The impact of digital transformation in the automotive supply chain in Mexico

Keywords:

Abstract:

Research question
While the process of digitalisation will lead to technical and organisational changes across and within the global value chains, the ongoing changes in the trade agreements spurred by the Trump administration may change the location advantages of previous plants and their specialisations. In addition, investment in the electric car may offer first-mover advantages in markets, while requiring the re-organisation of the value chains.
The paper aims at providing a first answer to these issues, by looking at how these changes are affecting opportunities for the OEMs in their value chains based in the Mexican automotive system. Mexico, ranked in 2018 as the seventh producer at world level, is an important case study for several reasons: among these, its cost advantages and its former privileged access to the US market, that attracted many OEMs from Europe, Asia, the US, and its role in the prospective regionalization of world trade.

Methodology
The research design builds on desk analysis of the supply chains and trade agreements, and on interviews with suppliers, with experts and with business associations of the automotive industry.

Main results
1. Impact of the new trade agreement with US and Canada.
Feedback from interviews show positive expectations of the impact of the new agreement on the Mexican automotive industry, though the ultimate assessment will depend on the final decisions to be made with respect to the four rules to be fulfilled in the USMCA/T-MEC.
2. Regional content: effects inside the country and cross-country impact on the global value chain.
While two of the rules (those requiring a minimum regional content) are likely to benefit Mexico, the overall effect will depend on the definition of the penalties for non-compliance and on the global strategies of the OEMs, relative to their suppliers’ present location.
3. Digital transformation: a marketing issue
Digital technologies are considered necessary, especially for those suppliers in the automotive value chain that are moving towards the aerospace industry.
4. Cross industry transformation and competence networks
The digital transformation is already producing several changes: the emergence of new actors and competences (among others, software designers for data collection and data analytics) both within and outside the firms; cross industry transformations (with impacts on automotive, aerospace, truck and buses). Relevant competence networks range within the country, across the region (US, Canada) and the global value chains (e.g. Japan, China, Italy).
5. Software skills
The development of software applications for data collection, transmission and processing is based on a constellation of specific applications, some developed ad hoc by freelance consultants, other purchased from digital start-ups. The overall home-made design did not seem different from what we found in companies that make use of Siemens platform.
6. Between digital and manual: the digital representation of the production process
In the companies interviewed, the focus of the digital transformation concerns the digital representation of the production process, which is automated, but the machines are fed and unloaded mainly manually, assisted by bridge cranes or pneumatic devices, when needed. The repetitive work on board the machine has quite high pace and the only breaks are for lunch. Digital controls of the operation of individual machines (forging, stamping, etc.) allows suppliers to be aligned with the customers’ needs (tiers 1 and OEMs): in keeping track of the production, and in the optimisation and control of the production process, but also of the workers.
7. Automation and manual work
The automation of the moulding and forming phases (with high power, capacity and precision plants) is flanked by manual operations to unload the machined pieces, but also to fix welding nuts. The welding of pipes and sub-assemblies (mufflers, for example) is still a highly professional operation, carried out by hand, due to the small size of the batches produced. Relative small size of batches and relative low volume of production still find in manual tasks a source of flexibility to reduce average costs and in the digital representation of the production process a support for optimisation.
8. Working environment and working conditions
Compared to the standards of similar Italian companies, perhaps the requirements for air quality in the shop floor were less stringent (although they have the environmental certification Iso14001). It is the rhythms of workday, without breaks (4 hours plus another 4 after a lunch break of one hour) that make the difference.
9. Industrial and training policies and policies for retaining workforce
The new government is not only asked for system policies (transport infrastructure, for example, or the fight against corruption, on which this government has embarked). The managers point out a detailed list of industrial, research and training policies to accelerate the pace of change, with a focus on young people as carriers of new knowledge.
10. Cross country trade and plant locations
Both Mexican and foreign companies are expanding their productive capacity in Mexico. In case of reduction – as for Nissan – it is due to a reorganization needed to cope with changes in the upsurge in the US demand for different cars. The location of new plants is driven by the incentives offered by the states, which attract plants with high value added technologies/products: a powerful development policy of which we will further investigate the characteristics and extent of the incentives, by state.

Practical implications
These preliminary findings show the importance of the analysis of the transition phase in the digital transformation of a key player in the automotive global value chain. The empirical analysis on Mexico provides clues for understanding the multiple changes in technologies and trades in a multilateral perspective. Further developments of this research will consider tier 1 suppliers with the same specialisations of the tier 2 suppliers already interviewed, and their OEMs.
These results will entail policy indications for the federal and the state governments in Mexico. In addition, they will shed light on the opportunities for the OEMs to keep important segments of their value chains in Mexico and in the overall design shaping the global value chain in the automotive industry.