Strategies for Japanese Auto Parts Suppliers to Expand Business in Mexico
Mizuho Industry Research
- Interest in Mexico has been rising among Japanese auto parts suppliers in recent years. Reasons for this include the recent near-shoring trend caused by trade friction between the US and China and disruptions to the supply chain under the Covid-19 pandemic, deteriorating profitability in the US, and the increasing difficulty of producing auto parts amid the labor shortage.
- The labor shortage for the auto industry in the US may continue over the long term, as the labor supply is being affected by the decline in the working age population accompanying the aging of the population overall and labor demand is increasing with the announcement of numerous EV-related investments. Given this situation, it will become strategically important for Japanese auto parts suppliers to consider utilizing Mexico by shifting production from the US to Mexico. We believe that a greater shift of production from the US to Mexico is a helpful tool for rebuilding North American operations, an urgent issue for Japanese auto parts suppliers. This is particularly true for labor intensive parts and smaller parts because transferring the production of these is easier and more quickly generates benefits.
- There are of course issues with production in Mexico, such as the high costs of electricity and transportation. There are no swift solutions for these issues, and it may be necessary to find ways to mitigate them through cooperation with other suppliers.
- Meanwhile, another issue to consider when planning a shift of production from the US to Mexico is what to do with US factories, which are likely to end up with surplus production capacity. Possible ways to deal with the surplus include consolidation of the supplier’s US factories, integration with other company’s factories, sale to other companies, maintaining of production levels through contracted production, and production of new products for EVs. It will be important to consider the rollout of Mexico operations and optimization of US operations at the same time.
- The easiest time to make the move would be coinciding with model changes. However, given that entry into Mexico by companies from other countries, particularly China, is accelerating, there is potential for Chinese companies to buy up the available transportation capacity, labor resources, and land in industrial parks. This fact necessitates more rapid planning of any shift of production to Mexico.