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BMW plans €800mn Mexican EV and battery investment amid subsidies row

German carmaker BMW on Friday said it will invest €800mn to step up electric vehicle production in Mexico, as the Latin American country stands to benefit from its inclusion in US subsidies that have sparked tension with Europe.

The investment includes €500mn for the construction of an assembly centre for lithium-ion batteries on the grounds of a BMW car plant in San Luis Potosí. The remaining sum will be used to prepare the plant for EV production. BMW said the investment would create 1,000 jobs.

The investment is among the largest in the flurry of clean energy deals in North America to follow passage of the US Inflation Reduction Act climate law last year.

At least $34bn has been announced to develop the continent’s EV supply chain since the bill was signed by US President Joe Biden, according to BloombergNEF, underscoring the region’s prime position to cash in on the energy transition and efforts to decouple supply chains away from China.

The $369bn in green subsidies have sparked a tense diplomatic row with Europe, which argues they could unfairly draw investment away and breach World Trade Organization rules.

BMW said the plant was planned before the IRA and that “production follows the market” for investment considerations. But the German company’s announcement, made days after Brussels unveiled a rival incentive plan, adds fuel to the fire of the bloc’s criticism that the US law is putting European industry at a disadvantage.

On top of the proximity to the US market and its consumer tax perks for EVs, BMW said it would also benefit from Mexico’s labour force and its future supply of lithium.

“There is an open dialogue with the Mexican authorities for understanding the rules and requirements for the access to these benefits by vehicles manufactured in Mexico,” it added.

At a recent summit in Mexico City, the leaders of the US, Mexico and Canada reaffirmed their commitment to making the region of almost 500 million people a clean energy powerhouse.

While the IRA excluded European allies from its green subsidies, the bill extended EV final assembly tax credits to Mexico and Canada. Countries with free trade agreements with the US are also eligible for battery subsidies, although companies are still waiting for the US Treasury to announce guidance.

Mexico’s lower wages and border with the US helped the auto industry flourish under the North American Free Trade Agreement, which removed most trade restrictions with the US and Canada. Mexico is the largest exporter of auto parts to the US and nearly all major automakers including Ford, Toyota and Volkswagen have long-established operations in the country.

A handful of companies have already decided to open new plants or increase EV production in Mexico. Ford is building an electric version of its Mustang in its Cuautitlán plant. General Motors plans to produce two EV models at its Ramos Arizpe plant, which currently produces only internal-combustion vehicles. Volkswagen plans to upgrade its Mexican plants for EVs in the second half of the decade.

“We have an opportunity that we haven’t had all century and there is no way we will let it pass us by,” Marcelo Ebrard, Mexico’s foreign minister, said of the factors aligning in the country’s favour.

Tesla, the US EV leader, has been scouting sites in Mexico for a new EV plant, though the company has not confirmed any final decision. Tesla did not respond to a request for comment.

Line chart of electric vehicle assembly capacity and forecast (thousands) showing US leads North America in electric vehicle assembly capacity

Top trade and industry leaders say Mexico would attract much more if its energy policies were more investor-friendly.

Mexico’s President Andrés Manuel López Obrador has changed electricity market rules to favour the state utility’s higher-carbon electricity production over private, zero-carbon renewables. Neil Herrington, senior vice-president of the Americas at the US Chamber of Commerce, called the country’s energy policy “the single biggest risk” to attract EV and battery investment.

“Building batteries is enormously energy-intensive . . . You have to have a lot of energy available and a lot of clean energy available at that,” said a Volkswagen representative. The German company is scouting a location in the US and Canada for its first North American battery cell factory.

Louie Diaz of battery recycler Li-Cycle said that clean energy sources were a “key focus” in their site selection process and that the company was prioritising the US and Canada in North America.

Column chart of actual and announced plant capacity (GWh/year) showing US accounts for most North American EV battery capacity

Foreign direct investment in Mexico has held up under López Obrador, and in 2022 it likely hit its highest level in several years, but business leaders say the country should be seeing a boom.

“If the Mexican government adjusted its policies to welcome competition in the energy sector and to fully get on board with the energy transition, the investment the country would receive would be like hitting the jackpot on a Vegas slot machine,” said Amy Glover, director of McLarty Associates and member of the Council on Foreign Relations of Mexico.

The US has 10 times the EV assembly capacity of Mexico and outpaces the rest of the continent in battery capacity, according to industry data provider LMC Automotive and Argonne National Laboratory. BloombergNEF tracked $715mn in new EV supply chain investments in Mexico following the passage of the IRA, compared to $32.5bn in the US or unspecified North American locations.

Some subsidies in the IRA are limited only to manufacturing in the US. José Guillermo Zozaya Délano, executive president AMIA, of Mexico’s auto industry body, said that Mexico should issue its own set of incentives to attract investment south of the border.

“The fact that we’re neighbours, friends and partners doesn’t mean we aren’t also competing,” said Zozaya Délano said.

Additional reporting by Patricia Nilsson in Frankfurt

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