The attacker, who killed one person and injured several others Friday morning at the Air Products factory in Saint-Quentin-Fallavier, has been identified and arrested. There may have been a second attacker, Hollande said.
The suspect, identified as 35-year-old Yacine Salhi, who lives in the city of Saint-Priest near Lyon, had been known to security services for a number of years but did not have a criminal record, Interior Minister Bernard Cazeneuve told reporters.
A flag with Arabic writing on it was found at the scene, Cazeneuve said.
Hollande said there was a "decapitated body with inscriptions" at the site, though legal sources have told French news agency AFP that it is not clear whether the beheading happened at the factory or if the body was transported.
The attack was carried out "in a vehicle driven by one person, perhaps accompanied by another, which rammed its way at high speed into this establishment which contained bottles of gas," Hollande said.
"The intent was without doubt to cause an explosion. It was a terrorist attack," he added.
The attack comes nearly six months after the Islamist attacks in and around Paris that killed 17 people in January that started with a shooting at satirical magazine Charlie Hebdo.
Extremists claiming connections to radical groups attacked the publication's office, killing 12. A policewoman and four hostages in a Jewish supermarket were also killed during the attacks which occurred over three days.