Since Congress passed the CHIPS and Science Act one year ago, there has been much talk about how to shift electronics and computing supply chains away from China. In addition to the rapid buildup of domestic manufacturing capacity spurred by the CHIPS Act tax credits and incentives, the intensification of U.S.-China tensions and the imposition of export controls are encouraging many multinational technology companies to relocate production and assembly outside China. Until now, this has meant a greater emphasis on other parts of Asia: multinational firms are increasing their reliance on countries such as Vietnam and Thailand that already have a deep ecosystem of electronics suppliers, significant know-how, and low-cost workforces; and they are also investing more in India, which is seeking a prime position in the future of the electronics industry.
The focus on diversification within Asia, however, has meant that Mexico—America’s top trading partner and arguably its most important manufacturing partner—is being largely overlooked. This is a missed opportunity. The Western Hemisphere deserves more focus as Washington seeks to better secure the broader electronics supply chain. Building regional capacity offers a way to limit Asia-focused supply risks and, in the event of a major U.S.-China conflict, an intrahemispheric supply chain would be much less susceptible to interference. Mexico would be a key place to start.
Although Mexico is not known for high-technology production, it is a critical player in major advanced manufacturing sectors such as autos, aerospace, and medical devices. The country already hosts several semiconductor assembly and packaging plants and has a high density of chip-intensive end users. Moreover, Mexico and the United States have a strong network of manufacturing relationships that could be readily adapted for some segments of the semiconductor supply chain. And its comparatively low-cost workforce is cheaper than China’s, by some measures, making investments in the country attractive for assembly work that is too costly to undertake in the United States. At the same time, unlike Asian partners, Mexico has a deep and long-standing free trade agreement with the United States that has withstood political controversy and presidential administrations of both parties. It also shares a 2,000-mile border and 48 land crossings, making it less vulnerable to logistical disruptions.
Granted, there are significant hurdles to making Mexico a bigger player in supply chains for chips and advanced technologies. The country lacks its Asian rivals’ existing networks of high-technology firms. Until now, investments in the sphere have been sparse. To change this situation, Mexican political and business leaders need a clearer strategy for attracting semiconductor investment. The dividends, both for Mexican industry and for U.S. supply chain security, could be significant. Today’s large-scale shift away from China-focused assembly operations offers a once-in-a-generation opportunity to create a more fully integrated North American semiconductor and electronics supply chain.
MADE IN ASIA
Despite the United States’ major involvement in many segments of the chip industry, there is at present hardly any semiconductor packaging or assembly in the country and very little anywhere else in the Western Hemisphere. The United States maintains a leading role in R&D-intensive segments of the semiconductor industry, including chip design and manufacturing equipment. The CHIPS Act is intended to increase the amount of chip fabrication in the United States. Yet neither the United States nor any country in the Western Hemisphere plays a major role in the final stages of the chip manufacturing process—assembly, testing, and packaging (ATP)—in which semiconductors are tested and assembled into sophisticated packages. The Western Hemisphere also does relatively little assembly of advanced electronic systems that require a lot of chips, such as consumer electronics.
As of now, the United States has only three percent of the global semiconductor ATP market share—a number that will only grow modestly from CHIPS Act investments in the segment. It has almost no market share in printed circuit boards, which are used to connect chips to external devices, and a minimal share in other critical but often low-tech electronic components. Canada is home to a small ATP industry that specializes in advanced packaging, a set of sophisticated techniques used to increase performance, but its market share is also small. As for Mexico, the country is home to a mere four ATP facilities, operated by chip makers Texas Instruments, Infineon, and Skyworks (which operates two). By contrast, Asia commands a whopping 81 percent of semiconductor ATP activity, including 38 percent in China. China alone accounts for a staggering 80 percent of global printed circuit board production.
Consider the smartphone. Its primary chips—which are also among its highest value-added components—are often manufactured in Taiwan and Korea. These are typically sent for packaging in China, Taiwan, or Southeast Asia before being assembled in China into a smartphone. The processes of semiconductor packaging and device assembly have traditionally been seen as labor-intensive and lower value added. As a result, for decades, much of this industry has been offshored to Asian countries.
Now, as tensions grow between Beijing and its major trading partners, and as China’s economic policy becomes less favorable to foreign investors, companies are growing uncomfortable with their high dependence on China for semiconductor packaging and device assembly. They are also reconsidering the use of China as a source of simpler electronic components. From Apple to HP, multinational electronics firms are building up assembly operations outside China. But because of Asia’s dominance, many firms will find it tempting to continue to rely on Asia for ATP, despite billions of dollars of new investment in U.S. chip-making capacity. Indeed, even as U.S. semiconductor production significantly increases as a result of the CHIPS Act, many of these U.S.-made chips may well be shipped to East Asian factories—or in some cases, even to facilities in China—for packaging and assembly.
Of course, deepening connections between the United States and the electronics industries of Asian allies and partners is not itself problematic. But the fact that U.S. chip production will be expanding in states such as Arizona and Texas, coupled with the deterioration of the U.S.-China relationship, raises the question of why some of this packaging and assembly work could not happen far closer to home.
FROM CARS TO CHIPS
Beyond its geographical proximity to the United States, Mexico could become an attractive partner in a revamped U.S. semiconductor supply chain for multiple reasons. First, it is well integrated into other international manufacturing supply chains, bolstered by the 2020 U.S.-Mexico-Canada Agreement (USMCA). Mexico also has 12 other free trade agreements with major economies including the European Union and Japan. And it has a large, cost-efficient workforce. The strength of the U.S.-Mexico relationship provides a fourth compelling reason. Despite many bilateral challenges, Mexico is one of the closest U.S. partners, with deep economic, cultural, and diplomatic ties that are difficult to match. For evidence, one need only look at the more than $100 billion in foreign direct investment by U.S. firms in Mexico.
Some U.S. technology firms are already taking a closer look at Mexico. In July, HP announced it is moving more assembly of its computers to the country, and other technology firms say they would like to do the same. Yet a common complaint is that many of the components needed in the assembly of advanced electronics such as personal computers can be sourced only from Asia and in some cases only from China. Semiconductor ATP capabilities and printed circuit boards are two common examples. Lacking the deep electronics ecosystem that exists in Asia, manufacturers in Mexico must either pay higher prices to obtain local supply or, more often, simply import components from Asia. Mexico’s limited microelectronics sector has driven up costs of production in the country and discouraged further investment. In comparison with Vietnam or Thailand, the network of component producers is simply less dense.
Still, limited progress on several fronts suggests a growing interest among U.S. and Mexican officials to develop the country’s technology manufacturing potential. In September 2021, the U.S. and Mexican governments formed a semiconductor supply chain working group within the relaunched High-Level Economic Dialogue, a step that has opened discussion on bilateral investment opportunities and vulnerabilities. More recently, along with Canada, the United States and Mexico announced a set of trilateral initiatives to build North American semiconductor supply chains and expand cooperation on workforce development. The announcement was made at the first North America Semiconductor Conference (NASC), which took place in Washington in May 2023 and will meet biannually to enhance the North American semiconductor ecosystem.
The U.S. Chamber of Commerce and Mexico’s Consejo Coordinador Empresarial are also leading an important pilot project to attract Taiwanese printed circuit board manufacturers to Mexico as part of the U.S.-Mexico CEO Dialogue. Major electronics manufacturers and device assembly firms including Foxconn, Petragon, Quanta Computer, Compal, and Inventec have announced plans to build facilities in Mexico to meet growing demand. Finally, significant efforts are occuring at the subnational level in states such as Nuevo León, Chihuahua, and Baja California, which are offering their own incentive packages to attract investment.
Yet major challenges remain. Mexico cannot currently compete on cost with Asian rivals. Asian governments provide significant subsidies and incentives that Mexican administrations, historically, have been neither willing nor able to match. Even where the Mexican government has offered favorable investment packages, they have not always been well designed. Take the government’s signature Interoceanic Corridor of the Isthmus of Tehuantepec initiative, launched in 2019, which aims to attract investment to the country’s poorer southern region. Officials have pitched the initiative’s tax incentives announced earlier this year to semiconductor manufacturers. Firms in the industry have not shown much interest, given the program’s decadelong development timeline and the region’s distance from existing Mexican and U.S. facilities and end users, which are predominantly clustered in the northern border region.
Workforce readiness presents another challenge. Despite Mexico’s sizable labor pool for skilled manufacturing jobs, the country trails Asian competitors on key measures of talent for the microelectronics industry. It also lacks a pipeline for the highly specialized workers that are required to operate new microelectronics facilities. In 2022, Arizona State University committed to partnering with the Mexican government and higher education institutions in Mexico to fill this gap through training programs, technical assistance, and curriculum development. More work and funding are needed, however, to provide the capacity the country needs.
In addition, inadequate infrastructure and rule-of-law concerns in many parts of Mexico present barriers to investment. Lack of reliable access to clean water and renewable energy sources threaten stable output and the ability to meet net-zero targets, while Mexico’s security crisis undermines its case for supply chain resilience. Partly as a result of these drawbacks, no significant semiconductor investments have been announced in Mexico since 2018, even as industry leaders continue to expand capacity in countries such as Malaysia, Poland, and Vietnam. Indeed, the U.S. government recently launched new programs under the $500 million CHIPS Act International Technology Security and Innovation (ITSI) Fund to explore semiconductor partnerships with Costa Rica and Panama. Work with Mexico, by contrast, remains in limbo.
MEXICO’S MOMENT?
What is needed to make Mexico a bigger player in U.S. efforts to restructure semiconductor supply chains? First, the Mexican government needs a clearer strategy for attracting ATP facilities and component production. Efforts since 2021 have been fitful because of policy disagreements, leadership changes, and competing priorities. Now they appear to be gaining momentum following the launch of the North American Semiconductor Conference and could be set for a breakthrough following the 2024 Mexican elections. To be effective, the strategy should leverage existing microelectronics clusters in the northern border states and central Mexican plateau as well as promote closer coordination with device assemblers, the auto industry, and other chip-intensive end users. In addition to workforce development and clean energy investments, Mexico needs to offer more substantial subsidies and incentives if it wants to compete with Asian countries. Recruitment packages would serve both as an indication of long-term commitment and as a coordination mechanism for an industry that benefits from co-location.
Second, the United States should be prepared to help if Mexico can demonstrate political will. The State Department’s ITSI fund should be employed to bolster U.S.-Mexico collaboration if Mexico devises a stronger semiconductor strategy. In addition, the Development Finance Corporation and Trade and Development Agency could explore financing and project preparation solutions as part of the next biannual convening of the NASC. A proposal to pursue trilateral research through the U.S. National Semiconductor Technology Center generated significant enthusiasm at the recent NASC meeting.
Third, the United States and Mexico should work both bilaterally and with Canada to advance North American competitiveness, such as improving U.S.-Mexico border infrastructure and modernizing existing ports of entry. Both Washington and Mexico need to implement USMCA commitments, including dispute resolution and customs modernization, which will increase investor confidence and streamline clearance of goods. The Mexican government will also need to address the security crisis to reassure foreign companies that the country is sufficiently stable to support large-scale investment and that risks to their personnel and products are contained.
Shifting semiconductor and electronics supply chains presents a major opportunity for Mexico. A bigger electronics industry would provide a much-needed boost to economic and political stability. The United States has much at stake, too. Because of the CHIPS Act and comparable legislation in Europe, Japan, and elsewhere, the landscape of semiconductor manufacturing is shifting. But supply chain analysis requires thinking about the entirety of the production process. Even if chip manufacturing is relocated, the United States will not have achieved the resilience it is seeking as long as semiconductor packaging and device assembly remains substantially anchored in China. Multiple countries can contribute to a revamped electronics supply chain, and America’s largest trading partner should be part of this effort.
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