Guest Business Wu Ting: Mexico, the next global automotive manufacturing hub?

The world's automotive giants and industrial chains are collectively pouring into Mexico, and the next global automotive manufacturing center is about to be born.

In May this year, Tesla officially started building a gigafactory in Mexico, with an estimated total investment of $15 billion, more than twice that of the Shanghai gigafactory.

Not only Tesla, but also China's BAIC and JAC, Japan's Toyota, Honda, Nissan, South Korea's Hyundai and Kia, Germany's Volkswagen, BMW, plus the United States' General Motors and Ford...... All have already built or are planning to build factories in Mexico.

As automakers enter Mexico, companies in the supply chain will naturally follow suit. It can be said that entering Mexico has been the consensus of the global automotive industry, and what is the charm of this country, which has only 80% of the GDP of Guangdong Province?

I think the main reason is that the next-door neighbor is too rich.

As a land neighbor of the United States, Mexico's economy has long been forcibly tied to the United States, and in the first half of this year, Mexico has replaced China as the largest trading partner of the United States.

The backbone of Mexico's exports to the United States is automobiles.

As early as the twenties and thirties of the 20th century, Ford, General Motors, and Chrysler successively set up factories in Mexico, using cheap Mexican labor to assemble automobiles, and then export them to the United States. The Big Three helped Mexico build the foundation of the automotive industry, and Volkswagen, Hyundai, and Toyota followed suit and entered Mexico one after another.

In 1994, the North American Free Trade Agreement (NAFTA) was enacted, and Mexican-made cars were sold to the United States with zero tariffs, which further accelerated the transfer of the global automotive industry to Mexico.

But objectively speaking, at that time, Mexico was more like an assembly workshop, and the car companies that went there to build factories just wanted to take advantage of tariffs, and did not bring a mature supply chain to Mexico.

It wasn't until 2020 that the three North American countries re-signed a trade agreement that stipulated that in order for the three countries to enjoy zero tariffs, 75% of the parts must be sourced locally. This is a major positive for Mexico, as car factories in China, Europe, Japan and South Korea will have to relocate their supply chains if they want to build cars in Mexico and export them to the United States.

Up to now, the world's major multinational car companies have set up production bases in Mexico. With an annual production capacity of more than 3 million vehicles, 90% of which are exported, Mexico is expected to become the world's fifth-largest car producer by 2025.

In this North American car carnival, the faces of Chinese cars are naturally indispensable.

Since 2017, the total domestic automobile consumption has begun to peak and fall. After 2020, although new energy vehicles have sprung up, the price war has become more and more intense, and car companies have to go overseas, and the North American market, with a large population and strong consumption power, is a must to compete.

In 2022, China became the largest source of Mexican car imports, with one out of every four cars imported by Mexico coming from China. For example, SAIC MG entered Mexico only two years ago, and its sales exceeded 48,000 units last year, ranking 7th in the local market.

But you also noticed that it is imported, not produced locally. So far, only Beiqi Foton and JAC have achieved local production, and other brands basically rely on exports.

This means that they are only targeting the local Mexican market, not the U.S. market through Mexico. How big is the Mexican market? About 1 million units a year is not enough to sell in China in half a month. European, American, Japanese and South Korean car companies have laid out early, leaving little gap for Chinese brands.

If you want to really go overseas, you must enter the United States, the world's second largest market, which means that investing and building factories in Mexico is almost the only way. But this road is not easy to follow, for example, there are many differences in labor laws between China and Mexico, Mexican companies must have more than one union, and the cultures of the two countries are very different, and this cake is really not easy to eat.

Of course, there is also good news, although there are not many Chinese car companies to build factories in Mexico, but China's automotive supply chain companies are taking the lead, such as Yinlun Co., Ltd., which does thermal management, Huayu Automobile, which makes electric drive systems, and Sanhua Intelligent Control, which makes refrigeration parts, and so on. They are all suppliers of multinational car companies such as Volkswagen and Toyota, and major customers go to Mexico to build factories, and they will naturally follow suit.

When Chinese automakers actually land in North America, they will be faced with a complete and familiar supply chain, and I think they will be able to accelerate.

In addition to Mexico, do you know any other gathering places for Chinese car companies to go overseas?

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Author | Wu Ting

Resources:

[1] Mexican official: Tesla and suppliers will invest $15 billion to build a factory.China Economic Net.2023

[2] Chinese car chains flocking to Mexico.brocade.2023

[3] Next stop, Mexico?.Chebai Think Tank.2023

[4] Will Mexico's Rise Seize China's Export Market?.Shangguan News.2023

[5] Beiqi Foton will build a second plant in Mexico to produce electric vehicles.China Economic Net.2023