US fears as China eyes EV factories in Mexico

Mexico, the world’s seventh-largest carmaking nation, is one of the countries best placed to benefit from an upheaval in global supply chains caused by disruptions in the COVID-19 pandemic and the US-China trade war. It offers cheaper labour, a broad-based car supply chain and access to the North American free trade deal USMCA.

“The interest of Chinese companies in the Mexican market has grown exponentially,” said Francisco Bautista of EY Latin America, which is working with four Chinese electric vehicle companies looking to locate production in Mexico.

The US is vying with China for supremacy in electric vehicle manufacturing and launched stringent curbs to exclude EVs, batteries and other components and resources made by Chinese companies from its supply chain through the Inflation Reduction Act.

President Joe Biden’s administration is concerned that Chinese carmakers would sidestep the measures by building cars in Mexico, outshining global rivals with technologically advanced models that are more competitively priced.

Top members of the Republican-led House Select Committee on China wrote in a recent letter they were worried Chinese companies would use Mexico as a “back door” into their market.

China is the world’s largest producer of electric vehicles and their batteries, with its carmakers increasingly exporting low-cost models around the world as they face overcapacity in domestic factories.

MG, owned by state car giant SAIC, plans to build a $US1.5 billion-$US2 billion factory in Mexico, while BYD is working on a factory investment worth hundreds of millions in its first phase, said one source familiar with the talks. Last month, BYD met ministers from at least four Mexican states, including Edomex and Yucatán, at a reception in Mexico City about an electric vehicle factory, said a former state official.

Nuevo León’s governor said BYD was planning a factory there, although the company said no final decision had been taken. SAIC, BYD and Chery did not respond to requests for comment.

Chinese carmakers have experienced astronomical growth in Mexico in recent years, accounting for nearly a fifth of sales, up from virtually zero six years ago.

The US has said it is not trying to block Chinese investments in Mexico. But US Treasury Secretary Janet Yellen recently stressed the need to apply trade rules properly, including a recent US agreement with Mexico to strengthen its foreign investment screening.

Mexico is heavily dependent on the US, where more than two-thirds of its exports go and 37 million people of Mexican origin live and work, sending back almost $US60 billion a year in remittances.

Asked whether the investment screening agreement could harm Mexico-China business relations, Finance Minister Rogelio Ramírez de la O was blunt.

“Our trade and financial relationship with the US is completely dominant,” he said while sitting next to Ms Yellen in the National Palace. “It’s not a great priority to dedicate time to countries other than the US.”

This year Mexico became the US’s largest trading partner, with Mr Biden pushing for greater economic integration in North America, particularly in green industries.

Mexico is covered by the IRA’s consumer tax credit to speed up the deployment of electric vehicles. But that required models to be made in North America and source materials and components from countries with US free trade agreements.

No parts can come from China or other “foreign entities of concern”, adding to US trade barriers that have already dissuaded some new Chinese brands from focusing on the market.

Michael Dunne, chief executive of Asia-focused car consultancy Dunne Insights, said Chinese companies were “realistic” that anti-China sentiment in Washington threatened to block access to the Biden administration’s generous EV subsidies. “It is clear to them there is a target on their chest,” Mr Dunne said.

Additional reporting by Peter Campbell in London

Financial Times