Bloomberg — Tesla Inc.’s (TSLA) plan to build a new assembly plant in Mexico is a clear sign the country will be a center for electric-vehicle making, even as the US tries to bolster domestic, union-based manufacturing with the Biden administration’s Inflation Reduction Act.
The planned factory in Monterrey will be one of Mexico’s first that’s entirely dedicated to the expensive and complex process of making electric cars. The Latin American nation, long a supply base for makers of gasoline and diesel-powered vehicles, brings with it advantages including relatively cheap labor and free trade agreements with 50 countries. The US has similar deals with just 20.
One of the key agreements is between the US, Canada and Mexico, making it possible for electric vehicles made south of the border to be eligible for up to $7,500 in tax credits offered in President Joe Biden’s IRA. Barring big changes to the law, automakers could build even more EVs in Mexico, which drifts away from Senator Joe Manchin’s Made-in-America goals when he helped craft provisions of the act.
“If you look at the auto provisions of the IRA, as I recall one of the very first tests the moment the bill was signed was, the vehicle made where? North America,” said John Bozzella, chief executive officer of the Alliance for Automotive Innovation, an industry lobby group. “It doesn’t say United States.”
For Mexico, the deal with Austin, Texas-based Tesla is a sign that companies see President Andres Manuel Lopez Obrador’s government as welcome to outside investment in the industry, said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. The nationalist leader, who announced the Monterrey factory Tuesday, said he won environmental commitments from Tesla Chief Executive Officer Elon Musk as part of the agreement.
“If Tesla, the most important company in electric vehicles, is coming to Mexico, that gives a very good sign to the market,” Abadia said. “It diminishes all of this somewhat negative news that we have seen about politics, about populism and nationalism.”
It also allows a potentially cheaper path for automakers trying to cut expenses. Mexican minimum wage is $11 a day. Workers who produce car parts typically earn just under $700 a month, while those who make vehicles earn around $1,000, according to government data analyzed by Monterrey-based Banco Base.
Wage Disparity
United Auto Workers members in the US all got bigger-profit sharing checks from Stellantis NV (STLA), Ford Motor Co. (F) and General Motors Co. (GM) this year than Mexican workers get paid in 12 months, said Harley Shaiken, chair emeritus for the Center for Latin American Studies at the University of California, Berkeley.
Stellantis CEO Carlos Tavares, speaking at a briefing Tuesday after announcing plans to invest $155 million in three Indiana plants, said automakers need to find ways to reduce costs because EVs are 40% more expensive to build than conventional models.
“It is a big amount of money,” he said. “So what do we do with this 40%? We cannot pass it to the consumer, then we lose half of the customer base. We cannot prevent the middle classes from having access to new cars.”
Stellantis NV, which owns the Jeep and Ram brands, is considering a Mexico plant for electric vehicle production, Bloomberg has reported.
Mexico’s other advantages include an established base of auto-parts plants and lithium sources that could potentially be used to develop an EV battery supply chain.
“It has a well-established supply chain and ecosystem,” said Gabriela Soni, head of investment strategy for UBS Mexico. “Add to that that there is a significant demand for lithium for electric cars, because it’s crucial to make batteries, and it turns out that Mexico is in 10th place in the world in lithium.”
Trade Deals
For Tesla and other automakers, Mexico’s free trade deals may enable them to expand EV exports. The country is the seventh-largest global passenger vehicle manufacturer, producing approximately three million vehicles annually with 90% of them exported, mostly to the US.
A trade deal forged during the Trump administration and designed to update the North American Free Trade Agreement requires that 40%-45% of automotive content be made by those earning at least $16 an hour — a move aimed at reducing Mexico’s low-wage advantage in the region. The accord, called the USMCA, also guarantees the right of Mexicans to choose their labor unions and contracts.
While it has had some impact — GM hiked wages last year for workers at its plant in Silao, Guanajuato — Mexican auto workers still make less on average than their American counterparts.
Ford builds its electric Mustang Mach-E at a plant in Cuautitlan, Mexico. The company is increasing the factory’s capacity to 130,000 cars a year, up from 78,000 in 2022. It sells the vehicle in 37 countries, with plans to move into other markets.
IRA provisions will force battery supplies closer to home. Ford brings batteries into Mexico from Poland for the Mach-E thanks to a free trade deal with European Union, but the car won’t qualify for IRA credits under current rules, said Sam Abuelsamid, analyst with researcher Guidehouse Insights. The batteries need to be made in the US or with a free trade partner. The US doesn’t have such a deal with the EU.
“There may not be a tariff on Mach-E batteries, but it won’t qualify for IRA,” Abuelsamid said.
To meet certain battery requirements in the IRA, Tesla’s Mexican-made EVs would qualify if the company uses batteries from its Gigafactory in Nevada.
GM has spent $1 billion to start building electric versions of the Chevrolet Blazer and Equinox SUVs in Mexico from later this year. The automaker is shipping Ultium batteries from its LG Energy Solution joint venture plant in Ohio and would meet requirements under the IRA for subsidies. BMW will also add to an existing factory, announcing an investment of $866 million in San Luis Potosi.
Detroit’s automakers have at least one reason to tread carefully: Making EVs south of the US border already is roiling the United Auto Workers union. The three big companies will bargain for a new labor deal starting this summer. When GM announced its $1 billion EV investment in Mexico, former union Vice President Terry Dittes called it “a slap in the face.”
Stellantis is pondering Mexico for EV production while idling a plant in Belvedere, Illinois — a plan that could make union workers furious if it comes to pass. UAW President Ray Curry issued a statement Tuesday calling the Belvedere action “corporate greed.”
--With assistance from Keith Naughton and Keith Laing
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