China demands, Mexico supplies

China’s insatiable demand for new sources of energy has fuelled a growing amount of Chinese direct investment in foreign resources. Mexico, which has been mining an increasing amount of gold, silver and the increasingly needed lithium, plans to quench China’s desires.

There are currently at least 109 projects with Chinese investment planned in Mexico, and this number continues to increase rapidly. This growth is matched by increases in the country’s output of natural resources. In 2010, Mexico is expecting gold output to jump by nearly 2.5 million ounces, with an increase of approximately 50% over 2009’s figures expected in the country’s total exports of precious metals. Besides precious metals, Chinese companies are continuing to expand in manufacturing, assembly, agriculture and oil exploration within Mexico.

As a nation still seeking to gain legitimacy in the global marketplace, Mexico is now looking to Chinese investment in order to achieve its goal of becoming a new economic powerhouse.

New mining potential

Historically an oil-driven economy (with oil comprising more than 40% of government revenues), Mexico’s new-found success has stemmed from its mining potential. Asian investors have diverted from Latin America’s traditionally mineral-rich nations, including Bolivia, Argentina, and Peru, for Mexico’s new-found supplies of zinc, copper, molybdenum, silver and, most importantly, lithium. Recently, Jinchuan Group, China’s largest producer of nickel, cobalt and platinum group metals, spent more than US$25 million on exploration of the Bahuerachi mining project in the state of Chihuahua, Mexico. State-owned Chinese companies Sinopec and PetroChina are engaged in mining and exploration in the Gulf of Mexico (the site of the disastrous recent oil leak from the Deepwater Horizon rig).

With demand for lithium, and specifically lithium carbonate, substantially increasing in the last 10 years, Latin America’s lithium exploration, and consequently, exportation, has significantly increased. Although much of Latin America’s lithium reserves are found in Chile and Argentina, Mexico has become the new power player in lithium distribution. A Mexican mining company, Piero Sutti, recently discovered large lithium deposits in northern Mexico which could yield upwards of 12,000 tons of the metal a year. This could place Mexico’s lithium distribution on par with top Latin American producer Chile. China, as a top producer of computers, electronics, and now electric vehicles, is taking note of Mexico’s abundance of this precious metal. Citic Guoan Group, a leading Chinese company in the satellite and information industries, is already discussing the possible mining of lithium and potassium from the newly discovered Zacatecas deposits.

Not just natural resources

Chinese investment is not limited to the exploitation and importation of Mexico’s natural resources. At the end of 2009, approximately 57 Chinese companies had already established production of their products in Mexico. The number has undoubtedly increased since then. In July, China’s Foton Automobile, which has established a joint venture with Daimler AG, decided to shift production of light trucks to Mexico. Foton will invest more than US$15 million in advance of the start of production. As well, computer manufacturer Lenovo plans to invest more than US$40 million to make laptops in Mexico. The Mexico factory will be Lenovo’s single biggest investment outside China. Sinatex, a stateowned Chinese textile company, has invested more than US$92 million in its Mexican factory. Sinatex cites the close proximity to the US as the main reason for its choice of location.

With tariff-free trade deals with 25 nations, Mexico has become a premier place for cheap production, with low labour costs, and reduced rates of tax on products produced by foreign manufacturers. Since Mexico is a signatory of the North American Free Trade Agreement, channels of distribution to North and Central America come at little to no cost as compared to shipping a finished product overseas from China. Certainly, China will continue to ship raw materials to Mexico (or use domestic Mexican material), build the complete product, and then transport to proximate end markets at minimal cost. With the ever-consuming USA in close vicinity, China’s use of Mexican labour will only increase. At this time, more than 16% of North American vehicle production is undertaken in Mexico; however the figure is expected to increase to 20% by the end of this year. The Mexican maquiladora model – providing a low-cost manufacturing base for foreign producers – has thrived and will continue to thrive in this global environment. The maquiladora industry continues to urge the Mexican government to create more incentives that would encourage nations like China to conduct maquiladora operations in Mexico.

Trade and investment push

Mexico will utilize its growing relationship with China to gain recognition in the global economy. Still seeking to develop the necessary institutions and infrastructure to promote its own competitiveness in the free market, Mexico’s recognized international, geographical and logistical position nonetheless offers an attractive place for further investment in the region. Mexico now looks to capitalize on its abundance of resources, while fuelling its economy through foreign direct investment from powerhouse nations like China. China is ready and willing to assist by means of investing in Mexico’s rich natural resources and using Mexico’s maquiladora industry for mass production. Indeed, at the end of July Chinese Foreign Minister Yang Jiechi and his Mexican counterpart, Patricia Espinosa, executed a new cooperation agreement between China and Mexico. Both sides have agreed to push for more trade and investment between the regions, and enhance political mutual trust to absolve fears of investors entering either region.

The bridge has been built between Mexico and China. With long-term investments now underway between the two nations, their trade relationship looks promising for years to come.

Sumeet Chugani and Ricardo Ortiz are associate attorneys at Diaz Reus & Targ