Following its entry to the WTO, China laid waste to entire industries in Mexico, but one bright spot remained: the automotive sector. Due largely to the North American Free Trade Agreement (NAFTA), Mexico remains a crucial part of the US automotive supply chain, exporting 80% of the auto parts it produces to the US.
China has not been in a position to compete in the US auto market because thus far it has not had a surplus of cars or parts available for export, said Enrique Dussel Peters, director of the Center for Chinese-Mexican Studies at the National Autonomous University of Mexico (UNAM). Domestic consumers are already buying every car China produces, and the remaining 5% of domestic demand is filled by imports.
But in two or three years, when supply is expected to outstrip domestic demand, China is likely to go after global market share. Secondary markets will probably come first – such as Russia, Africa and Latin America – followed by more developed markets, including Western Europe and the US.
Mi casa es su casa
Mexico has succeeded in the US market in part because it makes auto parts and assembles cars rather than selling brands of its own, Peters said. Mexican manufacturing is not seen as a challenge to the American auto industry, which the US government has gone out of its way to defend, most recently through the bailout of GM and Chrysler following the financial crisis.
But the US government will probably take a much different view of China, where domestic brands account for some 40% of cars produced.
“If you want to engage in a massive competition between China and the United States in the US market – and this will happen, I’m sure this will happen – [it] would have huge political repercussions,” Peters said.
Politics aside, China would be at a disadvantage due to higher transport costs for trans-Pacific shipping and higher tariffs than those for NAFTA countries.
Chinese companies could follow the lead of Japanese and European carmakers that have already set up operations in Mexico to export to the North American market. Provided Chinese factories met NAFTA standards for sourcing a certain percentage of their materials and labor from within the free trade area, they can circumvent tariffs and other trade barriers. Great Wall Motors is already pursuing a similar strategy in Europe by opening a plant in Bulgaria as a backdoor to the rest of continent.
The challenge with pursuing new auto markets is it’s often an all-or-nothing strategy, said Klaus Meyer, an international business management professor at China Europe International Business School (CEIBS).
“You can’t just set up a car plant and turn out a couple of thousand cars,” Meyer said. “An efficient scale for cars is hundreds of thousands. So you have to be pretty confident you will succeed.”
That confidence has yet to manifest itself: Several major Chinese auto makers have announced plans to enter Mexico, but ultimately did not follow through. Geely Holding Group said in 2009 it would build a factory in Mexico that never appeared. Chery Automobile and SAIC Group have also announced major investments that have yet to be realized, Peters said.
FAW Trucks, a venture of the “big four” automaker China FAW Group, is one of the few Chinese firms that has stuck around in Mexico making commercial trucks (a previous FAW foray into making passenger vehicles failed). FAW’s export business is still in its initial stages, with the company exporting its first 10 or so trucks from Mexico to the US in November – a small but not insignificant accomplishment.
“It’s a joke in terms of volume,” said Peters. “But in terms of quality of processes, of organization, of distribution … this is the first very important step.”