Key Takeaways
China’s BYD, the world’s largest EV maker, is scoping out Mexico, where labor costs are low, to locate a new EV plant as a backdoor manufacturing hub for their entrance into the U.S. market.
Cars imported directly into the United States from China are assessed a 27.5 percent tariff, while those from Mexico are assessed at most a 2.5 percent tariff.
American manufacturers are concerned because China can manufacture cars at a much lower cost as it dominates and controls the EV energy supply chain, including the processing of necessary minerals.
BYD currently sells most of its vehicles domestically in China but is making inroads by offshoring manufacturing in obliging countries.
The U.S. EV market is ripe due to Biden’s strident push for electric vehicles including subsidies and mandates designed to force people out of internal combustion vehicles.
BYD, China’s largest EV auto maker, which recently surpassed Tesla as the world’s biggest seller of electric vehicles, is reviewing potential locations for a plant in Mexico that would allow it to bring its low-cost electric vehicles into the United States. Mexico offers close proximity to U.S. markets, relatively low labor costs and the opportunity to take advantage of low or zero tariffs on made-in-Mexico vehicles. Some of the locations BYD is considering are near the U.S. border. At least a dozen Chinese electric-car component suppliers have also announced new factories or added to their existing investments in Mexico in recent years. They are responding to a U.S.-Mexico-Canada trade deal that encourages carmakers in North America to use locally sourced materials.
BYD is looking to expand globally as it has an excess domestic EV inventory. CEOs at rival automakers have warned about the potential threat from China, with some suggesting the need for more government action to avert such competition in the United States as Chinese automakers have a big cost advantage in the electric vehicle market with China’s dominance of the battery supply chain and processing of essential minerals. Through engineering, government subsidies and lower labor costs, BYD and other China-based EV makers have been able to entice customers with stylish and technologically advanced electric vehicles at attractive prices. If China can lock buyers into electric vehicles dependent upon its dominant supply chains, it would strengthen its position as the world’s leading car manufacturer.
BYD’s low-price electric vehicles have gained traction with buyers in places such as Europe and Southeast Asia. Europe, where Chinese EV imports are strong due to their lower price and Europe’s net zero carbon goals, is conducting an investigation into whether China provided subsidies to the industry unfairly, making it more difficult for European EV carmakers to compete. The investigation could result in new tariffs if EU officials find the Chinese companies are receiving unfair subsidies. The Biden administration is monitoring Chinese investment in Mexico amid concerns Chinese businesses could take advantage of North American free-trade agreement rules.
Carlos Tavares, chief executive of Chrysler-parent Stellantis, likened China’s potential entry in the United States to the arrival of the Japanese automakers in the 1970s and South Korean firms in the 1990s, calling their expansion as “very Powerful.” Tesla Chief Executive Elon Musk also expressed similar concerns, saying the Chinese companies have already had significant success outside of China and are now the “most competitive” in the world.
Currently, Chinese-built electric vehicles are subject to a 27.5 percent tariff when imported into the United States that is composed of a 2.5 percent tariff that generally applies to imported cars plus an additional 25 percent tariff on Chinese-made cars that was introduced by the Trump administration in 2018. The Biden administration is debating whether to raise tariffs on Chinese electric vehicles further, and the Inflation Reduction Act limits eligibility for a $7,500 consumer tax credit for cars built with batteries made by Chinese companies.
In comparison, cars made at a Chinese-owned factory in Mexico would only be faced with the 2.5 percent tariff upon entering the United States and could possibly pay no tariff if they met stringent standards for local content under the U.S.-Canada-Mexico Agreement adopted in 2020.
Executives at Toyota estimated that Chinese companies had a 25 percent to 30 percent cost advantage over global competitors when manufacturing electric vehicles—more than enough to overcome the small 2.5-percent U.S. tariff. Pushing EV adoption too quickly would serve, however, as an invitation for Chinese EV companies including BYD, Geely and NIO to enter rigorously into the U.S. EV market. President Biden has a goal of electric vehicles making up 50 percent of new car sales by 2030, and his EPA and Department of Transportation have proposed rules that would effectively force electric vehicles to make up two-thirds of new car sales in 2032. The Biden Administration is pushing electric vehicles upon manufacturers and consumers and enticing them with subsidies for vehicles and charging stations.
BYD sees other potential uses for the plant in Mexico, including using it as an export hub for shipping cars to South America or sending batteries and other car parts to the United States. In China, BYD makes many EV parts in-house, including its EV batteries, to reduce costs—advantages it may or may not be able to replicate in Mexico. In North America, the company currently sells electric buses and trucks made at its location in Lancaster, California.
Conclusion
Chinese companies are looking into building EV car factories in Mexico to take advantage of the Mexico-U.S.-Canada trade agreement and avoid hefty tariffs on imports of electric vehicles coming directly from China. In particular, BYD, China’s largest EV automaker that recently surpassed Tesla in sales, is looking at locations in Mexico near the U.S. border. Chinese companies have a 25 to 30 percent cost advantage over U.S. competitors because of dominance in the EV battery supply chain and processing of critical minerals as well as low-cost labor and attractive energy prices. CEOs of U.S. automakers are worried that China could make a serious dent in the EV market as Japan and South Korea have done in the conventional auto market previously. With onerous proposed EV rules by Biden administration agencies on U.S. carmakers, the competition could be disastrous for legacy car makers, who are currently losing vast sums on meeting Biden’s EV goals.
