Chinese car companies should be careful when investing in Mexico
2024-08-12
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Although Mexico currently ranks among the top destinations for China's automobile exports, its future investment value may be overestimated.
Production丨Automotive Media
At the end of July, Ramirez, the current Mexican government’s finance minister, said that trade between China and Mexico was not equal and that North American countries must re-examine China’s practices."Mexico buys $119 billion worth of goods from China every year, and we only sell $11 billion.”He also said, “We are now considering changing our investment policy, focusing more on foreign investment, and focusing on production policy.”The data cited by Ramirez is wrong. In the first half of 2024, Chinese customs data showed that China exported $44.302 billion to Mexico and imported $9.344 billion, with a surplus of $34.958 billion. Although the other customs may have different calibers, there will be no multiple-level deviation.US steps up pressure on Mexico
Ramirez said this against the backdrop of increasing pressure from the United States.On July 10, the US government announced thatA 25% tariff will be imposed on Mexican products containing Chinese steel (a 10% tariff on aluminum products)If Mexico cannot prove that these metals are inMexico"It is melted or poured in the three countries. Previously, Mexican steel and aluminum products entered the United States duty-free.“Chinese steel and aluminum are entering the U.S. market through Mexico, evading tariffs, undermining our investments, and hurting American workers in states like Pennsylvania and Ohio,” said Lael Brainard, director of the White House National Economic Council.This measure was announced before Trump was assassinated. The two parties were competing to win the support of the steel and auto unions. The Republicans relied on promises and threats to their allies, while the Democrats relied on PUA allies. Although both parties pointed the finger at China, it was Mexico that was directly hit.The pressure from the United States was already evident last year. During her visit to Mexico at the end of 2023, U.S. Treasury Secretary Janet Yellen urged Mexico to strengthen foreign investment security reviews and establish a special foreign investment review system.“Bilateral Working Group”, jointly "monitoring foreign investment" with targets including advanced technology, critical infrastructure and sensitive data.Mexico ceded foreign investment review to the United States as a matter within its sovereign rights. The Americans also had the final say in the so-called "bilateral working group." Since then, Mexico has stopped contact with Chinese automakers and parts companies, and cancelled land supply and tax exemptions.In the United States, the United States already has many restrictive tools, such as Section 421 of the Trade Act of 1974 and relevant provisions of the IRA. Congressmen are also drafting a new Fair Competition Act to give American automakers more policy benefits (this is mainly aimed at Japanese and German companies operating in the United States).The 2.6 million "light vehicles" (what we call passenger cars) tax-free quota that the United States gives to Mexico each year are basically used by General Motors,Ford MotorandToyotaEqually divided.TeslaThey are no longer trying to get a share of the pie, because if Trump comes to power, not only will the IRA be abolished, but the quota may also be shaken. The quota for parts value is $108 billion, and Chinese suppliers can share in the profits, but with the influx of Chinese supply chain companies, the quota cap will be reached as early as 2025.Regarding China's automobile exports and investment in Mexico, the United States is forcing Mexico to "tighten its purse strings." The latter's true intentions are not important (common sense shows that it still hopes to attract more investment).Throughout the summer, Mexico's attitude toward automobile exports and investment in China has rapidly become "Americanized."Chinese car companies are deterred
Some people say that the United States is forcing Mexico to "take sides", which is obviously naive. Mexico has never been able to go against the will of the United States. There is no neutral or independent policy in Mexico, especially when it comes to Chinese investment.Mexico's president-elect, who will take office on October 1, is basically a believer in the policy line of the current president, Lopez Obrador (although she emphasizes the differences). The two are not only from the same party, but also because Lopez Obrador promoted her from university to politics and promoted her to a rocket-like position within four years.Therefore, althoughSheinbaumShe may be more willing to promote new energy than Lopez (she has an academic background in new energy), but on US-Mexico relations, she agrees with Lopez's policy: Mexico-US trade plays a "fundamental role" in the Mexican economy, and advocates building more industrial parks in line with the "nearshoring" policy to undertake industrial transfer.But she did not say what would happen if the US-Mexico relationship conflicts with the "nearshoring" policy. Now, this worry has become a reality, that is, Mexico cannot exercise its sovereignty in this matter and accept Chinese investment as it wishes.Judging from various signs, China-Mexico trade and investment relations will face a turning point after Sheinbaum takes office. Ramirez's remarks are a warning:The development prospects of Chinese automobile companies investing in Mexico have shifted from optimism to hesitation and suspicion.BYDIt once said it would invest in Mexico, but now it no longer mentions it.Overseas performance threatened by European policiesSAIC MGMG recently announced that it plans to build a Latin American hub in Mexico, including a car factory and a research and development center. However, this plan is still on paper, and whether it can become a reality depends on the results of the interaction between Mexico and the United States.In comparison, the common complaints of the domestic auto industry about Mexico being difficult to manage, poor water and electricity conditions, weak infrastructure, and rampant crime are minor issues. The change in Mexican policy will affect the investment decision itself. Those who have already invested should take care of themselves.Exports to Mexico no longer lead the growth rate
So far, all investment plans of Chinese auto brands in Mexico have been shelved, and the relationship between the two sides in the automotive industry is still limited to the trade of complete vehicles and parts.In June, Mexico still ranked second among China's vehicle export destinations with 34,000 vehicles, but only one-third of the number of Russia. In the first half of this year, Mexico ranked second with 226,000 vehicles, equivalent to 47% of Russia. In terms of growth, Brazil topped the list, followed by Russia and Mexico. The biggest change in the first half of the year was that the original "single core" of growth of Russia and the five Central Asian countries became Brazil and Russia.Dual Core”。Although Mexico's sales are also growing, both the new energy sector and the overall market are gradually withdrawing from the high-growth ranks. This is contrary to the growing trend of Mexico's total share in China's exports (from 1.7% in 2020 to 2.4% in 2023, and expected to reach 2.7% this year).If Mexico places more emphasis on local manufacturing and rejects Chinese investment (even though it is a decision made by Americans), the growth trend of China-Mexico trade and investment relations will be difficult to sustain.To some extent, the Sino-Mexico economic and trade relations are still Sino-US relations, and this "degree" may "deepen" with the coming to power of Sheinbaum. All Chinese companies investing in Mexico may have noticed this, but they may not have made a serious assessment of how far the "Americanization" of Mexican policies can go.Structural contradiction between demand and constraints
In 2020, two years after the start of the Sino-US trade war, China is no longer the largest trading partner of the United States. In 2023, China is the fourth largest trading partner of the United States. At the same time, the US global trade deficit has risen from US$678.7 billion in 2020 to US$1.2 trillion in 2023, setting new records every year.That is to say, when the United States' imports from the global "Southern countries" increased from about $60 billion per month to $90 billion per month, China's exports to the global South also increased from $60 billion per month to $14 billion. Of this $80 billion increase, $30 billion depends on US demand. The US financial and industrial policies have exacerbated the structural increase in US demand. The tariffs on China have shaped the re-export trade of the southern countries, with Mexico being the first to bear the brunt.Re-export trade has thus become the only way for the United States to stop the contradiction between its demands for Sino-US trade and its own needs. This is all old news. The Democratic Party and Mexico both want near-shoring, that is, if production cannot be transferred back to the United States, then they also want to be in a place like Mexico that is easy to control; while the Republican Party hopes to completely turn to the United States.However, the United States' coercion of Mexico to refuse China from playing an important role in the upstream supply chain of Mexico's automotive industry will not only increase the cost of nearshoring, but may also make production transfer very difficult.The United States certainly understands this. Given that the fixed investment in domestic factories has been declining in recent years, other products can be ignored, but steel and automobiles cannot be compromised. The reason is not that they are made in the United States (otherwise there would be no need to use the flag "made in the United States" trick), but because the steel and automobile industries have the two largest and most consistent vote bases.Domestic affairs determine foreign affairs, and elections determine policies. Over the past few decades, the opponents the United States has faced have changed again and again, but these two points have remained basically unchanged.Many people predict that the United States will also amend the "poison pill clause" in the USMCA (United States-Mexico-Canada Agreement), that is, when the agreement is reviewed in 2026, it will further restrict the economic and trade relations between the member countries of the agreement and "non-market economies", and ultimatelyClose the entire North American market to Chinese goods.Although a complete closure is impossible from the perspective of demand and supply, as long as it can be significantly weakened, even if it succeeds, it will also put Mexico's steel, aluminum and automobile industries completely under the supervision of the United States. The expectation of modifying the agreement actually points to Trump's coming to power. It was during his tenure that the NAFTA (North American Free Trade Agreement) was replaced by the USMCA.From this perspective, the fact that Chinese companies currently only maintain trade relations with Mexico and slow down or shelve investment relations is not a stopgap measure, but rather a recognition that China-Mexico economic and trade relations are not simply a bilateral issue.For the same reason, auto parts companies that have invested in Mexico need to cooperate with multinational companies (General Motors, Ford,BMW、HondaOn the one hand, there is competition from suppliers such as China and other countries; on the other hand, there is also policy uncertainty. If it is known for sure that Chinese vehicle brands will not come to build factories before 2028, then this current business model, lacking the traction of Chinese OEMs, will be difficult to develop.This is in contrast to the soaring exports of Mexico in the first half of this year (1.72 million vehicles, up 11% year-on-year). The rule of the past two years, that is, for every 1% increase in US demand for Mexican auto parts, Mexico's demand for Chinese parts will increase by 2%, is being broken.If the United States further increases its restrictive policies, Mexico's investment growth rate will peak faster.Unless Chinese vehicle manufacturers can invest and gain a foothold, the latter will also be subject to the U.S. "policy guidance" towards Mexico.It seems that although Mexico ranks among the top destinations for China's automobile exports, its future investment value may be overestimated.
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