Background

A recent report from the Federal Reserve Bank of Dallas finds that Mexico’s maquiladoras – large, mostly foreign-owned plants engaging in labor-intensive assembly of intermediate and final goods for export – are facing significant changes in their operating environment. The current state of global trade, including chronic input shortages and the specter of a worldwide economic slowdown, poses tough challenges. In addition, longstanding automobile assembly and parts businesses, which account for the largest portion of maquiladora output, confront a transition to electric vehicles that require new and different manufacturing processes.

The report states that in 2021 maquiladoras accounted for 58 percent of Mexico’s manufacturing GDP (as well as a majority of the country’s manufacturing exports) and 48 percent of industrial employment. Besides automobiles and auto parts, maquiladora production includes electronics, medical devices, aircraft parts, and machinery. Most maquiladora employment (62 percent) remains concentrated in Mexican border states even though plant proximity to the U.S. has not been a government requirement for many years.

According to the report, maquiladoras have shifted over the past several decades from low-skill, low-wage production toward high-wage, high-productivity operations, a transitioned hastened by the movement of lower-end production to China after its entry into the World Trade Organization in 2001. This shift provides insight into where the industry is headed, with the top five fastest-growing sectors being transportation equipment, paper, plastics and rubber products, fabricated metal products, and primary metals manufacturing. In contrast, low-wage employment has declined, affecting sectors such as textiles and fabrics and apparel and accessories manufacturing.

The report states that the future of maquiladoras will likely include their biggest industry, transportation equipment manufacturing, which includes production of cars, SUVs, buses, and trucks as well as all related manufacturing, including engines and engine parts, electronics, steering and suspension components, brake systems, transmission and powertrain components, seating, and interior trim. In 2021 this sector accounted for a third of all maquiladora employment and production and 3.6 percent of Mexico’s GDP. Mexico ranks seventh in total world vehicle production, fourth in automotive parts exports worldwide, and first in supplying autos and auto parts to the U.S.

However, the transition to electric vehicles poses a challenge to Mexico’s global leadership in this sector. The report notes that while the maquiladora industry has a history of quickly adapting to changes in technology and those arising from business cycles, the shift from internal combustion engine-based vehicles to electric vehicles is different. Electric vehicles have fewer moving and “wear” parts, meaning fewer parts to manufacture, and different types of parts, meaning demand for conventional components such as transmissions, brakes, and axles is likely to wane as demand for electric powertrains, batteries, sensors, and the like increases.

Another challenge to this sector is the U.S.-Mexico-Canada Agreement, which imposes tighter restrictions on the origin of steel, aluminum, and vehicle parts and new requirements governing labor and wages. These changes will increase production costs that, in turn, imply higher prices and reduced output. Projections indicate that the USMCA will negatively affect all countries in North America but that Mexico stands to sustain the biggest loss to auto production and GDP.

More broadly, maquiladoras face opportunities and challenges related to potential and actual trade policy changes in Mexico and elsewhere. For example, maquiladoras may benefit from the reshoring or near-shoring of manufacturing arising from pandemic supply disruptions and simmering trade disputes with China, although any such shift is only expected in the medium to long term. Other developments include the Mexican government making changes in electricity generation rules favoring the state-run utility over cheaper power sources, labor costs rising due to changing labor market regulations, and increasing challenges to private-sector and foreign investment in Mexico. “These and other changes could signal a departure from what has been an investment-friendly environment since NAFTA,” the report concludes, “dimming Mexico’s prospects in what has become an increasingly volatile global business environment.”

For more information on Mexico’s maquiladoras, please contact Juan Moreno at (415) 490-1402 or via email.

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