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Opportunities and Threats: Observations from SMTA Guadalajara

By Philip Stoten, Journalist, Podcaster, Speaker and Founder of SCOOP, EMSNOW and Hecho en México

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By Philip Spagnoli Stoten Founder of SCOOP

As I sit writing this column at Guadalajara airport about to board a flight to Dallas, I start to unpack the dozens of conversations I have had, on and off camera, during my week here. While the show, and indeed SMTA, is a success in México, the market is not having its best year and for many it has been marked by softening demand, particularly for capital equipment.

We all know why the market is down, it’s the same everywhere. The post pandemic inventory bubble has worked its way through to the OEMs, reducing demand for the EMS industry, which has largely processed any backlog they had after supply chain shortages. The economy, thanks to inflationary pressure, has slowed consumer spending. And the US election is combining with the high cost of money to create the usual four year pattern of investment hesitancy.

So, what does it all mean for México?

Put simply, it is a picture of mixed optimism and uncertainty. Most of those in the industry, many with decades of experience, see a mixture of opportunities and threats. Most, perhaps all, are looking forward to getting the US presidential election in the rear view mirror so they can relax and focus on doing what they do, which is creating an environment where México can thrive as the lower cost manufacturing partner that meets US needs.

Without getting into party politics, because nobody wants to do that here, I asked the movers and shakers of the México manufacturing sector if they cared who was elected. For most the priority was getting the election done, but some voiced concern around tariffs, which always remains a threat to such an important trade relationship.

Let’s start with opportunities

The industry in México has done extremely well in the last two and a half decades, and the last two or three years, post-pandemic have seen particularly strong growth. The concerns about China and fragile globalized supply chains has led to a more pragmatic, secure, and regional approach to manufacturing. No longer are we looking for a factory for the world with the lowest labor rates and little else, that’s old thinking. Now we want secure, low risk, sustainable supply chains that can deliver value and agility.

For México, this makes their proximity to the US and their participation in the USMCA even more valuable. The result has been substantial investment in capacity throughout 2022 and 2023 from global manufacturing companies including OEMs, ODMs and EMS companies. The largest Taiwanese contract manufacturing companies, including Foxconn, have made substantial investments in the regions, and numerous US, European and global players continue to do the same. México has the ability to grow with this demand, thanks to a substantial talent pool, and an academic system that delivers well educated engineering graduates. So, even if countries like Vietnam and India are the biggest winners from brands reducing the dependency on China, México can win too.

On demand, the market is challenging right now, but we know this will pass, it always does, and election years are always less stable. The underlying trend for electronics consumption remains as good as it has ever been. Electronics are finding its way into every part of our life and the potential for AI is driving even more penetration and growth. I don’t see underlying growth stalling any time soon; if you do, please let me know!

Lastly, exchange rates have shifted by almost 20% this year as we see a stronger US$ and a weaker MXN Peso. When I was here right after APEX the exchange rate was close to 20, now it is closer to 16. This makes México even more competitive, particularly for labor, but also for those elements of the supply chain that are sourced locally. One of the positives of this week in México has been seeing the many home grown Mexican businesses doing well in the local and global supply chain.

Not without threats

I have already mentioned the concern related to trade wars and tariffs and much of this stems from the huge importance of the trade relationship between the US and México. This year, México surpassed China to become the largest importer to the US, and this relationship is fundamental to the success of the region. While that cross-border relationship is not without tensions, especially around legal and illegal immigration, it is of great value to those north and south of the border. Any threat, from either presidential candidate, of additional tariffs or restrictions is seen as a threat to continued growth and the success of the Mexican manufacturing sector.

Other threats remain around concerns related to an ongoing downturn in demand, but perhaps post-election that anxiety will dissipate, particularly if we see one or two rate cuts from the fed between now and then. Many of those who depend on capacity growth for investment in their solution are also concerned about the excess capacity that has been added in the last 24  months that remains not fully utilized.

Advice to POTUS

I have always loved coming to México and am always impressed with the capacity and capability of the manufacturing industry here. If the next President of the United States takes my call, I will urge them to embrace their partnership with México. While bringing manufacturing and the associated jobs back to the US is important and valuable, and of course vote winning, it will not happen overnight and it will not meet the demands of the world’s largest consumer market. The US needs a lower cost partner, and with its talent, capacity, and capability, México is the perfect option for this!

 

You can see all the interview I did at SMTA on YouTube in this playlist:

https://youtube.com/playlist?list=PLWPIC4XR6zdFLX4GKXLG_hXDAsdkLhz7S&si=zYISz9_ZQeSD0oag

And you can read this article in Spanish or see the video interviews our local editor Joseph Arévalo did on https://hechoenmexico.tech/

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