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Analysis

Semiconductor Shortages: Which Direction Should Mexico Take?

By Antonio Gozain | Thu, 10/21/2021 - 06:00

Semiconductor shortages still plague the automotive industry, with OEMs constantly stopping production across the world. In Mexico, the situation has not been different; production and sales figures have hit their lowest levels in the last decade, while exports have not recovered entirely from the pandemic crisis. Some industry experts believe that Mexico has the potential to produce semiconductors, but think that the country should play a supportive role as the US opens its new factories.

As vehicles become smarter and greener, more semiconductors are demanded. While combustion engine cars require 50 to 150 chips, hybrid electric vehicles usually require around 3,000. These chips are made of silicon, which is the second most abundant element on Earth, surpassed only by oxygen, according to Britannica. While the raw materials are out there, the manufacturing process of semiconductors is extremely complex and involves 700 steps in 14 weeks, according to Bosch.

The surge in electronic devices sales due to the pandemic has certainly hit semiconductor production, but this is not the only origin of the shortage crisis, which is also affecting production of laptops, smartphones, gaming consoles and household appliances. US-China tensions and sanctions imposed during the last years have worsened the situation, according to diverse media outlets. The globalization of the supply chain and COVID-19 variants spread across Southeast Asia add another vertex to this problem.

“When the Delta variant spread across Southeast Asia, home of Tier 2, Tier 3 and semiconductor chips suppliers, the problem got worse because countries just entered the stage of lockdowns and the economy shutdown. The reopening cycle usually takes between six and eight months,” said during the Mexico Automotive Summit 2021 ECHO Guido Vildozo, Senior Manager, Americas Light Vehicle Sales Forecasting at IHS Markit.

The US and the EU have been addressing the situation in the last months, with different initiatives to attract investment and produce their own chips. However, opening semiconductor factories can take around two years, according to Bloomberg. “Manufacturing a chip typically takes more than three months and involves giant factories, dust-free rooms, multi-million-dollar machines, molten tin and lasers.”

Shortages Across the World

While exports are yet to recover, light vehicle sales in Mexico had their worst September since 2011 (when they amounted to 73,998 units) and hit the lowest level for any month since July 2020, following the 76,930 units sold during the month. September represented the third contraction in sales of 2021. “The results of September reflect the deterioration of the market. These results show the restriction faced by the lack of inventory linked to the shortage of semiconductors that impacts various industries globally,” said Guillermo Rosales, Director General of AMDA.

The crisis is similar in Europe. In Germany, the 196,972 new vehicles sold during the last month represented the worst September in the country since 1991, reported AFP. Meanwhile, in Austria, Stellantis will stop production from Oct. 18, 2021 to Jan. 2, 2022 at its Vienna Plant, due to semiconductor shortages, reported Reuters.

With one quarter to go in 2021, IHS Markit’s global light vehicle production forecast has been cut by 6.2 percent (5.02 million units) for the year and by 9.3 percent (8.45 million units) in 2022. “We estimate that 1.44 million units of production were lost in 1Q21 and a further 2.60 million units in 2Q22,” said IHS Markit. Losses in 3Q21 continue increasing and are estimated to be above 3.2 million units.

The World’s Dependency on TSMC

Taiwanese semiconductor manufacturers lead the semiconductor market, with 65 percent of the global revenues. Taiwan Semiconductor Manufacturing Company (TSMC) stands above the rest, with 56 percent of the global revenues and a market cap of around US$550 billion, ranking it as the world’s 11th most valuable company, according to The Wall Street Journal. This position led the publication to describe the world’s dependency on TSMC as a vulnerability. Semiconductors have also been a focal point of tensions between the US and China, as Taiwan claims the industry “as its own,” according to the newspaper.

TSMC also leads the market in semiconductor manufacturing for the auto sector, besides supplying other companies like Apple and Qualcomm. TSMC’s advanced technology enables the Taiwanese company to produce around 92 percent of the world’s most sophisticated chips, according to Capital Economics, which assured that being dependent on Taiwanese chips “poses a threat to the global economy.” TSMC makes 60 percent of the less-sophisticated semiconductors used by automakers across the world, according to IHS Markit.

The government of Japan, which is mindful of economic security and supply chain stability, is ready to invest JPY$800 billion (US$7.15 billion) to subsidize a currently-in-discussion joint venture project to build a semiconductor factory in Japan between TSMC and Sony Group, reported MBN. Meanwhile, the US drafted a bill called CHIPS for America Act to support semiconductor manufacturing, research and development, aiming to warranty supply chain security in the following years. “Specifically, the bill provides an income tax credit for semiconductor equipment or manufacturing facility investment through 2026,” states a US government release. This regulation has promoted the investment of US$75 billion in the US, including US$20 billion invested by Intel and US$12 billion invested by TSMC in three plants in Arizona.

What Is Mexico’s Role in This?

Mexico imported US$13.67 billion in semiconductors during 1H21, a 3.9 percent decrease when compared to the same period in 2019 and a 9.3 percent increase when compared to 1H20, according to the Ministry of Economy. During the first three quarters of 2021, Mexico imported chips mainly from Malaysia (US$4.4 billion), China (US$2.3 billion), Taiwan (US$1.6 billion), Vietnam (US$881 million) and the US (US$856 million), according to El Economista

Mexico could strengthen the entire semiconductor supply chain and is capable of producing semiconductors, from design to programming, according to Santiago Cardona, CEO of Intel Mexico and IT Vice President of CANIETI. "The great opportunity for Mexico as a country and as an economy is to recognize how to become more participative in this, considering the idea of rebalancing the supply chain in North America through the CHIPS for America Act,” said to El Economista Cardona, adding that the entire chip supply chain is already established in Mexico, from programming centers in Guadalajara to manufacturers in Mexico’s northern industrial corridor.

Still, as Mexico cannot compete with the billionaire tax incentives offered by the US to attract investment and manufacture semiconductors locally, it should play a complementary role, taking advantage of USMCA, said Mónica Duhem, Head of the Global Economic Intelligence Unit of the Ministry of Economy. "It would be a mistake to go head to head with tax incentives because we do not have the economic capacity to offer what (President Joe) Biden is doing, but we do have the conditions to compete in the long term and complement what the US is doing," said Duhem during an event organized by COPARMEX. Manuel Montoya, President of the Automotive Cluster Network, agrees with this vision, saying Mexico should try to play a complementary role and align to the investments taking place in the US, while focusing on areas where the country is a better competitor. “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. 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,” said Montoya.

The national tech industry has been in contact with the Ministry of Economy ever since the shortages began, to jointly explore which could be the best possible direction to take, said Cardona: “There has been strong communication between all parties to explore what type of processes can be implemented so that the most important strategic sector in the country has the necessary supply to operate.”

The data used in this article was sourced from:  
MBN, Britannica, Bosch, Bloomberg, IHS Markit, The Wall Street Journal, US Congress, El Economista, CANIETI, COPARMEX, AFP, Reuters
Antonio Gozain Antonio Gozain Journalist and Industry Analyst