Executive Summary
Since 2019, America has received a staggering amount of investment to build new semiconductor manufacturing plants within its borders.
Mexico has participated relatively little in this investment bonanza but is well-positioned to become an important player in the global semiconductor manufacturing ecosystem.
To give a sense of the scope of the opportunity, Taiwan presently produces 60% of all semiconductors made globally, and 80% of the total high-end chips. Per annum, semiconductor manufacturing adds around $175 billion to its economy and 20% of the country’s GDP. This represents a figure that is 75% larger than Mexico’s GDP contribution from its thriving automobile manufacturing sector.
Mexico has many powerful advantages in the quest to become a significant player in the semiconductor manufacturing ecosystem, including that it is: 1) a border country, 2) already possessing large American semiconductor firms, and 3) a leading manufacture of automobiles and parts.
To move into higher-value roles and manufacturing there are obstacles the country must overcome or avoid altogether. These include: 1) water scarcity in the north, 2) lack of consistent electricity delivery in the south, 3) unfavorable regulatory environment and incentive schemes, and 4) unforeseen consequences of increased Asian investments.
Introduction
Since 2019, America has received a staggering amount of investment to build new semiconductor manufacturing plants within its borders. One of the largest of these investments is from Taiwan’s TSMC to build a plant in Phoenix, Arizona. This investment began as a $12 billion transaction, which at the time was already the largest foreign direct investment in Arizona’s history, and has now ballooned to be a $40 billion project. Intel, GlobalFoundries, Texas Instruments and Samsung are also building plants and facilities in America.
Mexico has participated relatively little in this investment bonanza but is well-positioned to become an important player in the global semiconductor manufacturing ecosystem. To give a sense of the scope of the opportunity, Taiwan presently produces 60% of all semiconductors made globally, and 80% of the total high-end chips. Per annum, semiconductor manufacturing adds around $175 billion to its economy and 20% of the country’s GDP. This represents a figure that is 75% larger than Mexico’s GDP contribution from its thriving automobile manufacturing sector.
Mexico can learn much from the story of how TSMC, the largest semiconductor manufacturer in the world, came to exist. In 1987, Morris Chang tried to start the company in America, but was rebuffed by every venture capital firm he approached in Silicon Valley. Ultimately, the government of Taiwan invested, and the rest is history. Interestingly, Chang was born in China and moved to Hong Kong during the Chinese Civil War. He studied in America and attended Harvard and MIT, and then his employer Texas Instruments sent him to Stanford for his PhD in electrical engineering which he earned in 1964. His final role at Texas Instruments was the Vice President responsible for the firm’s global semiconductor business. America had every advantage but failed to see and seize the opportunity.
Morris Chang and TSMC Logo
The Ecosystem and Geopolitics
The production of semiconductors is an expensive, time and resource intensive process involving specialized players in various strategic geographies. The lowest-tier semiconductors (i.e., 90 nanometers and larger) are made almost exclusively in China with limited cooperation required from the ecosystem apart from the designs which mostly originate from America. These semiconductors are analog and used in items such as digital calculators and smart refrigerators. The mid-tier semiconductors are the next step up the value chain and are considerably more complicated to manufacture. These semiconductors are used in automobiles, aerospace equipment and other complicated machinery. The figure below shows a typical production process for mid-tier semiconductors.
Figure1: Typical Global Semiconductor Production Ecosystem
The manufacture of high-end semiconductors (i.e., smaller than 10 nanometers) is a truly global affair and requires many players acting in unison. These are the advanced semiconductors used in cellphones, servers, satellites and power management systems. A common manufacturing situation would entail the Netherlands making the lithography machines, Germany the lenses, California the optics, Japan the wafer systems, with designs coming from Silicon Valley and Salt Lake City. One hiccup in the supply chain and the entire process freezes until the problem is handled. Around 80% of these high-end semiconductors are manufactured in Taiwan.
Video 1: Geopolitical Analyst Peter Zeihan Discussing Semiconductor Manufacturing
Geopolitical forces (e.g., national security, China-America trade tensions) are the primary instigators of the difficult changes the global semiconductor supply chain is undergoing. President Donald Trump was the first major political figure to take action and alert the public to the dangers of relying on economic rivals for semiconductors and other strategic products. The Biden administration has followed by signing into law the CHIPS and Science Act (the “CHIPS Act”) which provides $52.7 billion for research, development and manufacturing of semiconductors. The CHIPS Act has an additional aim to hinder China’s ability to rise in the semiconductor manufacturing hierarchy by prohibiting the sale of certain semiconductor manufacturing equipment to Chinese firms.
Video 2: Geopolitical Analyst Peter Zeihan Discussing CHIPS and Science Act Implication
A final point in this area is that China’s dominance of the global rare earth industry is not a material factor in the case of semiconductor production. Rare earth elements actually aren’t that rare, and are relatively easy to mine and locate. Silicon, the primary ingredient in the production of semiconductors, is the second most common element in the earth’s crust comprising 27.7% of the total.
Mexico's Advantage
Mexico has many powerful advantages in the quest to become a significant player in the semiconductor manufacturing ecosystem, including that it is: 1) a border country, 2) already possessing large American semiconductor firms, and 3) a leading manufacture of automobiles and parts.
Being the lowest-cost border country to America is the foundation of Mexico’s relative advantage in many economic arenas. This advantage extends to semiconductors, and is exacerbated by the fact that 40% of America’s semiconductor plants are in states along the Mexican border. In 2021, Mexico imported $388 billion worth of products to America which is not too far off from the $506.4 billion China imported the same year. The pendulum is expected to continue to swing in Mexico’s favor due to rising Chinese labor costs, heightened political and trade tensions, and the advantages of being a USMCA member.
Firms like Intel, Skyworks Solutions, Texas Instruments and Infineon Technology are already in Mexico and building capacity in the microprocessor R&D, testing and manufacturing spaces. Foxconn has established a headquarters in Mexico, and TSMC is in discussions to commence operations in the country. Arizona State University has partnered with the government of Mexico to boost training and capacity to take on more semiconductor manufacturing and testing work.
Mexico is a leading exporter of automobiles and parts. It is the 7th largest passenger vehicle manufacturer globally, and produces about three million vehicles annually. 76% of those vehicles are exported to America, with only 10% used for domestic consumption. This is an important advantage for Mexico because Washington DC’s stated strategy in the near-term is to target gaining market share in the semiconductor sector through automobile manufacturing. A tangible example of this are provisions in the 2022 Inflation Reduction Act which support manufacturing of electric vehicles and their semiconductors in North America.
Issues to Overcome
The most realistic near-term opportunity is for Mexico to build semiconductor manufacturing capacity in lower-skill roles such as assembly, testing and packaging. To move into higher-value roles and manufacturing there are obstacles the country must overcome or avoid altogether. These include: 1) water scarcity in the north, 2) lack of consistent electricity delivery in the south, 3) unfavorable regulatory environment and incentive schemes, and 4) unforeseen consequences of increased Asian investments.
Manufacturing semiconductors requires a large amount of water and therefore most plans to build these plants in Mexico are located in the south where water is abundant. One must remember that Mexico is a large country by landmass with poor connecting road infrastructure. As the map below highlights, shipping microchips made in the south to the automobile manufacturing hubs of the north would be similar in distance to shipping parts made in Greece to assembly plants in Belgium or Ireland. In real terms, the trucking transit time would be roughly 24 hours or greater under ideal conditions and no major delays.
Figure 2: True Size of Mexico
Although the south has the water required for semiconductor manufacturing, it is plagued with unreliable electricity delivery issues. This is also the case in the north where the manufacturing hubs are located. It is estimated that the states of Baja and Chihuahua, from 2018 to 2021, lacked 1.8 gigawatts of combined power to capitalize on existing demand. In 2022, gross fixed energy investments were down 11% from 2018 which points towards a lack of effective policy, regulations and incentive framework to attract investment in the power sector.
There has been chatter of further incentives to spur semiconductor investment in Mexico, but so far not much has come to fruition. According to Isaac Avila, Director of Government Relations at Intel Mexico, what is required from the Mexican government is “(t)he training of specialized talent, greater investment in research and development and the improvement of logistics infrastructure… in order to attract more investment for this sector.” Labor laws continue to be an issue for American manufacturers in Mexico. These laws are strict and contain many more nuances and provisions than comparable laws in America.
Chinese and other Asian manufacturers are increasing their manufacturing capacity in Mexico at a rapid rate. The benefits of Asian manufacturers investing in Mexico are fairly obvious and include boosting the economy, creating jobs, and skills transfer. The potential downside, at least as it relates to the semiconductor supply chain, is alienating Washington DC. The entire purpose of creating the environment to alter the entrenched semiconductor ecosystem is to decrease reliance on economic rivals, namely China. It goes against the spirit of the USMCA to permit Chinese companies to continue with the status quo by simply operating through a Mexican shell company and new mailing address.
