China-based car component suppliers are building production sites rapidly in the suburb of Monterrey, the northeast of Mexico. They are forming a supply chain for Tesla's future Gigafactory in Nuevo Leon. The situation has concerned the US government.
Bloomberg reported that Tesla CEO Elon Musk had invited Chinese suppliers to expand in Mexico, aiming to replicate the company's supply chain in Shanghai.
According to preliminary data from INA, the automotive parts industry association in Mexico, the value of Mexico-made Chinese components that were exported to the US reached US$1.1 billion in 2023. The number grew by 15% from 2022. In 2023, 33 China-based automotive part companies registered in Mexico, with 18 exporting to the US.
While US government officials have expressed concerns about Chinese automotive part suppliers entering Mexico, industry sources said it makes sense that Tesla and other carmakers want to take advantage of China's highly organized and efficient supply chains.
Former US president Donald Trump ignited a trade war with China in 2018, causing China to increase investments in Mexico and other countries. As Mexico scales its manufacturing, China's exports to the US have decreased to the lowest point since 2010.
According to the US Inflation Reduction Act (IRA), EVs assembled in Mexico will be eligible for the US$7,500 tax credits. In addition, carmakers have to follow the IRA's restrictions regarding battery material sourcing. The policy targets China and other foreign entities of concern or some enterprises based in these countries.
According to Mexico-based Banco BASE SA, some China-based companies eager to supply Western automotive OEMs have been forming shelter companies under Mexican business guidelines.
Some US tax attorneys even found that as long as the battery mineral or components are not sourced from China, Mexico-headquartered Chinese carmaker will be able to produce EVs eligible for the US$7,500 tax credits.
China-based BYD, Chery, and SAIC-owned are considering expanding to Mexico. The industry suspected these companies would start constructing plants in Mexico within four years and export vehicles to the US within six years.
The rise of Chinese EVs has prompted the US government to mull over import restrictions. Sources told Bloomberg that the curbs will be applied to China-made EVs and parts. Implementing higher tariffs will likely be one of many measures the Biden administration plans to take to prevent Chinese manufacturers from importing cars and components to the US through Mexico or other third-party countries.
