total direct cost of the relevant components and B is the portion attributable to prohibited foreign entities. Taxpayers can support the numbers with supplier certificates, the safe-harbor tables or actual cost data.
For battery components, Baker Tilly lists the minimum non-PFE share at:
| Year | Minimum cost ratio | | --- | --- | | 2026 | 60% | | 2027 | 65% | | 2028 | 70% | | 2029 | 80% | | 2030 and later | 85% |
A simple illustration, with made-up numbers: if A is $100 and B is $30, the ratio is 70%. That clears 2026, 2027 and 2028 but fails in 2029. The point of running it now is to see how much sourcing has to move, and by when, while there is still a purchasing cycle to move it. Start collecting supplier certificates now rather than at tax filing time.
Step 6: Map equipment, software and services
This is where licensed-technology plants often carry exposure that no license review will catch. For each major asset, record:
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Country of origin and manufacturer of formation, coating and winding or stacking equipment
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Who holds administrator credentials on machine controllers and line software
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Who has remote access, through what path, and whether it is logged
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Who can push firmware or recipe updates, and whether you approve them first
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Which service contracts put a counterparty's staff on site, and what they can change
A licensor or equipment maker that can change recipes remotely may look, in practice, like a party directing operations, even if the contract does not say so. Record it either way.
Step 7: Document and fix what you can
Write a dated exposure memo that summarizes the register, states what was checked, and lists open questions. Because Treasury has not defined effective control, the memo should say plainly which assumptions you made and why. Then work the fixes that are within your control:
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Renegotiate license clauses that hit a trigger right, keeping in mind that a modification can itself bring an older license under the rules, so involve tax counsel before signing
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Qualify a second source for equipment, spares or service where one counterparty holds all the knowledge
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Move technical documentation, recipes and training in-house
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Tighten remote access and firmware change control
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Assign one owner for the file and a review date tied to new IRS notices and list updates
What will a customer or regulator ask to see?
Expect requests for four things: the exposure register, a summary of each license showing which trigger rights exist, supplier certificates, and the cost-ratio calculation with its supporting data. A defense-facing customer will add a question about Section 154 and the Oct. 1, 2027 date. Having these ready turns a letter like Duffy's into a document request rather than a crisis.
The takeaway for operators
Ford's answer to Duffy rests on ownership, day-to-day control and employment. Those are the right facts to lead with, and they are the same facts every licensed-technology plant should be able to prove on paper. The guidance is not finished: effective control is still undefined and more IRS notices are expected. That is a reason to record your assumptions now, not a reason to wait.
Related reading
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If Boeing Engineers Strike, Who Signs Off on Supplier Deviations?
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What Tier-3 Foundries Should Expect From the GE Castings Deal
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Two to Three Years of Samarium: The Magnet the Pentagon Can't Tariff Its Way Out Of
Sources
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Fox Business: Ford CEO says Duffy's letter reflected 'basic misunderstandings'
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WWMT: Transportation secretary wants Ford to cut Chinese ties
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Ford: BlueOval Battery Park Michigan Hits Hiring and LFP Production Milestones (June 17, 2026)
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UPI: Pentagon lists Tencent, CATL as Chinese military companies
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Department of Defense: Entities Identified as Chinese Military Companies (Jan. 7, 2025)
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Foley Hoag: The Prohibited Foreign Entity (FEOC) Rules and Battery Storage (July 2026)