EV Parts and Components Industry in Mexico PDF

EV parts and components industry in Mexico Andrew L. Davis MIBA Tecnológico de Monterrey, Campus Santa Fe Contents 1. Goals for reducing CO2 emissions. 2. Conditions for optimal FDI inflows in the auto parts industry for electric vehicles. 3. Mexican electric vehicle industry (brand...

EV parts and components industry in Mexico Andrew L. Davis MIBA Tecnológico de Monterrey, Campus Santa Fe Contents 1. Goals for reducing CO2 emissions. 2. Conditions for optimal FDI inflows in the auto parts industry for electric vehicles. 3. Mexican electric vehicle industry (brands, production, consumption). 4. Mexican electric vehicle components/parts industry (production by segment, production by region). 5. Trends in the Mexican electric vehicle components and auto parts industry. 6. Mexico as a potential market for electric vehicles. 7. USMCA rules of origin for electric vehicles relevant to the components and auto parts industry (change in tariff classification, regional value, labor content). Emissions reductions goals The United Nations has set as a goal to reduce global CO2 emissions by 45% by 2030 worldwide. Marcelo Ebrard, Mexican Chancellor, in 2023 stated that 50% of all domestic car sales would be EVs by 2030. The European Union will ban the sale of internal combustion engines by 2035. China has set the goal for net zero emissions for 2060. Conditions for a competitive export economy Generally, a major EV automobile exporter must meet two conditions: having a well-developed industrial infrastructure, a strong production capacity, and a domestic market that is not excessively large, to avoid overwhelming the country's production capacity. Additionally, it is good to have access to access to export markets through FTAs. Institutions, related and supporting industry in domestic economy to support the EV manufacturing industry. This includes: chain of local automotive component suppliers, and established supply chains. A business-friendly environment; low labour costs, social, economic and political stability.  Sales and production of EVs in Mexico 2019-2022. 142.000 electric automobiles produced in 2023 (Ríos, L., 2023). 125,000 electric automobiles produced between January and August, 2024 (VanguardiaMX, 2024).  Mexican auto industry Mexico is the 7th largest manufacturer of automobiles, and the 4th leading exporter of autoparts globally. Mexico is now China’s second largest export market for automobiles. Mexico’s location is key for nearshoring activities. Close to US market, where government gives incentives to consumers for electric car consumption.* *It will be interesting to see how these incentives will change or survive now we have a Trump government in the US. OEM/ Assembly for EV vehicles in Mexico 1. Ford Planta Cuautitlán (Estado de México) 2. General Motors Complejo Ramos Arizpe (Coahuila) 3. BMW Group Planta San Luis Potosí 4. Audi México Planta San José Chiapa (Puebla) 5. Giant Motors Latinoamérica (JAC México, CD. Sahagún, Hidalgo) 6. Toyota Motor Manufacturing Guanajuato TMMGT (Apaseo el Grande, Guanajuato) Source: OMRON, 2023  More EV production projects in Mexico. Stellantis: Started producing electric cars between in August 2024. Zacua Mexico: First Mexican brand of electric cars. Its production is handmade, so each car is assembled by hand. W Tech: Assembler of tactical vehicles and electric buses. International Navistar de Mexico: Produces the eMV unit, a 100% electric truck whose first delivery was in Canada in 2022. MOLDEX: Manufacture of electric utility vehicles. Subsidiary company of Grupo BIMBO. Questum: In 2024, will start with the production of e.GO vehicles for work fleets, starting a project for FEMSA where the cars will be used for supervision and pre-sales activities. Tesla: Arriving in Monterrey…still to be confirmed. LINK Electric Vehicles: Projected production line of electric trucks in Puebla will start operations. OLINIA: Governmental project to produce 100% Mexican designed and sourced EVs. CRONOS STEEL TRADING, CANACINTRA (2021) Auto part segments There are three main auto part product segments: Electric components and parts (EV & E/E trend components) ICE related components (those exclusively manufactured for internal combustion engines), and Core Vehicle Components (those non-electric components which can be employed in any vehicle) Over the next eight years, ICE-related non-electric components will be phased out, Core Vehicle Components will remain steady in terms of demand, and electric parts and components will see remarkable growth McKinsey & Company, 2023; Fleischer et al., 2023 Mexico and EV autoparts industry Mexico is receiving relocation and new EV auto parts for manufacturing plants from Germany, Brazil, South Korea, USA and Canada. Mexico will receive over $15 bn dollars (US) in investment (FDI) in EV parts/components over the next years. Guanajuato, Coahuila, Querétaro, Nuevo León, Chihuahua, San Luis Potosí and Estado de México have the highest concentration of plants making parts & components for electric vehicles. Established ICE autoparts companies making the transition to EV autoparts. Source: OMRON, 2023 Tier 1,2: Electromobility and electrification components Batteries/Capacitors and associated components (+44.4%)* Electric Drivetrain (+46.67%)* Fuel Cell Systems (+100%)* Cooling and thermal management systems for EV's (+46.15%)* Power control units (PCU) Other suppliers of components for Electric Vehicles (+242.86%)* * Change in # of plants from previous year Source: OMRON, 2023 Developing the supply chain for EVs in Mexico Greater interdependence between automotive, electronics and telecommunications industries an asset in Mexico. The market and industry is still better suited for hybrid EVs, rather than battery EVs. This is due to the slow conversion from ICEs. To move into higher value supply chain activity, Mexico must invest in its digital infrastructure to accommodate 5G technologies necessary for continued manufacturing and usage of EVs in the country. Skilled labour requirements in higher value manufacturing: specialized engineers, experts in battery management systems, powertrain optimization, battery chemistry, electrical harnesses, and safety systems. De los Santos, M. (2023) Mexico as a potential market for EV industry Mexico is a vibrant and emerging consumer market, making it suitable for early market positioning. In the short term, EVs are still considered a luxury option in Mexico; high prices due to considerable R&D costs and high-value inputs, coupled with a lack of governmental incentives for consumers makes it difficult for the middle and lower classes to purchase an EV. This having been said, low-cost EVs are increasingly popular in the cab hailing service industry (such as UBER or DIDI operators). In Mexico, there is still no national policy specifically focused on ZEVs (Zero Emissions Vehicles). Driven by President Andrés Manuel López Obrador's objective of wresting control of the energy sector from private companies in favor of state dominance in the market, the government is undermining efforts to expand renewable energy and betting the country's future on fossil fuels. Zheng B., 2023 Chapter 4 of USDA: Rules of Origin The rules of origin in FTAs help ensure that FTA benefits are granted only to goods produced by parties that are signatories to FTAs and not to goods manufactured wholly or partially in other countries. Under the USMCA, most goods containing materials from non-USMCA countries can only be considered North American if the materials are sufficiently transformed in the USMCA region to go through a Harmonized Tariff Program (HTS) tariff classification change (called a "tariff change"). In many cases, products must have a minimum level of U.S. content, in addition to undergoing a tariff change. The USMCA requires that the regional value content of most goods be not less than 60% if the "transaction value" method is used, or not less than 50% if the "net cost" method is used. The value of regional content can be calculated using either method. The transaction value method, which is simpler, is based on the price of the good, while the net cost method is based on the total cost of the good minus the costs of royalties, sales promotion, and packaging and shipping. Producers usually have the option to choose which method they use, with a few exceptions. Source: US Congressional Research Service, 2024 USMCA rules of origin for the automotive industry The USMCA raised regional content value requirements for the motor vehicle industry that were previously required under the North American Free Trade Agreement. NAFTA required 62.5% North American content for cars, light trucks, engines, and transmissions; and 60 % for auto parts. The most restrictive USMCA rules of origin in the motor vehicle industry include: product-specific standards requiring 75 percent U.S. content; wage requirements stipulating that between 40% and 45% of North American automotive content must be performed by workers earning at least $16 per hour (for the first time in any U.S. trade agreement); and the requirement that 70% of the steel and aluminum in a vehicle must originate (melted and dumped) in North America. Source: Congressional Research Service, 2024  Product-specific: Substantial transformation: Change in tariff classification (CTC) Change of tariff classification: When work performed within a country results in a change of classification. For example, the unique code for auto parts, 8708, is different from the code for a finished car, 8703. If a country assembles auto parts into a finished car, it would qualify as a change in tariff classification. The CTC may require the product to modify its chapter (2 digits in the Harmonized System), heading (4 digits), subheading (6 digits), or period (8-10 digits) in the exporting country. Source: Antoni Estevadeordal, Kati Suominen, 2003 Institute for Government, https://www.instituteforgovernment.org.uk/explainers/trade-rules-origin  What is a tariff classification? The Harmonized System is a classification system composed of 21 sections and 96 chapters. Chapter is the name of the 2-digit code in the Harmonized System. Each chapter is denoted by a 2-digit code that is divided into several 4-digit codes, which are called headings. The HS code, up to a 6-digit level, is tracked internationally and is common to all countries. Note: it is based on the WTO (World Trade Organization) Harmonized Commodity Description and Coding System. Regional Content Methods (USMCA) The Transaction Value Method The Net Cost Method TV-VNM NC-VNM RVC= *100 RVC= *100 TV NC The Net Cost Method: RVC = (NC-VNM)/NC x RVC is the regional value content, expressed 100 where as a percentage; RVC is the regional value content, expressed as TV is the transaction value of the good, a percentage; adjusted to exclude any costs incurred in the international shipment of the good; and NC is the net cost of the good; and VNM is the value of non-originating materials VNM is the value of non-originating materials including materials of undetermined origin including materials of undetermined origin used by the producer in the production of used by the producer in the production of the good. the good.  Regional Value Content requirements RVC Requirements for Passenger Vehicles and Light Trucks 66 percent RVC using the net cost method as of July 1, 2020 69 percent RVC using the net cost method as of July 1, 2021 72 percent using the net cost method as of July 1, 2022 75 percent using the net cost method as of July 1, 2023 RVC Requirements for Heavy Duty Trucks 60 percent RVC using the net cost method as of July 1, 2020 64 percent RVC using the net cost method as of July 1, 2024, or 4 years after entry into force 70 percent using the net cost method on or after July 1, 2027 or 7 years after entry into force Source: International Trade Administration, 2024 New Labor Content Rule Requires a specific minimum percentage of passenger vehicles, light trucks, and heavy trucks, by value, that come from North American manufacturing facilities that compensate workers at least $16 per hour; It ensures that U.S. producers and workers can compete on a level playing field and incentivizes investments in new vehicles and parts in the United States. Source: International Trade Administration, 2024 Labor Value Content is a point system based on three different high-wage expenses: High-wage manufacturing and material expenses The provision of high-wage manufacturing expenses and materials from parts and materials used in the production of those vehicles. High-Wage Technology Spending The high-wage technology expenditure provision allows producers to claim a credit for research and development expenditures or information technology wages. High-wage assembly expenses The high-wage assembly expense allows producers to claim a credit if the producer has an advanced engine, transmission, or battery assembly plant that meets certain production. Source: International Trade Administration, 2024 Labor Value Content for Passenger Vehicles Source: International Trade Administration, 2024 Labor Value Content for Light Trucks and Heavy Duty Trucks To originate, light and heavy-duty trucks must also comply with an LVC following the implementation of the USMCA of: 45 percent of the value must meet the requirements for high- wage expenses. 30 percentage points of high-wage manufacturing and material expenditures, no more than ten percentage points of high-wage technology expenditures, and no more than five high-wage assembly percentage points. The labor value content for light trucks and heavy trucks was implemented without a phase-in period. Source: International Trade Administration, 2024 What does this mean? To include a North American assembly or production plant in your calculation of material and manufacturing expenses, workers performing direct production work at the plant must earn an average hourly base wage of at least USD16 per hour. This wage calculation does not include certain payments, such as benefits, bonuses, and overtime pay, and excludes the salaries of executives, management, research and development, certain engineering personnel, and workers who are not directly involved in the production of motor vehicles or parts. The high-wage technology credit is calculated based on research and development and IT salary expenses, including software development and technology integration, as a percentage of production wage expenditures in North America. The high-wage assembly credit applies to plants that have the capacity to produce 100,000 original engines or transmissions, or 25,000 advanced battery packs, and meet the high-wage requirement of $16 per hour. Source: International Trade Administration, 2024