The spread of the coronavirus pandemic has caused the disruption of entire global supply chains. This is particularly true in the automotive industry. In the face of the crisis in the Far East, some auto parts manufacturers are moving to transfer production from China to Mexico.
Because the closure of Chinese manufacturing plants has deeply impacted automotive companies’ capabilities, and because of the benefits to manufacturers afforded by the recently implemented United States-Mexico-Canada (USMCA) trade agreement, manufacturers around the world are motivated to accelerate changes in their supply chains. In an effort to rely less on Chinese assets, Mexico has become a very attractive place to invest.
A movement to transfer production from China to Mexico
Mexico’s automotive industry has been attempting to replace imports of Chinese components with local production for over more than a decade with little success. China has been successful in offering unrivalled industrial scale to manufacturers, which made the country difficult for foreign investors to resist. Over the past twenty years, China has become a veritable factory of electronic components for the automotive industry, as well as dozens of other important parts.
As an example of this, the steering gear components that are incorporated into the Jeep Wrangler that is manufactured in Toledo, Ohio are built 7,500 miles away in a factory in Wuhan, China. Wuhan is the epicenter of the coronavirus outbreak and is known as the “Detroit” of China. The supply of these parts has been interrupted as a result of the pandemic.
Additionally, Audi recently announced that it would suspend production for three weeks in the face of a shortage of manufactured components supplied from the Far East. In the face of such interruptions in their supply chains, OEMs are now encouraging some of their suppliers to transfer production from China to Mexico.
A Mazda auto parts supplier recently acted to transfer production from China to Mexico
In China’s economically important Jiangsu province, where international supply chains have been heavily affected by the coronavirus outbreak, an important automotive supplier to the Japanese automotive manufacturer, Mazda, has moved the production of parts to Guanajuato, Mexico in order to maintain its customer’s ability to produce its vehicles. Mazda is one of Japan’s smallest automakers behind OEMs such as the Toyota Motor Corporation and Nissan.
To address the production shortage of a component used in the exterior finish of the Mazda3 and CX-30 models, the supplier increased the output of the part at its plant in Mexico by 50%. This was done at a cost to Mazda of US $5 million. Although product substitution such as this can be expensive, Mazda would have incurred a significantly greater expense by not taking countermeasures to avoid an interruption of in the production of its passenger vehicles.
Although the transfer of production from China to Mexico provided a solution for Mazda and its auto parts supplier, there is still a recognition of the fact that interruptions in the shipment of parts from China to Mexico could cause increased difficulties for the Mexican automotive industry. Therefore, moving production from the Far East back to North America makes economic and logistics sense.
The coronavirus could make Mexico a world leader in Manufacturing
Although it is still too early to calculate the effects of the coronavirus on the Chinese economy, there are those that affirm that, beyond the manufacture of auto parts, other industries with opt to transfer production from China to Mexico. Some analysts, such as Zenet Raposa of Forbes, envision that possibility that “The new COVID-19 coronavirus will end up being the final curtain on China’s nearly 30-year role as the world’s leading producer of manufactured goods.
Raposa’s main argument is that Chinese manufacturing had already been losing ground prior to the pandemic’s outbreak, but the world had not yet found a suitable replacement for many of the production activities performed in China.
After speculating that the crisis in China may last longer than many would like to accept, Raposa points out that the coronavirus will most likely result in the opening of a significant window of opportunity for Mexico. In addition to the manufacture of auto parts, other suppliers, such as those to the country’s electronics industry, may opt to transfer production from China to Mexico. A full forty percent of the components used in Mexico’s electronics industry are sourced from China.
Auto parts manufacturers and other companies that wish discuss the transfer of production from China to Mexico should contact the Tecma Group of Companies.