Nearshoring: The solution to North America’s chip woes?

Working with suppliers who are located close to, but not in, the destination market might mitigate the impact of the semiconductor shortage

David Oakley, Senior Analyst, Americas Sales Forecasts

07 March 2022

For months now, the dominant topic in the global automotive industry has been the semiconductor shortage, which has affected many of the world’s key markets. As production lines have been intermittently halted or at least slowed, inventory has declined, putting a brake on what would otherwise have been a robust sales recovery in 2021. North America has been no exception, but what solutions might help the region to avoid such crises reoccurring in the future?

There are various possible answers to that question, including better supply chain management and building larger inventories – though the latter option seems unlikely to be considered an efficient use of resources. A central feature of the changing North American landscape is the increased desire to see chip manufacturing take place within the region. For example, Intel recently announced a US$20 bn investment in an Ohio chip factory, while Samsung committed US$17 bn to build a facility in Texas. 

For the North American auto industry, “nearshoring” – where suppliers are located close to, but not in, the destination market, may be part of the long-term answer to its recent problems. The Mexican government is seeking to encourage increased chip manufacturing within its borders, and the topic has been discussed in meetings with the US. However, to date, there has been little to report in terms of concrete moves to invest in production facilities within Mexico. Arguably, the administration of Andrés Manuel López Obrador may be an impediment to progress, as it has developed a reputation for erratic policy decisions which appears to have reduced investor confidence. Another obstacle could be the fact that chip production requires a large amount of water, a resource which is relatively scarce in the northern Mexican states where many of the country’s auto plants are located. Therefore, the possibility of chip factories being built in Mexico’s water-rich southern states has been raised. This would represent a major boon for the area, which is generally much poorer than the north of the country.

Mexico has played a part in the semiconductor business for decades, but mainly in packaging chips, the final stage in their production, rather than the actual fabrication of semiconductor wafers. In 2019, Mexico exported US$691 mn of semiconductors, of which 71% went to the USA. However, this only represented 4.5% of the US’s semiconductor imports. Developing the industry in Mexico would make sense, as it would reduce lead times and provide greater security to the supply chain, rather than relying on East Asian countries for chips, as is often the case currently. The lower cost of labour traditionally associated with Mexico is another obvious advantage. 

None of this provides a quick-fix solution. Any new plant construction is a major undertaking, and it would be years before any chips were being produced and making their way into vehicles. By that time, it is highly likely that the current crisis will be over, and there is a risk that the additional chip production capacity could be superfluous. Nevertheless, with chips set to be a key component for vehicles and many other products for the foreseeable future, bringing their manufacture closer to home seems to be a worthwhile endeavour.