Mexico could benefit from China’s exclusion from supply chains

TIT PIECES OF the metal we’re working on doesn’t look very special. But the factory BAP Aerospace, a chemical processing company from Tijuana, alludes to Mexico’s importance to global supply chains. These are components, from trays to door parts, for airplanes made by companies such as Boeing, Cessna, and Lockheed Martin. BAP applies surface treatments to parts, from submerging them in large vats of chemicals to meticulous handwork, before shipping them north.

Mexico has long been a hub for manufacturing. Toyota, a Japanese automaker, has had a plant in Tijuana since 2002. Honeywell, an American industrial giant, opened one in 2010. But the country is increasingly moving towards higher added value processes. It now represents 3 to 4% of aerospace imports in the United States, against 1.5% in 2010. However, China’s share, which was the same as Mexico’s ten years ago, is no longer than 1%. US sanctions against China and tariffs on Chinese products largely explain this change, as well as rising wages in China and the difficulty of doing business there. The trend has accelerated recently. Pandemic-induced border closures, rising transportation costs, and consumer demands for instant gratification have all prompted businesses around the world to consider shortening their supply chains.

“This is a golden opportunity for Mexico,” says consultant Helen Wang. The country has some natural advantages, including a long land border with the United States. Mexico is party to 23 free trade agreements. Wages in manufacturing are lower than in China. A survey this year by the US Chamber of Commerce in Shanghai found that a fifth of its members were considering moving some of their work out of China; more than a third of those considering moving looked to Mexico.

In Tijuana, the mood for many Mexican businessmen is optimistic. Several large companies have developed recently. Panasonic, a Japanese electronics company, opened a factory in 2018 to manufacture cables for the aerospace industry. Other companies are diversifying into logistics and distribution. In September this year, an e-commerce giant Amazon opened a warehouse there, although the company denied it would use it to serve customers in the United States.

In addition to aerospace, the manufacturing of medical devices and other electronic devices is booming. “We do things [in Mexico] it should have been done once in Japan or Germany, ”boasts Eduardo Salcedo, director of local operations at Össur, an Icelandic medical device company. “We have guys running a million dollar machine with their right hand and another with their left hand. “

Chain reaction

The result is that the wealthier part of the country, near the border, is even better off. “Northern Mexico is experiencing growth similar to that of Asia,” says Luis de la Calle, a consultant who previously worked at the Mexican Ministry of the Economy. Elsewhere, however, the picture is mixed. IDE rose from 3.1% of GDP in 2018 at 2.3% in 2019, against 3.7% in Brazil or 6.2% in Vietnam.

And despite its proximity to the United States, Mexico has its shortcomings. Business parks offer world-class facilities, but the infrastructure outside, from roads to ports, is poor, says de la Calle. Companies complain about problems obtaining inputs. Panasonic and Össur import most of the materials they need. Likewise, Össur almost pulled out of Tijuana because he couldn’t find a company to apply chemical processes to his products, which include prostheses. (BAP finally stepped in.)

Some of the causes of Mexico’s problems are beyond its control. When the US government talks about “near-shoring,” it really means onshoring, says Bill Reinsch of CSRS, a think tank in Washington. He can be protectionist in negotiations with Canada and Mexico. USMCA, the revised trade agreement concluded in 2020 between the three countries, is stricter than its predecessor, NAFTA– in fact, it was negotiated in part to preserve manufacturing jobs in the United States.

But Andrés Manuel López Obrador, the populist Mexican president, did not help. In 2018, his administration replaced one of the most business-friendly (albeit corrupt) governments in Mexican history, that of Enrique Peña Nieto. Mr López Obrador, on the other hand, seems to enjoy bewildering investors.

Shortly after taking office, he canceled a new airport for Mexico City, after diggers had worked for three years, at a cost of at least $ 5 billion. In 2020, he also ended a $ 1.4 billion investment in a new plant for Constellation Brands, an American brewer, which was nearing completion. It has weakened independent regulators by absorbing them into government or cutting their budgets.

Mr. López Obrador is also reversing the opening of his predecessor of the energy sector to private companies and favoring inefficient public companies. In addition to making electricity dirtier and less reliable, it sends off boring signals to investors. In November the boss in Mexico of General Motors (DG), an American automaker, said the company would not invest more in the country without laws promoting renewable energy. Earlier this year DG had said it would invest more than $ 1 billion to manufacture electric cars in Mexico starting in 2023. Last year, Tesla, a leading manufacturer of these cars, considered opening a factory in Mexico. Mexico, but instead opted for Texas. Although Tesla did not explain his reasons, Elon Musk, his boss, complained about the Mexican government shutting down some of his suppliers’ factories during the covid lockdowns.

Mexico risks “shooting itself in the foot” by not taking advantage of shorter supply chains, says Michael Camuñez, who has launched a series of meetings to strengthen economic ties between Mexico and the United States under the administration of Barack Obama. (Mr. López Obrador and President Joe Biden re-launched this “economic dialogue” in September.) Sadly, it’s Mr. López Obrador who has his finger on the trigger and, if his past treatment of foreign investors is any guide, seems likely to support it.

This article appeared in the Americas section of the print edition under the title “Missing Links”

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