US tech giants turn to Mexico to make AI gear, spurning China

Taiwan-based contract manufacturers step up investment south of the US border for American clients.

A Foxconn factory in San Jeronimo, Mexico. Picture: Bloomberg

Some of the biggest US companies in artificial intelligence have asked their Taiwanese manufacturing partners to step up production of AI-related hardware in Mexico, seeking to diminish reliance on China.

Taiwan-based Foxconn, the world’s largest contract electronics manufacturer, and other Taiwanese companies are heeding the call and investing more in Mexico, according to industry executives and analysts.

They are taking advantage of the US-Mexico-Canada Agreement, the free-trade deal that took effect in 2020. It has attracted ­billions of dollars from manu­facturers aiming to move operations from China to Mexico, a process known as nearshoring.

The North American nations “hope to replace products imported from Asia as much as possible,” said James Huang, chairman of the Taiwan External Trade Development Council. “Based on this consensus, Mexico is poised to become the most important manufacturing base for the USMCA.”

In February, Foxconn said it spent about $US27m to acquire land in western Mexico’s Jalisco state, in what sources described as a major expansion of the company’s AI server production. Foxconn said it had invested about $US690m ($1.06bn) in Mexico over the past four years.

Foxconn’s Mexico facilities manufacture AI servers for US ­giants such as Amazon.com, Google, Microsoft and Nvidia. The US companies either declined to confirm whether they had servers made in Mexico by Foxconn or did not respond to requests for comment.

The rising presence of Taiwanese firms in Mexico was part of a process that would “dramatically modify the industrial structure of Mexico in the next 10 years”, said Francisco Cervantes, head of Mexico’s largest private-sector ­organisation, last year.

The hardware used in AI applications consists of powerful computers called servers, storage systems, cooling units, connectors and other equipment. From the outside, the machines look similar to those that handle non-AI tasks. Under the hood, they are designed to tackle the complex calculations needed in AI programs and often incorporate cutting-edge processing units.

As production of such gear increases, US companies are looking to avoid repeating the history of the smartphone after it took off 15 years ago. Much of the core manufacturing of smartphones and their parts ended up in China, in particular at the factories run by Foxconn and others to assemble iPhones.

Nvidia’s founder and CEO Jensen Huang. Picture: AFP

Mexico presents its own risks as a production hub, including crime, insufficient water and electricity supply, and intense wage competition for workers skilled at assembling hi-tech goods.

Some Taiwanese managers said they relied on private security to keep local gangs from robbing plants of chips or other valuable equipment. They also said Mexican workers tended to be less willing than those in China to log long overtime hours. Mexican workers are unionised, and factories are ­required to comply with USMCA labour provisions.

Taiwan-based Inventec, which manufactures servers for AI and other functions for major US tech companies, is one company expanding its footprint in Mexico.

Arch Chen, Inventec’s regional manager in Mexico, told a conference in Taiwan in December that one of his clients, a top American brand involved in AI development, initially said it wanted its equipment produced in the US. After inspecting facilities in Mexico, the client was impressed by the technology and opted to produce there instead, Mr Chen said.

It is getting harder to make cutting-edge equipment in China because the US bans the export to China of advanced chips for AI ­applications such as those designed by Nvidia.

Major US server manufacturers such as Dell and Hewlett Packard Enterprise have asked their suppliers to move some server and cloud computing production to Southeast Asia and Mexico, reducing reliance on China, people familiar with the matter said. HPE and Dell both said they wanted to strengthen and diversify supply chains, and HPE said its supply chain included robust sourcing from China.

AI-related equipment is one of several advanced manufacturing fields in which Mexico is taking a growing role as US-China tensions rise. The country has 14 free-trade agreements with 50 countries, more than any other nation in the world. Those pacts have attracted car manufacturers from Asia, Europe and the US, and turned Mexico into the world’s No.5 car exporter.

Some electric-vehicle manufacturers, including Tesla, are looking to open plants in Mexico. Taiwanese firms have also invested in the central and southern parts of Mexico to supply the automotive industry.

Taiwan officials estimate there are about 300 Taiwanese firms in Mexico that employ 70,000 ­people. Two-way trade last year surpassed $US15bn, according to Mexican government data.

Taiwanese contract manufacturers have concentrated in a few hubs near Texas, such as Ciudad Juárez neighbouring El Paso, Texas, and Monterrey. These locations host facilities of companies known in Taiwan as the “six brothers of electronics” – Foxconn, Pegatron, Wistron, Quanta, Compal and Inventec.

Led by those six, Taiwanese manufacturers account for about 90 per cent of global production of server mother­boards, the heart of a server containing the principal components, according to Mark Liu of market research firm TrendForce.

Foxconn alone accounts for more than 70 per cent of the upstream work for graphics-processing units, which refers to manufacturing the building blocks of the circuits that power AI servers, Foxconn chairman Young Liu said last August.

Chinese-made products accounted for 13.9 per cent of US goods imports last year, down from 21.5 per cent in 2015, according to Census Bureau data. Meanwhile, Mexico took over first place, with its share rising 2 percentage points to 15.4 per cent.

During a visit by a Taiwanese delegation to Mexico last year, Mexican Economy Minister Raquel Buenrostro said the country was ready to work with more Taiwanese suppliers, especially in the manufacture of products such as semiconductors: “We cannot forget that Mexico is the country in the Americas that has invested the most in infrastructure projects in the last five years: airports, trains, highways, and more.”

The Wall Street Journal