Chinese Automakers Set Up Shop in Mexico to Bypass Trade Barriers into North America

ON 03/12/2024 AT 06 : 48 AM

Two of China’s most successful auto manufacturers announced they will build new manufacturing facilities in Mexico, to take advantage of the low tariffs for shipment into the United States and Canada.
Jaecoo 7 SUV.
The Jaecoo 7 SUV is currently manufactured in China, sold in multiple countries internationally, and will be one of the first models Jaecoo will be manufacturing in Mexico. Jaecoo Global

The first of these two is BYD. It manufactures what China categorizes as passenger battery electric vehicles (BEVs), plug-in hybrid electric vehicles (PHEVs), plus battery powered electric buses and trucks. As of the first quarter of 2023, BYD holds the title of the largest-selling car brand in China, based on unit volume sales. It is the largest selling maker of both BEVs and PHEVs in China as of the fourth quarter of 2023, overtaking former market leader Tesla for in the battery electric vehicle as of the end of last year. Some of the most prestigious brand names BYD produces are Denza, Yangwang, and Fangchengbao.

BYD announced on February 29, 2024, that it would be building a new auto plant in Mexico. BYD claims it will be making its cars solely for the Mexican market and not yet for sale in the U.S. and Mexico, despite that the USMCA agreement which would freely allow it.

The second is Jaecoo. It is owned by Chery Automobile Company, which is currently the third largest automaker in mainland China and the country’s biggest auto exporter. It is headquartered in Wuhu, Anhui, China. The parent company Chery produces a wide range of passenger cars, minivans, and Sport Utility Vehicles (SUVs).

Jaecoo is a new brand for Chery, only just introduced as 2024 began. Its first product, created for China, was the SUV Jaecoo 7 model.  By mid-year to late summer, it will introduce a second model, a bigger SUV to be sold under the Jaecoo 8 brand.

According to Shawn Xu, Vice President International of Chery and CEO of Jaecoo International, the plan for his company’s first Mexican plant is to serve the Mexican market first, just like with BYD. After that gets established, he said, the company may “possibly take them to other parts of the continent”.

Xu is highly optimistic about the future of business for SUVs such as Jaecoo will be producing in Mexico.

“We have reports that the SUV market grew 10.8% in 2023 [in Mexico],” he said in an interview connected with the announcement to build in Mexico. “[This] gives us an idea of what we can achieve.”

Xu’s company is also expecting to introduce its Jaecoo 7 plug-in hybrid electric vehicle along with the other two. These will be styled more for an executive market.

As to where the plants will be built, BYD says it is looking for a location near where other automotive manufacturers are already located in Mexico, but has not disclosed where it plans to build and precisely when the locations will become operational.

Jaecoo’s Xu confirmed it is looking at the Mexican states of Durango and México as possible locations for its first plant. It has also announced it will be working with freight carrier DHL to assist in logistics management for the operation.

Both Jaecoo and BYD are entering the Mexico auto market at an opportune time. Chinese cars have an increasingly positive brand image in the country, with sales up by 63% for 2023 compared to 2022. Current unit sales of Chinese cars in Mexico hit a record high last year of 129,000 units sold.

Beyond just the core business issues, both Chinese manufacturers, which will establish their plants in conjunction with some Mexican partners, will have the advantage of the USMCA trade agreement which links Mexico with the U.S. and Canada, and offers far lower tariffs for products built within either of the three countries and then distributed for sales to either of the other two.

It is a major opportunity for China to enter the U.S. auto market at highly competitive prices, and possibly take market share, assuming both BYD and Jaecoo may decide to pursue that option. If so, one can expect tough price wars with U.S.-based manufacturers and accelerated market share erosion compared to equivalent categories of vehicles made on U.S. and Canadian soil. However, to compete with some American and European brands, Chinese manufacturers will have to improve the quality and reliability of their products. They will also have to improve their safety. 

The U.S. auto industry is terrified of Chinese manufacturers. A report by the Alliance for American Manufacturers states:

"The introduction of cheap Chinese autos – which are so inexpensive because they are backed with the power and funding of the Chinese government – to the American market could end up being an extinction-level event for the U.S. auto sector, whose centrality in the national economy is unimpeachable."

The American Big Three car companies were also deeply concerned by the Japanese industry when it started building plants in the U.S., and rightly so. At first, the lower cost Japanese cars were small and not great quality but it didn't take long for them to greatly surpass American manufacturers in quality and eventually they started offering larger vehicles. In 2016, more than 40% of cars sold in the U.S. were Japanese brands, however, in recent years that has come down as Japanese manufacturers stumbled in quality and parts supply and failed to lead in the EV markets. Since 2016, American manufacturers have improved quality and shifted more manufacturing to lower cost Mexico. 

While many Americans might be happy to see the end of their predatory auto industry and its importance to the economy has waned somewhat, its demise would certainly be a blow. More than 10 million Americans are employed by or supported indirectly by the U.S. auto industry and it is estimated that the US motor vehicle and parts retail trade revenue was $1.25 trillion in 2020.

With the China threat looming, U.S. manufacturers may decided to up their game and come to the realization that a 500-1,500% markup is not really necessary and that they can build better vehicles for less. If Trump gets back into power he could be paid to push through new legislation to make it easier for manufacturers to get rid of the mostly pointless dealership mafia that has turned so many Americans off on U.S. brands.