BYD's Mexico Factory Plan: A Difficult Choice Amidst Geopolitical Games

BYD's Mexico Factory Plan: A Difficult Choice Amidst Geopolitical GamesBYD's plan to build a factory in Mexico is becoming a focal point of geopolitical maneuvering, far more complex than a simple business investment. This move not only potentially challenges former US President Trump's trade policies but also tests the Mexican government's ability to delicately balance its interests amidst US-China trade friction

BYD's Mexico Factory Plan: A Difficult Choice Amidst Geopolitical Games

BYD's plan to build a factory in Mexico is becoming a focal point of geopolitical maneuvering, far more complex than a simple business investment. This move not only potentially challenges former US President Trump's trade policies but also tests the Mexican government's ability to delicately balance its interests amidst US-China trade friction.

BYD executives have revealed that the company is actively negotiating with the Mexican government to establish a new factory near an automotive industrial center in central or northern Mexico. On the surface, the plan is appealing: Mexico is a major global automotive manufacturing hub with a well-established supply chain, relatively low labor costs, and a generally welcoming attitude towards foreign investment. BYD, as a leading global electric vehicle (EV) manufacturer, should be an attractive investment. However, potential political risks put the Mexican government in a difficult position.

During the Trump administration, repeated threats of high tariffs on Mexican imports cast a shadow over US-Mexico relations. BYD's factory could be interpreted as Mexico facilitating Chinese access to the US market, angering US trade hawks and escalating US-Mexico trade tensions. This is particularly sensitive given existing disagreements between the US and Mexico on immigration and drug trafficking.

The Mexican government maintains it has no intention of becoming a conduit for Chinese goods to other markets and has made significant progress in combating illegal immigration. However, whether this reassures US concerns remains to be seen. Future USMCA negotiations will require Mexico to further demonstrate its stance to the US and Canada, safeguarding its role within the North American trade system. Eduardo Sols, a consultant to the former Mexican Automotive Industry Association president, notes, "In the current context, investments from China must be analyzed with extreme caution. Mexico needs to showcase its image as a reliable partner in North America."

Trump's threat of up to 200% tariffs on cars produced by Chinese companies in Mexico further intensified pressure on the Mexican government and businesses to strategically adjust. Canada, meanwhile, attempts to somewhat isolate Mexico by strengthening its ties with the US, making Mexico's position in North American trade even more precarious.

BYD has long sought to emulate Asian automakers like Toyota and Hyundai in entering the US market. However, this goal faces significant challenges. The Biden administration's nearly 100% tariff on Chinese-made EVs virtually blocks BYD from directly exporting EVs to the US from China. Even building a factory in the US would likely face strong domestic opposition.

BYD currently operates an electric bus factory in Lancaster, California North America's largest, producing around 1,500 buses annually. However, electric buses are comparatively less politically sensitive than consumer-oriented passenger vehicles.

BYD initially planned to use the Mexican factory to supply the US market. However, escalating geopolitical tensions have forced a strategic shift, focusing on the Mexican and other Latin American markets, and waiting for an improved political climate before considering US exports. Even this relatively cautious strategy faces uncertainties.

BYD's factory plan requires approval from both state and federal Mexican governments. However, some Mexican states have reduced incentives offered to attract BYD, including local tax breaks and water discounts. A Mexican federal official expressed dissatisfaction with the timing of BYD's push, fearing it might antagonize the US. Any BYD project needs federal approval, including environmental permits, import licenses, and other support.

Since the signing of the USMCA in 2018, Mexico has risen to become the world's fourth-largest exporter of light vehicles, shipping nearly 2.6 million cars to the US last year. While USMCA tightened rules of origin, automakers have adjusted supply chains, increasing procurement of parts from Mexico, the US, and Canada to comply. Companies like Stellantis and BMW have expanded their operations in Mexico.

A JPMorgan report points out that as Mexico's share of the US car import market grows, so will scrutiny. "How to effectively protect the North American trade bloc from the influence of Chinese goods" will be a central issue in future negotiations. In late 2023, US Treasury Secretary Janet Yellen visited Mexico to discuss plans for an investment screening mechanism to strengthen Mexico's oversight of Chinese investment. This could become part of USMCA reviews, with proposals to increase regional content potentially included.

Mexico argues that US and Canadian concerns about it acting as a "backdoor" lack evidence, pointing out that Chinese investment in the US and Canada far exceeds that in Mexico. They emphasize that any restrictions on China should be applied fairly across the three countries, as US automakers operating in Mexico also heavily rely on Chinese-made parts and vehicles.

In recent years, BYD has become one of China's largest EV manufacturers and has begun expanding globally. It currently has an auto manufacturing plant in Thailand and is building its first Latin American production base in Brazil. BYD began site selection for its Mexican plant in late 2023.

BYD initially planned to produce US-market vehicles in Mexico. Starting in late 2019, BYD conducted market research targeting US dealers to better align design and technology with US consumer preferences. In May this year, BYD launched its "Shark" plug-in hybrid pickup truck in Mexicoits first new model launch outside Chinainitially designed for the US market. However, Mexico's recent reintroduction of 15-20% tariffs on EVs from non-free trade agreement countries makes BYD's plan to offer low-cost EVs in Mexico more difficult. Concerns also exist that the Mexican market cannot replace the US market, as the pickup's starting price of $53,000 is too high for most Mexican consumers.

The success of BYD's Mexican factory plan hinges not only on its business strategy but also on the complex geopolitical interplay and the Mexican government's skill in balancing US-China relations and its own interests. It is undoubtedly a difficult choice.