USMCA's rules of origin and the pandemic have been catalyzers for global players to conduct nearshoring practices across the supply chain. Mexico has naturally become a preferred destination for relocations, expansions and new ventures. In this webinar, industry leaders discuss this phenomenon by addressing OEMs and Tier 1 efforts to expand or relocate their operations to North America, alongside part of their supplier base, the outlook for Mexican suppliers after the pandemic, as well as innovation and digitalization trends.
Regionalization Is the Name of the Game
USMCA's rules of origin and the pandemic have been catalyzers for global players to conduct nearshoring practices across the supply chain. Mexico has naturally become a preferred destination for relocations, expansions and new ventures. Industry leaders addressed this phenomenon during the webinar, “Supply Chain Relocation and Development in North America,” hosted by Mexico Business News and sponsored by Iberdrola and American Indusries. Industry leaders from Brose, Zacua, American Industries and KPMG discussed OEMs and Tier 1’s efforts to expand and relocate their operations and the advantages Mexico presents.
“Regionalization will occur at a faster pace in this decade than in the previous one. From our automotive global executive survey, industry leaders believe that within the next 10 years, less than 5 percent of the total production is going to be located in Europe. From 2010 to 2019, the share of global car production decreased from 18 to 15 percent in Europe and today is around 14 percent. We are going to decrease that to 5 percent,” said Oscar Silva, Leader Partner Global Strategy Group of KPMG.
“Entire industries are transforming their supply chain, making them more resilient, particularly this year with the events related to the pandemic originated in China,” said Alejandro Lara, Board Director of American Industries.
Over the last decade, the automotive industry in Mexico benefited greatly from relocation practices. Over a 10-year period, Kia, Toyota, Audi, Mazda, BMW, JAC and Fiat – thanks to the creation of FCA group in 2014 – arrived in the country with a long line of suppliers behind them. Vehicle production grew by 66 percent between 2010 and 2019 to reach 3.75 million units in 2019, while exports grew 188.4 percent in value to reach US$11.8 billion as of December 2019.
Brose was one of the companies that chose to expand operations in the country over the last decade and due to the ongoing circumstances, it is looking forward to do so again. “After Brose decided to invest its first plant in Mexico, we have now three additional facilities, two in Queretaro and one in Puebla,” said Manuel Guevera, General Manager at Brose El Marques Queretaro Plant, the first plant of the German supplier to be established in Mexico.
Zacua, the first Mexican brand of electric vehicles, also points out the importance of technology transfer to increase Mexican capabilities. “Despite Mexico being really well-known in ICE production, the country is relatively new in terms of electromobility. We are transferring our R&D operations to China to develop the technology the Mexican market needs,” said Nazareth Black, CEO of Zacua and one of the Top 8 female leaders in the automotive sector and Top 200 in the Latin American region.
KPMG is certain that should a second wave of investments take place in Mexico, Tier 2 companies will be the primary focus. “We are seeing a lot of renewed interest in relocating from China, Europe and US to Mexico. Ten years ago, a lot of suppliers came following the OEMs and we believe there is going to be another wave focused on Tier 1 and Tier 2, which we need a lot as we are lacking that strength in the Tier 2 segment,” he said.
Black highlighted the role and opportunities for local suppliers. “Mexico has talent and we know how to work. Zacua is the proof that we can transfer technologies, through Mexican talent, for other companies to take part in development. The first element is to take the risk, understanding our capabilities. We need to build all the elements needed for Mexico to transfer its capabilities toward electric vehicle technology through strategic partnership,” she said.
Brose acknowledges that relationships with OEMs are essential for suppliers to come to the country. “OEMs strategies and our alliances with them are needed for suppliers to keep our leadership in the market,” he said. During the webinar, Guevara announced that Brose is transferring operations from Detroit and Germany to Mexico. “We are really happy to bring these processes to Mexico because of three elements: we are close to the US and to South America, there is high-level education and locals are eager to thrive,” he said.
As one of the leading companies in helping manufacturing players to transfer operations to the country, American Industries highlights the stages in which this process ought to take place. “It is very important to understand the project, what is its scope, what are the company’s objectives and the corporate criteria. The best option is to initially bet on a shelter service provider. You bring your manufacturing expertise and the shelter supplier provides a comprehensive package of administrative services needed to ensure the success of your business in Mexico,” he said.
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Making Nearshoring Opportunities a Reality
Q: What does American Industries’ client portfolio look like?
A: We have over 40 clients that manufacture automotive products as their main activity. Close to a third of our client portfolio comes from the automotive sector. In addition, American Industries is working with over 30 companies that are looking to establish operations in the country.
Our most important partnership is with our clients in supporting their growth and legal certainty in Mexico while daily assuring successful operations in the country. Our clients are the most important referral for our success. We also need to partner with the authorities so we can provide legal and regulatory certainty to our manufacturing clients in Mexico.
Q: What are American Industries’ complementary services to support customers venturing into a new country?
A: There are different ways in which we support our customers. American Industries helps manufacturing players with their site selection process by evaluating how much it will cost to operate in Mexico and what are the advantages of different locations for their project. We also provide shelter services. Through ongoing administrative services, we allow our foreign manufacturing clients to focus on production, while we take care of human resources, accounting, fiscal and customs tasks. Finally, we also offer real estate with AAA industrial manufacturing spaces that are available for lease, either build-to-suit or inventory buildings.
Our client base in shelter services totals 58 clients with more than 16,000 employees between them. Our services are provided in the most important manufacturing regions in the country, including Ciudad Juarez, Chihuahua, Monterrey, Queretaro, Guanajuato and Guadalajara.
Q: What are your views on the nearshoring opportunities created by USMCA?
A: This is a great opportunity to attract more investment to North America because OEMs need to comply with rules of origin requirements, which will reward those suppliers that can manufacture in North America. Mexico is a very competitive option for them. In fact, we are working with several Chinese companies that are inquiring about Mexico as their manufacturing base for the Americas. This is a very important opportunity to further develop our Mexican manufacturing sector through Chinese investments.
Q: Which country, regions or states could take the most advantage of nearshoring opportunities?
A: We believe Mexico is the country best-suited to take advantage of the nearshoring opportunities in North America due to our competitive cost, legal certainty provided by USMCA and strong experience in the sector. We consider that all manufacturing regions in Mexico offer distinctive strengths for potential investors to evaluate. The most common elements when evaluating a new location are the distance to the end customer or suppliers, labor availability and security, which has become a key variable in the equation.
If we look at the different ways a company can establish operations in Mexico, namely greenfield projects, joint ventures and acquisitions, incoming companies usually prefer to establish by themselves because it is often difficult to find joint venture candidates or acquisitions targets. However, if they do want to explore some of these options, we provide guidance with the support of national and local business chambers and authorities.
Q: How does American Industries provide flexible options to clients to better face the pandemic?
A: We are continuously in touch with our clients, helping them to set up measures to reduce risks for all employees. We have taken advantage of some of the best practices from our international clients. For example, our Chinese clients were ahead of the curve in some of their safety practices and we have replicated those lessons and recommended similar measures to other clients.
Q: How has the pandemic influenced American Industries' strategies?
A: We believe that Mexico has become an even more important potential destination because the pandemic has created an urgent need to accelerate the nearshoring trend as travel to Asia has become more difficult. American Industries is gearing its efforts to taking advantage of this trend. In a post-COVID-19 world, we will continue to support the establishment of a resilient North American supplier base through our solutions for manufacturing companies looking to establish in the country.
American Industries is a Mexican company with over 40 years of experience supporting companies in transferring their manufacturing operations to the country. The company offers site selection, shelter services and real estate in Mexico’s top manufacturing destinations
What is Nearshoring and How Can Mexico Take Advantage of It?
Nearshoring has become a buzzword when talking about the automotive supply chain. Learn more about how Mexico can take advantage of the unique opportunities brought by USMCA and the pandemic.
Globalization is taking a break or is at least changing its ways. This is particularly true for the automotive value chain, which is observing a more regional approach as companies are establishing production closer to where demand is. The COVID-19 pandemic has proven how feeble off-shored production can be, while at the same time boosting advanced manufacturing technologies.
Offshoring meant to take production outside advanced economies, taking advantage of cheap labor, tax incentives, proximity to raw materials and less stringent regulations found in developing countries. There is also reshoring, which literally implies taking production back to the country where the company is originally from, in most cases the US or Western European countries.
Nearshoring meets both terms halfway. Advanced economies are bringing production closer to home or to where demand is by taking advantage of the opportunities their neighboring developing economies present. This is the case for the US and Mexico, as well as Western Europe with Eastern Europe and Turkey, for instance. The practice is not new but it has been reinforced by the current global conditions. While there were still companies that relied con global suppliers to meet regional demands, trade wars and the COVID-19 crisis are making the regional approach more attractive.
The Roaring Decade for Mexico's Automotive Sector
Over the last decade, the automotive industry in Mexico benefited greatly from nearshoring practices. Over a 10-year period, Kia, Toyota, Audi, Mazda, BMW, JAC and Fiat – thanks to the creation of FCA group in 2014 – arrived in the country with a long line of suppliers behind them. Vehicle production grew by 66 percent between 2010 and 2019 to reach 3.75 million units in 2019, while exports grew 188.4 percent in value to reach US$11.8 billion as of December 2019.
According to Mexico's Ministry of Economy, FDI in the sector accounted for US$7.4 billion in 2019, after reaching a peak of US$7.8 billion in 2017. Despite the pandemic, FDI in 1H20 showed similar levels to 2012 which can be a good sign. Following the North American Industry Classification system, the two greatest contributors to these numbers are industry group 3361 and 3363, motor vehicle manufacturing and motor vehicle parts manufacturing, respectively. According to Oscar Albin, Executive President of INA, "as vehicle manufacturing volumes ramp up, they have a spillover effect in the auto part sector."
New Driving Forces
"USMCA and the COVID-19 pandemic will take Mexico to nearshoring practices," told former Executive President of AMIA Eduardo Solís to Mexico Business News. On the one hand, USMCA's enforcement on July 1 set stringent rules of origin that required greater Regional Value Content (RVC), while creating a new Labor Value Content rule (LVC), as well as steel and aluminum requirements. On the other hand, COVID-19 showed the vulnerabilities of production lines that relied greatly on offshored suppliers, particularly from Asia.
"We must not confuse the decrease in demand caused by COVID-19 with the strengthening of the North American region through USMCA. Although both will foster the transfer of operations to closer locations, USMCA’s new rules of origin will imply a restructuring of OEM operations," says Solís.
Technological development, meaning Industry 4.0, is also pushing companies to move production closer to where demand is to manage them more efficiently. In its report Globalization in Transition: The Future of Trade and Value Chains, McKinsey notes that "as automation changes the balance of capital and labor, many multinationals are considering investing in new production capabilities closer to end consumer markets to tighten coordination of their supply chains and reduce shipping times. A more automated and digital form of manufacturing no longer requires a large, low-skill workforce."
Automotive cluster leaders from Mexico's main manufacturing destinations agree that the pandemic is accelerating technological trends further, which indirectly is also driving companies to nearshore their production. "Digitalization strategies are being embraced on the basis of a cost-benefit analysis," told Tarsicio Carreon, President of Chihuahua Automotive Cluster to Mexico Business News.
How Can Mexico Take Advantage of Nearshoring?
The scenario is set for the industry to continue growing and global suppliers are aware of that. "The automotive industry is changing and the role of Mexico in the sector continues to be really advantageous," told René Schlegel, President of Robert Bosch México to MBN. As the US-China war continues, it could be the Asian the country the one that leads some of the major investments into the country.
"Yanfeng is relatively young in North America but we are expanding our presence in the region. Our interiors division has cleared the path for other divisions to arrive in the region through Mexico," told Lourdes Cobos, Operations Director of Yanfeng Automotive Interiors Mexico to MBN, one of the largest Chinese automotive suppliers.
Consulting firm savills, in charge of the Savills' Nearshoring Index, presents a ranking of potential nearshoring countries. The index takes into account manufacturing labor costs, electricity costs and infrastructure and trade openness. Mexico is ranked 15th, largely due to cheap labor costs while offering greater opportunity areas in infrastructure and trade openness.
The major challenge for the country remains in providing certainty for incoming investors. As noted by Daniel Hernández, Director General of the Queretaro Automotive Cluster, "the scenario is most favorable to continue growing. The pandemic did not change the state’s assets for incoming companies. Having said that, the market needs the right signs to generate trust, both at the federal and the global level."
Different regions in the country can present particular advantages depending on what the company is actually looking for. At the same time, there are emerging regions within the country that want to take advantage of nearshoring opportunities. Jalisco, for instance is strongly betting on developing and bringing suppliers focused on electric vehicles, while Tlaxcala is taking advantage of its location near Volkswagen and Audi plants in Puebla.
All in all, it is clear that Mexico will continue to be a relevant player in the automotive supply chain. USMCA’s rules of origin, greater advanced manufacturing processes rushed by a pandemic and ongoing tensions between the US and Asian markets are presenting a unique scenario for another roaring decade. The country ought to send the right signals for companies to consider Mexico in their investment plans to not let this opportunity slip away.