While the US still dominates total dollars of foreign direct investment (“FDI”) into Mexico, China is Mexico’s fastest growing source of new FDI. This is a high stakes game that not only has the potential to crowd out investments from US companies, but also to put a strain on US-Mexico relations already complicated by the ever-changing political priorities on both sides.

Nowhere are the stakes higher than in the auto industry. 

It is clear Mexico has a winning hand with its historical automative expertise and world-class capabilities, built over many decades. But many say Chinese automakers are playing with a stacked deck.  One only needs to look to the rising complaints from US and European auto makers calling for protection. And it’s uncertain if China can even achieve the same cost and operational efficiencies that give them a competitive advantage outside of their own country.

While both the USMCA Agreement and the 2022 Inflation Reduction Act have strict requirements for sourcing foreign content, avoiding tariffs and benefiting from tax credits, it’s not surprising that many Chinese companies have a few tricks up their sleeves, like legally opening Mexican shelter companies or working with tax lawyers to circuitously follow the laws while ignoring their intent.

However, the blame cannot solely be about how the Mexican government is playing the cards they were dealt.  According to Bloomberg (Tesla Courts Chinese EV Suppliers to Mexico, Stoking Fears in DC), the value of Chinese auto parts made in Mexico and exported to the US grew to $1.1 billion in 2023, up 15%.  Someone in the US is buying these parts.  Tesla, for instance, seemingly speaking out of both sides of its mouth, has “invited” Chinese suppliers to Mexico to support its new gigafactory near Monterrey, Mexico, hoping to create the same super-efficient supply chain that feeds its gigafactory in Shanghai.  And Chinese manufacturers have responded, rapidly preparing facilities to address this demand, joining those that had already re-located following the implementation of President Trump’s Chinese tariffs.  According to Fortune, preliminary data from INA, Mexico’s national auto-parts industry association, indicates Chinese industrial companies were utilizing 9.31 million square feet of Mexican industrial space in 2023, up from 1.28 million square feet just four years ago.

Chinese car brands already have a gameplan for entering the US and it seems to start with Mexico.

Supposedly, Chinese car brands are patiently biding time in this adjacent market until the US opportunity materializes from a combination of familiarity, competency, attractive pricing, and lack of political will.  Today, from almost 0% pre-pandemic, Chinese imports account for 29% of all cars imported into Mexico, and 19% of all vehicles sold in Mexico are Chinese, according to MotorTrend.  And as automobiles have increasingly become “computers on wheels”, especially with respect to EVs where the Chinese compete most effectively, many worry that the Chinese government could potentially have access to massive amounts of key data of Mexican consumers and, ultimately, Americans as well.

According to the Wall Street Journal, the Chinese automaker, BYD, is reviewing potential locations for a plant in Mexico. According to most experts, full production of vehicles by Chinese companies in Mexico would qualify for the lower tariff under the USMCA and consumer rebates under the Inflation Reduction Act, if these vehicles were to be exported to the US.  Of course, the US could always simply change how it defines foreign content or how it applies the current rules – there is a history of this kind of idiosyncratic behavior on both ends of the political spectrum.  For now, it behooves the Chinese auto makers to fly below the radar while preparing for what many believe is the inevitable.

While certainly positive for the US and Mexico, nearshoring is not without trade-offs.

Fear is high in Washington with concerns that China is about to flood the US with lower-cost EVs, whose significant cost-advantage arises from Chinese government support and its domination of the EV supply chain. Toyota estimated, in an internal memo last fall, that Chinese companies had a 25-30% cost advantage over its global rivals. In December 2023, the US Treasury Secretary, Janet Yellen, visited China seeking closer cooperation in monitoring foreign investments and sharing information on the screening process. For its part, Mexico indicated a need and willingness to update its methods for investment analysis.

Supporting free trade typically results in lower prices for consumers, while defending strategic and national security interests typically raises them.  In the end, we hope that protectionist fears do not stifle legitimate opportunity for both sides.

There is no doubt deglobalization is a high stakes game and Mexico clearly has a winning hand. The key is for Mexico to play its cards close to the vest while navigating a more competitive US-China relationship. And most of all, never forget that just because you have the best cards, it doesn’t necessarily mean you will win the game.

 Are you a Financial Professional? Then check out our new portal and get all kinds of tools and resources on multi-strategy investing, and growth. 


Securities highlighted or discussed in this blog have been selected to illustrate Validus’s investment approach and/or market outlook and are not intended to represent any strategy or portfolio performance or be an indicator for how strategy or portfolio have performed or may perform in the future. Each security discussed in this blog has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and, in aggregate, may only represent a small percentage of a strategy or portfolio holdings. The strategies and portfolios are actively managed, and securities discussed in this blog may or may not be held in such strategies or portfolios at any given time. These individual securities do not represent all the securities purchased, sold, or recommended and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Nothing in this blog shall constitute a recommendation or endorsement to buy or sell any security or other financial instrument referenced in this letter.

Validus Growth Investors, LLC seeks to invest in companies at every stage of their growth. From startups to publicly traded companies, our research identifies inflection points that have the potential to produce meaningful growth and income for the clients we serve.

Investment Advisory Services are offered through Validus Growth Investors, LLC (“Validus”), an SEC Registered Investment Adviser. No offer is made to buy or sell any security or investment product. This is not a solicitation to invest in any security or any investment product of Validus. Validus does not provide tax or legal advice. Consult with your tax advisor or attorney regarding specific situations. Intended for educational purposes only and not intended as individualized advice or a guarantee that you will achieve a desired result. Opinions expressed are subject to change without notice. Investing involves risk, including the potential loss of principal. No investment can guarantee a profit or protect against loss in periods of declining value. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader. As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.