The U.S. government seeks to implement measures to limit national security risks associated with vehicles connected with Chinese technology, creating an atmosphere of intrigue in the automotive industry. This strategic decision comes shortly after BYD, a prominent Chinese electric vehicle company, announced plans to establish a plant in Mexico to leverage access to the North American market and the trade advantages of the United States-Mexico-Canada Agreement (USMCA). This scenario raises crucial questions about power dynamics and security in the global automotive industry, where the United States, Europe, and India seek to surpass China as leaders in electric vehicle battery production.

In Mexico, the expansion of Chinese automotive companies has been notable in the industrial real estate market. According to SiiLA data, these companies' gross leasable area (GLA) –including Yanfeng, Minth, and Shanghai Daimay– increased by 23% between 2022 and 2023. This growth rate, reflecting the increasing foreign investment from China in Mexican territory, could slow down if the United States pressures Mexico to curb the incursion of companies into North America. This would mean that, in addition to the articulation of value chains, investment in electric infrastructure, insecurity, water scarcity, gradual lack of skilled labor, pollution, and mobility, as well as the need for greater digital technological investment and financing for SMEs, Mexico would face the challenge of overcoming rigorous U.S. regional protectionist policies to take advantage of nearshoring opportunities, especially when the utilization is limited. In this regard, a study by the Tecnologico de Monterrey, signed by Dr. Roberto Duran, indicates that Mexico only utilizes 15% of the investment flows generated by nearshoring.

The Measures Announced by Joe Biden

On February 29, 2024, the U.S. government, led by President Joe Biden, acknowledged that it is investigating the risks associated with the collection of sensitive data and the potential remote access to the systems of vehicles connected with technology from countries considered a threat (including China). This concern arises from the ability of connected vehicles to interact with critical digital infrastructure and collect detailed information about drivers and passengers. The U.S. government fears that a foreign government could access and manipulate these systems, including the possibility of remotely piloting or turning off vehicles, posing a significant risk to the privacy and security of American citizens.

In response, the U.S. Department of Commerce is assessing the risks and exploring the possibility of implementing specific regulations for connected vehicles. According to official documents, the goal is to ensure that the U.S. automotive industry maintains its leadership in innovation and safety while protecting national security.

In this scenario, the USMCA could influence how these concerns are addressed. Although the agreement does not establish direct restrictions on the importation or nearshoring of specific companies, it does include provisions on rules of origin and national security that could affect trade and investment dynamics in the automotive industry. In this sense, USMCA member countries have the sovereignty to take exceptional measures to safeguard their national security, such as restricting investments or trade in risky industries, which could include the regulation (justified, not arbitrary) of connected vehicles that pose a risk. Although the USMCA allows for some flexibility in this regard, promoting transparency and dialogue between countries to prevent unnecessary trade conflicts and providing dispute resolution mechanisms to resolve differences, extraordinary measures, such as the imposition of tariffs, are often used to pressure trade changes.

BYD, Tesla, and Lithium Batteries

The growing presence of Chinese automakers in Mexico raises questions about how the United States will address these incursions within the framework of the USMCA and national security. The actions of the neighboring country will have significant implications for the Mexican real estate market and the commercial relationship between Mexico, the United States, and China, reflecting an international battle that is reaching national territory, where there are significant lithium reserves.

While it is true that BYD is the leading global competitor of Tesla, which in early 2023 confirmed its investment plans for a gigafactory in Santa Catarina, Nuevo Leon, it is also well known that the United States sees in this business competition a micro-model of what happens on a large scale, where China has a monopoly on the market for inputs to produce lithium batteries and, consequently, a significant commercial advantage in the production of lithium batteries, which are essential for the development of the electric vehicle industry, representing the future of one of the most important manufacturing sectors worldwide, in a context where internal combustion vehicles are numbered due to the growing development of new technologies.

On the one hand, although Tesla continues to outperform BYD in international sales, the gap narrows year by year. The financial reports of both companies indicate that, in the last year, Tesla sold more than 1.8 million electric vehicles and BYD 1.6 million units. However, BYD's sales increased by 70% during that period, while Tesla's increased by 38%. The same is valid for revenue volume. By the third quarter of 2023, BYD and Tesla reported revenues equivalent to 22.3 and 23.3 billion dollars, respectively. Compared to the same period in 2022, BYD and Tesla's revenue volumes increased by 38.5% and 8.8%, respectively.

As BYD continues to expand its presence in the global electric vehicle market, competition with Tesla intensifies, reflecting competitive advantages for the Asian company, which has extensive productive and commercial strengths related to the supply chains of companies from its country of origin. An example is CATL, which has been considered the largest battery manufacturer in the world since 2016. The preeminence and productive relationship of companies like BYD and CATL contribute to China's dominance in the lithium-ion battery and electric vehicle industries. This dominance extends beyond the manufacturing of products, as it involves significant control over the supply of essential minerals for producing batteries and, therefore, for producing electric vehicles.

In this sense, according to data from the East Asia Forum, it is estimated that China controls 60% of global lithium production and more than 50% of the market for critical minerals for producing lithium batteries. This explains why 75% of lithium-ion batteries come from the Asian country, as well as its growing electric vehicle market, which represents 60% of the global industry. This control over the mineral supply chain is key to understanding China's monopoly in the battery market, the dependency, and the national security risks it generates for other world powers, thus motivating efforts in Europe, the United States, and India to develop their own production capacities and find alternatives to imports from the Asian country.

For more information on this and other global trends influencing Mexico's industrial real estate market development, explore SiiLA REsource or write to us at contacto@siila.com.mx.