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Nearshoring: What is the solution to the North American chip problem?

In recent months, a major topic in the global automotive industry has been the shortage of semiconductors, which has affected many of the world’s major markets. Inventories fell, putting a brake on the strong recovery in 2021 due to intermittent production line outages, or at least slowdowns. North America was no exception, but will there be any future relapses of solutions that help the region to avoid such a crisis?

There are various possible answers to that question, such as improved supply chain management and building larger inventories, but the latter option does not seem to be considered an efficient use of resources. A central feature of the changing North American landscape is the desire for chip manufacturing to take place within the region. For example, Intel recently announced a US $ 20 billion investment in an Ohio chip factory, while Samsung has promised US $ 17 billion to build a facility in Texas.

For the North American automotive industry, “nearshoring,” where suppliers are close to the destination market but not in the destination market, can be part of a long-term answer to recent problems. The Mexican government is working to encourage increased chip production within the border, and this topic is being discussed at a conference with the United States. However, so far, there have been few reports on specific moves to invest in production facilities in Mexico. Undoubtedly, Andrés Manuel Lopez Obrador’s administration can hinder progress as it builds on the reputation of irregular policy-making that appears to undermine investor confidence. Another obstacle could be the fact that a large amount of water is needed to produce chips. This is a relatively scarce resource in the northern state of Mexico, where many of the country’s car factories are located. Therefore, it is more likely that chip factories will be built in the water-rich southern states of Mexico. This would be of great benefit to areas that are generally much poorer than the northern part of the country.

Mexico has been in the semiconductor business for decades, but is in the final stages of manufacturing, primarily in chip packaging, rather than in the actual manufacturing of semiconductor wafers. In 2019, Mexico exported US $ 691 million in semiconductors, 71% of which was destined for the United States. However, this is only 4.5% of US semiconductor imports. Developing industry in Mexico makes sense because it shortens lead times and strengthens supply chain security, rather than relying on East Asian countries for chips as is now common. The low labor costs traditionally associated with Mexico are another obvious advantage.

None of this provides a quick fix solution. Building a new plant is a big task and it will take years for chips to be produced and incorporated into vehicles. By that time, the current crisis is likely to end and there is a risk that additional chip production capacity will not be needed. Nonetheless, as chips are set to become key components of vehicles and many other products in the near future, bringing their manufacture closer to home seems to be a worthwhile effort. Nearshoring: What is the solution to the North American chip problem?

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