Mexico Still an Automotive Powerhouse Amid Global Disruptions
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Mexico Still an Automotive Powerhouse Amid Global Disruptions

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Rodrigo Andrade By Rodrigo Andrade | Journalist & Industry Analyst - Thu, 02/02/2023 - 12:38

The automotive industry has undergone significant changes in recent years, spurred mainly by the COVID-19 pandemic and the Russia-Ukraine conflict. These disruptions have led to a shift towards a more regional approach to its supply chain. Mexico, due to its favorable business environment, has become a popular destination for global automakers looking to relocate their operations.

Supply chain transformations are driven by a number of factors, including increasing costs, concerns over supply chain resilience and a desire to bring production closer to key markets. As production becomes more complex and reliant on global sourcing, the cost of transporting goods across long distances has increased. This has made nearshoring increasingly attractive to automakers, as it allows companies to reduce transportation costs and improve supply chain efficiency.

The benefits of nearshoring for global automakers are clear, as Luis Carlos Ramírez López, President, Chihuahua Aerospace Cluster, wrote for MBN. “The new opportunities for doing business in America — specifically, nearshoring — require the restructuring of the supply chain built in the past and the development of a more logical, practical and economical chain.” By their presence in a single region, automakers can also tap into local expertise, access new markets and benefit from a favorable business environment.

Mexico has a unique opportunity thanks to its privileged geographical position neighboring the largest economy in the world. The country offers a favorable business environment with a large, growing market and well-developed infrastructure. Mexico’s trade agreements also provide access to global markets: USMCA to the US and Canada and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to 11 Asia-Pacific countries, for example.

Mexico also offers a unique blend of favorable investment incentives including tax breaks and subsidies that encourage foreign investments. The country has also built a network of suppliers and a skilled workforce that provides for specialized manufacturing, with an increasing focus on R&D activities.

Mexico and Canada’s recent victory in the dispute regarding content rules of origin can add another layer of attractiveness for Mexico in terms of nearshoring, as it makes the latter country an ideal intermediary bridge to the US. “This is excellent news, not only because of the excellent work of Mexico’s legal and administrative teams, but also because USMCA will be fulfilled as negotiated, which immensely helps the North American automotive industry,” said Tatiana Clouthier, former Minister of Economy, as reported by MBN.

While relocation may offer companies great advantages in terms of production and logistics costs, a thorough analysis is necessary to define the right location that can offer supplier infrastructure and talent availability to ensure quality production. Cultural differences and miscommunication may also result in delays and disputes between companies and suppliers, so a local supplier that can understand the business environment is crucial for new investors. Nearshoring entails significant investments in new facilities, equipment and personnel, as well, especially when compared to maintaining operations in regions where companies already have this type of infrastructure and resources.

Regardless of its added advantages, Mexico must take a multi-pronged approach to remain an automotive powerhouse. This includes investing in infrastructure, attracting foreign investment, fostering innovation, developing a skilled workforce, strengthening competitiveness, addressing environmental concerns and developing strategic partnerships with the private sector. By taking these actions, Mexico can create a supportive environment for the automotive industry, attract investment and drive growth in the sector.

Photo by:   maxxyustas

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