The current Mexican president’s Chief of Staff has recently asserted that the disruption of production activities in China, as well as of the global supply chain, by the COVID-19 virus can ultimately result in an economic opportunity for Mexico and its manufacturing base.
President Andrés Manuel López Obrador’s Chief of Staff, Alfonso Romo, recently asserted that he believes that many companies that are based in the United States will act to reduce China’s importance in their global value chains over the medium term. This action represents a tangible economic opportunity for Mexico due to the nation’s proximity to its northern neighbor and the world’s largest market and, also, because of the recent signing of the United States – Mexico – Canada Free Trade Agreement (USMCA). In addition to these considerations, US firms have a history of successfully operating manufacturing plants in Mexico since the 1960s.
A supply chain nearby is an economic opportunity for Mexico
The current state of affairs, however, is that China is the point of origin of approximately 30% of the total of intermediate goods that are consumed in global manufacturing value chains. In the case of US manufacturing production, this figure increases to stand at a significant 50%. It is now abundantly clear that that there is an increased risk in concentrating more plants and operations in the Far East. The supply of much-needed goods can be deeply impacted by pandemic emergencies, as well as by natural disasters and even political-commercial disputes and other considerations. Therefore, a supply chain that is closer to home is an economic opportunity for Mexico.
Because of this, the disruption of production processes in Asia can affect important industries. For example, the spread of the coronavirus has already had a concrete impact upon Mexico’s electronics industry, as imports of Chinese components have been delayed or even canceled due to the closure of factories in the Asian country.
On the other hand, the Mexican automotive industry has not yet suffered the negative effects of the virus. If the situation continues to drag on, however, negative consequences will inevitably be felt. Lower production could threaten some of the nearly one million direct and three million indirect jobs that the industry is the source of in Mexico.
In short, the ultimate effect of the coronavirus on the global and Mexican automotive industry depends upon the speed and efficiency with which the collective contagion is contained, or, better yet, on the timely development of a vaccine that prevents and/or cures the disease.
Invest in Mexico to limit supply chain risk
The amount of risk for each individual company is related to the degree to which they are dependent upon Chinese suppliers. According to Romo, “the world has come to realize that suppliers in the Far East can be unreliable, and, as a result, Mexico becomes a logical destination for foreign direct investment in manufacturing.”
In light of the economic opportunity for Mexico that the current state of fairs can represent, Alfonso Romo explains that there is an effort being made by the Mexican federal government to unravel bureaucratic processes with the goal of further incentivizing foreign direct investment in Mexican manufacturing. As an example of this effort, the country’s legislature recently approved an infrastructure plan in which 78 projects were approved. Action is currently being taken on 72 of these initiatives.
Arturo Herrera Gutiérrez, head of Mexico’s Ministry of Finance and Public Credit (Hacienda) has recently commented that to deal with the coronavirus, the Mexican Federal Government is working to address two main aspects of the current situation: the health and well-being of the nation’s citizens and the potential economic impact of the global pandemic on Mexico.