Chinese EV makers are planning factories in Mexico—and the U.S. is worried it’s a ‘back door’ to undercutting the Big 3 carmakers

Electric vehicles made in China—boosted by large government subsidies—are rapidly being adopted around the world. Over the past three years, China’s EV exports have jumped 851%, the New York Times reported in October.

But in the U.S., tariffs affecting China’s EV makers have made it nearly impossible for them to compete against vehicles made domestically or imported from friendly countries. That doesn’t mean they aren’t planning an assault, however: Chinese EV makers are instead focusing on another North American market, one that could prove to be a stepping stone into the U.S.: Mexico. 

South of the border, sales of affordable Chinese-made EVs are booming. According to the Mexican Association of Automotive Distributors, Mexico’s imports of Chinese cars (both EVs and traditional ones) increased 62.6% during the first eight months of this year compared to the same period last year.

The Mexico advantage

More worrying for U.S. automakers, several Chinese EV makers plan to build factories south of the border. That’s concerning because Mexico has a free trade agreement with the U.S. and Canada (the USMCA). Among the Chinese EV makers scouting locations in Mexico are BYD, Chery, and MG, reports the Financial Times.

Especially formidable is BYD, backed by Warren Buffett’s Berkshire Hathaway and poised to overtake Tesla as the world’s biggest EV seller. It owns the entire supply chain of its EV batteries, from the raw materials to the finished battery packs. Other Chinese EV makers have similar supply-chain advantages, to varying degrees, giving them a big cost advantage.

Earlier this month, the U.S. government, intent on building up the domestic EV supply chain, released new rules making it harder for vehicles with battery components made by a “foreign entity of concern”—meaning companies in China, Russia, Iran, or North Korea—to qualify for a $7,500 tax break granted to EV buyers under the Inflation Reduction Act.

Currently in the U.S., made-in-China EVs are subject to a 25% tariff, which is atop a 2.5% tariff on imported cars. That’s prevented them from making significant inroads. But manufacturing in Mexico could change the equation.

Of course, American and European companies have long manufactured cars and parts in Mexico for export to the U.S. and Canada, taking advantage of lower labor costs and the free trade agreement. Under the agreement, automakers can import cars into the U.S. duty free, as long as three-quarters of each vehicle’s parts were built in North America.

Elon Musk’s Tesla also has its eyes in Mexico, announcing in March that it would produce significantly more affordable EVs than those in its current lineup in Monterrey, where it will build its fifth factory. (Musk confirmed in October that plans for the plant are still on after rumors of cancellation.)

Read More: After Elon Musk predicts leading carmakers will be Chinese, smartphone giant Xiaomi unveils first EV and vows to be in ‘world’s top 5’

A ‘coming wave’ of Chinese EVs—from Mexico

But China’s moves in Mexico have rattled nerves in Detroit and Washington, D.C. 

Last month, House lawmakers warned U.S. Trade Representative Katherine Tai in a letter about China’s “industrial strategy to dominate the global automobile market” and its EV makers “gaining a backdoor to the U.S. market through our key trading partners.” 

The lawmakers argued that existing tariffs on made-in-China cars should be maintained and even increased, and warned about a “coming wave” of Chinese vehicles that “will be exported from our other trading partners, such as Mexico.” 

Mexico isn’t the only country with a U.S. free trade agreement that Chinese carmakers want to leverage. Another is South Korea, where Polestar—a luxury EV brand owned by China’s Geely—will manufacture its Polestar 4 SUV in 2025 at a Renault factory in Busan. That vehicle will avoid the 27.5% U.S. tariff imposed on the made-in-China Polestar 2. Polestar was previously owned by Volvo, which is now owned by Geely. Polestar also plans to build its Polestar 3 at a Volvo factory in South Carolina, which would allow it to also avoid tariffs.

“We are concerned by how the People’s Republic of China (PRC) is preparing to flood the United States and global markets with automobiles, particularly electric vehicles (EV), propped up by massive subsidies and long-standing localization and other discriminatory policies employed by the PRC,” the lawmakers wrote. “Indeed, PRC automakers BYD, Chery, and SAIC Motors have already established themselves in Mexico.” 

U.S. automakers ‘not quite ready’

Earlier this year, Ford Motor executive chairman Bill Ford Jr. warned that U.S. automakers are “not quite yet ready” to compete with Chinese rivals on EVs. “They developed very quickly, and they’ve developed them in large scale, and now they are exporting,” he told CNN in June. “They are not here, but they will come here we think at some point and we need to be ready, and we’re getting ready.” 

Companies further north are similarly concerned. Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, told The Globe and Mail last month that he worries about investments in Mexico’s auto industry by Chinese firms, which appear designed to get around tariffs.

“All these Chinese companies have access to cheap capital, benefit from a central plan, and are part of a wider geopolitical objective to weaken the North American base,” he said. “Canadian suppliers are only just trying to be profitable and solvent in a free market.”

Made-in-China EVs are sold in more than 100 countries, and the U.S. is the only market where they “have not yet really begun a big assault,” ZoZo Go CEO Michael Dunne, whose advisory firm specializes in the Chinese EV industry, told the Wall Street Journal.

With the U.S. largely protecting itself from this onslaught so far, the big question now is what happens in Mexico in the years ahead.

 

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