Complying with USMCA Requires Supply Chain Integration

Q: How has USMCA influenced the Mexican automotive industry’s supply chain and operations?

A: USMCA is impacting the Mexican automotive industry mainly through the rules of origin, which now demand greater regional content. The original 62.5 percent of regional content is gradually shifting to 75 percent. Last year, it was 66 percent but this year it must reach 69 percent. By 2023, regional content will have to reach 75 percent. This means that the 12.5 percent of vehicle components that were previously imported from Asia or the EU now have to be produced in North America, leading companies in the region to look for local suppliers. Mainly Tier 1s are looking for Tier 2s to substitute imports. When supply does not cover demand, Tier 1s invite suppliers from Asia and the EU to establish in Mexico or the US. We have seen this trend intensify since last year. Rules of origin are changing the way Tier 1s operate.

Q: Regardless of where OEMs are located, what characteristics make regions attractive for FDI?

A: Investment will be very precise. Usually, Tier 2s focus on a very specific process so they invest in places that provide them with a skilled, specialized workforce rather than general labor. For example, an aluminum die-casting company would look for specialized technicians and engineers but they are not common, which could prevent regions from receiving FDI from those companies.

Regions that have a large number of engineers, engineering centers and good universities are usually attractive for FDI. Regions must be prepared because they cannot develop these abilities from one day to another. In the coming months, we will see interesting investments in the best-prepared regions.

Q: What can stakeholders in Mexico do to secure those engineering centers?

A: Mexico produces a good number of engineers but the industry requires specialization, such as mechanical, mechatronics or electrical. We need to further specialize those engineers. For example, there will be significant investment that will require embedded software engineers. In this case, mechatronic and electronic engineers will need further specialization.

The industry will require many specialized engineers due to the increasing software needs that vehicles demand. Investing in engineering centers does not have to be large and leads to high-added-value jobs for specialized technicians and engineers, while providing good salaries.

Q: What is the Automotive Cluster Network doing to integrate the supply chain and favor Tier 2 investment?

A: Within the Automotive Cluster Network, we collaborate to learn from one another. With NAFTA, the most important Tier 1s of the world landed in Mexico but they did not develop local suppliers because it was not a requirement. This has changed. Tier 1s are now looking for Tier 2s and have found that there are not enough. Mexico should have five to six times the Tier 2s it has.

To integrate the automotive cluster, we have to know where the suppliers are. Sometimes we look for suppliers in Nuevo Leon and find them in the Laguna region or in Chihuahua. We are connecting suppliers through the clusters and our network, which creates opportunities for local entrepreneurs to invest in Tier 2s, which do not require US$100 million investments as Tier 1s do. More Tier 2s will translate into wealth for the regions and economic growth for Mexico.

Q: Semiconductor shortages continue to impact the industry across the world. What role should Mexico play in the supply chain of these chips?

A: The semiconductor crisis is a structural, global problem. Mexico does not have the technology and economic capacity to make the required US$15 billion investment to build up a semiconductor plant that will only start operations 24 months later. The entire industry relies on the big semiconductor manufacturers in Asia. The majority of manufacturers specialized in the auto sector are located in Taiwan, where they have been attracting investment and building an ecosystem for years. It is a very complex technology.

Mexico should align to the investments taking place in the US and take advantage of its industrial connections. We should not focus on semiconductors but on areas where Mexico is a better competitor.

The Automotive Cluster Network was created in 2019 to group the nine Mexican automotive clusters with more than 500 members in the country, covering Nuevo Leon, Queretaro, Coahuila, Chihuahua, Puebla, Tlaxcala, Guanajuato, San Luis Potosi, State of Mexico, Jalisco, Aguascalientes and the Laguna region.