Shulou(Shulou.com)11/24 Report--

On Investor Day three months ago, Tesla revealed the location of his fifth superfactory, Monterrey, capital of Nuevo Leon, Mexico. It is said that the Monterrey factory will become the main production force of Tesla in the next stage, radiating the entire North American market, with an investment of more than 5 billion US dollars and a planned production capacity of 1 million vehicles, which will be 20 times the size of Tesla's Shanghai factory.

When Musk arrived in China a few days ago, he tried his best to persuade Chinese new energy suppliers to build factories in Mexico. Zeng Yuqun, chairman of Ningde Times, was the first entrepreneur Musk met in China last month. According to relevant media, the discussions between the two are likely to include the supply of energy storage batteries for the Shanghai Energy Storage Super Factory, future cooperation in North America to build battery plants and power battery supply.

Since Tesla announced that the new factory will land in Mexico, the discussion about whether China's Tesla supporting manufacturers should bet on Mexico has become more and more heated.

It is reported that since the beginning of this year, some Tesla suppliers have announced plans to build factories in Mexico. For example, Xusheng Group, which is engaged in the research, development, production and sales of precision aluminum alloy auto parts and industrial parts, is a first-class supplier to Tesla and Weilai. It said at the end of March this year that it would build a production base in Mexico with a total investment of no more than 276 million US dollars. In late May, the project was officially launched in the Mexican state of Coavira.

In addition, some Tesla concept stocks, such as Jinli permanent Magnet, Junsheng Electronics, Sanhua Intelligence Control, Dongshan Precision, Top Group and so on, also have industrial layouts in Mexico, or intend to build factories.

According to Tesla suppliers: "Mexico is now a hot place for investment, a lot of customers have come." There are even supply chain companies that directly take production line workers to Mexico to build factories.

Around this phenomenon, this paper will attempt the following three questions:

1. Why has Mexico become a hot spot for car investment?

2. Should Chinese enterprises go?

3. What opportunities and risks will they face?

1. China's supply chain into Mexico it is understood that Changan, Jiangling, Chery, BAIC, Mingjue, Jianghuai and other Chinese automobile industry chain enterprises went to Mexico early to lay out production and sales there.

According to the website of Mexican development magazine, the Mingjue brand has more than 20 brands in less than two years, and as of July 2022, it accounted for 4% of all new car sales in Mexico. From January to July 2022, the Mingjue brand of SAIC sold 24041 cars, making it the seventh largest car brand in Mexico, surpassing brands such as Ford, Honda and Mazda.

It can be seen that it is not a new thing for Chinese enterprises to build factories in Mexico. This craze has been popular for some time.

Suppliers in the auto industry chain are also enthusiastic about the Mexican market.

In July 2022, Ningde Times reported that it plans to invest 5 billion US dollars to build a plant in Mexico to supply batteries to Tesla and Ford; LG Electronics and Magna International will invest 100 million US dollars in Mexico to produce electric powertrain components for General Motors, which will be completed this year. According to incomplete statistics, 62 automobile-related project officers from 17 countries landed in Mexico in the fourth quarter of 2022 alone, of which 28 were new investments, 33 were production expansion and one was acquisition.

Before Tesla announced the construction of a plant in Mexico on February 3, BMW had already announced an investment of 800 million euros in Mexico to build it into BMW's first pure electric car factory in the world. GM representatives said in talks with the local government in Mexico that they hope to produce electric cars at the Mexican plant in 2024. Germany's Volkswagen and parts supplier Continental Group have also pledged to make major investments in Mexico, with a total value of nearly $1 billion. This is one of the largest investments announced by the Mexican auto industry in a single day.

2. the reason why the enterprises on the automobile industry chain in North America are flocking to Mexico is that they are "greedy" for the vast market in North America, and Mexico has more outstanding comprehensive conditions as a place of production.

A research report by Zheshang Securities shows that Mexico, as the "back garden" of US automobile production, is mainly exported to the United States for local light vehicle production, and the spare parts enterprises that choose to build factories in this layout will have a natural advantage.

First, Mexico is a car market with great potential.

As early as the entry into force of the North American Free Trade Agreement (NAFTA) in 1994, the American automobile industry began to transfer to Mexico. With its labor cost advantage and geographical advantage, Mexico is already the seventh largest car manufacturer in the world.

In May 2023, Mexican car production rose 25.1 per cent year-on-year to 344201 vehicles, the highest level for the month since May 2019.

According to Zheshang Securities, the Mexican auto industry includes more than 30 OEM,1100 multi-priced Tier1 and thousands of Tier2 and Tier3 suppliers, and workers' costs can be reduced by more than 30 per cent compared with the US. Compared with Asia, it takes 75 per cent less time to transport goods from Mexico to customers.

Second, after the United States has imposed tariffs on China, Mexico is an inevitable choice in order to maintain the US market.

Since July 1, 2020, the U.S.-Mexico-Canada Trade Agreement (USMCA) has replaced the North American Free Trade Agreement (NAFTA), under which 75 per cent of auto parts must be manufactured locally in the United States, Mexico and Canada, up from 62 per cent, making Mexico an ideal choice for producing and exporting products in North America.

In addition to the exclusive U.S.-Mexico-Canada Trade Agreement, Mexico is also a member of the North American Free Trade area, and its products are exported to the United States to enjoy zero tariff treatment. In the context of punitive tariffs imposed by the United States on China, Chinese suppliers go to Mexico to build factories, assemble Tesla cars and export them to the United States, which is the lowest-cost business route.

Third, Mexico is a large country with lithium reserves.

Gabriela Soni, head of investment strategy at UBS in Mexico, said: "Electric vehicles have a high demand for lithium because it is critical to making batteries, while Mexico ranks 10th in the world in lithium." Under the IRA Act introduced by the US government last year, electric vehicles can receive tax credits only if they use raw materials purchased or processed from the US or countries that have free trade agreements with the US, such as Mexico. Mexico may be one of the important sources of lithium for electric carmakers that want subsidies in the United States.

3. At present, Tesla's supply chain in China is very perfect, with 124 suppliers providing it with a variety of raw materials and parts, including cobalt, lithium, magnets, copper foil and other non-ferrous plates, as well as batteries, motors, seats, glass and other auto parts. Tesla's Shanghai super factory has a supply chain localization rate of more than 95 per cent, and 99.9 per cent of the Shanghai factory team is made up of Chinese. This means that Tesla's production costs in China have been greatly reduced, and at the same time, product quality and delivery efficiency have been improved. Without the support of Chinese suppliers, Tesla's competitiveness in the global market will be greatly reduced.

For Chinese suppliers, it is bittersweet to go to sea with Tesla. The good thing is that we can follow Tesla, a global customer, to expand overseas markets and enhance brand awareness and technical level. However, some people in the supply chain said that the Mexican market is not as mature as the European and American markets, and the social and geopolitical risks are relatively high, so it is necessary to fully consider the boundaries and effects of input and output to invest and build factories there.

For example, Xusheng Group, as one of the important suppliers of Tesla, mainly provides car seats. To enter Mexico to support Tesla's local production plan, for Xusheng Group, the opportunity is to use Tesla's brand effect to attract more overseas customers and increase revenue and profits. The challenge is to complete plant construction and recruitment in a short period of time to ensure product quality and delivery dates, as well as to cope with factors such as exchange rate fluctuations and tax policies.

For example, in the Ningde era, on October 22 last year, the media said that the Ningde era had shelved its plan to invest 5 billion US dollars in producing lithium batteries for Tesla and Ford in Mexico, directly due to the "IRA Act" aimed at China.

According to the bill, battery components shall not come from "sensitive entities" of certain countries from 2024; from 2025, key mineral materials of batteries shall not come from "sensitive entities" of certain countries; and by 2029, vehicle power batteries should be produced locally in the United States at 100%.

Although the IRA Act does not specify the specific category of "sensitive entities". However, under US law, the US government has the discretion to define any entity in any country as a "sensitive entity".

The introduction of the above laws and regulations directly affected the process of building a factory in North America in the Ningde era. The Ningde era had planned to build a plant in North America, including Virginia, but Glenn Youngkin, the Republican governor of Virginia, blocked the partnership, according to Bloomberg.

Even Qiangru Ning Wang also encountered all kinds of setbacks and difficulties, even various constraints when building factories overseas.

The Mexican president has also said that he does not want the US-Mexico-Canada Trade Agreement to break down. In the final analysis, if Mexico wants to undertake more industrial transfer, it depends on the face of the United States.

"We must go to the American market in the Ningde era!"

But as Zeng Yuqun said, the Ningde era was to enter the American market, and Mexico, which has a natural advantage, was his first stop. Not only in the Ningde era, other domestic suppliers will not easily give up the opportunity to "hug the thigh".

[full text reference]

[1] "Mexico is the" political correctness "of Tesla, Zhang Zhidong, dimensional C.

[2] "strive to be an electric vehicle manufacturing center from Thailand to Mexico", Yang Jing, Automobile Commune

[3] "build a factory in Mexico and make money in North America", zhifang, play Global

[4] bypassing Imperial anxiety: China's industrial chain runs the Mexican Nuggets Tesla? "Krypton Gold New Energy" Wang Lin Zheng Huaizhou, 36 Krypton Finance

[5] "the investment of Chinese household electrical appliance companies in Mexico is on the rise" | creation of big countries

[6] "Tesla Mexican Super Factory affects China's supply chain", 2030 Travel Research Lab, Tao Yanyan

This article comes from the official account of Wechat: che Bai think Tank (ID:EV100_Plus). Author: Zhou Shuangjiang.

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