Nearshoring to Mexico, crucial for the future of the automotive industry

Aligned to the trend of attracting companies through nearshoring to Mexico, the country's automotive industry has seen sustained growth in recent years, with the arrival of suppliers and manufacturers placing it as the seventh largest car manufacturer worldwide in 2023, according to the International Organization of Motor Vehicle Manufacturers.

The industry ranks among the most important in terms of demand for industrial space across various states, driven by trends in the sector to promote electromobility. However, recent actions by the United States, Mexico's main trading partner, pose a risk to this activity.

Mexican nearshoring and the Asian boost

Within the framework of the United States-Mexico-Canada Agreement (USMCA), the free trade agreement that includes the United States, Canada, and Mexico, products exported among the three countries are tariff-exempt if they meet specific criteria, including that at least 75% of the raw materials used are processed domestically.

The tariff exemption has accelerated the establishment of Asian companies in Mexico, aiming to enter the United States and compete in the most active market globally. However, the conditions of the trade agreement are prompting the U.S. to consider a review of its internal policies that could affect the dynamics of the Mexican industry.

Recently, U.S. President Joe Biden announced that the country might impose tariffs on vehicles imported from Mexico made by Asian companies if they do not meet the USMCA criteria regarding the proportion of raw materials used.

The reason for these restrictions would be national security concerns, potentially impacted by the use of Chinese-origin software and hardware in vehicles operating in U.S. territory, reported Expansión.

This statement aligns with previous remarks by the current president-elect, Donald Trump, who stated that the U.S. should aim to protect its domestic production.

Meanwhile, the Mexican Association of Private Industrial Parks (AMPIP) forecasts the arrival of about 100 foreign companies establishing themselves in Mexico by 2025, a trend that has been evident since the COVID-19 pandemic and the global supply chains reconfiguration thanks to nearshoring, with Asian automakers among the primary players.

Automotive sector: key to the Mexican economy

Faced with the measures that U.S. authorities plan to impose, Mexico's Ministry of Economy stated to the U.S. Department of Commerce that such a decision would mean “potential trade barriers, disruptions in supply chains, increased production costs, and a risk of reducing direct and indirect employment” in Mexico.

Automakers have also asked the U.S. government to consider extending the time before implementing these measures, after tariffs were set to increase in September on imports from China to the U.S., including a 100% tariff on Chinese-made electric vehicles and increased fees on batteries or minerals sourced from China.

Despite the outlook shaped by U.S. announcements about imposing limits, the automotive sector remains one of the main drivers of industrial activity in Mexico.

During the first half of this year, investments by foreign companies reached a record of over USD $6,090 million, according to the newspaper El Economista. This is significantly higher than the industry's historical average of USD $3,3808 million. Among the most important projects are:

• $115 million for a Harman auto parts facility (a U.S.-based company specializing in sound technology components and a subsidiary of South Korea’s Samsung).
• $942 million for an electromobility strategic center by Volkswagen (a German automaker).
• $427 million for a tire production plant by Sailun Group (a Chinese tire manufacturer).
• $407 million for a truck assembly plant by ELAM-FAW (a consortium between Electric Luxury Auto Mexico and FAW Group, of Chinese origin).
• $404 million for an auto parts plant by Nemak (a Mexican manufacturer specializing in aluminum components).

Consequences of Tariff Imposition for nearshoring in Mexico

Mexico believes that these actions violate established trade norms and will lead to increased production costs, considering:

• The need to change suppliers.
  
  
• The reconfiguration of existing supply chains.
  
  
• The availability of components and auto parts.

The U.S. measures are scheduled to gradually take effect starting in 2027. However, the Alliance for Automotive Innovation, which includes General Motors, Toyota, Volkswagen, and Hyundai, among others, requested additional time to allow the industry to adjust.

The Consumer Technology Association also requested extensions, asking for the deadlines: 2027 for software restrictions and 2029 for hardware to be pushed back two years. Honda Motor joined this request, citing the need for testing, validations, and contract updates.

The associations requesting extensions include several Asian and European automakers with assembly operations in Mexico, such as:

• Toyota (plants in Guanajuato and Baja California).
  
  
• Honda (plant in Guanajuato).
  
  
• Volkswagen (plants in Guanajuato and Puebla).
  
  
• General Motors (plants in Guanajuato, Coahuila, and the State of Mexico).
  
  
• Hyundai (plant in Nuevo León).

Within the context of nearshoring to Mexico, the automotive industry is one of the most important sectors for industrial demand, with investments totaling USD $ 7,802 million in the first half of 2023, according to Clúster Industrial digital publication. This investment is distributed as follows:

• 64.6% corresponds to Tier 1 and Tier 2 auto parts companies.
  
  
• 8.1% corresponds to OEMs (Original Equipment Manufacturers).
  
  
• 9.1% corresponds to automotive services and products suppliers.
  
  
• 6.4% corresponds to industrial parks and raw materials development.
  
  
• 3.6% corresponds to engineering development centers.

The automotive industry's growth, in line with Mexico’s nearshoring activities, drives the demand for industrial space in the country. To meet this need, Frontier Industrial offers Class A industrial facilities and customized projects (Build-to-Suit) in the most important regions for the Mexican industry.

Feel free to contact us if your company is looking to establish operations in Mexico.