Mexico's EV manufacturing potential is immense and the impact of the USMCA on EV trade is on the verge of making Mexico an EV manufacturing behemoth. Major players like Tesla, Volkswagen, Kia, Stellantis Group, BMW, and now BYD are pouring billions into expanding their manufacturing bases in Mexico. Domestic EV sales surged 24% in 2023 to 1.36 million, but the real catalyst is tax-free access to the US market for EVs built with North American components. Mexico is not wrong to welcome BDY, but by so doing it may diminish its leverage at the next renegotiation of the USMCA which is slated to occur in 2026. Failure to reach an agreement would trigger an automatic termination of the USMCA after ten years.
BYD is the second largest electronic vehicle company in the world with a 17% global market share. The EV manufacturer has surpassed Tesla which has a similar market share globally of just under 17%. In the fourth quarter of 2023, BYD beat Tesla for the first time in total sales globally.
In China, BYD's home market, BYD is the clear market leader with a nearly 25% market share. Tesla had the first-mover advantage in China, but its Chinese sales have fallen dramatically, as evidenced by the following annual market share figures:
2020: 14.4%
2021: 12.5%
2022: 7.8%
2023: 7.5%
Tesla is Losing Ground to BYD
Why is Tesla losing the EV war? It all comes down to price and China's dominion of the critical minerals required to manufacture batteries. China has a stranglehold on the lithium-ion market. 86% of all lithium-ion battery manufacturers are located in China (CATL & BYD), South Korea (LG, Samsung, SK Innovation), and Japan (Panasonic). China’s CATL is the dominant player and has a one-third global market share. In 2021, China produced 75% of the world's refined cobalt, its largest refiner alone boasting a 22% global market share.
In 2023, 92% of BYD's sales came from China (i.e., 3 million EVs) with only 8% (i.e., 242,000 EVs) from international sales. In Tesla's case, 72% came from North America (i.e., 1.31 million EVs), 25% from China (i.e., 453,000 EVs), and 2% from the rest of the world (i.e., 36,000 EVs). This helps explain why BYD is so aggressively expanding internationally.
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BYD and Tesla Have Different Expansion Strategies
In addition to mineral dominance and lower prices, BYD's investments are more geographically diverse and more focused on partnerships, joint ventures, and further partnerships surrounding existing manufacturing hubs. Tesla, on the other hand, relies less on partnerships and tends to aim for larger and grander investments.
Comparing the list of the major international investments made and announced by each company in the last three years highlights the differences in approaches:
Telsa's announced international investments (2021 - 2024):
Gigafactory Berlin: Opened in March 2022 with an initial investment of €5 billion ($ 5.4 billion). Producing Model Y and Model 3 for the European market.
Gigafactory Texas: Opened in April 2022 with an initial investment of $1.1 billion. Producing Model Y and Cybertruck.
Mexico Gigafactory: Announced in October 2022 with an investment of $7 billion. Location and production details are still under wraps.
Indonesia: Signed an agreement with the Indonesian government in May 2022 to build a battery and EV factory. Investment details haven't been disclosed.
India: Announced entry into the Indian EV market in January 2023. Specific investment plans and timeline unclear.
Thailand: Signed a memorandum of understanding with the Thai government in July 2023 to explore building a Gigafactory. No investment details yet.
BYD's announced international investments (2021 - 2024):
Singapore: Building a battery and component factory worth ~SGD$400 million (USD 296 million) (2023).
Eygpt: Establishing a joint venture with Egyptian automaker El Sewedy Electric to produce EVs and batteries with an initial investment of ~USD 200 million (2023).
Brazil: Building a factory in cooperation with Marfrig, a meatpacking company, to produce trucks and buses with an investment of BRL 3 billion (USD 624 million) (2023).
Germany: Expanding its European headquarters in Stuttgart and setting up a research and development center with an investment of €40 million (USD 43 million) (2022).
Japan: Partnering with local companies to sell EVs and establish charging infrastructure with an initial investment of ¥5 billion (USD 37 million) (2022).
While Tesla, much like its founder Elon Musk, is aggressively pursuing large-scale facilities to make a lasting impact, BYD, influenced by the CCP's significant ownership stake and leadership involvement, is methodically leveraging partnerships and local relationships to expand in foreign markets. The outcome of these divergent approaches remains to be seen.
BYD's substantial market concentration in China, as evidenced by 93% of its 2023 sales originating from its home market, underscores its motivation to expand internationally. However, this strategy is not without risks, particularly given the geopolitical and economic uncertainties surrounding China. As global scrutiny intensifies over alleged unfair and unethical business practices from Chinese companies, BYD's overreliance on its domestic market could pose challenges to its international expansion.
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BYD's Interest in Mexico
The primary reason BYD is seeking to manufacture in Mexico is to take advantage of tax-free importation of finished goods to America through the USMCA framework. EV adoption in Mexico is relatively low and nowhere close to sufficient to justify the flurry of investment announcements being made.
In 2023, over 1.36 million electronic vehicles were sold in Mexico, up 24% from 2022. Of those, Chinese vehicles accounted for more than 120,000, a 60% increase from the previous year. The three Chinese brands doing well in Mexico are SAIC Motor affiliate MG, Chery Automobile, and JAC Group.
BYD has launched a feasibility study in Mexico and is busy negotiating with national and local government officials over the location and other terms for the investment to establish the plant. To receive tax breaks for importation of EVs batteries must be manufactured in North America and the vehicles must be assembled there as well. Preliminary estimates are that the facility would cost $5 billion and begin production by 2026 with a capacity to produce 150,000 EVs per annum.
Beyond BYD, South Korea's Kia will also reportedly manufacture EVs in Mexico. BMW, Volkswagen, and Stellantis have all made EV investment announcements exceeding $3 billion collectively.
Risk for Mexico of BYD Investments
Relations between the governments of Washington DC and Mexico City are perhaps at an all-time low. Illegal border crossings are constantly in the news, drugs continue to flow in, and cartel violence is beginning to rear its head throughout America. The President of Mexico has actively interfered in a number of US elections calling for Mexicans in America to vote in certain ways. Other infractions have occurred including the "nationalization" of all lithium in the country and the confiscation of Alabama's Vulcan quarry on dubious grounds.
Mexico stands to lose some of the generous benefits extended to it through the USMCA's initial framework. The USMCA mandates a renegotiation of terms every six years to ensure compliance with the agreement's spirit. Since its inception in 2020, the next round of negotiations is slated for 2026. Among the key topics for discussion is the practice of Chinese companies using Mexican operations to circumvent tariffs on goods destined for the American market. Failure to reach consensus during the 2026 review triggers a 'poison-pill' provision, leading to automatic termination of the USMCA a decade later.
USMCA (LINK) Language Dealing with Review and Termination
Chapter 34: Review and Term Extension
Article 34.7: Review and Term Extension
The Parties shall, no later than six years after the entry into force of this Agreement, conduct a review of the operation and effectiveness of this Agreement.
The Parties may agree to extend the term of this Agreement for an additional period of up to 16 years, by written instrument.
If the Parties do not agree to extend the term of this Agreement by the end of the seventh year after the entry into force of this Agreement, this Agreement shall terminate ten years after the entry into force of this Agreement.
Article 34.8: Termination
If a Party withdraws from this Agreement pursuant to Article 34.6, this Agreement shall terminate for that Party one year after the date of withdrawal.
If this Agreement terminates pursuant to paragraph 3 of Article 34.7, this Agreement shall terminate for all Parties ten years after the entry into force of this Agreement.
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