US AI Hardware Makers Choose Mexico Over Taiwan To Reduce Chinese Threat Risk

Increasingly aware of the threat posed by aggressive Chinese policies, the largest US AI companies are demanding that Taiwanese companies which manufacture most of the hardware needed for AI implementation switch their operations to Mexico. 

The actions are intended to reduce the potential for Chinese disruption of global supply chains, intellectual property theft and competitive advantage. JL 

Yang Jie and Santiago Perez report in the Wall Street Journal:

Some of the biggest U.S. 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.Foxconn’s Mexico facilities manufacture AI servers for

Amazon

, Google, 

Microsoft

 and 

Nvidia

. Foxconn and other Taiwanese companies are taking advantage of the U.S.-Mexico-Canada free-trade deal that took effect in 2020. It has attracted billions of dollars from manufacturers aiming to move operations from China to Mexico, known as nearshoring.

Some of the biggest U.S. 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 U.S.-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.”

A Foxconn factory in San Jeronimo, Mexico. PHOTO: PAUL RATJE/BLOOMBERG NEWS

In February, Foxconn said it spent about $27 million to acquire land in western Mexico’s Jalisco state, in what people familiar with the plan described as a major expansion of the company’s AI server production. Foxconn said it had invested about $690 million in Mexico over the past four years.

Foxconn’s Mexico facilities manufacture AI servers for U.S. giants such as 

Amazon

.com, Google, 

Microsoft

 and 

Nvidia

, said people familiar with the operations. The U.S. companies either declined to confirm whether they have servers made in Mexico by Foxconn or didn’t respond to requests for comment.

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

Francisco Cervantes said the presence of Taiwanese firms will transform Mexico. PHOTO: EYEPIX/ZUMA PRESS

As production of such gear increases, U.S. companies are looking to avoid repeating the history of the smartphone after it took off some 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.

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 high-tech goods.

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

Taiwan-based 

Inventec

, which manufactures servers for AI and other functions for major U.S. 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 U.S. After inspecting facilities in Mexico, the client was impressed by the technology and opted to produce there instead, Chen said.

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

Major U.S. 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 includes robust sourcing from China.

Nvidia’s founder and Chief Executive Jensen Huang. PHOTO: JOSH EDELSON/AGENCE FRANCE-PRESSE/GETTY IMAGES

AI-related equipment is one of several advanced manufacturing fields in which Mexico is taking a growing role as U.S.-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 U.S., 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 $15 billion, according to Mexican government data.

Taiwanese contract manufacturers have concentrated in a few hubs near Texas, such as Ciudad Juárez neighboring 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 around 90% 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% 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% of U.S. goods imports last year, down from 21.5% in 2015, according to Census Bureau data. Meanwhile, Mexico took over first place, with its share rising 2 percentage points to 15.4%.

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,” she said.