Chinese car makers increase investment in Mexico, they had a plan [Backbook Global].

ORIGINAL LINK : https://www.sedaily.com/NewsView/29YKMBM37W

Visitors are checking out BYD vehicles at the IAA Mobility 2023 held in Munich, Germany. Sinhua-Yonhap News

China is targeting Mexico as a ‘weak link’ to evade U.S. sanctions. The country’s largest electric vehicle (EV) manufacturers are making massive investments in Mexico, which borders the U.S., revealing their intentions to bypass the Inflation Reduction Act (IRA). The move to exploit this loophole could potentially disrupt U.S. policies intended to exclude China from the supply chain.

The Financial Times (FT) reported on November 17, quoting multiple sources, that “U.S. government officials have raised issues related to Chinese investment during recent meetings with Mexican government officials.” The Mexican officials who attended the meeting acknowledged the need to be cautious in attracting Chinese investment, as it could potentially irritate the U.S.

According to sources, MG under China’s SAIC, BYD, and Chery Automobile, are in talks with Mexican bureaucrats to select sites for building factories in Mexico. These three EV companies, among the top-selling in China, are revealing specific investment plans.

MG plans to build a factory in Mexico worth between $1.5 billion and $2.5 billion. BYD is investing hundreds of millions of dollars in a factory and contacted four states in Mexico last month. Another Chinese company is planning to build an EV battery factory worth $12 billion.

Chinese auto companies plan to expand car sales in the Mexican market while establishing manufacturing facilities as a springboard to target the U.S. market. According to Bloomberg, until 2016, it was rare to see cars imported from China in Mexico, but recently the sales of Chinese cars have skyrocketed. According to the China Automobile Manufacturers Association, China ranked first in the list of countries from which Mexico imports cars last year. As of October this year, the sales of Chinese cars in Mexico have surged by 51% to 212,169 units compared to the same period last year.

In this context, Chinese EV companies plan to take advantage of the U.S. IRA by using Mexico as a stepping stone. Mexico, with its relatively low wages and abundant labor force, is the world’s seventh-largest car manufacturer. To receive a maximum subsidy of $7,500 under the IRA, EVs must be produced in the U.S., Canada, or Mexico. Mexico, which can benefit from the U.S.-Mexico-Canada Agreement (USMCA) that replaced the North American Free Trade Agreement (NAFTA) in 2020, becomes a forward base for Chinese companies to evade IRA sanctions and export to the U.S. Francisco Batista of EY Latin America said, “Chinese companies’ interest in the Mexican market has grown exponentially.”

The Biden administration’s plan to exclude Chinese-made EVs, batteries, and other components and resources from the supply chain is bound to be disrupted. The top members of the House China Special Committee, led by the Republican Party, recently sent a letter to Mexico expressing their concern that Chinese companies would use Mexico as a ‘back door’ to their domestic market.

Meanwhile, China, which is under export sanctions for advanced semiconductors from the U.S., is reportedly using Malaysia, known as a semiconductor packaging hub, as a bypass region. According to Reuters, two Chinese companies have requested Malaysian chip packaging companies to manufacture chips such as Graphic Processing Units (GPUs).

Malaysia is currently estimated to account for 13% of the global semiconductor packaging, assembly, and testing market. Chinese semiconductor design companies are asking Malaysian companies to assemble semiconductors, excluding chip wafer manufacturing, which is subject to U.S. sanctions, and some contracts have already been agreed upon.