The Semiconductor Shortage Is An Opportunity To Create A Win-Win Situation For Mexico And US

According to the Banco de México, Mexico's central bank, stoppages in the nation's automotive industry as a result of the global semiconductor chip shortage could cost Mexico up to 1% of the expected growth of the Gross Domestic Product (GDP) by the end of 2021.

The semiconductor shortage is hitting many industrial sectors hard, but the automotive industry has been hit much harder than others. This is because semiconductors are an indispensable component for auto manufacturers since they need them for a wide variety of in-vehicle systems such as security, navigation and entertainment. A combination of events such as the suspension of operations in factories and ports in Asia due to the pandemic and the increase in demand from the technology industry (especially cell phone companies, computers, and video game consoles) all led to a surplus of demand for this one component. This in turn has resulted in shortages in the auto sector.

For Mexico, the forecast is not good. In the most adverse scenario, the lack of semiconductors would cause a decline of 2.16 in the participation of secondary activities in GDP; 3.57 in the case of manufactures; and 10.9 in the manufacture of transportation equipment where the automotive industry is located. Despite being the seventh largest car manufacturer and the fifth largest auto parts producer in the world, the production in Mexico is the lowest it has been in a decade, and Mexican manufacturers stopped producing 493,410 vehicles from January to October 2021.

Consequently, the Banco de México Governing Board detailed that in August of this year, automotive exports were 16.76% below what was registered in February 2020, while non-automotive manufacturers were 8.25% above what was registered in the same period of 2020. Unfortunately, this has effects on the U.S. too because these two nations' economies are closely connected. Since the worldwide shortage of semiconductor chips is expected to last until 2023, we should think about how this is an opportunity to improve the situation now and for the future, in case other supply chain disruptions occur.

How this affects both Mexico and the U.S.

The semiconductor chip shortage represents a challenge for our region, Baja California, in particular, because the auto sector is one of our most important industries. Kenworth, Toyota and Hyundai are among the automotive manufacturers who have factories here because our location makes this a good base for exporting cars north of the U.S.-Mexico border.

Throughout 2021, numerous factories have had to temporarily shut down due to the chip shortage. Some of these factories are full of cars that are almost complete but missing only the semiconductor chips. However, without the chips, they cannot be finished and shipped out. The automotive manufacturing sector, which employs about 946,000 workers at the national level, has lost at least 16,000 jobs since late 2019, according to data from the Asociación Mexicana de la Industria Automotriz (AMIA).

This is a problem for the auto industry in the U.S. as well because the U.S. imports about 15 percent of its cars from Mexico. Car sales in the U.S. have been dropping because of the chip shortage, and the average wait time for new cars is between four to six months and up to 12 months for some models.

Long waiting times are not the only problem. Anything that is bad for Mexico’s economy is also a problem for the U.S. economy because the two countries share an economically interdependent relationship. This is especially true with the auto and auto parts industries.

Avoiding this problem in the future

What can be done about this? There are two perspectives to this question. In the short term, the only thing that can be done is for chip and auto manufacturers to try their best to produce what they can with the current limitations. But the long-term is where we can find opportunities for the future.

70% of the world’s semiconductor chips are manufactured in Asia, and most of this is in China, Taiwan and South Korea. From the perspective of the auto industry and tech supply chains in general, relying so much on this region is becoming riskier. Pandemics and increasing demand are not the only things we need to be worried about. More and more, there are other kinds of disruptions being caused by problems such as droughts and natural disasters. If chip production in Taiwan were to stop for one year, for example, this would cost the electronics industry half a trillion dollars in lost revenue.

A possible solution that is being considered in Mexico right now is nearshoring, or moving production of semiconductor chips to Mexico and especially the Baja region, which would be beneficial for both Baja specifically and Mexico overall in terms of job creation, economic recovery, and insurance against future supply chain disruptions. This would be a big advantage for the U.S. as well. Since Mexico is so close, nearshoring chip production south of the border would significantly reduce logistics time. Currently, the Mexican government is pushing for this as a solution.

The challenges of nearshoring

There are some challenges with this, however. The production of semiconductor chips requires a lot of water and electricity, which can be a problem. The drought in Taiwan has exposed the extremely large amounts of water needed for semiconductor chip manufacturing, and Mexico is in the middle of a serious drought. The Baja region, specifically, is also struggling with the shortage of water. Chip manufacturing also requires a lot of electricity, which also requires water.

One possible approach may be to focus the nearshoring in Mexico's southern states, where more water is available. This is one of the ideas that were considered at the recent High-Level Economic Dialogue (HLED) in Washington, D.C., according to Mexico’s Minister of Economy, Tatiana Clouthier. If this happens, it could mean that the Baja region might miss out on some of the nearshoring. However, it would still be a win-win for Mexico overall and the U.S. as well as for the auto industry and consumers. Costs would be lowered and risks to future supply chain disruptions would be reduced.

The semiconductor supply chain crisis shows that we live in an increasingly complex and connected world. The auto industry is around 3% of the world's economic output, and it is higher in areas with a lot of auto manufacturing such as Mexico, Germany, Japan, South Korea, and parts of the U.S. A shortage of one item in one region, Asia, currently leads to economic effects around the world. Because of this, we need to think and communicate outside of our own industries. The semiconductor, auto, water, and electricity industries all need to forecast and communicate about what they need, what they can supply, and how much. We need to reach across sectors and work together to move away from just-in-time supply chains so that, in the future, we can avoid the same problems that we are experiencing now.

(Bertha Martinez-Cisneros is the coordinator of the Degree in International Logistics at CETYS)