Shunned by US, China investors eye Mexico to grab North American market (2024)

China has pledged to defend its supply-chain dominance with a new grand expo planned for November, but for now its endeavours remain haunted by the reality that many multinational companies are reshoring, and that even some Chinese firms caught in geopolitical fragmentation have headed as far as Mexico to secure orders.

The latest sign of decoupling derives from new-energy vehicle giant Tesla, which has reportedly demanded that Chinese suppliers set up plants in Mexico to support its proposed next-gen “gigafactory” there. Tesla already has a gigafactory in Shanghai, and Chinese leaders rolled out the red carpet for CEO Elon Musk when he visited last month.

Meanwhile, China is investing heavily in Mexico and augmenting supply chains there to get around US trade curbs into the American market, analysts say.

Chinese enterprises have poured US$20.84 billion into Mexico-based projects since 2008, and about US$8.29 billion of that total has arrived since 2018, according to data from Latin America and the Caribbean Network on China research portal.

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The US-China trade war that began in 2018 has resulted in hundreds of billions of dollars worth of tariffs being placed on two-way shipments, prompting Chinese exporters to recalibrate their international supply chains.

Washington has separately restricted hi-tech commerce with China over the past half-decade, in line with a broader trend of supply-chain decoupling in the trade of goods such as advanced semiconductor chips.

Networking hardware providers, oil drillers, garment makers and electric vehicle developers from China already liked Mexico for its access to natural resources and cheap labour, said Evan Ellis, a research professor of Latin American studies at the US Army War College’s Strategic Studies Institute.

In February, for example, Chinese networking giant Huawei Technologies announced that it would work with the Mexican Agency for International Development Cooperation on a US$1.6 million programme to offer start-ups more cloud access.

Finished factory goods are handily shipped from Mexico over a land border to the US, where they benefit from a three-year-old US–Mexico–Canada trade accord that cuts tariffs on a wide range of imports.

“Decoupling hurts China and favours Mexico, so Chinese companies are rushing to nearshore near the US,” Ellis said.

However, it is worth noting that China still counts the US as its top export destination, with the value of US imports from China worth US$536.8 billion last year.

“China is trying to invest in Mexico as part of their supply chains,” he said. “Chinese nearshoring is a way to protect themselves against decoupling.”

Mexican President Andres Manuel Lopez Obrador has “moved away” from the US politically and “pushed Western business out”, and both of these shifts represent opportunities for China, Ellis added.

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“The reason Chinese investments are being made in Mexico, in the manufacturing sector, is [to get] the products close to the clients to avoid supply-chain issues,” said Guilherme Campos, a Shenzhen-based international business advisory manager with professional services firm Dezan Shira & Associates.

China looks to Mexico, as well, for energy and agricultural goods, said Zhao Xijun, an associate dean with the School of Finance at Renmin University in Beijing. “The mutual benefits are quite strong, so the trade and commerce situation will keep growing,” Zhao forecast.

Risks to China in Mexico include unionised factory labour and the public perception that Chinese enterprises are competitors, Ellis said.

Tesla is reportedly encouraging its Chinese suppliers to set up factories in Mexico. That call would follow CEO Elon Musk’s announcement in March that Tesla would set up a Mexican gigafactory for car batteries.

Tesla’s Asia-Pacific media offices did not answer a request for comment.

Some Tesla suppliers have already announced plans to build factories in Mexico. In March, auto-parts maker Ningbo Xusheng Group said it would invest up to US$276 million to establish a production base in Mexico, and the project officially launched in late May.

Tesla’s five-year-old Shanghai factory was designed to eventually make up to 500,000 electric vehicles per year.

Chinese industries are looking to Southeast Asia, a growing source of cheap factory labour, along with Africa, for manufacturing, said Peng Peng, executive chairman of the Guangdong Society of Reform.

“Many industries are already walking on the two legs of ‘bringing in’ and ‘going out,’” Peng said, citing the production of ceramics and home appliances from the southern city of Foshan. He pointed to “geopolitical risks” behind the current supply-chain relocations.

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Chinese officials are still promoting domestic supply-chain advantages, which are expected to be showcased at the China International Supply Chain Expo scheduled for November 28-December 2. The expo will include a segment on smart-vehicle supply chains.

The Beijing expo is an “important topic of common concern” between China and Musk, Ren Hongbin, chairman of the China Council for the Promotion of International Trade, said at a press conference on Friday.

“Many foreign executives have decided to participate in the expo … thinking that, against the background of economic integration of various countries, the expo is coming at the right time,” Ren said.

During his recent China visit, Musk met with commerce and industrial officials.

Tesla may be tapping its Chinese suppliers for the Mexico operation to diversify geographically without upsetting officials in Beijing, said James Chin, a professor of Asian studies at the University of Tasmania in Australia.

“I don’t think they will do anything to rattle Beijing,” Chin said. “They’re looking for China to be the primary market for electric cars.”