Chinese and Korean EV Makers Look to Mexico as a ‘Sanctions Evasion’ Hub for U.S. Market

Chinese car manufacturers consider Mexico a potential “sanctions evasion hub” in response to the U.S. supply chain blockade policy. This choice is driven by the requirement for electric vehicles to be produced in a country that is a signatory to the United States-Mexico-Canada Agreement (USMCA) to qualify for subsidies in the U.S. The strategy involves indirect access to the U.S. market by producing vehicles locally in Mexico.

According to an inside source on the 7th, Chinese companies have recently been known to be in talks with the Mexican government to build factories in the U.S.-Mexico border area. There is a growing trend to use third countries that need China’s substantial financial resources to avoid U.S. sanctions. MG, a subsidiary of China’s SAIC, is considering building a factory in Mexico worth up to $2 billion. BYD is also looking for factory sites in four local states.

The Mexican market already includes Chinese companies such as BYD and Shanghai Automotive (SAIC), as well as Tesla (U.S.), Volkswagen (Germany), and Stellantis (Netherlands). According to KOTRA, as of last year, about 10 Korean auto-related companies, including Mando, Hyundai Motor Group (Hyundai, Kia, Hyundai WIA, Mobis, Hyundai Transys), Dayou AP, and DH Autoware, have also entered Mexico.

Mexico is receiving attention as a potential base for electric vehicle production. While domestic demand for electric vehicles in Mexico may be limited, the connection between the demand for electric vehicles in North America and production in Mexico is evident. Producing electric cars in Mexico offers several advantages, including tariff-free trade by the strengthened 75% USMCA standards and eligibility for IRA subsidy benefits. Mexico ranks as the fourth-largest importer of electric vehicles in the U.S.. It plays a significant role in importing critical components of electric cars, ranking ninth in lithium batteries, first in drive motors, and second in inverters.

South Korean car companies are also actively entering Mexico. In addition, they plan to target the Mexican market itself. According to the cumulative investment amount (1999-2022) by the Mexican Ministry of Economy, Korea has invested $8.734 billion in Mexico, ranking 12th in the history of investment. Last year, it invested $673 million, ranking 7th among major investors in Mexico. Of these, 82% were found to have been invested in the transportation equipment manufacturing industry, especially in automobiles and auto parts. Kia is considering electrification by investing 1.787 trillion won, an increase of more than 750% from last year, in the Pesqueria production plant (KMM) in Nuevo Leon, Mexico, this year. DH Autoware, a company specializing in producing IVI and ADAS for automobiles, recently held a board meeting and approved a production corporation’s establishment and investment plan (DH Autoware N.A) in Monterrey, Mexico.

Electric vehicle subsidies are essential to be competitive in the U.S. electric vehicle market in the future. Hyundai and Kia are currently unable to receive electric vehicle subsidies in the U.S. Hyundai, and Kia are planning to complete the construction of an electric vehicle-only factory in Georgia, USA, by the end of next year by investing $5.5 billion, according to the local production conditions stipulated in the IRA draft. Still, it will not be easy to support the sale of electric vehicles next year due to strengthening regulations. Therefore, Mexico is emerging as a major market for Chinese and Korean cars.

An industry insider commented that the Hyundai Motor Group should consider constructing new electric vehicle factories or expanding existing production facilities in North America to cater to the local market. They pointed out that Mexico is a likely candidate for becoming a hub for Hyundai’s North American electric vehicle market in the future due to the potential for subsidy benefits under the IRA and its comparatively lower labor costs.

By. Seong Eun Bae