Manuel Montoya Ortega
Director
CLAUT Cluster Automotriz de Nuevo León
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Expert Contributor

From Made in China to Made in Mexico

By Manuel Montoya | Fri, 06/03/2022 - 13:00

In July 2020, the new free trade agreement between Mexico, the US and Canada (USMCA) was implemented. In this new treaty, the regional content of light vehicles was increased by 12.5 percent. In addition, new rules have been incorporated for Tier 1 providers that are now required to boost regional content from 63 percent to 75 percent. These changes are increasing the need to find and incorporate Tier 2 providers in Mexico.

Additionally, nearshoring is a global phenomenon in which we are moving from globalization to regionalization after the COVID-19 pandemic caused international supply chains to break down. The lack of semiconductors, for example, stopped production at the world's automobile plants. The industry realized that it was depending on very few suppliers, especially those in Asia, that did not have the capacity or interest to serve the automotive industry. Furthermore, the crisis of congestion at ports due to a lack of containers has increased logistics costs up to three or four times from previous levels. The trade conflict between the US and China has also discouraged supplies from that Asian country.

As a result, Mexico is becoming the ideal place to relocate supplies for North America. I will mention some real examples while adhering to the confidentiality of personal data. Daniel is an executive in the purchasing area of ​​a transnational that has approached the Cluster because he has the task of looking for suppliers in Mexico that can substitute US$600 million in imports from China. The Cluster has been working with him for a year to identify the suppliers to whom he is about to give purchase orders. Jaime, Rubén, Ricardo and Alfredo, executives from Tier 2 suppliers, have told us that they have received purchase orders from new clients and their current clients have assigned them more business. The USMCA and the nearshoring phenomenon are accelerating the national integration that we have been seeking in Mexico for many years. We are facing a great opportunity for sustainable economic growth, which the automotive industry is going to generate in the regions of Mexico where it is located.

Another feature that is driving national integration is referred to as “Friendshoring.” With the conflict between Ukraine and Russia and the commercial restrictions that have resulted, global corporations are seeking to do business with those nations with which they share values. Business decisions are now considering ideologies. For this reason, it is thought that China is no longer the best option for suppliers. Mexico has emerged as the best option, not only because of its proximity to the US but also because it is better aligned in terms of business values.

In 2021, fewer vehicles were produced than in 2020, due to the lack of semiconductors and other materials; however, Mexico produced more auto parts than in 2020. This indicates that today, Mexico produces more national content for each car.

We do not expect car production in Mexico to normalize in 2022. In North America, the production of just over 15 million cars is expected, which is still below what was produced in 2019. We hope that in 2023 we will be able to reach a production of between 16 and 17 million cars in North America, similar to pre-pandemic numbers.

In Mexico, we estimate production will reach 4 million cars in 2023 and 4.3 million by 2024. This means that when automotive production reaches these volumes, we will have an expansion in the production of auto parts and components in the country. We estimate that this growth will be reflected in more business for local companies with Mexican capital, which will translate into regional economic growth. We foresee that the next challenges in making this happen are the need to have more Tier 2 providers and that the existing providers may have a greater capacity to meet the nearshoring requirements.

One strategy that has been effective in several regions is the creation of specialized business conventions, such as Proveedor Automotriz, an event organized since 2011 by the Automotive Cluster of Nuevo Leon, which will hold its 12th edition (hybrid format) on June 7- 9 in Monterrey, Nuevo Leon and to which we invite you to participate. This event brings together industry buyers and suppliers through B2B meetings and has proven to be very successful in generating new business opportunities and, therefore, in strengthening the development of the supply chain in the region.

The Automotive Cluster of Nuevo Leon (CLAUT) and the National Network of Clusters (REDCAM) are committed to promoting and supporting Tier 2 Mexican companies so that they can grow with this expansion of the automotive industry in Mexico.

Photo by:   Manuel Montoya Ortega