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Mexico Electronics Industry to Face Turbulence if NAFTA Breaks Up

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December 12th, 2016

Mexico is one of the largest electronics production hubs outside of Asia Pacific. In 2015, Mexico produced consumer and business electronics equivalent to USD46.6 billion, the 10th position in production value globally. Mexico’s electronics industry grew strongly in recent years, recording a 4% value CAGR over 2010-2015. However, with potentially changing US policy regarding free trade agreements after the recent presidential election, the industry is about to face turbulence as barriers could emerge with its largest trade partner – the US.

This article is a part of a global briefing Computers and Office Machinery: Trends, Developments and Prospects, which analyses global developments in the computing equipment industry.

Mexico – the American electronics manufacturing hub

Mexico has become an appealing production hub for electronics manufacturers in North America due to lower costs, the growing domestic market and free trade with the US. Thanks to large scale FDI in electronics manufacturing that reached around US$13 billion over the last decade, Mexico has started producing everything; from consumer electronics to complex items, such as business products and electronic components. Over 2010-2015, production of computers and office machinery in Mexico jumped by 27%, communications equipment – by 17%, followed by a 29% surge in electronic components fabrication.

A significant share of product output, ranging from 4% in electronic components to 79% of communication equipment, was exported. Mexican electronics product exports, including re-exported production, stood at US$52.0 billion in 2015, up by 13% over 2010-2015. Thanks to free trade deals, 85% of the exported value went to the NAFTA agreement countries – the US and Canada.

Exports structure of selected electronics industries in Mexico in 2015, % of total exports

exports-electronics-mexico-2015

Source: Euromonitor International from national sources

However, due to Donald Trump’s victory in the US presidential elections, the success story could come to an abrupt halt. Recently, the president-elect, in his 200-day plan, promised to renegotiate NAFTA’s deal or leave the block completely in the near future. As the US might shift towards a more protectionist economy model, Mexico’s influence in the US electronics market could be stampeded, raising concerns about further investments in production expansion in this country.

US withdrawal from NAFTA to harm Mexican electronics companies

Exit of the US from NAFTA would be a massive blow to the Mexican electronics industry. It would mean growing US isolation that is likely to be achieved by straightforward measures, such as import tariffs. Growing tariffs will inflate Mexican-made products’ prices at least by the tariff value. However, electronics prices in the US were already starting to rise in recent years, hindering volume sales growth. Overall computer prices, for instance, grew by 1% to US$464 per unit in 2015, mobile phones – by 4% to US$120 per unit. Rising Mexican wages in manufacturing, up by 5% annually over 2010-2015, definitely added to this increase.

Import tariffs are usually implemented to protect domestic manufacturers, which, in fact, in certain segments like consumer products, are absent in the US. Therefore, Mexico’s position in the short term will primarily weaken against other key electronics makers operating in the US market, such as Chinese companies. This could mean potential downsizing of production capacity in Mexico or at least, withdrawal from some expansion plans.

What is more, relocating manufacturing back to the US is possible in the longer term, especially of higher added value production, posing an additional threat to Mexican businesses. Implemented import tariffs, therefore, should act as a protective measure for the future “reshored” companies. Such model is already functioning in the EU, where less transportable electronic goods, such as TVs, are taxed with a 14% import tariff and countries like Poland and Slovakia assemble a significant share of TVs sold in Europe.

Alterations likely to be well weighted

Since the impact of the US leaving NAFTA will be two-sided, a well-weighted compromise is likely to be reached over potential NAFTA renegotiation/break process. Mexico is an important trade partner for the US electronics industry with electronics exports to Mexico being a USD42.8 billion business for US companies. Therefore, some sort of transition period or exceptions are likely to be reached, softening the impact of a potential split.

Mexican electronics makers, however, must take into account that uncertainty in the region could be for the long term. Therefore, measures focusing not only on cost-competitiveness, but also on high value added manufacturing are important, while exports differentiation is an answer for more stable growth. It is clear, however, that breaking down trade ties in North America will be harmful for the Mexican electronics industry in the short term, thus the forecast growth of 5% for 2015-2020 will be difficult to achieve.

You can find more global trends on the computers and office machinery analysed in the global briefing Computers and Office Machinery: Trends, Developments and Prospects.

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Justinas Lasinskas

Justinas Lasinskas is an Industry Analyst at Euromonitor International. He holds bachelor’s degree in Business and master’s degree in Economics from Vilnius University. Justinas has been working in market research since 2012, where he is engaged in research of electronics, electric and ICT industries. His professional interests include IT, telecommunications, business analytics and data analysis. You can find Justinas on LinkedIn.