US AI Companies to Move Hardware Production to Mexico

In response to rising geopolitical tensions and logistical challenges, US-based artificial intelligence (AI) companies have asked their manufacturers to increase the production of AI-related hardware in Mexico. This strategic move aims to capitalize on the US-Mexico-Canada Agreement (USMCA) to reduce their dependence on China, diversify their supply chains, and establish a new base of operations near major markets. 

With Foxconn leading the charge, there is a growing presence of Taiwanese companies in Mexico. This signals a significant shift in the country's industrial structure, potentially positioning Mexico as a key center for advanced technology manufacturing in the region. Despite local challenges, this trend reflects Mexico's increasingly important role on the global artificial intelligence and technology stage. 

"The rising presence of Taiwanese firms in Mexico is part of a process that will modify the industrial structure of the country in the next 10 years,” said Francisco Cervantes, President of the Business Coordinating Council.

For its part, Mexico has effectively capitalized on both the global move towards nearshoring and the USMCA to consolidate its position as the top trading partner of the US for the first time in two decades. In 2023, according to the US Census Bureau, Mexican exports to the US have increased 4.6% since 2022, totaling US$475.6 billion. In contrast, Chinese exports to the US stood at US$427 billion, representing a 20% drop for the same time period. 

The USMCA Agreement, in force since 2020, has played a crucial role in this trend, as evidenced by significant investments in Mexico's manufacturing sector, which received foreign direct investment (FDI) of approximately US$17.49 billion in 2023, according to Statista. This trend has been largely supported by companies' efforts to avoid over-concentration of production in China. "The desire to diversify supply chains and mitigate the risks associated with reliance on a single country has led U.S. companies to look for viable alternatives," reports the Wall Street Journal.

The decision on the part of US-based AI technology firms to seek safer and more stable alternatives in the face of growing tensions and logistical challenges in the technology industry is poised to provide Mexico with another economic boost. This is evidenced by the increasing number of Taiwanese companies, several of which are among the largest producers of AI hardware, announcing their intention to increase investments in Mexico.

Foxconn, the Taiwanese electronics giant specializing in the development of AI hardware used by companies such as Amazon, Microsoft, and NVIDIA, recently announced an expansion of its AI server production in Mexico, with an investment of approximately US$27 million in Jalisco. This investment is part of a broader effort that has seen Foxconn invest around US$690 million in Mexico over the last four years. 

In addition, Taiwanese company Inventec, which specializes in AI software, is expanding its presence in Mexico. Arch Chen, Country Manager of Inventec in Mexico, shared at a conference in Taiwan that one of its clients, a leading US AI development brand, has chosen to focus its production process in Mexico after being impressed by the technology available in local facilities.

An alternative explanation for this shift, however, may also be due to difficulties in manufacturing cutting-edge equipment in China. This is because of US export bans on advanced chips for AI applications, imposed at the end of 2023 to allegedly "prevent China from benefiting from cutting-edge technology for military purposes". 

The increasing prominence of Taiwanese companies in Mexico serves as an early signal of forthcoming shifts in the country's industrial framework. As noted by Rossana Marin Cabrera, US News Editor at Infobae, this trend presents Mexico with an opportunity to solidify its position as a significant hub for advanced technology manufacturing in the region.

However, this move is not without its challenges. Issues such as crime, irregular water and electricity supply, and intense competition for skilled labor have been identified as potential hurdles. Moreover, differences in labor cultures between Mexican and Chinese workers present additional complexities, particularly concerning overtime practices and union involvement, as reported by the Wall Street Journal. Additionally, compliance with labor provisions outlined in the USMCA regarding factory construction adds another layer of consideration.

Despite these challenges, the trend towards AI production in Mexico is a clear sign of the country's growing importance in the global technology landscape. Bolstered by robust infrastructure and a strategically advantageous location, along with its extensive network of 14 free trade agreements encompassing 50 countries - the most of any nation worldwide - Mexico stands poised to seize this opportunity and emerge as a pivotal player in the AI industry.