“As a result of the covid, many global value chains are going to form regional chains for reasons of efficiency, profitability and also for safety,” said Ernesto Acevedo, the country’s deputy economy minister. “Mexico is going to take advantage of this moment.”
U.S. companies were beginning to shift some production away from China before anyone had heard of covid-19. Aside from trade tensions, firms complained about intellectual property concerns, rising labor costs and political instability. In February, the consulting firm Gartner found that 33 percent of global supply-chain leaders had either shifted sourcing and manufacturing activities out of China or planned to in the next three years.
The question, then, is where those companies will relocate. Countries across Southeast Asia are attempting to attract them. Japan set aside $2.2 billion this year for the effort. President Trump made his own pitch of sorts on Twitter last year, ordering U.S. firms to “immediately start looking for an alternative to China, including bringing your companies HOME and making your products in the USA.”
Enter Mexico, with its own message.
Since the implementation of the North American Free Trade Agreement in 1994, Mexico’s role in the U.S. supply chain has grown, evolving from an exporter of textiles to a leading automobile and aerospace manufacturer. But its growth has been nowhere near as impressive as China’s. By 2015, China owned 20 percent of global manufacturing; Mexico’s share was 2 percent.
Now, Mexican President Andrés Manuel López Obrador sees increasing exports as the primary way to extract the country from a deepening recession. Even before the coronavirus pandemic, the economy was stagnating. The International Monetary Fund expects the country’s GDP to decline this year by 10.5 percent.
López Obrador visited the White House last month to tout the new U.S.-Mexico-Canada trade deal, a trip his aides said was intended in part to spur investment in Mexico. In Washington, López Obrador signed a declaration calling the agreement “the ideal instrument to provide economic certainty and increased confidence to our countries.”
Much of that trade, his administration believes, will come from companies relocating from China. But economists say Mexico’s efforts to lure firms from China are hamstrung by López Obrador’s own policies, which have created an uncertain investment climate. Foreign direct investment in Mexico fell by 16.1 percent in 2019.
Those analysts point to the closure of a $1.4 billion brewery owned by Constellation Brands in the border city of Mexicali that was nearly finished; a regulatory crackdown on private solar and wind generators, and López Obrador’s suggestion that he might reverse the country’s energy reforms.
“Mexico in some ways is its own worst enemy,” said trade consultant Eric Miller, president of Rideau Potomac Strategy Group. “On paper, it should be doing better than it is, but there’s real concern about the predictability of the investment climate.”
In attempting to convince firms to relocate from China, the Mexican government is emphasizing the value of its proximity to the United States. Officials are chasing some of the world’s biggest companies, such as Apple, Google and Microsoft.
At a news conference last month, Economic Minister Graciela Marquez held up her cellphone.
“There’s no reason why this phone has to be produced in China,” she said. “There’s an enormous opportunity to produce them” in Mexico.
Reached for comment, the Chinese Foreign Ministry said it has a friendly and cooperative relationship with Mexico, and noted joint efforts against the coronavirus and Mexico’s growing exports to China.
“China has a huge market with a population of 1.4 billion, a well-established industrial supporting system and an improving business environment,” the ministry said in a statement. “We believe that smart foreign businesses will never give up the Chinese market.”
“China will continue opening to the world,” the ministry said, and “is willing to work together with other countries including Mexico to maintain a smooth supply chain.”
Some companies have already made the move.
Over the past two years, Los Angeles-based Motorcar Parts of America has invested more than $30 million in a Tijuana production facility to remanufacture devices including alternators and starters and brake power boosters — which the company used to make in China.
“I saw a number of years ago a number of big inflationary moves in the Chinese economy and started to get a little uncomfortable with situation there,” CEO Selwyn Joffe said. “I thought we should balance where we do business and our supply chain.”
The company maintains a footprint in China, which Joffe says is still a cheaper place to produce.
“But stability and government relations seem to favor Mexico,” he said. “Mexico is more expensive, but we weigh that with the accessibility of the marketplace.”
At the outset of the pandemic, the Chinese supply chain was hit badly. In the first three months of the year, China’s exports dropped 11.4 percent compared with the same period last year. The U.S. Department of Homeland Security claimed in May that Chinese officials “intentionally concealed the severity” of the virus so they could stock up on medical supplies.
Mexican officials hoped to distinguish themselves by keeping their supply chains with the United States open, even as cases in the country peaked. Mexico continued to export ventilator parts and medical equipment north of the border as its own hospital suffered from shortages. Labor activists said workers were pressured to stay on the job even as co-workers contracted the virus. But Mexican officials believe their supply chains proved to be reliable through the crisis.
“I would say in general terms Mexico performed relatively efficiently, and we can see that because it has continued to be a major supplier to the U.S.” said Acevedo, the deputy minister
Still, in April, as Mexico’s caseload increased, large corporations and the U.S. government complained that Mexican factories were being shuttered without explanation, disrupting supplies needed for aerospace equipment and medical gear. Ellen Lord, the U.S. defense undersecretary for acquisition and sustainment, called Mexico’s supply-chain problems “somewhat problematic for us.”
Joffe said supply-chain problems during the pandemic in Mexico and China were equally disruptive to his company.
Mexico’s Economy Ministry had planned a road show to meet with companies across the United States about shifting production south of the border. That has been canceled because of the pandemic. Mexican officials have instead been holding video calls with CEOs.
“The idea,” Acevedo said, “is ‘Consider Mexico as a place to begin or expand your businesses.’ ”
Yuan Wang in Beijing contributed to this report.