Amid the ongoing AI surge and supply chain's decoupling from China, Mexico has emerged as a promising alternative destination for electronic manufacturers.
In response to the US promotion of nearshoring strategies, Mexico has experienced a notable uptick in investment from Taiwan. Simultaneously, Taiwanese firms have begun relocating some of their AI production capacity from China to Mexico.
This wave of investment into Mexico finds its impetus in the United States-Mexico-Canada Agreement (USMCA) according to a report by The Wall Street Journal (WSJ). The USMCA replaced the North American Free Trade Agreement (NAFTA) upon its enactment in July 2020.
Clients demand suppliers comply
Sources cited in the report indicate that major US server manufacturers such as Dell and Hewlett Packard Enterprise (HPE) are requesting suppliers to relocate some server and cloud computing equipment production to Southeast Asia and Mexico. Such moves are taken to reduce reliance on China, diversifying and strengthening the resilience of the supply chains.
Foxconn, Pegatron, Wistron, Quanta, Compal, Inventec, and other electronics companies have production facilities in Mexico. They are mainly concentrated in areas near Texas, such as Ciudad Juarez and Monterrey.
In February 2024, Foxconn announced a US$27 million investment to acquire land in the southwestern state of Jalisco, Mexico. The land acquisition is to expand the production of all server-related products, including AI servers.
Foxconn stated that it had invested US$690 million in Mexico over the past four years.
Once upon AI in Mexico
Sources claim that Foxconn's Mexican factories produce AI servers for clients such as Amazon, Google, Microsoft, and Nvidia. Young Liu, chairman of Foxconn, stated in an online conference in August 2023 that Foxconn holds over 70% market share in upstream supply chains such as GPU modules and motherboards.
Inventec, which produces AI and other functional servers for US tech companies, has recently expanded its presence in Mexico.
Arch Chen, regional manager of Inventec's Mexico plants, cited an example of an American client involved in AI development who initially wanted to manufacture in the US but ultimately chose Mexico after visiting factories there. With 14 free trade agreements signed with 50 countries under its belt, Mexico is the world's leading and prime destination for automotive manufacturers from Asia, Europe, and the US looking to set up shop.
Notably, Mexico ranks as the fifth largest automotive exporter globally with EV makers like Tesla also considering setting up factories in Mexico. In turn, Taiwanese companies are also investing in central and southern Mexico to supply the automotive industry.
Nevertheless, numerous challenges lie ahead. These include high crime rates, insufficient water and electricity supply, and competition for high-tech assembly talent.
Taiwanese manufacturers told WSJ that they must hire private security personnel to prevent local gangs from robbing factories of chips and valuable equipment.
Additionally, compared to Chinese employees, Mexican workers are less inclined to work overtime. With most of the workers unionized, companies are required to comply with labor regulations under the USMCA.
Mexico In, China Out
James C. F. Huang, chairman of the Taiwan External Trade Development Council, stated that North American countries hope to replace Asian imports with Mexico. "With the support of the USMCA, Mexico is expected to become the most important manufacturing hub", Huang adds.
Data from the US Census Bureau indicates that in 2023, Chinese-made products accounted for 13.9% of US imports, down from 21.5% in 2015. In contrast, Mexico's share rose to 15.4%, surpassing China as the largest importer to the US.
Taiwanese officials estimate that there are approximately 300 Taiwanese companies in Mexico, employing a total of 70,000 people. According to Mexican government statistics, bilateral trade between the two has exceeded US$15 billion in 2023.
