Analyses
31 oct 23

US tariffs and Chinese ambition: How Mexico turned into a perfect nearshoring location?

How did a tariff strategy backfired and become a win-win strategy through an emerging power? 

The joint-venture partnership strategy with international automakers had a remarkable impact on China's local vehicle production capabilities since the early 1990s, helping the country surpass the US in vehicle assembly in 2008 with 8.2 million units. Today, China is the largest vehicle manufacturer by far, producing 27.02 million units in 2022 and selling 26.86 million, according to CAAM (China Association of Automobile Manufacturers). 

Unsurprisingly, China is also the top global commercial vehicle exporter, strengthening its ties with two particular countries in recent years. Embargoed due to the Ukrainian war, Russia held a 21.3% share of exported commercial vehicles from China in the first half of 2023. Mexico was second with 9.8% of the exports. 

The economic relationship between China and Mexico increased by over 23% in the 2018-2022 period, according to Statista. In 2021, the commercial exchange between two countries surpassed $100 billion, according to the Bank of Mexico. The thrive in the economic relations does not only rely upon Mexico’s potential as a growing market but carries the characteristics of a perfect nearshoring destination for global companies, from auto to manufacturing.

Following the increasing tensions between the US and China over the accusations of the former for unfair trade practices and intellectual property theft, the US imposed sharp tariffs in January 2018, while former President Donald Trump demanded that American companies abandon the country. Chinese companies responded to tariffs by relocating factories to countries such as Vietnam, but this time, the shipping costs soared. 

China had no intention of abandoning the vast American consumer market, and Mexico had all the reasons to become the perfect nearshoring spot, helping China bypass tariffs and eliminating shipping costs. Northern border state Nuevo León came under the spotlight fast, grabbing 30% of the foreign direct investment from Chinese companies by 2021, according to the New York Times. Hofusan Industrial Park, the first Chinese industrial park in North America, now houses over two dozen Chinese companies in Nuevo León.  

What makes Mexico so important? 

With around 127 million population, Mexico has an overdemand for innovative and high-performance cars, as well as commercial vehicles, as the country is becoming the rally point of the electric vehicle (EV) brands. Mexico draws global brands all over the world while solidifying a trade link between North and South America along with foreign countries active in the region. One essential fact in this commercial relationship is the US is the top FDI contributor and a major auto parts importer of Mexico. 

  • Mexico benefits from the U.S.–Mexico–Canada trade accord (USMCA), which took effect in July 2020 and replaced NAFTA
  • Strong labour supply and low wages provide a cost-efficient location for manufacturing
  • The US auto industry supplies large amounts of auto parts produced in Mexico
  • General Motors, Ford, Honda, Hyundai, Kia, Mercedes-Benz, and Nissan are leading global auto brands in Mexico
  • Nine out of 10 vehicles assembled in Mexico are exported (Federal Reserve Bank of Dallas) 
  • Japanese and South Korean auto brands also have a strong presence and future interest in Mexico
  • Nuevo León, Baja California and Chihuahua are three border states with growing auto industries and FDI.

Source: Dallasfed.org

Pouring commercial vehicles into Mexico

Mexico is the second top commercial vehicle importer of China and the top buyer of Chinese light-duty trucks. Chinese commercial vehicle exports to Mexico in 2022 jumped a staggering 377.6%, reaching 46,000 units. Between January-July 2023, exports to Mexico jumped 82% year-on-year, exceeding 38,000 units, placing Mexico firmly in the second place of commercial vehicle import destinations. 

The export value of Chinese commercial vehicles to Mexico in 2022 amounted to CNY3.9 billion (around €502 million), representing a 432.8% increase year-on-year. Between January and July 2023, export value reached CNY3.6 billion (€462 million), with a 129.8% year-on-year increase. Other figures from Interact Analysis show an export increase in every vehicle type:

  • Chinese exports of light-duty trucks to Mexico increased 85% year-on-year in the first half of 2023, surpassing the US and grabbing 30.9% of the light-duty truck market in Mexico. 
  • Japan is the top exporter of heavy-duty trucks to Mexico, increasing 16.8% year-on-year between January and June 2023, surpassing the US. China is the third largest exporter in this category. 
  • The US is the top exporter of towing vehicles, increased 150.4% year-on-year as of June 2023, while China is the third largest exporter. 

Rally point of Chinese brands

Mexico is a hotbed for global truck manufacturers, including Freightliner, Kenworth, International, and Daimler. Chinese players in Mexico are Shaanxi Automobile Group, First Automobile Works (FAW) and China National Heavy Duty Truck Group. Another brand, Shacman Trucks, began manufacturing natural gas-powered trucks in Mexico in November 2020. The company is building a distribution and service network across Mexico, followed by a heavy-duty truck assembly plant, to supply North America. 

Many more companies are ambitious to use Mexico as a bridge in passenger car and commercial vehicle segments. China is already active with BYD, SAIC and Chirey in the former; they also managed to increase their sales during the chip shortage, while General Motors, Volkswagen and BMW declined in sales. Newcomer Chinese OEMs include Foton, eager to produce EVs with battery supplier CATL and Jiangling Motors (JMC), aiming to bolster Chinese influence in pick-up, light-duty trucks and light commercial vehicles.

Additionally, Jetour plans to launch a $3 billion plant in Mexico by the end of 2024 to sell internal combustion engine (ICE) cars for South America and EVs for North America. Jetour has partnered with LDR Solutions, a conglomerate of Chinese automotive companies working to bolster ties between Mexico and China. Chirey, under Chery Holdings, is in talks with the Mexican government to determine the location of a new plant which will produce cars for South and North America. 

With increasing FDI in auto and manufacturing and the rapid rise of both passenger car and commercial vehicle markets, Mexico’s potential is expanding to the whole of the American continent as it becomes one of the top nearshoring spots in the world. 

The main image is courtesy of Shutterstock, 1046227495.

Authored by: Mufit Yilmaz Gokmen