Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector: USMCA, Covid-19 Disruptions, and Electric Vehicle Production (New Frontiers in Regional Science: Asian Perspectives, 72) 9819939844, 9789819939848

Table of contents :
Contents
List of Figures
List of Tables
Chapter 1: Challenges to Mexico’s Automotive Industry. The USMCA, COVID-19, and Electric Vehicle Production
1.1 The Mexican Automotive Industry
1.2 Japanese Foreign Investment in Mexico’s Automotive Industry
1.3 Challenges to Mexico’s Automotive Industry
1.4 Summing Up
References
Chapter 2: Japanese Cooperation and Suppliers in Mexico’s Automotive Sector. New Challenges from USMCA and Nearshoring
2.1 Introduction
2.2 Fragmentation of Production: From Globalization to Regionalization
2.3 Mexico’s Automotive Sector, Global Supply Chains, and Small and Medium Enterprises
2.4 The Role of Japanese Foreign Direct Investment in the Mexican Automotive Sector
2.5 Japanese Cooperation: The Development of Tier-2 Mexican Suppliers and Training of Human Resources
2.6 Challenges and Opportunities for the Mexican Automotive Sector from USMCA and Nearshoring
2.7 Conclusions
References
Chapter 3: The Role of Japanese Cooperation in the Transition to Electric Vehicle Production in Mexico
3.1 Introduction
3.2 The Mexican Automotive Industry
3.2.1 Automotive Production
3.2.2 Auto Parts
3.3 Transition to EV Production
3.4 Japanese Cooperation and the Transition to EV Production in Mexico
3.5 Conclusions
References
Chapter 4: Japan International Development Cooperation. An Important Tool for Training and Strengthening Supply Chains in the Automotive Industry in the State of Guanajuato, Mexico
4.1 Introduction
4.2 Institutions, Responsible Agents to Promote the Japanese Automotive Sector in Mexico
4.3 The Japanese Automotive Sector in Mexico. Investment and Cooperation to Promote Profits
4.4 For Training, Cooperation
4.5 Conclusions
References
Global Business Reports
Interviews
Chapter 5: The Role of Keiretsu in the Spatial Distribution of Japanese Automotive Production Networks in Guanajuato 2016–2020. A Social Networks Analysis
5.1 Introduction
5.2 Literature Review
5.2.1 Keiretsu in the Automotive Industry
5.3 Empirical Model
5.4 Empirical Framework
5.4.1 Network Analysis
5.5 Results
5.6 Conclusions
References

Citation preview

New Frontiers in Regional Science: Asian Perspectives 72

Leo Guzman-Anaya   Editor

Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector USMCA, Covid-19 Disruptions, and Electric Vehicle Production

New Frontiers in Regional Science: Asian Perspectives Volume 72

Editor-in-Chief Yoshiro Higano, University of Tsukuba, Tsukuba, Ibaraki, Japan

This series is a constellation of works by scholars in the field of regional science and in related disciplines specifically focusing on dynamism in Asia. Asia is the most dynamic part of the world. Japan, Korea, Taiwan, and Singapore experienced rapid and miracle economic growth in the 1970s. Malaysia, Indonesia, and Thailand followed in the 1980s. China, India, and Vietnam are now rising countries in Asia and are even leading the world economy. Due to their rapid economic development and growth, Asian countries continue to face a variety of urgent issues including regional and institutional unbalanced growth, environmental problems, poverty amidst prosperity, an ageing society, the collapse of the bubble economy, and deflation, among others. Asian countries are diversified as they have their own cultural, historical, and geographical as well as political conditions. Due to this fact, scholars specializing in regional science as an inter- and multi-discipline have taken leading roles in providing mitigating policy proposals based on robust interdisciplinary analysis of multifaceted regional issues and subjects in Asia. This series not only will present unique research results from Asia that are unfamiliar in other parts of the world because of language barriers, but also will publish advanced research results from those regions that have focused on regional and urban issues in Asia from different perspectives. The series aims to expand the frontiers of regional science through diffusion of intrinsically developed and advanced modern regional science methodologies in Asia and other areas of the world. Readers will be inspired to realize that regional and urban issues in the world are so vast that their established methodologies still have space for development and refinement, and to understand the importance of the interdisciplinary and multidisciplinary approach that is inherent in regional science for analyzing and resolving urgent regional and urban issues in Asia. Topics under consideration in this series include the theory of social cost and benefit analysis and criteria of public investments, socio-economic vulnerability against disasters, food security and policy, agro-food systems in China, industrial clustering in Asia, comprehensive management of water environment and resources in a river basin, the international trade bloc and food security, migration and labor market in Asia, land policy and local property tax, Information and Communication Technology planning, consumer “shop-around” movements, and regeneration of downtowns, among others. Researchers who are interested in publishing their books in this Series should obtain a proposal form from Yoshiro Higano (Editor in Chief, [email protected]) and return the completed form to him.

Leo Guzman-Anaya Editor

Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector USMCA, Covid-19 Disruptions, and Electric Vehicle Production

Editor Leo Guzman-Anaya Departamento de Recursos Humanos Universidad de Guadalajara, CUCEA Zapopan, Jalisco, Mexico

ISSN 2199-5974     ISSN 2199-5982 (electronic) New Frontiers in Regional Science: Asian Perspectives ISBN 978-981-99-3984-8    ISBN 978-981-99-3985-5 (eBook) https://doi.org/10.1007/978-981-99-3985-5 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Contents

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Challenges to Mexico’s Automotive Industry. The USMCA, COVID-19, and Electric Vehicle Production ������������������������������������������   1 Leo Guzman-Anaya

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Japanese Cooperation and Suppliers in Mexico’s Automotive Sector. New Challenges from USMCA and Nearshoring ����������������������   7 Melba Falck-Reyes

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The Role of Japanese Cooperation in the Transition to Electric Vehicle Production in Mexico 31 Leo Guzman-Anaya

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Japan International Development Cooperation. An Important Tool for Training and Strengthening Supply Chains in the Automotive Industry in the State of Guanajuato, Mexico ��������������������  53 Maria Elena Romero

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The Role of Keiretsu in the Spatial Distribution of Japanese Automotive Production Networks in Guanajuato 2016–2020. A Social Networks Analysis����������������������������������������������������������������������  71 Maria Guadalupe Lugo-Sanchez

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List of Figures

Fig. 2.1 Number of enterprises in the automotive sector, 2013–2018. Source: Own elaboration with information from INEGI (2018). Censos Económicos (2019). Resultados definitivos. https://www. inegi.org.mx/app/saic/default.html��������������������������������������� Fig. 2.2 Number of employees in the automotive sector, 2013–2018. Source: Own elaboration with information from INEGI. Censos Económicos (2019). Resultados definitivos. https://www.inegi. org.mx/app/saic/default.html��������������������������������������������� Fig. 2.3 Mexico’s automotive sector trade, 2005–2022 (million dollars). Source: United Nations (2023) Comtrade database. Trade data. https://comtradeplus.un.org/TradeFlow and INEGI, Banco de Información Económica. https://www.inegi.org.mx/app/ indicadores/?tm=0. Calculations include the following codes of the Harmonized System: 870120, 8702, 8703, 8704, 8705, 8705, 8706, 8707, 8708, 87089, 8711������������������������������������������� Fig. 2.4 FDI flows to Mexico in the manufacturing sector and transport equipment sector, 2003–2022 (million dollars). Source: Own elaboration with data from the Secretaría de Economía (2022), Comisión Nacional de Inversiones Extranjeras. https://www.gob. mx/cms/uploads/attachment/file/785699/Informe_ Congreso-­2022-­3T__VF_.pdf�������������������������������������������� Fig. 2.5 Accumulated FDI from Japan to Mexico 2003–2022 (million dollars). Source: Own elaboration with information from Secretaría de Economía, Comisión Nacional de Inversiones Extranjeras. https://www.gob.mx/cms/uploads/attachment/ file/785699/Informe_Congreso-­2022-­3T__VF_.pdf�������������������� Fig. 2.6 Japan’s vehicle production, exports, and domestic sales in Mexico, 2005–2022 (vehicle units). Source: Own elaboration with information from INEGI. Registro Administrativo de la Industria Automotriz de Vehículos. https://www.inegi.org.mx/ datosprimarios/iavl/#Fecha_de_publicacion����������������������������

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List of Figures

Fig. 2.7 Auto parts suppliers interviewed by JETRO between 2008 and 2022 (Mexican states). Source: Own elaboration with information from JETRO (2023). Overseas Business Information. Mexican local auto parts supplier information https://www.jetro.go.jp/ world/cs_america/mx/autoparts.html������������������������������������ Fig. 2.8 Local content of Japanese brand vehicles assembled in Mexico and sold in the United States, 2022. Source: Own elaboration with information from NHTSA (2023) U.S. Department of Transportation National Highway Traffic Safety Administration https://www.nhtsa.gov/part-­583-­american-­automobile-­labeling-­ act-­reports������������������������������������������������������������������ Fig. 2.9 Regional content of Japanese brand vehicles assembled in Mexico and sold in the United States, 2022. Source: Own elaboration with information from NHTSA U.S. Department of Transportation National Highway Traffic Safety Administration https://www.nhtsa.gov/part-­583-­american-­automobile-­labeling-­ act-­reports������������������������������������������������������������������ Fig. 3.1 Mexico’s main exports, 2021. Source: Author’s elaboration using data from Trade Map (2022)��������������������������������������� Fig. 3.2 Mexico’s automobile production (units). Source: Author’s elaboration using data from AMIA (2022). Notes: Figures with * show estimates of production������������������������������������� Fig. 3.3 Mexico’s automobile exports (units). Source: Author’s elaboration using data from AMIA (2022). Notes: Figures with * show estimates of production������������������������������������� Fig. 3.4 Exports and internal sales of auto parts (million dollars). Source: Author’s elaboration with data from INA (2022)�������������� Fig. 3.5 Auto parts exports and internal sales forecast (million dollars). Source: Author’s elaboration with data from INA (2022)�������������� Fig. 3.6 Auto part employment by country in North America, 2021. Source: Author’s elaboration with data from INA (2022)�������������� Fig. 3.7 FDI in auto parts industry by major countries, 2021 (million dollars). Source: Author’s elaboration with data from INA (2022)������ Fig. 3.8 Accumulated auto part FDI by major countries, 1999–2021 (million dollars). Source: Author’s elaboration with data from INA (2022)����������������������������������������������������������������� Fig. 3.9 Electric vehicle production forecasts in North America (total units). Source: Author’s elaboration with data from INA (2022)������ Fig. 5.1 Random Social Network Analysis of the Japanese automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software��������������������������������������������������������������

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List of Figures

Fig. 5.2 Fruchterman Reingold Social Network Analysis of the Japanese automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software�������������������������������������������� Fig. 5.3 Label adjust Social Network Analysis of the Japanese Automotive assemblers and their linkages to Japanese automotive suppliers in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software�������������������������������������������������������������� Fig. 5.4 Random Social Network Analysis of Honda’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software�������������������������������������������������������������� Fig. 5.5 Random Social Network Analysis of Mazda’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software�������������������������������������������������������������� Fig. 5.6 Random Social Network Analysis of Nissan’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software�������������������������������������������������������������� Fig. 5.7 Random Social Network Analysis of Toyota’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software��������������������������������������������������������������

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List of Tables

Table 2.1 Mexico’s automotive sector share in the economy (%)��������������� Table 2.2 Announced Japanese FDI to Mexico, 2003–2021��������������������� Table 2.3 Japanese OEMs share in Mexican exports, production, and domestic sales of vehicles����������������������������������������������� Table 2.4 JICA’s selected projects of bilateral cooperation for the development of Mexico’s automotive sector, 2012–2023������������ Table 2.5 Investment projects announced by Japanese companies in Mexico’s automotive sector, 2021–2022������������������������������� Table 3.1 Mexican auto part exports by major countries (million dollars)����� Table 3.2 Mexican imports of auto parts by major countries (million dollars)�������������������������������������������������������������������� Table 3.3 Regional share of auto part production, 2021������������������������� Table 3.4 State share of auto part FDI, 2021�������������������������������������� Table 4.1 SMEs installed in the State of Guanajuato by number of employees, 2020–2021 (Pandemic period)����������������������������

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Chapter 1

Challenges to Mexico’s Automotive Industry. The USMCA, COVID-19, and Electric Vehicle Production Leo Guzman-Anaya

Abstract  The Mexican automotive industry faces challenges from an evolving context and changes in the manufacturing process. The industry is a pillar of the Mexican economy and showed resilience during the COVID-19 pandemic. As the world moves to a post-COVID-19 scenario, the industry faces new challenges stemming from the United States-Mexico-Canada Agreement (USMCA) regulations and a shift to Electric Vehicle (EV) production. Japanese cooperation has shown to be an important avenue for supplier development and human resource training needed in the industry. Keywords  Mexican automotive industry · USMCA · COVID-19 · Electric vehicles · Japanese cooperation

1.1 The Mexican Automotive Industry Globally, as the world moves past the COVID-19 disruption, automotive sales recover to pre-pandemic levels. According to forecasts, global automotive sales will rise 7.5% in 2022, surpassing levels registered in 2019. However, recovery will vary depending on the region, the pace of overall economic restoration, and the deepness of the economic slump endured during the pandemic. Several automakers are still struggling to meet recovering demand due to global chain disruptions (The Economist 2021). In 2022, Mexico ranked globally seventh in total production of cars and commercial vehicles, an increase of 10% compared with 2021 (OICA 2023). The country also ranks fourth in global exports, concentrating in the North American market. The industry’s dynamism generates over 930,000 jobs and 3.5% of the total GDP, L. Guzman-Anaya (*) Human Resources Department, CUCEA, University of Guadalajara, Guadalajara, Mexico e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Guzman-Anaya (ed.), Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector, New Frontiers in Regional Science: Asian Perspectives 72, https://doi.org/10.1007/978-981-99-3985-5_1

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and 18.3% of the manufacturing GDP (AMIA 2022). Despite the fall in production of 20% in 2020, the industry has recovered to pre-pandemic levels, a sign of development and integration of the North American production networks. Furthermore, Mexico has become an important hub for auto parts production. Globally, it is the fourth largest producer of auto parts and the leading supplier to the US market. There are around 2000 firms at tier 1 and tier 2 supplier levels; the auto parts industry represents around 8% of the manufacturing GDP. The auto parts sector also showed a recovery after the COVID-19 pandemic. After experiencing a drop of 800,000 units in 2020, by 2021, production was registered at pre-pandemic levels (AMIA 2022). The industry’s resiliency is a result of a long tradition of automotive production that dates back to the 1920s with the arrival of Ford Motor Company. Since then, major automakers have been established in the country, and a production network spanning the country’s center, western, and northern regions has flourished. The North American Free Trade Agreement (NAFTA) also contributed to the integration of Global Value Chains (GVC) in Mexico, Canada, and the USA. During the middle of the 2010s, a new wave of automotive investment was observed with the arrival of Japanese automakers and suppliers to Mexico’s central and western regions. This investment brought new possibilities for the industry, especially regarding integrating Japanese GVCs with endogenous suppliers required at different procurement levels.

1.2 Japanese Foreign Investment in Mexico’s Automotive Industry In the past 20 years, Mexico has been favored by increasing flows of foreign direct investment (FDI), and FDI from Japan stands out as one of the most important, especially in the automotive sector. The interest from Japanese investors began in the 1990s with the signing of the North American Free Trade Agreement (NAFTA). The arrival of Nissan and the location of two plants in Aguascalientes and Morelos attracted further investment. Additionally, the entry into force of the Mexico-Japan Partnership Agreement (EPA) in 2005 increased FDI flows to the automotive industry. The spur of Japanese investment has more than doubled in the past 5 years, and around 70% of total investment is concentrated in the auto parts and automobile sectors. The number of Japanese companies recently went from 400 firms in 2009 to over 1300 in 2020. Several factors have contributed to this flow of investment: the network of Free Trade Agreements (FTA) signed by Mexico (13 with 50 countries); the strategic location of the country as an export hub to the North American and South American markets; the potential growth of domestic and foreign markets nearby Mexico (North America and Latin American countries); the network of suppliers and infrastructure already established in Mexico; as well as stable macroeconomic

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indicators, competitive manufacturing costs, and qualified labor force. Furthermore, as previously mentioned, signing the Economic Partnership Agreement between Japan and Mexico in 2004 also contributed largely to this end. Japanese automotive investment has concentrated primarily in Mexico’s central and western regions. Major Original Equipment Manufacturers (OEMs) have established in these regions, which in turn has incentivized the agglomeration of Japanese tier 1 and tier 2 suppliers. The location decisions of Japanese automotive firms have brought cooperation possibilities with local economic actors in Mexico. For example, the Japan International Cooperation Agency (JICA) has set forward several projects with local governments aimed at human capital and supplier development. The results have been positive in increasing suppliers’ technological and managerial capabilities via kaizen training (Katai 2020; Guzman-Anaya 2019). As the industry moves toward Electric Vehicle (EV) production, several challenges will arise in the Mexican automotive industry, and Japanese cooperation will be crucial to face the new conditions.

1.3 Challenges to Mexico’s Automotive Industry The COVID-19 pandemic and the USMCA regulations pose a challenge to Mexico’s Automotive industry. The COVID-19 pandemic brought disruption to supply chains around the world. As a result, car manufacturers began to exert more considerable control over their production process. This change will result in nearshoring or reshoring processes for the industry, shifting to a preference for in-house production. The vertical integration of the industry may reduce supplier importance, especially for SME endogenous firms, and this will be more noticeable as the industry moves to Electric Vehicle production. In 2021, automotive industry executives expressed high levels of concern about supply chains, primarily regarding the near-term availability and prices of semiconductors, steel, rare earth elements, exotic materials, and labor (KPMG 2021). On the other hand, the USMCA brings new rules that require firms to evolve. For example, local content requirements of USD 16 per hour will be challenging. The labor market provisions indicate that 40–45% of automobile parts must be made by workers earning at least USD 16 per hour by 2023. Besides that, the new Rules of Origin (ROO) contained in USMCA will require that by 2023 the origin of 75% of parts and components of automobiles should come from the region as opposed to 62.5% during NAFTA. Thus, the current scenario poses significant opportunities for further integration in the region, and Mexico will play a key role in strengthening the North American supply chain. As a result, SME supplier firms must be prepared for the changes observed in the industry, and Japanese cooperation will be vital in facing these conditions. These challenges will require SMEs to evolve and acquire new technical skills to successfully insert themselves into restructured value chains. As a result, Japanese

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cooperation will be critical for the transmission of knowledge, technology, and know-how needed in the reshaping of the automotive industry in Mexico.

1.4 Summing Up As the automotive industry moves past recent disruptions, profitable growth is expected in the next 5 years. The industry is confident it can be prepared to withstand the following significant crisis. The purpose of this book is twofold: first, to analyze Mexico’s automotive industry, the impact of COVID-19 and USMCA regulations, and its evolution to electric vehicle production. Second, to highlight the role of Japanese cooperation in the challenges that Small and Medium Size Enterprises (SMEs) face in reshaping the industry. The analysis is pioneering since it will focus on Japanese cooperation’s role in facing these challenges as the industry moves toward Electric Vehicle production. The project’s relevance relies on the fact that the COVID-19 pandemic and the USMCA reshaped the industry, and new challenges to the automotive sector in Mexico are looming. The book is organized as follows: Chapter 2 presents the important role of Japanese cooperation in developing the automotive industry. The analysis employs the fragmentation of production approach, and with firm-level data, it highlights the role that Japanese FDI has played in the Mexican automotive industry. Japanese FDI in the industry is considered a main stakeholder regarding production, exports, and employment. Therefore, Japanese cooperation has eased local supplier development and human resource training, allowing the expansion of networked production chains in North America. Japanese cooperation can inform public policies to overcome imminent challenges threatening the development of the automotive sector. Chapter 3 discusses the challenges the industry faces as it evolves into Electric Vehicle (EV) production. The author mentions that the EV transition will be experienced in stages, with developed nations converting in the first stage and developing nations in the latter stage. However, COVID-19 and new USMCA regulations have accelerated interest in EV technology for consumers and producers in the Mexican automotive industry. The chapter explains how these challenges will be observed for the industry, especially for Small and Medium Size Enterprises (SMEs) that will need to adapt to new manufacturing processes. The crowding-out effect will be felt by firms that do not meet quality and dependability indicators, as the industry will require fewer parts and components. According to the author, Japanese cooperation may assist in the EV transition by seeking joint ventures and projects with local governments aimed at human capital and supplier development. Chapter 4 focuses on the weaknesses of SMEs and Japan’s efforts to meet the needs of large industries located in Guanajuato through JICA programs. The study employs institutional neoliberalism as the theoretical approach to understand the importance of institutions as instruments of certainty to agreements and to maximize the results of the International Development Cooperation (IDC). The analysis

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is centered on how IDC supports small and medium-sized enterprises to improve the local labor force and strengthen the Mexican automotive industry. The author highlights that local governments and development agencies from Mexico and Japan contribute to taking advantage of externalities from FDI and IDC by designing adequate public policies. Chapter 5 deals with the role of the Keiretsu in the spatial distribution of Japanese automotive production networks in Guanajuato. Company relationships are analyzed using Social Network Analysis (SNA), and closeness between major assemblers in Mexico is presented. Companies such as Toyota, Honda, and Mazda are topologically close and share ties. Furthermore, supplier exclusivity is scarce, and shared suppliers are favored. This organizational preference allows firms to benefit from supplier development and favors suppliers’ ability to diversify their client base. Finally, The COVID-19 pandemic has introduced the necessity to reconsider productive processes in the automotive industry, enhancing supply chains through cooperative ties. In this regard, the Japanese keiretsu system in Mexico is observed as a complicated, intertwined, and collaborative production network.

References AMIA (2022) Importancia de la Industria Automotriz. https://amia.com.mx/publicaciones/industria_automotriz/. Accessed 29 Sept 2022 Guzman-Anaya L (2019) Knowledge transfer in the automotive industry: The Case of JICA’s project for automotive supply chain development in Mexico. México y la Cuenca del Pacífico 8(23):93–122. https://doi.org/10.32870/mycp.v8i23.609 Katai K (2020) The role of Kaizen in participation in the global value chain: the case of the Mexican Automotive Industry. In: Hosono A et  al (eds) Workers, managers, productivity. Springer, Singapore, pp 171–195 KPMG (2021) 22nd Annual Global Automotive Executive Survey, Industry Leaders Foresee Dramatic Changes. KPMG International OICA (2023) 2022 production statistics. International Organization of Motor Vehicle Manufacturers. https://www.oica.net/category/production-­statistics/2022-­statistics/. Accessed 21 Mar 2022 The Economist (2021) Automotive in 2022. A report by EIU.  The Economist Intelligence Unit Limited

Chapter 2

Japanese Cooperation and Suppliers in Mexico’s Automotive Sector. New Challenges from USMCA and Nearshoring Melba Falck-Reyes

Abstract  During the past three decades, Mexico has participated actively in Global Supply Chains (GSC). The Mexican automotive sector stands out as one of the major players by becoming the fourth global exporter of automobiles and the seventh of auto parts. Japanese cooperation has played an essential role in promoting the sector’s development and thus increasing the impact of Japanese Foreign Direct Investment (FDI) in the country. Using the Fragmentation of Production approach and based on firm-level data, this chapter analyses the role that Japanese FDI has played in the Mexican automotive sector, becoming a main stakeholder in the sector’s production, exports, and employment. The study also shows how Japan’s cooperation has facilitated the development of local suppliers and the training of human resources, facilitating the entry to the networked production chains that Japan has contributed to building in North America. With the new challenges posed to local suppliers by the new rules of origin from USMCA and the recent tendencies of nearshoring, the chapter highlights how the experience accumulated through Japanese cooperation can inform public policies to overcome those challenges for the development of the automotive sector. Keywords  Japan Cooperation · Global Supply Chains · USMCA · Nearshoring

2.1 Introduction Currently, Mexico is one of the major exporters and importers of the world and is participating actively in Global Supply Chains (GSC). Moreover, the automotive sector stands out as one of the major players, where Mexico is the fourth global The author thanks the collaboration by David Ramos Luna. M. Falck-Reyes (*) University of Guadalajara, Guadalajara, Mexico © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Guzman-Anaya (ed.), Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector, New Frontiers in Regional Science: Asian Perspectives 72, https://doi.org/10.1007/978-981-99-3985-5_2

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exporter of automobiles and the seventh of auto parts. Based on a solid network of free trade agreements, Foreign Direct Investment (FDI) has contributed notably to the enrollment of Mexico in these new tendencies of flows of trade. Japanese Multinationals contribute one-third of Mexico’s production and exports of automobiles, and they do have high participation in sales in the domestic market. Japanese FDI has been a major source of Mexico’s success in its integration into the regional network of production in North America. Nowadays, about 1300 Japanese affiliates are operating in Mexico, including Original Equipment Manufacturers (OEM) and Small and Medium Enterprises (SMEs) producing parts and components. Mexico’s participation in GSC has been characterized mainly by backward linkages, which means that imported inputs have a high participation in value added of gross exports. This situation represents an opportunity for Mexican SMEs to incorporate national inputs into the export flows subject to new regional and global tendencies. At the regional level, the New Rules of Origen (ROO) of the United States, Mexico, and Canada Trade Deal (USMCA), as well as the new rules regarding salaries paid in the production of parts and components of vehicles exported within the region imply new opportunities for Mexican SMEs. At the global level, the disruption of GSC caused by COVID-19’s lockouts, their impact on the global supply of intermediate goods, and higher transportation costs are leading to new tendencies for the organization of GSC known as nearshoring, reshoring, and friend shoring. They all bring opportunities for Mexican SMEs to become suppliers of inputs, substituting production mainly from Asia. Finally, the new transformation of the automotive industry toward Electrical Vehicles (EV) is drastically changing the production structure of the sector, reducing the number of parts and components used in a fossil fuel combustion car. One implication of this new tendency will be on employment levels and new qualifications required in the labor force. Moreover, Japanese OEMs have announced their plans to follow these tendencies at a slower pace. This chapter employs the Fragmentation of Production approach to study the role of Japanese Cooperation in facilitating Mexican SMEs to join GSC more efficiently, given the experience already accumulated by Japanese Cooperation in developing local suppliers and labor training programs. The study considers the high enrollment level of Japanese FDI in the Mexican automotive sector and the experience developed during the past seventeenth years of cooperation under the rules of the Partnership Agreement between Mexico and Japan. After a theoretical discussion on the Fragmentation of Production, the chapter is organized into four sections. The first one is dedicated to highlighting the automotive sector’s current role in GSC and its relevance to SMEs in Mexico. The next section addresses the role that Japanese FDI plays in the Mexican automotive sector, followed by an analysis of the role that Japanese Cooperation has played in developing suppliers to the automotive sector and training human resources. The last section is dedicated to evaluating the challenges posed by USMCA and nearshoring to suppliers in the Mexican automotive GSC. Conclusions close the chapter.

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2.2 Fragmentation of Production: From Globalization to Regionalization Since the mid-1980s of the past century, Multinational Companies (MNCs), favored by advances in information technology and the development of world transportation systems, shifted to new ways of organizing production, dispersing their production plants around the world by taking advantage of costs differences between countries (Kimura and Ando 2005). During this process, developing countries became part of the new networks of production led by developed countries’ foreign direct investment flows through the establishment of OEMs and their affiliates in recipient economies. In this manner, local Small and Medium Enterprises (SMEs) had the opportunity to join the new supply chains and become part of the GSC (Harvie and Charoenrat 2015). This model of the organization of production at the international level meant that countries could advance in their development by specializing in production processes and transforming their comparative advantages as flows of intermediate goods became the international rule. MNCs’ decisions on input sourcing and sales of final goods were fundamental in determining regional and global flows of goods, giving way to networked investment (Kimura 2015; Baldwin and Okubo 2013; Baldwin 2011). Under this model of fragmentation of production, imported inputs were incorporated into exporting goods, intermediate as well as final, and it became common for a good to cross borders more than once, giving way to new concepts of gross and net exports and imports depending on the value added in the process by each country. Hence, backward linkages (sourcing of foreign inputs) and forward linkages (supplying inputs) became indicators of a country’s exposure to supply chains, domestically and internationally (Baldwin et al. 2022). Under this new paradigm of global production, China, the United States (US), Germany, and Japan became the main hubs of production in their respective regions. Thus, emerged a new pattern of “hubs and spokes,” as labeled by Baldwin et al. (2022). By far, China turned out to be the leading supplier of inputs as more companies offshored their production to that country attracted by lower costs. In the process, the United States became more dependent on imports of intermediate goods from Asia. However, since 2016 under the US government of President Trump, trade differences raised between the United States and China, and consequently, companies in the United States started looking for alternative sources of suppliers. This tendency became more pronounced as the COVID-19 pandemic, initiated in China, caused severe disruptions to global value chain operations since 2020, making evident the risks involved in concentrating on a few suppliers of intermediate goods. Hence, GSC are switching to a new strategy privileging resiliency and minimizing risks over costs and efficiency (Fernandez-Stark and Bamber 2022). Accordingly, reshoring and nearshoring are becoming more predominant. Hence, under these recent geopolitical and pandemic-related rearrangements of the production network of supply chains at the global and regional levels, the participation of SMEs in developing countries faces important challenges. These challenges are related to firms improving their productivity levels, technological

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capabilities, and skilled labor force, among others. Furthermore, for the recipient countries, openness to trade, efficient infrastructure and logistics, and good governance are required attributes (Urata and Baek 2020). Moreover, in those current regional arrangements, more companies are looking to establish their plants in the North American region, where Mexico has become an attractive alternative because of its geographic position as well as its well-developed ecosystem. As a result, Japan, through its networked investment in the North American region, has become a strategic economic partner for Mexico, where cooperation has turned into an essential aspect of the relationship to potentiate the benefits that Mexican SMEs can get from their current participation in global and regional supply networks.

2.3 Mexico’s Automotive Sector, Global Supply Chains, and Small and Medium Enterprises Since Mexico started its liberalization policy of the economy back in the mid-1980s, first unilaterally and then following a reciprocal strategy by signing free trade agreements with the major economies of the world, the country became an important player in the international economy, participating actively in GSC through flows of trade and as a recipient of foreign direct investment. Mexico stands out as the seventh global automotive producer (OICA 2022). It is one of the leading exporters and importers of global merchandise trade, ranking in 12th place in both indicators in 2021. Moreover, the country stands among the group of the top 10 major global exporters and importers of manufactures. Furthermore, Mexico is the fourth leading exporter of automotive products and the seventh main importer (WTO 2022a, 2022b). More specifically, Mexico is the fifth exporting country of motor vehicles for transporting persons, the first for transporting goods and road motor vehicles, and the fifth exporter of parts of motor vehicles (UN 2021). Thus, the automotive sector has become an important engine for the Mexican economy contributing to employment and the formation of production networks both at the domestic and regional levels, as well as its outstanding participation in trade flows and in attracting foreign direct investment. Consequently, the automotive sector’s share in Mexico’s Gross Domestic Product (GDP) has expanded from 1.8% in 2003 to 3.01% in 2022, while its participation in manufacturing GDP grew from 10.6% to 18% in the same period (Table 2.1). According to the results of the last Economic Census in 2018, the production base of the automotive sector is constituted of 3000 enterprises, where 6% are in the automotive sub-sector, including the Original Equipment Manufacturers (OEM), while 94% are producers of auto parts, most of them SMEs. The number of companies involved in the production of auto parts has increased by 57% between 2003 and 2018, which denotes the dynamism of this sub-sector. Hence, the automotive sector became an important source of employment in

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Table 2.1  Mexico’s automotive sector share in the economy (%) Economic indicator GDP GDP manufacture sector

2003 1.8 10.6

2008 2 12.4

2013 2.5 16.1

2019 3.07 19.3

2022 3.01 18

Source: Own elaboration with data from INEGI (2023b) Banco de Información Económica (BIE) https://www.inegi.org.mx/app/indicadores/?tm=0. Calculations include the following codes of the North American Industry Classification System (NAICS): 3361 = Motor Vehicles Manufacturing, 3362 = Motor Vehicle Body and Trailer Manufacturing, 3363 = Motor Vehicles Parts Manufacturing, and 3369 = Other Transportation Equipment Manufacturing

Fig. 2.1  Number of enterprises in the automotive sector, 2013–2018. Source: Own elaboration with information from INEGI (2018). Censos Económicos (2019). Resultados definitivos. https:// www.inegi.org.mx/app/saic/default.html

manufacturing, with 1.2 million employees in 2018,1 90% working in the auto parts industry (Figs. 2.1 and 2.2). Regarding the impact on trade, between 2005 and 2022, automotive sector exports (automobiles and auto parts) have shown a growing tendency, especially since the global financial crisis of 2008 (see Fig. 2.3). In fact, automotive exports grew four times during this period with an average annual growth rate of 11%, notwithstanding the negative impact of the global crisis in 2008 and that of COVID-19 in 2020. In comparison, automotive sector imports have shown a lower growth rate during the same period, thus generating a growing surplus of 101.7 billion US dollars in 2022, ten times as big as the one reported in 2005. However, it must be noted that gross exports and gross imports include foreign value added represented by inputs imported that are incorporated into final and intermediate goods exported (backward linkages), as well as value added by Mexico in imports (forward linkages) (Winkler et al. 2021).  This figure does not include employment at the distribution stage.

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Fig. 2.2  Number of employees in the automotive sector, 2013–2018. Source: Own elaboration with information from INEGI. Censos Económicos (2019). Resultados definitivos. https://www. inegi.org.mx/app/saic/default.html

Fig. 2.3 Mexico’s automotive sector trade, 2005–2022 (million dollars). Source: United Nations (2023) Comtrade database. Trade data. https://comtradeplus.un.org/TradeFlow and INEGI, Banco de Información Económica. https://www.inegi.org.mx/app/indicadores/?tm=0. Calculations include the following codes of the Harmonized System: 870120, 8702, 8703, 8704, 8705, 8705, 8706, 8707, 8708, 87089, 8711

To have a more accurate picture of the Mexican automotive sector involved in GSC, a current database on Trade in Value Added (TIVA) published by OECD (2021) based on 66 economies and 45 industrial sectors supplies relevant statistical

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information about value added in trade in Mexico during the period between 1995 and 2018. In general, in 2018, about one-fourth of Mexican domestic value added met final foreign demand, and for the automotive sector, this figure stands out at 78.8%, showing its integration in GSC.  The most important partner of Mexico’s trade is the United States (USA), where 67% of value-added exports have that destination and from where 46% of value added is imported, followed by China (13.8%) and the European Union and Canada (6% each). It must be noted that regarding imports, especially intermediate goods, China, Japan, and South Korea, have become important suppliers for Mexico’s imports while the United States has lost its relative share (Falck-Reyes 2018). Regarding the foreign content in Mexican gross exports, in 2018, it represented more than one-third (35.9%) at the national level. In contrast, the foreign content on gross exports was even higher at 44% for the automotive sector. Notwithstanding, the automotive sector contributed the highest share (16.4%) of value-added content of Mexican exports in that year. Thus, Mexico’s automotive sector has stronger backward linkages (sourcing inputs) than forward linkages (supplying inputs) in its participation in global production networks. Therefore, it depends less on local inputs (Winkler et al. 2021). However, it also implies an opportunity to fill the gap by SMEs. The dynamism showed by the automotive sector in the past three decades has been favored by the reciprocal preferential treatment under the free trade agreements signed by Mexico since the 1990s and by the flows of Foreign Direct Investment (FDI) of which the automotive sector has been a major recipient. In fact, according to the recent report of the National Commission on Foreign Investment (2022), during the period from 1999 to September 2022, the accumulated FDI received by Mexico amounted to 671.1 billion US dollars, and almost half of it (47%) was directed to the manufacturing sector. Within the latter, the most favored sector was Transport Equipment (automobiles and auto parts), with an accumulated amount of 84.3 billion US dollars during the same period (Fig. 2.4), representing 29% of the FDI received by the manufacturing sector. The current structure of the Mexican automotive sector reflects these tendencies. At the top of the sector, there are about 20 OEMs in charge of automobile assembly, mainly from the United States, Germany, and Japan, and more recently from South Korea and China. They are followed by enterprises at the Tier-1, Tier-2, and Tier-3 levels of procurement. All of the Tier-1 companies are of foreign capital and are the ones that supply highly technological automotive components directly to OEMs, followed by Tier-2 and Tier-3 levels (González 2022; AMIA et al. 2020; INA 2023). Mexican SMEs participate mainly at the Tier-3 and some at the Tier-2 levels, sharing their participation with foreign enterprises. As noted above, there are currently 2818 Mexican SMEs engaged in auto parts production that employ 1.1 million people. Until 2018, major challenges for the sector were to incorporate more Mexican SMEs as suppliers at GSC, to increase their forward linkages (Winkler et al. 2021), and to escalate the ladder structure of the sector. Between 2003 and 2018, the number of SMEs that joined the GSC increased by 1025, but most were incorporated

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Fig. 2.4  FDI flows to Mexico in the manufacturing sector and transport equipment sector, 2003–2022 (million dollars). Source: Own elaboration with data from the Secretaría de Economía  (2022), Comisión Nacional de Inversiones Extranjeras. https://www.gob.mx/cms/ uploads/attachment/file/785699/Informe_Congreso-­2022-­3T__VF_.pdf

into the Tier-3 level. Hence, upgrading remains a challenge to SMEs that join the sector. Moreover, in the past 5 years, new challenges and opportunities have been raised in the Mexican automotive sector from the new tendencies in the geopolitical and economic spheres (Fernandez-Stark and Bamber 2022; Carrillo and de los Santos 2022). First, with the trade disputes between China and the United States, companies in the latter started to substitute Chinese suppliers for other countries in Asia, and Mexico became an opportunity. Second, in 2020 the North American Free Trade Agreement (NAFTA) was replaced by the United States, Mexico, and Canada Trade Agreement (USMCA) which includes new rules that, among other things, have an important impact on the functioning of the production network of the automotive industry. Third, the pandemic of COVID-19 affected GSC operations since 2020, and considering the significant role played by China as the world center of production of intermediate goods, disruptions of flows of trade and increasing costs of transportation became the rule as cities, ports, and companies were shut down. Hence, GSC started to rethink their global organization of production by favoring resilience and security over production costs. As already noted, the tendency was reinforced by Russia’s invasion of Ukraine, which also affected the supply of raw materials and goods. These new tendencies, especially since 2022, have given way to new strategies in companies’ decisions regarding their networks of suppliers in what has been denominated as reshoring, nearshoring, and friend shoring. In North America, Mexico has become a new target for nearshoring. Finally, the transition to

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Electrical Vehicles in the automotive industry will also impact the current organization of the Mexican automotive industry.2 Under these new trends, the Mexican SMEs that have joined the automotive sector have new opportunities to increase their participation in the regional networks of production in North America but, at the same time, face new challenges to scale to higher levels of technology and to improve the skills of the labor force (Carrillo and de los Santos 2022; Winkler et al. 2021). Moreover, cooperation is needed among the government at the national and local levels, the automotive clusters, and the academy to achieve those goals and to take advantage of the cooperation programs of major investors in the country. For example, Japan has become one major stakeholder in the Mexican automotive industry. The following section will address Japan’s role as an investor and cooperator.

2.4 The Role of Japanese Foreign Direct Investment in the Mexican Automotive Sector In 2004, Japan and Mexico signed the Economic Partnership Agreement (EPA), the first for Mexico with a country in Asia and the first for Japan in the Western hemisphere. Since then, Japan has become a strategic economic partner for Mexico (Falck-Reyes 2022). The economic alliance has benefited both countries as trade flows have increased, and Mexico has been a major recipient of Japanese FDI. This brought positive impacts on Mexico’s exports to North America and employment as well as positive externalities on the recipient’s local entities of the country (Falck-­ Reyes and Guzman-Anaya 2018). For Japan, Mexico has become an essential platform for exporting to the United States, taking advantage of the Mexican developed ecosystem and favorable conditions in the labor market. Furthermore, the EPA included a chapter on cooperation that has, among their activities, promoted the development of local suppliers and the training of human resources with an emphasis on the automotive sector. Japan has become the fourth major foreign investor in Mexico after the United States, Spain, and Canada. As seen in Fig. 2.5, Japanese FDI has shown a growing tendency since 2003, with an accumulated total, until September 2022, of 28.2 billion dollars representing 4.6% of the total FDI received by Mexico. Currently, 1300 Japanese affiliates are operating in Mexico, together with the 3235 affiliates operating in North America (METI 2022), which are part of a network of production that has contributed to the integration of the region (Falck-Reyes 2018). For instance, overseas production of Japanese affiliates has shown an increasing tendency since the 1980s when Japan started investing abroad. One of the manufacturing sectors

 See Chap. 3 of this book for an analysis of the impact of EV transition in Mexico’s automotive sector. 2

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Fig. 2.5  Accumulated FDI from Japan to Mexico 2003–2022 (million dollars). Source: Own elaboration with information from Secretaría de Economía, Comisión Nacional de Inversiones Extranjeras. https://www.gob.mx/cms/uploads/attachment/file/785699/Informe_Congreso-­2022­3T__VF_.pdf Table 2.2  Announced Japanese FDI to Mexico, 2003–2021

Automotive components Automotive OEM Automotive total General total Automotive %

No. of projects announced 212

Jobs announced 82,132

Capital investment announced (in million USD) 7267.1

42 254 580 43.8%

789 82,921 173,401 47.8%

6602.7 13869.8 18689.4 74.2%

Source: Own elaboration with information from Financial Times (2023). fDiMarkets.com Trends Report: FDI from Japan to Mexico. January 2003 to December 2022

where this tendency has been more pronounced has been the transportation equipment (TE) sector (METI 2022). According to these trends, during the period 2003–2022, investment announced by Japanese companies in Mexico was concentrated mainly in the automotive sector. Of the 580 projects announced during that period, 43.8% were directed to the automotive sector, and most were to the automotive components sector (37%). Furthermore, of the total jobs announced, 47.8% corresponded to the automotive sector, with a total of 82,921 (Table 2.2). As a result, Japan has become the second major foreign investor in the sector after the United States. The results of this flow of investment are shown by the growing importance of Japanese OEMs in the production, exports, and domestic sales of automobiles in Mexico (Fig. 2.6 and Table 2.3). A database prepared by INEGI gathers information from the OEMs operating in Mexico regarding production, domestic sales, and exports decomposed by brands produced by each OEM.  From this database, the production of light vehicles in Mexico increased from 1.6 million units in 2005 to 3.8 million in 2019, decreasing to 3.3 million in 2022 with the impact of the

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Fig. 2.6  Japan’s vehicle production, exports, and domestic sales in Mexico, 2005–2022 (vehicle units). Source: Own elaboration with information from INEGI.  Registro Administrativo de la Industria Automotriz de Vehículos. https://www.inegi.org.mx/datosprimarios/iavl/# Fecha_de_publicacion Table 2.3  Japanese OEMs share in Mexican exports, production, and domestic sales of vehicles Production Domestic sales Exports

2005 23% 27% 14%

2019 31% 41% 27%

2020 25% 33% 28%

2022 27% 38% 24%

Source: Own elaboration with information from INEGI  (2023a). Registro Administrativo de la Industria Automotriz de Vehículos. https://www.inegi.org.mx/datosprimarios/iavl/#Fecha_de_ publicacion

pandemic.3 Japanese OEMs Honda, Mazda, Nissan, and Toyota observed light vehicle production increase by three times to reach 1.2 million in 2019, while the impact of the pandemic decreased production by 250,000 units. Japanese OEMs’ share in Mexico’s vehicle production has increased to almost one-third, and among them, Nissan has the highest participation in 2019 (57.9%), followed by Toyota, Honda, and Mazda. As mentioned above, most of the vehicle production in Mexico is exported (86%). Japanese OEMs contribute 24% of those exports, with a level of 692 000 units exported in 2022, a contraction of 192 000 units compared to 2019. Nissan and Toyota are the major exporters among the four. In the domestic market, seven Japanese OEMs participate, besides the four already mentioned, including Suzuki, Subaru, and Isuzu. The Japanese OEMs participated with 41% of the domestic market in 2019, with leading sales from Nissan, Toyota, and Mazda. It must be noted that the declining tendency of production, exports, and  Figures at the national level are not shown in the Fig. 2.4.

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domestic sales, which started in 2018, was influenced by uncertainty in the political sphere and the negotiations of NAFTA that concluded in 2020 (D.Econosignal Deloitte 2020). Since then, the disruptions in the global supply of inputs have had a significant negative impact. Though, with the new strategies by OEMs regarding nearshoring, the new flows of FDI are expected to positively impact the Mexican automotive sector.

2.5 Japanese Cooperation: The Development of Tier-2 Mexican Suppliers and Training of Human Resources The EPA between Mexico and Japan included a chapter on cooperation that has as one of its goals to facilitate and enhance the impact of Japanese FDI in the country. As such, the agreement included actions favoring SMEs to develop Mexican suppliers and train human resources involved in the GSC (Traslosheros 2021). The Japan International Cooperation Agency (JICA) and the Japan External Trade Organization (JETRO) are the Japanese governmental organizations in charge of developing and coordinating the cooperation activities in collaboration with the government of Mexico at the national level and local level, the automotive clusters, supplier enterprises, and the academic sector. Notwithstanding, during the past three decades, the main challenge for the industrial development of the automotive industry in Mexico has been for the local auto parts suppliers to join the GSC, as noted by Guzman-Anaya (2019). These include the catch-up process to achieve higher levels of productivity and efficiency, improve quality, reduce costs and delivery times, and climb up the sector’s ladder structure. Besides that, local SMEs currently face more competition from new auto parts suppliers coming into Mexico in recent years induced by geopolitical factors including, as already mentioned, the trade frictions between the United States and China and the impact of the pandemic on GSC resilience and hence nearshoring tendencies. Companies from China, Taiwan, Spain, and Germany (MEXICONOW 2023a) have moved production processes to Mexico. Furthermore, local suppliers’ links with Japanese enterprises are subject to stricter rules because of the keiretsu-type organization that prevails in Japanese Multinationals (JMNs) that tend to favor Japanese suppliers.4 According to information gathered from JICA,5 regarding the training of human resources, JICA has offered, uninterruptedly since the signing of the agreement, four types of courses: Knowledge and Co-Creation Program (KCCP) that are collective courses offered in Japan to participants from different countries; country-­ specific courses offered to counterparts from the academic sector such as the National Council of Technical Professional Education (CONALEP) or to clusters of  See Chap. 5 for a discussion on this topic.  The author had several consultations with the Official in Programs of Technical Cooperation.

4 5

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producers of different localities; NICHIBOKU courses, that emphasize the “Human Resources Training for the Global Strategy between Mexico and Japan,” with 50 places for Mexico every year by two modalities: short stay (2 weeks to 2 months) and extended stay (8–12 months) in Japan; and the Third Country Training Program that includes courses in Mexico or other Latin American countries for other Latin American participants. Additionally, there is the program “Japan Overseas Cooperation Volunteers” (JOCV), by which Japanese human resources are assigned to proportionate technical assistance depending on their area of specialization. Between 2017 and 2020, JICA coordinated in Mexico 23 projects (among others)6 under the four categories mentioned above. The projects were related to the development of the SMEs with an emphasis on improving productivity through Kaizen, Monozukuri,7 and managerial and financial training, as well as projects directed to regional and local industry promotion of clusters and automotive manufacturing. Three projects of cooperation carried out by JICA and linked to the automotive sector between 2012 and 2023 stand out (Table  2.4). The first one, implemented between 2012 and 2015 and requested by the Mexican government, was “The Automotive Supply Chain Development in Mexico.” The project’s objective was to support the automotive supply chain by establishing a network with the participation of the state governments, Tier-2 Mexican auto parts suppliers, and Tier-1 Japanese component suppliers in each participating state. The Mexican state governments involved in the project were Guanajuato and Querétaro in the central area known as the Bajío Region and in the north, the state of Nuevo León, all of which form part of the automotive clusters in their respective regions. From the national government, the ProMexico agency participated.8 From JICA, the project included three long-term experts, as well as short-term experts, mobilized in coordination with the Ministry of Economy, Trade, and Industry (METI) of Japan, Japan Automobile Manufacturing Association (JAMA), and Japan Auto Industries Association (JAPIA) in their areas of expertise, including die and mold maintenance, stamping, cold forging, molding materials, die casting, and machining. The project also involved training programs in Japan on areas related to Japanese business practices, operations management, production technology, and automotive industrial policy. Thirty Tier-2 Mexican SMEs participated in the project, including managers and business people, state government employees, and six Tier-1 Japanese enterprises. According to the project’s final report (JICA 2015), results showed that 65% of local Tier-2 parts suppliers that received training on Kaizen philosophy9 achieved  Based on information provided by JICA on the list of projects implemented during the period 2017–2020. 7  Japanese practice that seeks to optimize all processes of the global value chain of a given product. 8  ProMexico, the governmental agency in charge of the promotion of foreign investment and exports was abolished in 2019 under the austerity plan of the present government. 9  Kaizen philosophy that implies continue improvement of working practices and personal efficiency. 6

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Table 2.4  JICA’s selected projects of bilateral cooperation for the development of Mexico’s automotive sector, 2012–2023 Period of execution June 2018–June 2023

Project Strengthening the automotive cluster of Mexico

Objective To strengthen the Mexican automotive enterprises to have better opportunities in the supply chain, fostering local employment and the regional economy through seminars and workshops with the active participation of State Governments and private sector.

September 2015– December 2020

Training of Human Resources for the Automotive Industry in the Bajio Region

October 2012– October 2015

Automotive Supply Chain Development in Mexico

To train technical professionals in the automotive industry to develop 36 coreprofessors in four of the Model Campuses of the National Colleges of Professional Education (CONALEP) in the states of Aguascalientes, Guanajuato, and Queretaro. To establish a network of State Government, Local Tier-2 auto parts suppliers (30) and Japanese component suppliers Tier-1 (6) to develop automotive supply chain

Partners State Governments of Aguascalientes, Guanajuato, Queretaro, San Luis Potosi; Automotive Clusters in Guanajuato, Queretaro, and San Luis Potosi, Pro México and the Mexican Agency for International Cooperation for Development (AMEXCID). CONALEP and the Economic Development Secretaries of the States of Aguascalientes, Guanajuato, and Queretaro.

Input by JICA To strengthen the capabilities of State governments and automotive clusters to develop assistance to local Tier-2 enterprises in technical and organizational fields with methodologies like “5S’s”, KAIZEN, and other processes.

State Governments of Guanajuato, Nuevo León, Queretaro, and Mexico City and ProMexico.

Three long-term experts and Short-term experts. Training in Japan.

Japanese experts to train core-­ professors in the field of automotive industry.

Source: Own elaboration with information from reports from JICA-Mexico

their quality, control, and delivery targets, and 70% of them implemented Kaizen practices in their workplace. Based on a survey of Tier-2 SMEs participants, 80% manifested that they had increased their transactions with Tier-1 Japanese companies and that the participation of the state governments in the business encounters contributed to increasing opportunities with Tier-1 Japanese enterprises. Furthermore, an evaluation of this project by Guzman-Anaya (2019) focusing on the State of Guanajuato and based on interviews with Tier-2 participants confirmed

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the above results that firms that participated in the program improved their productivity levels and diversified and increased their market shares. Japanese Tier-1 firms interviewed acknowledged that the training provided Tier-2 firms with the tools to implement Kaizen practices and improve their performance, but they still saw room for improvement. The second project of cooperation carried out by JICA was the “Training of Human Resources for the Automotive Industry in the Bajío Region,” applied for 5 years (2015–2020), with the primary objective of supporting technical professionals in the automotive industry by training 36 core-professors in four of the model campuses of CONALEP in the states of Aguascalientes, Guanajuato, and Querétaro. The other participants at the local level were the Economic Development Secretaries of the mentioned states. JICA participated with experts to train core-professors in the field of the automotive industry. The project’s objective was to generate positive externalities by training specialists in automotive production and create knowledge spillovers through specialized courses in their respective technical colleges. A follow-­up of the impact of the project is still pending. It must be noted that the plant of Nissan, which operates in Aguascalientes, agreed with CONALEP for its students to do their professional practices at the company. Finally, the “Strengthening the Automotive Cluster of Mexico” project coordinated by JICA will conclude in June 2023 after 6 years of operation. The objective is to support the Mexican auto parts SMEs to have better opportunities in the supply chain, fostering local employment and the regional economies through seminars and workshops with the active participation of the State Governments of Aguascalientes, Guanajuato, Querétaro, and San Luis Potosí, and the automotive clusters of the last three states. From the Mexican Government side, in the first year, ProMexico participated, and during the whole period, the Agency for International Cooperation for Development (AMEXCID). The input by JICA in this project is to enhance the capabilities of state governments and automotive clusters by developing a network of assistance to Tier-2 enterprises in technical and organizational fields with Kaizen philosophy, 5S’s10, and other processes. JETRO is the other Japanese organization that has participated in cooperation activities to promote the development of the automotive industry in Mexico in collaboration with the entities in charge of economic development and automotive clusters in different states and governmental agencies (Mendoza Martínez 2018). One of the projects carried out by JETRO has to do with setting up a database of potential Tier-2 suppliers identified by JETRO specialists working in the automotive sector. From 2008 to 2022, 441 suppliers operating in Mexico, local and from other nationalities, were interviewed by JETRO to evaluate them and to provide this information to Japanese Tier-1 enterprises as potential customers. Enterprises interviewed are located mainly in the northern and Bajío regions of Mexico, which stand  5Ss is a Japanese method to enhance the productivity of a company making emphasis on organization, work conditions and efficiency. The 5Ss refer to five Japanese words that start with S: Seiri  =  classification, Seiton  =  order, Seiso  =  cleanliness, Seiketsu  =  standardization, and Shitsuke = discipline. 10

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Fig. 2.7  Auto parts suppliers interviewed by JETRO between 2008 and 2022 (Mexican states). Source: Own elaboration with information from JETRO (2023). Overseas Business Information. Mexican local auto parts supplier information https://www.jetro.go.jp/world/cs_america/mx/ autoparts.html

as the main recipient regions of automotive FDI (Fig. 2.7). Of the group of interviewed enterprises, out of 19 processes/products in which those Tier-2 suppliers were involved, five processes stand out: plastic injection, print, machining coatings, and molds and mitches. In this way, JETRO has contributed to connecting Japanese TIER-1 enterprises with potential local auto suppliers. Hence, Japanese cooperation has played an important role during the past two decades in promoting the development of Tier-2 local suppliers and training of human resources for the development of the Mexican automotive sector, thus potentiating the impact of Japanese FDI in the country by spillover effects. However, nowadays, two important tendencies are opening up new opportunities and challenges for the sector, namely the new rules under USMCA and the redirection of flows of investment to Mexico by the nearshoring. The following section will address these two issues.

2.6 Challenges and Opportunities for the Mexican Automotive Sector from USMCA and Nearshoring The new rules affecting the networks of automotive production in North American countries after the approval of the USMCA are related mainly to Rules of Origin (ROO) and Labor Standards. The objective was to increase the regional content of auto parts and vehicles, given the growing relative share of China’s intermediate

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goods in the production networks of the region. For instance, exports of automotive products from Mexico to the United States include indirect inputs imported from China that were incorporated in the gross exports of automotive products from Mexico to the United States (Baldwin et al. 2022).11 Therefore, stricter rules of origin were included in the USMCA. Regarding vehicles, the new terms for regional content implied an increase from 66% in 2020 to 75% in 2023; concerning auto parts, the agreement contemplates an increase from 62.5% of regional content in 2020 to 70% in 2023. Whereas for steel, ROO was set up at 70% and 100% for aluminum.12 On the one hand, these new ROO represent opportunities for local suppliers to join the regional GSC and, on the other hand, to upgrade their production levels and skill capacities to be ready to face greater competition from new entrants in the automotive production networks. How do these new rules by USMCA affect exports of Japanese brands of vehicles to North America? The database prepared by the US Department of Transportation National Highway Traffic Safety Administration gathers information on input contents (local, regional, and foreign) of OEM vehicle brands sold in the US market. It classifies them according to the country of assembly providing information on Japanese OEMs’ exports from Mexico into the United States. In 2022, 13 brands of automobiles assembled in Mexico by Japanese OEMs were being sold in the US market, according to this source. In that year, eight brands had a regional content between 55% and 70%, lower than the USMCA requirement for that year (72%), while the remaining five brands had regional content above 75%, already fulfilling the requirement. If local (Mexico) and regional (North America) content among the brands is compared, the average local content for the 13 brands was 48%. At the same time, it goes up to 70% at the regional level (Figs. 2.8 and 2.9). The difference is made up by Mexican imports of parts and components from the United States, indicating, on the one hand, the strong backward linkages of the industry through close integration of production networks in North America made up by Japanese intrafirm trade as well as interfirm trade and, on the other hand, it shows the opportunities for local Mexican Tier-3 and Tier-2 companies to fill the gap. The other new rule from USMCA, regarding the automotive sector, refers to labor standards and to the fact that by 2023, 40% of the labor content value should be produced by a labor force earning salaries up to 16 US dollars per hour. Since then, some Japanese auto parts companies have announced their willingness to increase their salaries rather than move their plants to the United States, which will be costlier (MEXICONOW 2020). Furthermore, since 2021, that tendency has been  In their paper (Baldwin et al. 2022, pp. 49–54), the authors develop new indicators to measure countries’ foreign exposure to trade by taking into account indirect imported intermediate goods into exports from the sourcing side as well as sales side. 12  Diario Oficial de la Federación de México (2020, June 29). DECRETO Promulgatorio del Protocolo por el que se Sustituye el Tratado de Libre Comercio de América del Norte por el Tratado entre los Estados Unidos Mexicanos los Estados Unidos de América y Canadá. Secretaría de Relaciones Exteriores. http://dof.gob.mx/2020/SRE/T_MEC_290620.pdf 11

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Fig. 2.8  Local content of Japanese brand vehicles assembled in Mexico and sold in the United States, 2022. Source: Own elaboration with information from NHTSA (2023) U.S. Department of Transportation National Highway Traffic Safety Administration https://www.nhtsa.gov/ part-­583-­american-­automobile-­labeling-­act-­reports

Fig. 2.9  Regional content of Japanese brand vehicles assembled in Mexico and sold in the United States, 2022. Source: Own elaboration with information from NHTSA U.S.  Department of Transportation National Highway Traffic Safety Administration https://www.nhtsa.gov/ part-­583-­american-­automobile-­labeling-­act-­reports

confirmed as more foreign and Japanese auto parts companies have announced new investments in Mexico, motivated by the new nearshoring tendencies (Table 2.5). Additionally, to the new stricter rules of origin set up by USMCA in 2020, Tier-2 suppliers in Mexico are facing new opportunities and challenges posed by the new patterns of investment motivated by nearshoring. However, there is scattered

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evidence available so far (March 2023) about these new tendencies, some indicators in 2022 point in this direction. For instance, the space demand by new coming enterprises in the industrial real estate market during the first 9 months of 2022 accumulated 12.5 million square feet, almost doubling the figure of 2021 (CBRE 2022). According to the same source, motor vehicles and parts represented 40% of the manufacturing space demanded. This information is confirmed by the President of the Mexican Association of Industrial Parks (AMPIP) in an interview by MEXICONOW (2023b), indicating an inventory growth of manufacturing space during 2022 that reached 95.5% of occupancy levels. Moreover, of the supply of 430 industrial parks in Mexico in 2022, the most representative consumers are light manufacture (53%), logistics (19%), and automotive (17%). Furthermore, according to the Banco de México (2022), in a recent survey of Mexican enterprises’ perception of the reconfiguration of Global Value Chains (GVC), half of the companies interviewed (June and July 2022) perceived the new tendencies of nearshoring in Mexico as responses to the new rules of origin in USMCA and the trade conflicts between the United States and China, followed by the conflict between Russia and Ukraine. Regarding the impact of nearshoring on sales, production, and flows of FDI, 16% of enterprises with more than 100 employees reported benefits during the year (up to July 2022). These benefits were related to increased FDI and greater demand from enterprises established in the United States, companies that relocated their production plants into Mexico, and other companies that benefited from nearshoring. The most benefited enterprises were those integrated into GVC and in the manufacturing sector. The first indicator of the impact of new flows of nearshoring was represented by the new dynamism observed in exports in 2022 (Ornelas 2023). Currently, new flows of FDI confirm this tendency. From information gathered by MEXICONOW (2023a), over 75 companies have relocated their plants to Mexico. Among them, 34 FDI nearshoring projects were announced between 2021 and 2022. Of those, 61% were from Asia, 27% from Europe, and 12% from North America. Moreover, 41% of those projects are related to the automotive sector. To this list, we must add the recent announcement by Tesla (NYT 2023) to establish a factory in Mexico to produce Electrical Vehicles at the Nuevo León state in northern Mexico. Regarding projects announced by Japanese companies coming into Mexico that can be attributed to the nearshoring tendencies, 18 projects are related to the automotive sector from September 2021 to November 2022, where 44% correspond to new projects and 66% to expansions (Table 2.5). This new wave of FDI linked to nearshoring is bringing new opportunities to suppliers in the Mexican automotive sector to join the GSC but, at the same time, implies new challenges mainly related to the labor market and skill improvement, innovation, infrastructure, and the institutional approach to the network of production. As Wayne and Alcocer (2022) point out, technological change and pandemic-­ related changes in the organization of production by GSC have represented a “double disruption” for the labor force. According to the authors, these changes will increase the demand for “reskilling” as workers are displaced from jobs and “upskilling,” training for evolving jobs. Regarding the availability of infrastructure,

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Table 2.5  Investment projects announced by Japanese companies in Mexico’s automotive sector, 2021–2022

No. Date 1 November 2022 2 October 2022 3 September 2022 4

5

6 7 8 9 10

11 12 13

14

15 16

17

18

Name Nidec into Mexico

Control Techniques, a subsidiary of Nidec into Mexico Aspina America, a subsidiary of Aspina (Shinano Kenshi) into Mexico September Sumitomo Drive Technologies, a 2022 subsidiary of Sumitomo Group into Mexico July 2022 Suminoe Textile Mexico, a subsidiary of Suminoe Textiles into Mexico June 2022 Fujikura Automotive, a subsidiary of Fujikura into Mexico June 2022 Fujikura Automotive, a subsidiary of Fujikura into Mexico June 2022 Daikin Comfort, a subsidiary of Daikin Industries into Mexico May 2022 Nissan into Mexico April 2022 Toyotetsu de Mexico, a subsidiary of Toyoda Iron Works (Toyotetsu) into Mexico March 2022 Marelli Holdings into Mexico February Toyota, a subsidiary of Toyota 2022 Motor into Mexico January INX International Ink Company, 2022 a subsidiary of Sakata Inx into Mexico September Kawasaki Motores de Mexico 2021 (KMX), a subsidiary of Kawasaki Heavy Industries into Mexico September Honda Motor Company into 2021 Mexico September Hitachi Automotive Systems 2021 Mexico, a subsidiary of Hitachi into Mexico September Hitachi Automotive Systems 2021 Mexico, a subsidiary of Hitachi into Mexico September Hitachi Automotive Systems 2021 Mexico, a subsidiary of Hitachi into Mexico

Project type New

Jobs creation estimate 3000

Location N/A

New

280

Nuevo Leon

Expansion 387

Guanajuato

New

Chihuahua

84

Expansion 419

Guanajuato

New

Coahuila

957

Expansion 2300

Coahuila

New

N/A

1804

Expansion 2315 Expansion 250

Aguascalientes Guanajuato

New 250 Expansion 124

Coahuila Guanajuato

New

100

Queretaro

New

225

Nuevo Leon

Expansion 350

Jalisco

Expansion 160

Estado de Mexico

Expansion 160

Estado de Mexico

Expansion 160

Estado de Mexico

Source: Own elaboration with information from Financial Times (2023). fDiMarkets.com Trends Report: FDI from Japan to Mexico. January 2003 to December 2022

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industry members refer to the availability of electrical power, water, natural gas supply, logistics, and transportation of materials as necessary conditions to fulfill the new demand from increased automotive production (Ornelas 2023). To achieve the above objectives, the development of an institutional network of governmental agencies, state governments, clusters, and academia is fundamental (Wayne and Alcocer 2022). Furthermore, given the complexity of the new tasks that SMEs face in enhancing the resilience of the GSC, auto parts suppliers’ coordination with manufacturers and retailers is needed, as well as the flow of data concerning demand and supply among the different levels of the production structure (Tier-1, Tier-2, and Tier-3 levels and OEMs) (Coffman et al. 2021). Hence, USMCA’s new rules and nearshoring tendencies simultaneously bring more and better opportunities to participants in the automotive GSC and place new demands regarding improvements in productivity, advancements in new technologies, and the development of new talent, among other requirements.

2.7 Conclusions During the past three decades, Mexico has become a significant player in the global automotive GSC, currently being the seventh producer, fourth exporter of motor vehicles, and fifth exporter of auto parts. With a favorable industrial policy, the automotive sector has developed a solid ecosystem that has achieved high standards at the international level. This level of development has been achieved through a solid base of free trade agreements that have promoted trade through reciprocal preferential treatment by partners and significant flows of FDI from developed countries. Japan has been an important strategic partner of Mexico in the automotive sector, participating actively with FDI in the sector’s production, exports, and employment growth, with 1300 Japanese affiliates operating in the country. In conjunction with the ones established in the United States, they have contributed to forming a highly integrated networked automotive production in the region. Since the signature of the EPA 17 years ago, Japanese Cooperation has become a vital avenue to potentiate the impact of the FDI in the country. Projects carried out by the Japanese governmental agencies, JICA and JETRO, in collaboration with the government of Mexico, local governments, their respective clusters, local enterprises, and the academic sector, have contributed to developing local automotive suppliers and the training of human resources. In doing so, Japanese Cooperation has focused on developing a network system of support among the main stakeholders to create better opportunities for the supply chain participants, mainly SMEs, through better business practices, operations management, and production technology. The development of core-professors highly specialized in the automotive sector was introduced to spread this knowledge to more participants. The accumulated experience on the development of the automotive sector through these years of cooperation between Japan and Mexico in key areas could be an important input for

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policymakers to respond adequately to the new challenges posed by the new rules by USMCA and the new flows of foreign investment related to nearshoring. The local SMEs participating in the automotive GSC could be the major beneficiaries.

References AMIA Asociación Mexicana de la Industria Automotriz, AMDA Asociación Mexicana de Distribuidores de Automóviles, ANPACT Asociación Nacional de Productos de Autopartes, Camiones y Tractocamiones, A.  C., INA Industria Nacional de Autopartes (2020) Diálogo con la Industria Automotriz 2018–2024. https://www.amda.mx/wp-­content/uploads/ asociaciones_2018-­2024_180724.pdf. Accesed 19 Jan 2023 Baldwin R (2011) Trade and industrialisation after globalisation’s 2nd unbundling: how building and joining a supply chain are different and why it matters. National Bureau of Economic Research Working Paper 17716 Baldwin R, Freeman R, Theodorakopoulos A (2022) Horses for courses: measuring foreign supply chain exposure. National Bureau of Economic Research Working Paper 30525 Baldwin R, Okubo T (2013) Networked FDI: sales and sourcing patterns of Japanese Affiliates. National Bureau of Economic Research Working Paper 18083 Banco de México (2022) Opinión empresarial sobre la Relocalización de las Empresas hacia México in Reporte sobre las Economías Regionales abril-junio de 2022, pp 16–21. Banco de México, México Carrillo J, de los Santos S (2022) México: políticas industriales para el aprovechamiento del T-MEC y las políticas expansivas en los Estado Unidos. Comisión Económica para América Latina y el Caribe (CEPAL), Ciudad de México CBRE (2022) Mexico nearshoring: demand in the industrial real estate market. Mexiconow 21(121-122):92–96 Coffman J, Iyer R, Robinson R (2021) The road ahead: auto suppliers navigate new terrain. Insights from Deloitte’s 2021 automotive supplier study. https://www2.deloitte.com/content/ dam/Deloitte/us/Documents/manufacturing/us-­automotive-­supplier.pdf. Accessed 11 Oct 2022 D.Econosignal Deloitte (2020) Perspectiva industrial. Industria automotriz. https://www2.deloitte. com/content/dam/Deloitte/mx/Documents/finance/2020/Perspectiva-­Industria-­Automotriz-­ DEconosignal.pdf. Accessed 16 Feb 2023 Diario Oficial de la Federación de México (2020, June 29) DECRETO Promulgatorio del Protocolo por el que se Sustituye el Tratado de Libre Comercio de América del Norte por el Tratado entre los Estados Unidos Mexicanos los Estados Unidos de América y Canadá. Secretaría de Relaciones Exteriores. http://dof.gob.mx/2020/SRE/T_MEC_290620.pdf. Accessed 21 Oct 2021 Falck-Reyes M (2018) Japanese foreign direct investment in Mexico’s transport equipment sector. The Macro impact: regional networks of production and trade. In: Falck-Reyes M, Guzman-­ Anaya L (eds) Japanese direct investment in Mexico’s transport equipment sector. Macro impact and local responses. Springer, pp 9–29 Falck-Reyes M (2022) Mexico-Japan economic alliance from a global perspective: sharing prosperity. Hogaku Shimpo. The Chuo Law Review CXXVIII(10):619–649 Falck-Reyes M, Guzman-Anaya L (eds) (2018) Japanese direct investment in Mexico’s transport equipment sector. Macro impact and local responses. Springer Nature, Singapore Fernandez-Stark K, Bamber P (2022) North America in global value chains. In: Long T, Bersin A (eds) North America 2.0. Forging a continental future, North American Institutes at the Woodrow Wilson International Center for Scholars, Washington, pp 241–261 Financial Times (2023). fDiMarkets.com trends report: FDI from Japan to Mexico. January 2003 to December 2022 Accessed 23 Jan 2023

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González F (2022) El futuro de la industria automotriz en México, Webinar Industria Nacional de Autopartes. UDLAP Jenkins Graduate School. Online Presentation Guzman-Anaya L (2019) Knowledge transfer in the automotive industry: The case of JICA’s project for automotive supply chain development in Mexico. México y la Cuenca del Pacífico 8(23):93–122. https://doi.org/10.32870/mycp.v8i23.609 Harvie C, Charoenrat T (2015) SMEs and the rise of global value chains. In: ADB Institute (ed) Integrating SMEs into global value chains. Challenges and policy actions in Asia. Asian Development Bank, Asian Development Bank Institute, Tokyo, pp 1–26. https://www.adb.org/ sites/default/files/publication/175295/smes-­global-­value-­chains.pdf INA Industria Nacional, de Autopartes AC. (February 2023) Outlook for the automotive industry in Mexico. Online Presentation INEGI (2018) Encuesta Nacional sobre Productividad y Competitividad de las Micro, Pequeñas y Medianas Empresas (ENAPROCE). https://www.inegi.org.mx/programas/enaproce/2018/. Accessed 26 Jan 2023 INEGI. Registro Administrativo de la Industria Automotriz de Vehículos Ligeros. Registro administrativo de la industria automotriz de vehículos ligeros. inegi.org.mx. Accessed 22 Feb 2023a INEGI.  Banco de Información Económica (BIE). https://www.inegi.org.mx/app/ indicadores/?tm=0. Accessed 8 Feb 2023b INEGI.  Censos Económicos (2019) Resultados Definitivos. https://www.inegiorg.mx/app/saic/ defalult.html. Accessed 25 Feb 2023 Japan International Cooperation Agency (JICA) (2015) Proyecto para el fortalecimiento de la cadena de proveeduría del sector automotriz en México. Informe de terminación del proyecto. JICA, Mexico JETRO.  Overseas business information. Mexican local auto parts supplier information. https:// www.jetro.go.jp/world/cs_america/mx/autoparts.html. Accessed 16 Mar 2023 Kimura F (2015) International production networks and economic diplomacy in Japan. In: Mulgan GA, Honma M (eds) The political economy of Japanese Trade Policy. Palgrave Macmillan, Basingstoke, pp 175–195. https://doi.org/10.1057/9781137414564 Kimura F, Ando M (2005) Two-dimensional fragmentation in East Asia: Conceptual framework and empirics. Int Rev Econ Finance 14(3):317–348 Mendoza Martínez E (2018) Spillovers of Japanese Automotive Companies’ Activities in the State of Aguascalientes. In: Falck-Reyes M, Guzman-Anaya L (eds) Japanese direct investment in Mexico’s transport equipment sector. Macro impact and local responses. Springer Nature, Singapore, pp 55–80 METI (2022) Summary of the 51st basic survey on overseas business activities. https://www.meti. go.jp/english/statistics/tyo/kaigaizi/pdf/h2c414je.pdf. Accessed 5 Mar 2023 MEXICONOW (2020) Japanese automakers prefer staying in Mexico. https://mexico-­now.com/ japanese-­automakers-­prefer-­to-­stay-­in-­mexico-­than-­move-­to-­the-­united-­states/. Accessed 30 Aug 2021 MEXICONOW (2023a) Main nearshoring projects 2021–2022. MEXICONOW 21(121-122):47–48. https://mexico-­now.com/mexiconow-­magazine-­20th-­anniversary-­ edition-­2023/. Accessed 4 Feb 2023 MEXICONOW (2023b) Editors Interview. Sergio Arguelles Presidente Mexican Associaton of Industrial Parks. MEXICONOW 21(121-122):50–56. https://mexico-­now.com/mexiconow-­ magazine-­20th-­anniversary-­edition-­2023/. Accessed 4 Feb 2023 NHTSA U.S. Department of Transportation. National highway traffic safety administration. https:// www.nhtsa.gov/part-­583-­american-­automobile-­labeling-­act-­reports. Accessed 7 Mar 2023 NYT The New  York Times. Tesla could start making cars in Mexico next year. https://www. nytimes.com/2023/03/03/business/energy-­environment/tesla-­nuevo-­leon-­mexico-­factory.html. Accessed 3 Mar 2023 OECD TIVA (2021) Trade in value added data base. https://www.oecd.org/sti/ind/measuring-­ trade-­in-­value-­added.htm. Accessed 24 Feb 2023

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OICA (2022) International Organization of motor vehicles manufacturers production statistics 2022. https://www.oica.net/category/production-­statistics/2022-­statistics/. Accessed 7 Mar 2023 Ornelas SL (2023) Mexico’s industrial real estate market & the nearshoring connection. MEXICONOW 21(121-122):31–46 Secretaría de Economía (2022) Comisión Nacional de Inversiones Extranjeras. Informe estadístico sobre el comportamiento de la inversión extranjera en México (enero-septiembre de 2022). https://www.gob.mx/cms/uploads/attachment/file/785699/Informe_Congreso-­2022-­3T__VF_. pdf. Accessed 5 Mar 2023 Traslosheros G (2021) La negociación del Acuerdo para el Fortalecimiento de la Asociación Económica entre México y Japón. Alcances y limitaciones. México y la Cuenca del Pacífico 10(28):9–33. https://doi.org/10.32870/mycp.v10i28.728 United Nations (2021) International trade statistic yearbook. Volume II. Trade by product. United Nations, New  York. https://www.google.com/url?sa=t&source=web&rct=j&url=https://comtradeapi.un.org/files/v1/app/publicationfiles/2021/VolII2021.pdf&ved=2ahUKEwix1vGf8 sD9AhWFA4gKHSVhC7AQFnoECBIQAQ&usg=AOvVaw2CmbL2w62gMixaW_6kXfL2. Accessed 3 Mar 2023 United Nations. Comtrade data base. Trade data. https://comtradeplus.un.org/TradeFlow. Accessed 16 Feb 2023 Urata S, Baek Y (2020) The determinants of participation in global value chains: a cross-country firm level analysis. ADBI Working Papers No. 1116 Wayne EA, Alcocer S (2022) Successful workforce. Development is vital for a competitive and prosperous North America. In: Long T, Bersin A (eds) North America 2.0. Forging a continental future. North American Institutes at the Woodrow Wilson International Center for scholars, Washington, pp 129–256 Winkler D, Constantinescu C, Aguilar Luna L, Olaberría E (2021) Aumento de la productividad mediante la participación en las cadenas globales de valo. In: Iacovone L, Muñoz Moreno R, Olaberria E, Pereira López M (eds) Crecimiento de la productividad en México. Comprendiendo las dinámicas principales y los determinantes clave, Banco Mundial, pp 81–97 WTO (2022a) Trade profiles 2022. https://www.wto.org/english/res_e/booksp_e/trade_ profiles22_e.pdf. Accessed 11 Sep 2022 WTO (2022b) World trade statistical review 2022. https://www.wto.org/english/res_e/booksp_e/ wtsr_2022_e.pdf. Accessed 11 Sep 2022

Chapter 3

The Role of Japanese Cooperation in the Transition to Electric Vehicle Production in Mexico Leo Guzman-Anaya

Abstract  The transition to Electric Vehicle (EV) production is a worldwide phenomenon. Many countries have established transition goals by the end of the decade and are offering incentives for producers and consumers to shift to EV technology. The transition is expected to be phased out depending on demand pull factors occurring in developed nations in the first stage and in developing nations afterward. For Mexico, the COVID-19 pandemic and new regulations under the United States-­ Mexico-­Canada Agreement (USMCA) have also accelerated interest in EV technology. A post-COVID-19 scenario suggests less reliance on Chinese parts and components, and the USMCA regulations favor the further integration of North American Global Value Chains (GCVs). The challenge for local Small and Medium Size Enterprises (SMEs) resides in entering more competitive GVCs as EVs require fewer parts and components than traditional Internal Combustion Engines (ICE). Thus, the EV transition will have a crowding-out effect on suppliers that do not meet quality and dependability indicators. Also, automotive assemblers will increase in-house production of integral parts, components, and software development, altering the different stages of production. Japanese cooperation may assist in the EV transition via joint ventures and projects aimed at human capital and supplier development. Keywords  Mexican automotive industry · Electric vehicle production · Japanese cooperation

L. Guzman-Anaya (*) Human Resources Department, CUCEA, University of Guadalajara, Guadalajara, Mexico e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Guzman-Anaya (ed.), Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector, New Frontiers in Regional Science: Asian Perspectives 72, https://doi.org/10.1007/978-981-99-3985-5_3

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3.1 Introduction Worldwide, the Electric Vehicle (EV) has become a popular option for consumers, manufacturers, and governments. Global sales of electric cars (including fully electric and plug-in hybrids) reached 6.6 million units in 2021, doubling sales from 2020 (IEA 2022). One reason is environmental. Consumers seek to reduce the carbon footprint of traditional automobiles, thus increasing the demand for electric cars. Also, a shift in production to EVs was accelerated during the COVID-19 pandemic as consumers modified their demand to electric or hydrogen-powered cars. Additionally, working-from-home policies were implemented for many workers during the pandemic, and as we move to a post-COVID era, these norms are here to stay for many industries. Goel et al (2021), using data from 13 countries, mention that average weekly travel time is up from 9.0 to 9.2 h. These conditions seem to incentivize employees to move further from the workplace, resulting in fewer work-­related journeys and longer duration. The authors also found that 50% of survey respondents planned to buy a new or used car and that 42% would prefer an electric or hydrogen-powered vehicle. Despite the increased interest in EVs, the transition to EV production creates challenges for developing countries like Mexico. First, regarding infrastructure requirements. Second, related to public policies to create favorable environments for the industry to flourish. Third, concerning the effects on local suppliers due to major manufacturers favoring in-house production. However, it is foreseen that a significant restructuring of the value chain in the industry will also shift the roles of different actors, from assemblers down to suppliers at different levels. For Mexico, cooperation from a developed country like Japan may help reduce the technological gap, support the allocation of crucial raw elements and parts, boost human capital development, and aid the expansion of local suppliers to EV production. In the case of Mexico, despite being committed to stopping producing Internal Combustion Engine Vehicles (ICE) by 2040, the country is still in the early stage of adopting EVs from the manufacturing and consumption side. In 2021,1 EV and hybrid vehicles represented only 4.2% of total vehicle sales, an increase from 2.2% in 2020 (AMIA 2022). One of the main limitations of EV adoption is infrastructure. The country only accounts for 2100 charging stations, while countries like the United States have 42,500. The current conditions are inconvenient for the Mexican driver and reduce EV demand. An effort on this front is “Ciudad Modelo,” a production complex in the State of Puebla that combines technology, production, and human resource training needed for EV manufacturing. It is estimated that Ciudad Modelo will be able to manufacture 1200 charging stations annually in the first stage (Secretaría de Relaciones Exteriores 2022). This is a positive effort; however,  Globally, EV sales have almost tripled between 2019 and 2021, from over six million units to 16.5 million units, respectively. The main increase was observed in the Chinese market with continued growth in the European and North American markets (IEA 2022). 1

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further infrastructure development is needed to transition to EV adoption successfully. Another determining factor is related to public policy. Countries in Latin America have provided different kinds of incentives for EV production and consumption. Mexico, among the countries in Latin America, provides the most consumer incentives regarding purchase incentives, use and transit incentives, and other promotional instruments. However, there need to be regulatory reforms related to minimum safety standards related to the functioning and disposal of electric vehicles and charging infrastructure. This will assure production with quality standards that administer safety for the consumers and the environment. Fiscal incentives will also play a key role. For example, AMIA (2022) suggests providing a 100% of fiscal deduction or 0% purchase tax for the sale of new EV vehicles. Also, a transparent government energy policy prioritizing EV production and seeking to attract foreign investment is required. For example, proposals to nationalize lithium production and prioritize non-renewable energy seem unlikely to help the country attract global EV investment (Murray 2021). Therefore, fiscal incentives will play an essential role in pushing forward the EV technology adoption by Mexican producers and consumers. Another critical point relates to the effects of a transition to EV production. During the COVID-19 pandemic, car companies saw their complex global supply chains disrupted, especially in producing semiconductors. As a result, car manufacturers attempt to exert more significant control over their value chains following nearshoring or reshoring processes.2 Traditionally, car companies outsourced most of the manufacturing process to focus on design, supplier management, marketing, and parts assembly activities. The recent trend favors in-house production with significant investments in acquiring raw materials such as lithium, graphite, cobalt, and nickel. Also, the development of firm-endemic software expertise is expected to be the industry’s primary revenue source (The Economist 2022). EV firms, such as Nio from China, expect future automobiles to be a “second living room,” where cars become supercomputers and users may connect to multimedia and immerse into augmented reality. As a result, automotive firms will be evaluated on the services they offer, from safety capabilities and “infotainment” to artificial driving features. Other characteristics, including handling or mechanical attributes, will be less relevant. The reshaping of global value chains may also negatively affect suppliers. Vertical integration reduces supplier importance in the manufacturing process, potentially reducing business. Consequently, the EV transition will also affect automotive production chains, notably small and medium supplier companies (SMEs) that might struggle to insert themselves throughout the reshaping of the industry successfully. Traditional ICE suppliers must assess the risk, the technological and regulatory landscapes, and consumer shifts in preferences. Also, evaluate their

 Estimates indicate a loss of 7.7 million units in 2021 due to the global chip shortage (The Economist 2022). 2

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technological capabilities to compete as software and advanced electronics suppliers with firms outside the traditional automotive supply chain. Similarly, these firms must observe their financial flexibility and the need to invest with payoffs that may come in the long run. Considering this, traditional ICE suppliers may have a 10-year window until EVs become mainstream to decide their strategic moves to transition in the industry, including developing their technological capabilities internally or via acquisitions, joint ventures, or partnerships. Therefore, the role of cooperation becomes crucial for local firm’s transition to EV production, especially for the case of firms in developing nations. The transition to EV production is a complex yet necessary task for the evolution of the automotive industry in Mexico. Several challenges arise as interest increases both from manufacturers and consumers for EV technology. For example, the country must increase its charging station capacity to be a viable option for consumers. Also, public policy must be aimed at incentivizing the production and consumption of EV technology. Regulatory reform should aim for safety and environmental standards and fiscal incentives in new EV manufacturing. The reshaping of value chains in the industry during the COVID-19 pandemic has shown us that nearshoring or reshoring and in-house manufacturing are gaining momentum among predominant car assemblers. Furthermore, there needs to be a discussion regarding the effects of this transition, especially on SMEs in Mexico. The shift to EV production will affect SME suppliers by crowding them out of EV production chains. For example, some of the largest OEMs, including Ford, GM, and VW, have initiated joint ventures or made significant investments to secure battery production. Furthermore, the country seems to be moving on the right path to EV conversion. Recently, several states have started to explore the possibility of electric vehicle production. One example is Puebla, which has launched the “Electrification Working Group,” a triple-helix partnership (government, academia, and industry), that seeks to identify opportunities in the transition to electric vehicles (EVs) production. Currently, Link EV (a US firm) is constructing a plant in Ciudad Modelo (Puebla) to assemble EVs and charging stations with a starting capacity of 1200  units (Secretaría de Relaciones Exteriores 2022).

3.2 The Mexican Automotive Industry Mexico has a long tradition as an automotive manufacturer, and the industry is an essential engine of the Mexican Economy. In 2022, Mexico ranked as the seventh largest producer of automobiles and commercial vehicles (OICA 2023). Most automotive production is exported primarily to the North American market, ranking the country as the fourth largest exporter. According to Trade Map (2022) data, automotive-­related exports were Mexico’s main export in 2021, representing 23.3% of total exports, followed by electrical machinery, mechanical machinery, mineral fuels, precision instruments, and plastic manufacturing (see Fig. 3.1). AMIA (2022)

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Fig. 3.1  Mexico’s main exports, 2021. Source: Author’s elaboration using data from Trade Map (2022)

mentions that the automotive industry accounts for 32% of Mexican manufacturing exports. The automotive industry plays a vital role in the economy, representing 3.5% of GDP and 18.3% of manufacturing GDP. The industry also directly employs around 930,000 workers, accounting for 25% of total manufacturing employment, and generates over 2,000,000 jobs related to the industry. Furthermore, automotive investment flows are the country’s primary source of Foreign Direct Investment (FDI), and there are 26 Research and Development (R&D) centers throughout Mexico with over 15,000 engineers. Notes: The data is classified under the Harmonized Tariff Schedule (HTS) based on the International Harmonized System. The main chapter products reported are 87 Vehicles other than railway or tramway rolling stock and parts and accessories thereof. Eighty five Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles. Eighty four Nuclear reactors, boilers, machinery, and mechanical appliances; parts thereof. Twenty seven mineral fuels, mineral oils, and products of their distillation; bituminous substances; mineral waxes. Ninety optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments, and apparatus; parts and accessories thereof. Thirty nine plastics and articles thereof. Ninety four furniture; bedding, mattresses, mattress supports, cushions, and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated sign, illuminated nameplates, and the like; prefabricated buildings. Twenty two beverages, spirits, and vinegar.

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3.2.1 Automotive Production In terms of automotive production, the COVID-19 pandemic severely affected the production of automobiles. The drop in production in 2020 was 20% compared to 2019. Figure 3.2 shows the production of automobiles between 2013 and 2025 (production forecast). By the end of 2022, the industry is predicted to grow by 7.6%, and this growth trend is expected to be maintained by 2025. By then, the industry may reach levels of production observed in the pre-pandemic years. A similar trend is also observed in automotive exports. Figure 3.3 reports a fall in total exports of 21% in 2020. Exports are expected to recover after 2022; estimates indicate they will grow between 5% and 7% annually (AMIA 2022). It should be noted that exports will remain the main engine of growth of the industry, representing close to 90% of total production. The further integration of the North American production networks will be critical for the development of the industry as it shifts to EV production.

3.2.2 Auto Parts The country is also a significant producer of parts and components required in the industry. According to data from the INA (2022), globally, it ranks as the fourth largest producer of auto parts and is the leading supplier of auto parts to the US market. Over 2000 companies produce auto parts at tiers 1 and 2 levels of procurement. Also, the importance of automotive and auto parts production has increased during the last 30 years. In 1993, automotive production represented 8.4% of the manufacturing GDP; auto parts production accounted for 3.5% of the manufacturing GDP. In 2021, automotive production had increased to 18.3% of manufacturing GDP, where auto parts account for 8%. The expansion of the auto parts sector has been mainly driven by export growth. Over 80% of total auto part production is exported, as shown in Fig. 3.4. The Graph indicates a steady growth trend between 2010 and 2019, followed by a drop in 2020 caused by the COVID-19 pandemic. AMIA (2022) estimates that the pandemic affected the industry by reducing production by 800,000 units. Similarly, the semiconductor shortage affected Mexico’s GDP growth by 1.3%. The year 2021 indicates a recovery of the industry to almost pre-pandemic levels. The recovery is further supported by industry sales forecasts for 2022, 2023, and 2024 (see Fig. 3.5). Furthermore, Tables 3.1 and 3.2 summarize the primary markets for Mexico’s exports and imports of auto parts. The US market concentrates almost 90% of auto parts’ exports and 53% of imports. Canada is the second recipient of exports with 3.2%. These figures show heavily integrated production chains in North America and strong dependence on these markets for suppliers located in Mexico (see Table 3.1). Furthermore, as shown in Table 3.2, following the United States as the leading importing country, the main partners are China (14%), Japan (6.5%), and

Fig. 3.2  Mexico’s automobile production (units). Source: Author’s elaboration using data from AMIA (2022). Notes: Figures with * show estimates of production

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Fig. 3.3  Mexico’s automobile exports (units). Source: Author’s elaboration using data from AMIA (2022). Notes: Figures with * show estimates of production

38 L. Guzman-Anaya

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Fig. 3.4  Exports and internal sales of auto parts (million dollars). Source: Author’s elaboration with data from INA (2022)

Fig. 3.5  Auto parts exports and internal sales forecast (million dollars). Source: Author’s elaboration with data from INA (2022)

South Korea (6.2%). It is essential to highlight that a proportion of these imports are parts and components not currently manufactured within the country but will be increasingly required to be produced in Mexico due to USMCA regulations and nearshoring shifts in the production chains. In terms of employment, comparing USMCA countries, Mexico concentrates the largest share of workers in the auto parts industry. These results are represented in Fig. 3.6. Mexico’s employment growth evolved from 465,000 workers in 2010 to 869,000 in 2022, representing an annual average growth rate of 5%. For the United

40 Table 3.1  Mexican auto part exports by major countries (million dollars)

L. Guzman-Anaya Country United States Canada Brazil China Japan Germany Others TOTAL

Exports 70,265 2513 1178 943 707 550 2356 78,543

% Share 89.50% 3.20% 1.50% 1.20% 0.90% 0.70% 3.00% 100%

Source: Author’s elaboration with data from INA (2022)

Table 3.2  Mexican imports of auto parts by major countries (million dollars)

Country United States China Japan South Korea Germany Canada Others TOTAL

Imports 28,171 7486 3476 3315 2674 2032 6310 53,474

% Share 52.70% 14.00% 6.50% 6.20% 5.00% 3.80% 11.80% 100%

Source: Author’s elaboration with data from INA (2022)

States, employment grew at an annual average growth rate of 2%, transitioning from 433,000 workers in 2010 to 574,000 in 2022. The case of Canada reported 60,000 workers in 2010 and 72,000 in 2022. Cumulatively, for the North American region, in 2022, Mexico represented 57.4% of total employment in the auto parts industry, while the United States and Canada represented 37.9% and 4.8%, respectively. Auto part production is concentrated in Mexico’s northern, center, and western regions. In 2021, the northern states accounted for 52% of total production, while the central and western states for 46%. The leading states that produce auto parts are Coahuila, Chihuahua, Nuevo Leon, and Guanajuato, with 16.8%, 12.2%, 11.3%, and 11%, respectively. These states represent over half of Mexico’s total auto part production (see Table 3.3). This trend is also reflected in auto parts FDI to Mexican states. As shown in Table 3.4, four states concentrate almost 72% of the total FDI received in the industry. These states are Nuevo Leon (36.9%), Guanajuato (13.8%), Chihuahua (13.6%), and Queretaro (7.5%). The state of Guanajuato, in particular, has successfully attracted Japanese investment at the Tier-1 and Tier-2 levels of procurement. The development of production networks and a supplier base has been partly due to the arrival of foreign suppliers to the country. As previously mentioned, the

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Fig. 3.6  Auto part employment by country in North America, 2021. Source: Author’s elaboration with data from INA (2022) Table 3.3  Regional share of auto part production, 2021

Northern states Coahuila Chihuahua Nuevo León Tamaulipas Baja California Sonora Center and western states Guanajuato Querétaro Edo. México Puebla San Luis Potosi Aguascalientes Jalisco Morelos Ciudad de México Tlaxcala

51.80% 16.80% 12.20% 11.30% 6.00% 2.80% 2.70% 45.80% 11.00% 6.60% 6.00% 6.00% 5.10% 4.90% 3.20% 1.50% 0.80% 0.70%

Source: Author’s elaboration with data from INA (2022)

42 Table 3.4  State share of auto part FDI, 2021

L. Guzman-Anaya State Nuevo Leon Guanajuato Chihuahua Queretaro Coahuila San Luis Potosi Morelos Jalisco Baja California CDMX Edo Mexico Puebla Rest of states

% 36.9% 13.8% 13.6% 7.5% 6.2% 5.4% 3.8% 3.4% 1.8% 1.6% 1.5% 1.3% 3.3%

Source: Author’s elaboration with data from INA (2022)

Fig. 3.7  FDI in auto parts industry by major countries, 2021 (million dollars). Source: Author’s elaboration with data from INA (2022)

automotive sector is the leading destination of FDI inflows, and the auto parts industry plays a vital role as a destination for these investments. Figure 3.7 shows the major investing countries in the auto parts industry in 2021. Similarly, Fig. 3.8 indicates the accumulated investment by country between 1999 and 2021. Comparing both graphs, we may observe that the United States is the primary investing country in the auto parts sector, followed by Germany (if we only observe the year 2021) or Japan (for all years accumulated). The presence of Japanese FDI in the auto parts sector results from the location decisions of Japanese automotive assemblers in the

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Fig. 3.8  Accumulated auto part FDI by major countries, 1999–2021 (million dollars). Source: Author’s elaboration with data from INA (2022)

first stage, followed by the location of a supplier base used in Japan and other host countries (For further discussion, see Chap. 5 of this book). The North American Free Trade Agreement (NAFTA) highlighted the importance of regional integration and boosted productivity in value chains across North America. This importance was again set forward during the COVID-19 pandemic and from the new United States-Mexico-Canada Agreement (USMCA) regulations. The USMCA requires higher local content than NAFTA, bringing challenges and opportunities to local suppliers in Mexico and incentivizing a restructuring of the industry with reshoring and nearshoring processes. Technological advancements or policy changes set off adjustment reactions at a firm and household level, which are subsequently felt as structural effects at an industry or regional level. The measurement of the accumulative impacts is observed in changes in macroeconomic variables. These include price and cost effects, structural demand effects, multiplier and accelerator effects, and innovation and productivity effects (Ragwitz et al. 2009). It should be noted that the demand shift to EVs will likely occur first in European, Asian, and North American markets in the upcoming 10–15 years. For Mexico, this means that the industry requires planning a transition to EV production; for example, over 80% of sales from the industry come from exports to these markets (primarily to the United States). However, it is also true that the production of ICE vehicles will remain relevant during and after the period mentioned because it will take longer for less developed regions to catch up to EV technology. A poorly timed and managed transition to EV production may turn out devastating to the automotive industry’s workforce and the industry’s competitiveness. An effective transition to EV production requires foresight and accurate estimates of future demand. However, Singh (2021) points out that there is wide variability in forecasting EV sales. Globally, these range from 50–60 million to 550 million over the next two decades. This trend is also observed in single markets. For

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example, in the United States, sales forecasts from different agencies predict the adoption of EV technology to be from 7% to 30% of total automotive sales by 2030. This variability complicates the estimation of economic benefits-losses to the industry and spillover effects to the economy. A shift to EV technology will require a new set of skills for the workforce. Singh (2021) mentioned an estimated loss of 157,000 jobs, representing 20–25% of total parts related to Powertrain activities in the United States. Also, there is a need to increase the number of local suppliers, especially at the Tier-2 and Tier-3 supplier levels. The industry requires technological advancement in digital manufacturing and 4.0 industry knowledge to achieve this goal. Several cooperation projects have successfully transferred knowledge to local automotive suppliers, but much work is still pending (Guzman-Anaya, 2022). However, the industry’s transformation will also crowd out actors from the supply chains since most of the essential systems in ICE automobiles are no longer necessary in EV manufacturing. For example, in producing an ICE vehicle, it is estimated that producers of parts and components supply 50%–55% of value added, while the share is only 35%–40% in producing an EV. As a result, Original Equipment Manufacturers (OEMs) and traditional suppliers must prepare for the coming shift in manufacturing. For this, OEMs and suppliers should have financial and manufacturing flexibility to acquire new machinery, develop necessary digital tools, and adapt their production processes to new technology and materials.

3.3 Transition to EV Production The North American EV market has been growing during the last few years and is expected to grow expeditiously during the current decade. As shown in Fig. 3.9, EV production forecast in the region is expected to grow at an average annual growth rate of 24%, increasing from almost 900,000 units in 2022 to over 5 million units by 2029. This growth requires the development of OEMs and suppliers working under new technological and market conditions. By the end of the 2020s, it is estimated that traditional and established OEMs will account for 60% of production, while new firms will represent 40% of EV production (INA 2022). The transition to EV production faces several barriers. The first barrier is related to costs. EVs are still out of reach for most consumers. For example, Tesla has focused on higher-income consumers to finance research & development (R&D) costs and strengthen the supply chain. The expectation is that this might lead to economies of scale and may lower prices, allowing the reach of middle-income families (FUMEC 2021). The adoption of EV technology will thus be economic

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Fig. 3.9  Electric vehicle production forecasts in North America (total units). Source: Author’s elaboration with data from INA (2022)

rather than regulatory, despite several countries imposing adoption goals for the shift to EVs.3 The second is related to manufacturing processes. EVs are less complex in terms of parts and components than ICE vehicles. Traditional ICE suppliers must employ their stock of knowledge and know-how to successfully transition to the production of parts required for EV production. PCW (2019) identified three main detachable parts in an EV motor compared with 113 in a 4-cylinder ICE. The simplicity eases the manufacturing process but increases the requirements for quality and dependability of main automotive components, crowding-out suppliers that do not meet industry requirements. This shift will impact the value added observed in different parts of the manufacturing process. In an ICE vehicle, around 10–15% of value added comes from raw material suppliers, 50–55% from suppliers of parts and components, and 30–35% from the OEMs. In an EV manufacturing model, 15–20% of value added is attributed to raw materials, 35–40% to parts and components, and 40–45% to the battery and battery-related components (which may or may not be an OEM) and to the assembly process done by the OEM (AUTOCAR Professional 2018). However, it is imperative to note that EVs are more complex regarding software usage. Traditionally, code was embedded in the car’s parts in charge of powering the electronic control units (for example, breaks, ignition, and steering). These programs were developed by the part’s suppliers, which were later shipped in complete units to the automotive assemblers into finished vehicles. OEMs were mainly integrators. This system has proven complex and difficult to continue with EV production. As more software is added, it becomes harder to make different pieces and

 For example, the United Kingdom and France plan to ban the sale of ICE vehicles by 2040. Other countries including Germany and China are offering financial benefits to incentivize consumers to purchase EVs. 3

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software work together. This situation requires technical transformation where decentralized teams of developers work on problem solving rather than execution. One challenge for traditional ICE manufacturers transitioning to EV production will be to decide which software to keep in-house and which to outsource. In terms of battery production, this is one of the main barriers to the transition of EV manufacturing due to the current high costs and regional concentration. Currently, the lithium-ion battery pack alone can account for up to 50% of the cost of an EV (PWC, 2019). According to FUMEC (2021), in 2023, China will account for 68% of total battery production for EVs, followed by Europe with 13%, North America with 10%, and other Asian countries with 9%. This situation pressures North American suppliers to increase overall battery production, the longevity of the units, and the distance range per charge, and reduce charging times, overheating, and weight of each battery. In Mexico, the Japanese company Nidec plans to build a USD 715 million electric motor vehicle plant in 2023. The focus of this plant is to have a manufacturing presence in the North American region and distribute electric motors in this region (Reuters, 2022). The plant is expected to aid Nidec in achieving 1.2 million production units, doubling the production of 2022 (it currently has production plants in Europe and China). The company expects to reach a production capacity of 7 million units annually by March 2026. Another barrier that should be noted is the allocation of crucial raw elements for battery production, including lithium, cobalt, nickel, manganese, and graphite, which will be a determinant for reshaping the production chains. Mexico stands out as a potential world supplier of lithium. For example, it is estimated that 4.5 million tons of lithium may be extracted from Sonora in the next 20 years. This mineral deposit is estimated to be the largest in the world. The Mexican government has granted 31 concessions for lithium exploration in five states to companies from Canada, China, the United Kingdom, the United States, Australia, Spain, and Mexico (FUMEC 2021). China is a dominant player in the exploration, allocation, and transformation of raw materials needed for lithium batteries. In 2021, there were 142 firms producing lithium batteries, and 107 were in China. In 2019, of total lithium battery production, China accounted for 70% (SAFE 2021). This preeminence is seen down the production chain, as Chinese firms have invested in acquiring critical raw materials in other parts of the world. For example, Sonora’s lithium deposits are attractive to foreign firms looking to expand EV production in Mexico. The company “Bacanora Lithium,” a joint venture between Bacanora Minerals and Ganfeng Lithium, both Chinese companies, attempted to bid to extract these deposits. In 2023, the “US & Mexico Taskforce on Electrification of Transport” provided a roadmap for the electrification of the automotive industry in Mexico, focusing on five areas: human capital, innovation, supplier development, infrastructure, and governance. This task force is a joint initiative between the Mexican Ministry of Foreign Affairs and the University of California’s Mexico Alliance. The task force argues that the integration of supply chains between Mexico and the United States allows for around 22% of parts and components exported from the United States to

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Mexico to be then reimported to the United States as assembled vehicles, which in turn means that 40% of total value added of vehicles assembled in Mexico come from the United States. However, Mexico’s transition to EV production must increase from around 55,000 EVs in 2022 to 2.2 million units per year before 2030 (United Nations Climate Change 2023). Recommended policies include phase-out targets, EV regulations, CO2 standards, fiscal incentives, charging and refueling infrastructure, consumer awareness, and fleet purchase requirements (Pineda 2022). Finally, it is significant to point out that the automotive industry is capital-­ intensive and highly optimized, with low net margins of 2%–5%, leaving no room for error. The transition to EV production will be fatal to automakers that remain focused on the culture of mechanical engineering. Therefore, cooperation will be crucial for developing countries to successfully transition from ICE to EV production.

3.4 Japanese Cooperation and the Transition to EV Production in Mexico The COVID-19 pandemic had substantial performance impacts on global supply chains, mainly affecting countries that relied on Chinese inputs. The effects were significant for Japanese multinational firms with direct links to Chinese manufacturing and overseas production (Chen, Senga, and Zhang 2020). Similarly, Zhang (2021) argues that the pandemic substantially impacted the performance of Japanese MNCs and global supply chains during the first to third quarters of 2020. Specifically, negative impacts are reported for Japanese companies’ firm performance, expectations, and business plans in major host countries. Furthermore, it seems that overall COVID-19 response policies in host countries do not affect firm performance positively; the effects might come in the short term by improving sales expectations, employment, and investment. The transformation and restructuring of global production in a post-COVID-19 era implies reshoring, diversification, and regionalization of GVCs. In the case of Japan, in April 2020, the Japanese government approved a fiscal stimulus of 2 billion dollars for firms to relocate to Japan and 0.2 billion dollars to move to ASEAN countries to reduce reliance on China. Kimura et al. (2020) mention that regional policy coordination and cooperation were critical in mitigating and isolating the pandemic shocks on financial markets, trade, and GVCs in East Asia. Notably, the study analyzes the role of regional economic cooperation through the Association of Southeast Asian Nations (ASEAN) Economic Community and the Regional Comprehensive Economic Partnership (RCEP), which includes ASEAN plus six countries: Australia, China, India, Japan, Korea, and New Zealand. The study argues that coordinated policy responses and regional cooperation should focus on applying fiscal policies and sharing information, experiences, and resources in the health sector. Also, the primary policy response should be on GVC preparedness and flexibility to deal with external

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shocks of a vital trading partner (for example, the case of China in the COVID-19 pandemic). Japanese cooperation has been an essential source of knowledge and technological transfer from Japan to developing countries. Japanese government agencies, including the Japan International Cooperation Agency (JICA) and the Japan External Trade Organization (JETRO), play a significant role in the cooperation process in crucial industries. One key area of Japanese cooperation worldwide is strengthening the local supplier base in manufacturing industries requiring several production stages. For example, the automotive industry, organized as a sequence of value-added stages that usually span across country borders, is regarded as a Global Value Chain (GVC). The role of firm capabilities is relevant for understanding the successful insertion of firms in GVCs. Several factors cited in the literature include the presence of productive infrastructure and connectivity, openness to FDI, favorable business climate, solid institutions, and financial and labor markets with an educated workforce (Kummritz et  al. 2017; Taglioni and Winkler 2016). Katai (2020) mentions that production management capabilities such as kaizen4 may assist domestic firms’ participation in Japanese GVCs. Japanese cooperation will be crucial as the Mexican automotive industry goes through a drastic transformation to EV production. For example, JICA (2019) found that for the Philippines, during their automotive industry development, the industry maintained strong hierarchical characteristics where both ends of the value chain showed high-value added or what is referred to as the “smile curve.” This analysis explains that the OEM remains the leading actor within the GVC, in charge of defining stages from product planning to aftersales services. Tier-1 producers work closely with the OEM and Tier-2 producers with Tier-1 firms. Katai (2020) identifies six stages of participation in the GVC. These range from the proto-connecting stage, periodic supplier, regular supplier, major supplier, partner supplier, and global supplier. The transition from one stage to the next depends on domestic firms’ upgrading ability to meet quality and standards set by MNEs. Providing direct technical assistance to domestic firms may boost spillover effects and improve the participation possibilities of firms in higher stages of the GVC (Cusolito et al. 2016). Katai (2020) argues that one form of direct technical assistance is introducing kaizen to local firms. Through kaizen training, firms may boost quality and productivity in the first and second stages, reduce costs in the third stage, improve their position on the GVC in the fourth stage (e.g., from a periodic supplier to a regular or major supplier), and increase sales in a fifth stage (targeting to be a partner supplier). Previous studies in Mexico argue that Japanese cooperation plays an important role in developing the manufacturing capabilities needed for local firms to insert themselves into Japanese automotive GVCs. Katai (2020) analyzes the role of

 Kaizen is a production management system that originated in Japan. It is employed to improve the quality and productivity in manufacturing processes. 4

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kaizen training in improving and maintaining positions in the GVC by local firms. The study finds that cooperation and training are crucial for improving Quality, Costs, and Delivery (QCD) and domestic firms’ productivity indicators, improving their evaluation as reliable suppliers and increasing business volumes. Similarly, Guzman-Anaya (2022) mentions that Japanese cooperation was essential in improving quality and productivity measurements. Knowledge acquired via Japanese cooperation was internalized and diffused within the firm and, in some instances, spilled over to other vertically integrated firms. The knowledge acquisition allowed firms to receive industry-specific certifications easing their insertion in Japanese GVCs and generating growth in sales and market diversification. Several areas of opportunity in Mexico-Japan cooperation arise as the Mexican automotive industry transitions to EV production. These may come via public or private investment, joint ventures, or government assistance in several aspects. First, in allocating crucial raw elements, the Mexican government nationalized the mining and extraction of lithium in 2022. These conditions restrict the rights to the exploitation of lithium by a state-run company. Previous private lithium extraction projects are currently seeking agreements with the federal government to either give up their plans, come to a compensatory agreement, or seek a joint venture with the state-run company. The policy change seems to deter private investment. However, it may open the possibility of joint ventures between foreign firms and the state-run company since mineral deposits are estimated to be among the largest in the world. Second, under the post-COVID-19 nearshoring scenarios and the need for raw elements needed for EV production, Mexico is expected to be a key manufacturing hub for battery packs. Currently, China accounts for almost 70% of worldwide battery production, and North America only represents 10%. Japanese companies have invested in projects related to the production of EV motors. However, the possibility looms for producing battery packs that have longer longevity, a more extensive distance range per charge, and lower charging times, weight, and overheating issues. Third, in terms of human capital. As the industry transitions to EV production, automobiles will be more complex in terms of software usage. EV systems are continuously increasing in complexity, and OEMs will require technological transformation with decentralized teams of developers working on problem solving, not execution. This, in turn, will make manufacturers decide which software to keep inhouse and which should be outsourced. Under the new requirements for the industry, human capital must be trained in the use of soft skills (critical thinking, creativity, communication, cooperation) and hard skills (programming, embedded software, and the use of advanced technologies). The training of these skills and specific engineering knowledge may be achieved via government assistance. Cooperation will be critical in the knowledge transfer process required for the new forms of production. Previous successful experiences developing endogenous suppliers and human capital have been reported between the Japanese Cooperation Agency (JICA), Mexican state governments, and federal agencies (Guzman-­Anaya 2022). Fourth, associated with the need for reliable suppliers. As previously mentioned, EVs are less complex than ICEs, demanding fewer parts and components, thus increasing supplier requirements regarding quality and dependability. The share of

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value added allocated by suppliers will drop from 50–55% to 40–45%, crowding out suppliers that do not meet industry requirements. Therefore, Japanese cooperation in supplier development may benefit endogenous firms by increasing the knowledge, technology, and know-how necessary for EV production. Previous successful and positive spillovers from Japanese cooperation have been documented in some instances of vertical linkages between Japanese and Mexican firms and government assistance and training programs aimed at developing Mexican suppliers (Katai 2020; Guzman-Anaya 2022).

3.5 Conclusions The shift to EV production and consumption has grown in the last decade. However, this growth is expected to be in several phases. In terms of consumption, in the first stage increase in demand will be observed in developed nations first and afterward in developing countries. The increase on the demand side will rely on the ability of infrastructure expansion, consumer preferences, and public policy. For the production side, a post-COVID-19 scenario suggests less reliance on China through nearshoring practices. In contrast, the shift to EV production that requires fewer parts and components steers the manufacturing process to favor in-house production and vertical integration. For a country like Mexico, the automotive industry is essential to the economy. The country ranks seventh in global production and fourth in exports of automobiles and commercial vehicles. The industry represents 3.5% and 18.3% of GDP and manufacturing GDP, respectively. It employs 930,000 workers directly and indirectly, accounting for over 2 million jobs. The COVID-19 pandemic brought devastating consequences for the industry between 2020 and 2022. However, the resilience shown indicates a speedy recovery with growth rates that will bring production and exports to pre-pandemic levels in the upcoming years. In the case of EV production, the country is at an early stage of manufacturing and consumption of this technology. For example, EV and hybrid vehicles represented less than 5% of total vehicle sales in 2021. The transition to EV manufacturing needs a well-planned effort between the public, private, and education sectors. Despite a surge in demand in developed countries, the shift will be gradual, spanning over 10–15 years and a more extended period for developing countries. A poorly timed and managed transition to EV production may be harmful to the automotive industry’s competitiveness and labor force. The shift to EV production in Mexico poses several challenges. On the consumer side, EV prices are still out of reach for most buyers. Even with the introduction of subsidies, the transition decision from customers seems to be economic rather than regulatory. Additionally, infrastructure is still a constraint as the country is only endowed with 2100 charging stations, limiting EV adoption to specific regions and income levels. On the manufacturing side, EVs employ a simpler production process that stems from using fewer parts and components than a traditional

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ICE.  However, suppliers down the value chain must increase their quality and dependability indicators accordingly. The EV transition will have a crowding-out effect of suppliers that do not meet these requirements and a restructuring of the value added during different stages of production as OEMs seek to increase in-­ house production of integral parts, components, and software development. Japanese cooperation may play an important role in facing the challenges for the industry as it transitions to EV production. One decisive area is associated with the extraction and exploitation of raw inputs. The country accounts for some of the world’s largest lithium deposits. Joint ventures between state-run companies and Japanese firms may be advantageous for both parties to extract crucial minerals and develop the manufacturing of parts and components in the country. For example, in terms of battery packs, Mexico has the potential to stand out as a leading manufacturing hub, especially for the North American market. Furthermore, Japanese cooperation may also assist the transition needs related to human capital and supplier development. For instance, human capital needs not only hard skills related to the use of advanced technologies but also soft skills that allow creativity and critical thinking while communicating and cooperating under remote systems. Previous experiences show positive results from the cooperation efforts between public, private, and academic sectors from Mexico and Japan, especially in developing human resources for the automotive industry (Romero 2020). The main disruptions affecting suppliers will be the changes in the distribution of value added throughout the value chain and the crowding-out of inefficient and no longer needed parts and components. Similarly, endogenous suppliers will require the transfer of knowledge, technology, and know-how to remain competitive in the reshaping of the industry. Japanese cooperation may help reduce the knowledge gap via assistance and training programs of local suppliers.

References AMIA (2022) Importancia de la Industria Automotriz. https://amia.com.mx/publicaciones/industria_automotriz/. Accessed 29 Sept 2022 AUTOCAR Professional (2018) EVs and the impact on the automotive value chain. www.autocarpro.in: https://www.autocarpro.in/feature/evs-­impact-­automotive-­valuechain-­28821. Accessed 30 Sept 2022 Chen C, Senga T, Zhang H (2020) Measuring business-level expectations and uncertainty: survey evidence and COVID-19 pandemic. RIETI Discussion Paper 20-E-081, October 2020 Cusolito AP, Raed S, Taglioni D (2016) Inclusive global value chains: policy options for small and medium enterprises and low-income countries. Directions in development. World Bank, Washington, DC FUMEC (2021) Estudio de prospectiva y oportunidades en vehículos eléctricos (VEs) y el futuro de la cadena de valor automotriz en México. FUMEC, Mexico Goel A, Miller RJ, Cardell M, Batra G (2021) How did a global crisis pave the way for EV sales? EY. Retrieved November 9, 2021, from https://www.ey.com/en_be/automotive-transportation/ how-did-a-global-crisis-pave-the-way-for-ev-sales. Accessed 29 Sept 2022 Guzman-Anaya L (2022) Individual case studies of Japanese knowledge transfer via training in Mexico’s Automotive Industry. México y la Cuenca del Pacífico 11(33):95–127. https://doi. org/10.32870/mycp.v11i33.807

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IEA (2022) Global EV outlook 2022, securing supplies for an electric future. IEA Publications, Paris INA (2022, November 24) El Futuro de la Industria Automotriz en México [Webinar]. UDLAP Jenkins Graduate School. https://udlapjenkins.mx/ JICA (2019) Project for elaboration of industrial promotion plans using value chain analysis in the Republic of the Philippines Final Report. Japan International Cooperation Agency (JICA) Nomura Research Institute, Ltd., Tokyo Katai K (2020) The role of Kaizen in participation in the global value chain: the case of the Mexican Automotive Industry. In: Hosono A et  al (eds) Workers, managers, productivity. Palgrave Macmillan, Singapore, pp 171–195 Kimura F, Thangavelu S, Narjoko D, Findlay C (2020) Pandemic (COVID-19) policy, regional cooperation and the emerging global production network. Asian Econ J 34(1):3–27 Kummritz V, Taglioni D, Winker D 2017 Economic upgradation through global value chain participation: which policies increase the value added gains. Policy Research Working Paper 8007 Murray C (2021) Mexico’s once roaring auto sector falls on hard times. The Financial Times. https://www.ft.com/content/51476cda-­c8d8-­4ad3-­b0e0-­45dbc0bfcb5b. Accessed 28 Nov 2022 OICA (2023) 2022 Production statistics, international organization of motor vehicle manufacturers. https://www.oica.net/category/production-­statistics/2022-­statistics/. Accessed 10 Mar 2022 Pineda L (2022) What’s missing in Mexico’s EV strategy? https://theicct.org/whats-­missing-­ mexicos-­ev-­strategy-­oct22/. Accessed 23 Jan 2023 PWC (2019) Merge ahead: electric vehicles and the impact on the automotive supply chain (full report). https://www.pwc.com/us/en/industries/industrial-­products/library/electricvehicles-­ supply-­chain.html. Accessed 30 Sept 2022 Ragwitz M, Wolfgang S, Barbara B, Walz R, Nicki H, Max R, Gustav R, Christian P, Thomas F, Reinhard H (2009) The impact of renewable energy policy on economic growth and employment in the European Union. European Commission, DG Energy and Transport, Brussels Romero ME (2020) La Cooperación japonesa para el desarrollo. El estado de Guanajuato en México, donde los objetivos del sector publico y privado se encuentran. Adm Pública Soc (APyS) 9:66–86 Reuters (2022) Japanese electric motor maker Nidec to build $715 mln Mexican plant. https:// www.reuters.com/business/autos-­t ransportation/japanese-­e lectric-­m otor-­m aker-­n idec-­ invest-­715-­mln-­new-­mexican-­plant-­2022-­11-­18/. Accessed 22 Nov 2022 SAFE (2021) The commanding heights of global transportation. https://2uj256fs8px404p3p2l7­ nvkd-­wpengine.netdna-­ssl.com/wp-­content/uploads/2020/09/The-­Commanding-­Heightsof-­Global-­Transportation.pdf. Accessed 03 Oct 2022 Secretaría de Relaciones Exteriores (2022) In Puebla, Foreign Secretary Ebrard announces international collaboration for electric vehicle transition. https://www.gob.mx/sre/en/articulos/in-­puebla-­foreign-­secretary-­ebrard-­announces-­international-­collaboration-­for-­electric-­ vehicle-­transition-­293876?idiom=en. Accessed 14 June 2022 Singh A (2021) Modelling technological improvement, adoption and employment effects of electric vehicles: a review. Massachusetts Institute of Technology, Cambridge, MA The Economist (2022) How supply-chain turmoil is remaking the car industry. https://www. economist.com/business/2022/06/12/how-­supply-­chain-­turmoil-­is-­remaking-­the-­car-­industry. Accessed 15 June 2022 Taglioni D, Winkler D (2016) Making global value chains work for development. Trade and development. World Bank, Washington, DC Trade Map (2022) Trade statistics for international business development. https://www.trademap. org/Index.aspx. Accessed 28 Nov 2022 United Nations Climate Change (2023) US & Mexico: Taskforce on electrification of transport: a progress report. https://unfccc.int/event/us-­mexico-­taskforce-­on-­electrification-­of-­transport-­a-­ progress-­report. Accessed 23 Jan 2023 Zhang H (2021) The impact of COVID-19 on global production networks: evidence from Japanese multinational firms. ERIA Discussion Paper Series No. 364, March 2021

Chapter 4

Japan International Development Cooperation. An Important Tool for Training and Strengthening Supply Chains in the Automotive Industry in the State of Guanajuato, Mexico Maria Elena Romero Abstract From an international Relations perspective, Japanese international cooperation in Mexico is analyzed as a strategy that promotes investment in the automotive sector through training the labor force and improving conditions for Japanese investment prosperity, assuming that the United States-Mexico-Canada Agreement (UMSCA) is a fundamental incentive. The analysis recovers the institutions as the vehicles that promote the response of the different actors involved in the production processes to make them successful. Thus, institutional neoliberalism will be the theoretical approach that allows an understanding of the importance of institutions to give certainty to the agreements and potentiate the results of the International Development Cooperation (IDC). While in Japan, the Japan International Cooperation Agency (JICA) is the institution responsible for technical cooperation programs, in Mexico, the Mexican Agency for International Development Cooperation (AMEXCID) is the institution responsible for cooperation actions. Mexican local governments also contribute to taking advantage of the externalities of FDI and IDC by designing public policies. This paper focuses on the weaknesses of the SME sector and Japan’s efforts to meet the needs of large industries in Guanajuato, Mexico, through JICA programs, analyzing how IDC supports small and medium-sized enterprises (SMEs) to improve the local labor force and strengthen the automotive industry. Keywords  International Development Cooperation · Small and medium industry · Technical education · Automotive industry

M. E. Romero (*) Faculty of Political and Social Sciences, University of Colima, Colima, Mexico e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Guzman-Anaya (ed.), Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector, New Frontiers in Regional Science: Asian Perspectives 72, https://doi.org/10.1007/978-981-99-3985-5_4

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4.1 Introduction The tight content and wage rules under the renegotiated United States-Mexico-­ Canada Agreement (USMCA) have forced hundreds of Japanese automotive suppliers and material manufacturers operating in the North American region to think in new countries to reassess their supply chains. This condition also addresses the dilemma of remaining in Mexico. The fragility of supply chains is a risk factor for the competitiveness of local companies, both in terms of quality and quantity. Japan, one of the most important investors in Mexico, demands quality and specialization for its processes, especially those linked to the automotive industry. According to the Japan Foreign Trade Organization (JETRO), around 1300 Japanese-affiliated companies operate in Mexico, 60% of which are related to the automotive sector. They are choosing to maintain their operations in Mexico and pay Mexican workers the wages set in the USMCA. The stipulation of 40% or more of national auto parts, besides the 16 dollars per hour worked, is one of the most important requirements to avoid paying extraordinary tariffs to enter the United States market. Unlike the initial forecasts of relocating their production processes, companies such as Toyota, Honda, Mazda, and Nissan remain in Mexico, adapting to the conditions of the new UMSCA, taking advantage of the conditions Mexico offers, and looking for better situations to support automotive production. Despite what the UMSCA stipulates, there are reasons to stay in Mexico: (a) Keeping investments in Mexico will avoid the cost of moving and its implications in adapting to another country; (b) Japanese companies have found in Mexico a favorable environment for their investment, as well as incentives from local governments and the use of international development cooperation (IDC) to promote an efficient labor force; (c) The Economic Association Agreement with Mexico (EPA) establishes clear rules in the economic–commercial relationship with Mexico, and finally; (d) the conditions offered by Mexican regions such as the Bajío and, particularly, Guanajuato, in sectors such as infrastructure and social environment contribute to creating a favorable location for Japanese needs. From the International Relations perspective, Japanese cooperation in Mexico is analyzed as a strategy that promotes investment in the automotive sector through the training of human resources and the adequation of conditions for the prosperity of Japanese investment, assuming that the UMSCA is a fundamental incentive. The analysis recovers the institutions as the instruments that promote positive responses from the different actors involved in the production processes to make them successful. Thus, institutional neoliberalism will be the approach that allows us to understand how institutions give certainty to the agreements and potentiate the results of the IDC. In Japan, the Japan International Cooperation Agency (JICA) is responsible for technical cooperation programs; in Mexico, the Mexican Agency for International Development Cooperation (AMEXCID) is its counterpart. Also, local Mexican governments contribute to taking advantage of the externalities of FDI and IDC by designing public policies.

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This paper analyzes the weaknesses of the small and medium-sized enterprises (SMEs) linked to the automotive sector, specifically in the Mexican state of Guanajuato. We also discuss Japan’s efforts to meet the needs of large industries located in this state through JICA programs. Mexico recognizes cooperation as a means to contribute to the advancement of those who require complementary support to implement their development programs. Mexico also assumes that cooperation is a useful tool to further its development objectives. Japan, a traditional donor, defines cooperation as an important political and diplomatic instrument to support development strategies in developing countries and special partners. Japan enacted its Development Cooperation Charter (DCC) in 2015, assuming that cooperation will be maintained with its strategic partners responding to the request for specific projects to enhance development goals for both countries. In this context, JICA has defined strategies to contribute to the prosperity of the Japanese automotive industry located in Mexico, focusing on training human resources, promoting quality in production and supply chains, strengthening the competitiveness of SMEs, and reinforcing the industrial platform and the support industry in Mexico. The institutional neoliberalism approach will allow us to understand the actions that the different actors promote through cooperation programs to strengthen the Japanese automotive sector. JICA, as the central axis of Japanese cooperation, marks the principles that frame cooperation with Mexico and emphasizes its efforts in Guanajuato, a Mexican state located in the Central Bajío region. This chapter is divided into three sections. In the first one, a general review of institutional neoliberalism is made in order to understand the role that different institutions play in the Mexico-Japan cooperation scheme. The second section analyzes the Japanese automotive sector located in Guanajuato and the means implemented to promote this sector through cooperation to development. The third section reviews the specific case of training human resources through the projects implemented by JICA in the Mexican Bajío, highlighting the specialization project supported by JICA and implemented by the National College of Technical Professional Education (CONALEP). Finally, several premises are presented as a conclusion.

4.2 Institutions, Responsible Agents to Promote the Japanese Automotive Sector in Mexico The institutions are responsible for designing the cooperation actions, making the resources transparent, and evaluating the results, giving certainty to the cooperation objectives and results. In Japan, JICA is in charge of technical cooperation. Since 1974, JICA has guided its efforts to achieve the economic and social development of those countries that require resources to promote development. In 2015, the Development Assistance

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Charter, enacted in 2012, was revised and reformed, changing Japanese international cooperation principles and emphasizing its strategic priority. Mexico inaugurated the AMEXCID in 2011 and promulgated the International Development Cooperation Law. In this Law, cooperation is assumed as a joint effort of governments, international organizations, civil society, academia, and the private sector to promote actions that contribute to sustainable development. Both institutions, JICA and AMEXCID, agree that cooperation is an avenue that supports development objectives in other countries to promote a more equitable and stable world. Japan and Mexico have a long history of bilateral relations driven by their respective institutions and backed by strong agreements. Since the Treaty of Friendship, Commerce, and Navigation of 1888, both countries established diplomatic relations that have deepened and diversified over time. Mexico became a strategic partner as Japan industrialized and expanded its economic-commercial activities abroad. Both countries have worked to promote mechanisms that would give certainty to this strategic relationship. The Japan-Mexico Economic Partnership Agreement (EPA), signed in 2004 and into force in 2005, recognizes that Mexico and Japan are complementary economies. The EPA provides certainty in transactions between the two countries. The Agreement recovered cooperation as a priority in some sectors. Chapter 14 and its articles include cooperation in matters of trade and investment promotion; cooperation in support industries; improvement of small and medium-sized companies, and cooperation in technical and vocational education and training. Topics such as intellectual property, agriculture, tourism, and the environment are also added (Japan-­ Mexico Economic Partnership Agreement EPA 2005). EPA assumes cooperation as a tool to promote key sectors for Japan and defines the necessary means to reach its objectives. As a middle-income country, Mexico is susceptible to receiving support in selected sectors and priority areas. Therefore, through its principles, the EPA raises the need for a gradual opening of the Mexican economy and an increase in Japanese investment. According to the Foreign Trade Information System, the EPA recognizes the automotive sector as a special case and achieves a unique negotiation under the following scheme: (a) EPA grants Japan immediate access for an equivalent amount of 5% of the national automobile market. Under the current promotion of the automotive industry regime in Mexico, around 3% is already imported free of duty; (b) above the negotiated quota, imports for automobiles will be deducted after 6 years (SICE-OAS 2022). Furthermore, institutions are the battering ram to generate certainty and maximize results. As Keohane (1993) states, institutions help to define the meaning and importance of State actions. However, State actions depend considerably on the prevailing institutional arrangements, which affect information flow and negotiation opportunities. They also depend on their capacity to control others and set their priorities. Hence, as institutions, the ability of governments to assume credible commitments and meet expectations is vital to strengthening international agreements (Keohane 1993). From the perspective of liberal theories of International Relations, particularly the institutionalist one, the most recurrent ways to encourage synergy between

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foreign policy and international cooperation has been the definition of formal and informal norms and institutions, tending to promote predetermined processes and objectives (Prado 2014). Institutional neoliberalism does not ignore internal politics. The convergence of objectives in a democratic context with a liberal economic system produces beneficial economic opportunities for the Agreement’s participants. As a result, institutions facilitate cooperation by reducing transaction costs, exchanging information, making commitments more transparent, and focusing actions on priority objectives. Despite the convergence of objectives, the success of the actions undertaken by the institutions depends to a great extent on context, politically and economically speaking. Although complementarity plays an important role in defining common objectives within an Agreement, individual capacities lead to differentiated results and ease necessary adjustments. The Mexican internal context, characterized by a period of political transition, has been characterized by its inclination to attend to national problems without a defined foreign policy, which presents a challenge for foreign capital. Besides, the country’s insecurity discourages investment, and bureaucratic procedures discourage FDI. However, the Mexican geographical location and UMSCA offer excellent conditions for investors interested in competing with better opportunities in the American market. As Ishikane (2015) states, Japan has a developed economic infrastructure, an educated society that supports development, and policies that promote actions that complement its industrial competitiveness objectives. Japan also has vast technological development and economic resources to ensure a favorable environment for its industrial production. In this context, Japanese IDC is granted to Mexico based on its goal to promote its strategies, taking advantage of the externalities of cooperation. The private sector is essential for Japan, and the IDC is a necessary cost to achieve its objectives. JICA, in accordance with its DCC, focuses its efforts on human security and growth with quality (JICA 2022). Under the vision of a leader who promotes trust under strategic actions with broad and long-term perspectives that promote co-creation and involves pooling wisdom and diverse resources, JICA is committed to supporting others for the benefit of Japan. Japan prioritizes self-reliant development and mutual benefits from development cooperation. According to preliminary data, cooperation from government funds, called official development assistance (ODA), totaled USD 17.6 billion in 2021, representing 0.34% of gross national income. The DCC states that the ODA focuses, among other things, on improving local capacity to grow the economy through technological and financial cooperation based on the development plans of partner governments (DAC-OECD Japan 2022). The convergence of institutional objectives is fundamental to supporting strategic partners’ goals, although the maximization of the positive effects is the responsibility of the local government’s political decisions and actions.

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Government and private sector join efforts to reinforce the competitiveness of Japanese industries abroad. In order to strengthen its cooperation, Japan adds private funds to its ODA program’s budget. In 2020, JICA, through its Leading Private Sector Infrastructure Fund in Asia (LEAP Fund) of the Asian Development Bank and the Japan Bank for International Cooperation, together mobilized USD 513.2 million from the private sector through loans, credits, and direct investment in companies and entities with special purposes (DAC-OECD Japan 2022). Therefore, JICA is a key institution to back and improve the Japanese automotive sector located in Mexico. Furthermore, AMEXCID is a decentralized body of the Ministry of Foreign Affairs (SRE). It was opened on September 28, 2011, as the institution responsible for executing the Mexican cooperation program. Through AMEXCID, Mexico defines its cooperation mission as a compromise to share experience and resources to face global challenges and grow together, based on strategic alliances with the private and academic sectors, civil society, and local governments; to coordinate, plan and evaluate cooperation efforts and educational, cultural and tourist, technical and scientific, financial and economic promotion (AMEXCID 2011). So, Mexico, as a strategic partner and recipient of Japanese FDI and international cooperation, must create the conditions to take advantage of foreign capital. As Japan takes advantage of the Mexican location and preferential taxes and tariffs obtained within the framework of the renewed USMCA, Mexico should take advantage of the externalities caused by foreign investment and cooperation. This may be achieved by committing to improving the conditions of SMEs that contribute to local supply chains by training human resources, improving infrastructure, and thus improving the quality of life of the benefited Mexican population.

4.3 The Japanese Automotive Sector in Mexico. Investment and Cooperation to Promote Profits Japan promotes productive activities in Mexico based on strategies that complement Japanese industrial production and provide the opportunity to be competitive in other markets. Mexico must define its own sectors of interest and open them selectively within the framework of an industrial policy that meets national development needs, taking advantage of the externalities of the participation of foreign capital, either as investment or as cooperation projects. Japanese business abroad is encouraged by internal factors as well as by the international environment. The recent survey on the business situation of Japanese companies in Latin America suggests some progress in 2021, compared to the previous year, given the increase in local market billing, which is the Mexican case. Most of the companies in Latin America with improvements are manufacturers in the automotive industry with exportation to the US market. Thus, we can deduce that a large part of the companies that expect an increase in local market billing are

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trusting in an export increase to the US market (Japan External Trade Organization 2022). This situation could encourage the positive effects of the presence of Japanese companies in Mexico. However, the same survey reports that in the local supply of raw materials and manufacturing parts, the percentage of Japanese supply increased to 35.8%, higher than the 31.7% reported in the 2020 survey. Also, local supply coming from Japanese companies installed in the country is 53.2%, higher than the 46.0% of the last survey. On the other hand, the percentage of supply coming from local companies is 37.4%, less than 41.5% of the last survey (Japan External Trade Organization 2022). These data show a supply chain based on goods from Japan and a significantly diminished supply capacity of local companies that have been unable to place themselves as a stable link in the production chain. Obstacles such as the sharp rise in labor costs, the lack of specialization of labor, complex and lengthy bureaucratic procedures, and lack of transparency in tariff processes delay the ability to incorporate local companies. The Mexican government has focused more on providing infrastructure and tax incentives to attract Japanese investment and has set aside an industrial policy that efficiently encourages local industry, particularly SMEs. According to the Mexican Ministry of Foreign Affairs (SRE), the flow of Japanese investment is considering a corresponding path that has promoted a symbiotic and complementary economic relationship (SRE 2020). However, the relationship between Japan and Mexico is characterized by being asymmetrical with a Mexican response that works within the framework of Japan’s FDI interests so that Japanese investment stays in Mexico and keeps increasing. JICA designs strategies that strengthen Japanese production processes. Given the weakness of Mexican SMEs, the Japanese industry supply chain located in Mexico has been corrected by Japanese companies coming to Mexico to support the automotive supply chain. The Japanese government has a very well-implemented and complementary strategy to provide cooperation in favor of its economic security. Since 2012, JICA has been supporting Japanese SMEs to incorporate them into the international market, encouraging competition, seeking complementarity with large corporations, and encouraging shared experiences. Around 600 companies have been supported in various countries since then (JICA 2018). Through the ODA, JICA implements programs to finance projects of its own industries located in other countries, applying a circular strategy, where Japanese investment is complemented with ODA to benefit Japanese industries abroad that return their profits to Japan. Japanese institutions do have a well-designed process through which they support economic goals. JICA, within the framework of its “public-private alliance” program, assumes the importance of Japanese SMEs that actively participate in business development abroad. Since 2014, JICA has consolidated the program for SMEs to facilitate the organizational structure of these companies. These kinds of strategies enabled collaboration between training programs offered by JICA and by Japanese local governments and non-governmental organizations and universities to encourage their participation in developing business abroad.

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As an institution, JICA designs policies that go from the planning phase to the implementation processes, assuming cooperation as a catalyst for the expansion of Japanese economic activities, promoting the creation of capacities that improve private investment and “quality growth” in developing countries (MOFA 2015). JICA promotes tasks that complement Japanese investment and encourage Japanese SMEs to share experiences with local enterprises. Then, through cooperation, JICA focuses on programs that yield more significant mutual benefits to Japan’s economy and recipient countries. Likewise, JICA defines basic activities, among which ODA to SMEs is fundamental during their settlement abroad. The automotive sector is the spearhead of Japanese investment in Mexico. The automotive industrial complex of Aguascalientes, Nissan II, opened in 2013 and expanded in 2017. The Honda, Mazda, and Toyota assembly plants were established between 2014 and 2015 in the industrial corridor of Silao, Guanajuato. These automotive projects made the accumulated Japanese investment between 1999 and 2018 the second investor in Mexico—after the United States—in the automotive sector, contributing 17.2% of the total investment received in those years (Morales and Carbajal 2019). In Mexico, the Central Bajío region, particularly the State of Guanajuato, became an optimal location for Japanese industries. There, the objectives of the Japanese companies met those of the Mexican State governments and the strategies of JICA. The Mexican Bajío became a suitable region to attract the Japanese automotive industry. One after another, large Japanese automakers arrived in the Bajío region. The proximity to Mexico City, adequate communication routes, and local governments’ advocacy for adequate infrastructure and policies to promote investment made this geographical region attractive for the Japanese industry to locate. The Japanese automotive industry favors proximity and organizes in clusters allowing them to strengthen support chains and facilitate interaction between firms and share best practices among them; likewise, it is through the clusters that the transfer of technological knowledge from foreign to local companies is sought (Global Business Reports, 2016, cited by Lugo-Sanchez and Guzmán-Anaya 2021). Hence, cooperation is promoted by JICA to support the Japanese industry and is used by the government of Guanajuato to improve areas such as education. In this way, cooperation is seen as a tool to strengthen the weak links in the production chain and prop up the Japanese automotive sector. JICA has designed programs such as the Strengthening of the Competitiveness of SMEs-Support Industry, on which two projects depend: Project for the Training of Human Resources for the Automotive Industry in El Bajío in Mexico and the Project for Strengthening the Automotive Cluster in Mexico (JICA-Mexico 2018). SMEs are the central focus of cooperation in support programs for the automotive sector. While Japanese SMEs work hand in hand with large Japanese companies, Mexican SMEs require support to properly insert themselves into the supply chain. Mexican SMEs are the main source of employment and represent an important link in the production chain. According to the INEGI (National Institute of Statistics and Geography of Mexico) and the Ministry of Economy, between October 2020

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and July 2021, the proportion of new micro, small, and medium-sized businesses (MiPyMES) increased, and its closure decreased, compared to the period May 2019 to September 2020. Nevertheless, 1,010,857 were permanently closed (National Institute of Statistics and Geography INEGI 2021). In the state of Guanajuato, by the end of 2018, more than 260,000 economic units were registered, 99.8% of them are MiPyMEs; all together contribute 51% of the gross domestic product (GDP) produced by the State and around 70% of formal jobs (Diosdado Interview 2019). Regarding the SMEs linked to the supply chain of the automotive sector during the COVID-19 pandemic (2020–2021), INEGI, in its National Statistical Directory of Economic Units Mapping, reports in Guanajuato, only 85 SMEs linked to this sector (see Table 4.1). Of the 85 SMEs registered in the INEGI Directory, in the category of 11–30 employees, we find six with Japanese capital, seven with Mexican capital, and one with Indian capital. In the 31–50 employees category, only three are from Japanese capital, one is from Japanese/American capital, one is from Chinese capital, four are from American capital, one is from Germany, one is from Spain, and one is from French capital (DENUE s /F). This data is retrieved since they have the most significant presence in the supply chain due to the number of personnel hired and the technology they use in their production process. Of these 85 SMEs, only 7 are from Mexican capital. The data shows that the supply chain is supported by external capital and that Mexican SMEs still represent an area of opportunity for Mexico. Guzmán-Anaya (2017) states that endogenous firms in developing countries may not receive the positive externalities of entering global production chains due to technological and knowledge deficiencies. This situation is notable for Japanese production chains, which demand high-quality parts and components and favor the supply of companies that belong to the same economic group, limiting opportunities for local companies if they do not have the required quality. Guanajuato has encouraged the location of Japanese FDI in its territory by strengthening its governmental institutions. As a result, it opened a business representation in Japan to advertise the State and organize promotion visits to increase investment. In 2017, representatives of the Guanajuato government visited Hiroshima, Tokyo, and Nagoya, achieving four investment projects for 48 million dollars that would generate 800 direct jobs. The investments of the Toyota Group and Kyoto Platec were extended, with an investment of 20 million dollars, aimed at providing plastic injection molds to the automotive sector. Minamida, with an investment of 6 million dollars dedicated to cold forging and production of bolts and nuts, arrived at Guanajuato following a promotional visit (Mexico Industry 2017). In this order of ideas, Mexican institutions attempt to potentiate the externalities generated by Japanese FDI. However, this effort is aimed at granting better conditions for investment and taking advantage of benefits, such as opening sources of employment. However, efforts to encourage local industry and professionalization of human resources are limited. Within the renegotiated USMCA that entered into force on July 1, 2020, the new rules of origin were perceived negatively due to the requirement of a 70% local

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Table 4.1  SMEs installed in the State of Guanajuato by number of employees, 2020–2021 (Pandemic period) Number of business Employees companies 0–5 19

6–10

11–30

31–50

6

15

21

Number of companies by product Electrical and electronic equipment and parts for motor vehicles Other parts for automotive vehicles Parts for steering and suspension systems for motor vehicles Parts of brake systems for automotive vehicles Parts of transmission systems for motor vehicles Stamped metal parts for automotive vehicles Seats and interior accessories for motor vehicles Electrical and electronic equipment and its parts for motor vehicles Other parts for automotive vehicles Stamped metal parts for automotive vehicles Seats and interior accessories for motor vehicles Electrical and electronic equipment and its parts for motor vehicles Gasoline engines and their parts for motor vehicles Other parts for automotive vehicles Parts for steering and suspension systems for motor vehicles Parts of brake systems for automotive vehicles Parts of transmission systems for motor vehicles Stamped metal parts for automotive vehicles Seats and interior accessories for motor vehicles Electrical and electronic equipment and its parts for motor vehicles Gasoline engines and their parts for motor vehicles Other parts for automotive vehicles Parts for steering and suspension systems for motor vehicles Parts of transmission systems for motor vehicles Stamped metal parts for automotive vehicles

1 4 4 3 2 5 3 1 1 1 3 2 2 4 1 1 1 1 5 3 1 2 1 4 4

(continued)

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Table 4.1 (continued) Number of business Employees companies 51–100 24

Number of companies by product Seats and interior accessories for motor vehicles Seats and interior accessories for motor vehicles Electrical and electronic equipment and its parts for motor vehicles Gasoline engines and their parts for motor vehicles Other parts for automotive vehicles Parts for steering and suspension systems for motor vehicles Parts of brake systems for automotive vehicles Parts of transmission systems for motor vehicles Stamped metal parts for automotive vehicles

2 1 2 2 10 1 1 2 3

DENUE (s.f.). Directorio Estadístico Nacional de Unidades Económicas. [Conjunto de datos]. Directorio Estadístico Nacional de Unidades Económicas. https://www.inegi.org.mx/app/mapa/ denue/default.aspx

steel/aluminum supply ratio added to the high wage clauses. Given this situation, it was speculated that Japanese FDI would be redirected to other regions that offered better infrastructure and salary conditions. However, the opposite happened; the large automotive corporations located in Guanajuato decided to stay and encourage strategies to promote their competitiveness in the US market. Mexico, for its part, worked to achieve better conditions in the interpretation of the USMCA clauses. Recently, the resolution of the dispute over regional content in automobile production opened up the opportunity to interpret the rules according to alternative methodologies and offer better conditions to foreign companies investing in Mexico with exports to the American market.1 However, to stay competitive, the automotive industry requires efficient processes that keep its products competitive in the US market. Japan has been preparing for years and is implementing cooperation projects in Mexico through JICA.

 Mexico filed a dispute for an interpretation regarding regional content in vehicle production. Mexico argued that the requirements established by the United States to calculate the Regional Value Content (RVC) of passenger vehicles, light trucks, and their parts, did not correspond to what is established in the USMCA. Mexico considered that the provisions of the Appendix Annex 4-B of the USMCA grant automobile producers different methodologies that allows them to consider non-originating parts and components in the calculation of the RVC, and thereby ensure that the vehicle be considered for purposes of obtaining the tariff benefits of the Agreement. The United States does not agree with that position, nevertheless Mexican government submitted a request to set a discussion panel on January 6, 2022, to examine the issue of methodologies applied to calculate local components. Canada applied to join as a co-complainant on January 13, 2022. On January 11, 2023. The Panel’s Final Report was published stating that vehicle manufacturers are allowed to consider essential parts of a finished vehicle (engine, transmission, bodywork, etc.) as original, once, separately, said auto parts have complied with the minimum percentage of regional content (75%), using the alternative methodologies that the same treaty establishes (SE-Controversy 2022; SE 2023). 1

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4.4 For Training, Cooperation To favor the productivity and competitiveness of Japanese companies, JICA defined the Industrial Development Plan and approved the Program to Strengthen the Competitiveness of SMEs and Supporting Industry. This Program aims to integrate local companies into the supply chain of Japanese automotive companies, thereby strengthening the industrial platform and the support industry in Mexico. The Program contains two projects: The Human Resources Training Project for the Automotive Industry in El Bajío in Mexico and the Project for the Strengthening of the Automotive Cluster in Mexico (JICA 2018a, 2018b). The Project introduction for the Strengthening of the Automotive Cluster in Mexico recognizes the weakness of the local infrastructure and states that: “Given the importation of numerous components and the competition difficulties that local companies face, the project will focus on strengthening the capacities of state governments and automotive clusters, so that they can provide adequate assistance to Mexican companies in technical and organizational fields, such as ‘5S’s’ methodologies, KAIZEN, and other specialized processes such as forging or stamping to make them more efficient” (JICA—Project 2 2018). According to JICA, Mexican companies represent less than 30% of the total local acquisition of auto parts, with clear deficiencies in meeting the requirements of Japanese companies in terms of quality, costs, and delivery times (Guzmán-­ Anaya 2018, p. 109). The Human Resources Training Project for the Automotive Industry in El Bajío is essential to train personnel that the Japanese industry requires. In Mexico, since 2015, JICA has been working to create a new undergraduate study program on the “Automotive Industry” to specialize professional technicians to join the automotive industry in Bajío (JICA—Project 1 2015). The specialization of local labor capable of joining the supply chain through the strengthening of SMEs is essential for Japanese FDI to increase and to promote the transfer of processes with advanced technology in the automotive sector located in Guanajuato. Considering that one of the areas of opportunity for Mexican SMEs is the specialization of their workforce, in the projects promoted by JICA, training is essential. The projects oriented to training technical professional human resources and preparing government staff will improve mutual understanding to promote a better advantage of the positive externalities that Japanese investment can leave in Mexico. Also, professional workers will help SMEs efficiently incorporate into the production processes of foreign companies located in Mexican territory. JICA and AMEXCID, as institutions, synthesize cooperation efforts. On June 11, 2015, both Agencies signed the “Project for the Training of Human Resources for the Automotive Industry in the El Bajío Zone in Mexico”. This project is highly relevant as it promotes the economic, productive, and technological dynamism that the automotive industry generates in Mexico, with special emphasis on improving technological and industrial dual education models (AMEXCID 2015).

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The project has been carried out by the National College of Technical Professional Education (CONALEP) and the State Ministries of Economic Development of the Mexican States of Aguascalientes, Guanajuato, and Querétaro, all of them located in the Bajío. The project aims to promote adequate coordination between the public, private, and academic sectors to reflect the needs of the automotive sector in educational programs and thereby contribute to the training of technicians who meet the expectations of the Japanese automotive industry. This initiative adds to the work that Mexico and Japan have developed since 2012 on the automotive issue through the project “Strengthening the supply chain in the automotive industry in Mexico,” which developed the necessary tools for the establishment of a supply chain between Japanese assemblers and potential suppliers in Guanajuato, Nuevo León, and Querétaro (AMEXCID 2015). The project with CONALEP contemplated different stages to link the needs of the Japanese automotive sector. JICA was the agency that promoted the project and implemented the diagnosis to detect needs. JICA supported the undergraduate program’s profile design, included the teachers’ training in the project, and held several meetings with the automotive sector in Bajío. Since 2017, meetings have been held to request the cooperation of the companies of the automotive cluster, industrial associations, and advisory councils of the states of Aguascalientes, Guanajuato, and Querétaro. Within the framework of the Public-Private Alliance, JICA’s budget became more efficient, with greater opportunities to meet the objective of Japanese cooperation, promoting the consolidation of its companies abroad. The follow-up of the project remained in the hands of Mazda, whose director of resources presided over the Advisory Council. The Japanese companies located in the Bajío contributed to the design of the program of studies of the career. Neaton, Yorozu, and Plastec attended design and promotion meetings. Neaton was responsible for training 12 teachers in the management area on the production floor issues. Sumitomo, another company, was in charge of the model to match the objectives and the costs and responsibilities, donated consumable material with a value of more than 2 million pesos to support the teaching-learning process of the CONALEP-JICA project (News CONALEP-­ JICA 2017). For Mexico, the human resources training project represents the opportunity to potentiate the positive effects of cooperation by preparing qualified human resources and strengthening intercultural processes in the Bajío region. In other words, the interaction of Mexican students with Japanese teachers or Mexican teachers trained in Japan will provide an element to improve a better understanding of the Japanese community arriving in the region and also creates the societal conditions to facilitate immersion in Mexican culture. In addition, the awareness of the “Japanese how to do” will impact the processes, making a smooth course of labor relationships based on the same work logic. For teachers, the project represents an excellent opportunity for specialization and to opt for better working conditions. However, until 2020 there was no analysis of the situation of teachers or their working conditions. The specialization could open the door to joining the Mexican auto parts industries as quality advisors,

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allowing SMEs to understand the processes better and be more competitive. Likewise, CONALEP should, due to the opportunity it represents, take advantage of qualified human resources and replicate the experience in other units. The project proposes that graduates join as production floor supervisors or area managers in companies that supply raw materials or parts and components important for manufacturing in the automotive industry. Although the project shows effective cooperation between the different sectors, the results are not yet evident. Regarding the students, in the first call, in the CONALEP Irapuato campus, 84 students were formally accepted, graduating in 2019 only 71, while on the Celaya campus, there were 149 graduates (Conalep-Irapuato Archive 2019; El Sol del Bajío 2019). The specialization program in the automotive industry includes a professional internship period whose purpose is to link students with the labor field. In this program, professional practices were carried out in the automotive sector located in the region. Although the number of graduates indeed reports a high terminal efficiency, greater than 80% of accepted students, there is no data on the number of graduates incorporated into the large Japanese automotive corporations or the supplier SMEs. Dr. Alberto Diosdado, general director of CONALEP—Guanajuato, affirmed that the program is the result of a CONALEP (sic) strategy to reinforce training for the Bajío Automotive Cluster. However, he said, nothing guarantees that trained human resources will be incorporated into the Japanese industry located in the region (Torres 2019). Until December 2019, there was no strategy for monitoring the first graduates to find out if there was a positive effect. For example, if the resources trained are incorporated in automotive industries located in the region, in the SMEs where graduates would contribute to adding local SMEs to the supply chain. According to Diosdado, the CONALEP program does contribute to the training of quality human resources, opens up more and better opportunities to get a job, and supports efforts for technological development, without the positive impact being directly on the SMEs located in the Bajío zone (Diosdado Interview 2019). The Industrial Development Projects Officer of JICA Mexico shared with Diana Ramírez in 2020 the first survey of graduates of the first generation of the career. From all the model selected schools, only 16% of them started working, the vast majority chose to continue university studies, and a smaller percentage is working and studying simultaneously. The JICA officer specified that of the graduates of the Irapuato campus, only 13 work for the automotive and auto parts sector (Ramírez 2020). The IDC has been an important factor in the training of specialized human resources. However, the project’s final objective is to lighten the burden of the automotive companies in relation to the content of national labor and incorporate small companies as solid links in the supply chain. This objective has not been met in a timely manner.

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4.5 Conclusions This analysis found that the links between Japan and Mexico have been strengthened. The EPA between both countries has been a factor that drives investment and cooperation in favor of key sectors. The IDC is a positive instrument for the government and private sector to achieve their objectives. However, Mexican actions have been pragmatic and reactive. While Japan has defined and planned the cooperation model it implements in each country based on its economic-commercial objectives, Mexico and particularly the state of Guanajuato design their strategies based on the interests of Japanese investment. The objective in Guanajuato is to maintain existing investment and attract new companies, which will create sources of employment and boost the service sector to meet the needs of the growing Japanese community. Even more, the projects that contribute to strengthening the companies, providing employment, and supporting the local economy come from the Japanese initiative. The Japanese IDC projects implemented in the Mexican Bajío are focused on creating favorable conditions for Japanese industries, which is a legitimate action. JICA works to promote grant resources to strategic partners to benefit their own companies. Nevertheless, Mexico should define a long-term public policy that defines strategies to adequately take advantage of the positive effects that foreign investment and international development cooperation could achieve to boost local and regional development. JICA, as an institution, has been working on designing principles and strategies to promote IDC as a factor of change. The Japan and Mexico relationship has been strengthened based on instruments, such as the EPA, that give certainty to both countries’ commitments. Both JICA and AMEXCID have coordinated and implemented the projects defined within the framework of the cooperation agreements; however, the results of such projects are not enough to impact positively in the production chain. The Training of Human Resources for the Automotive Industry in the Mexican Bajío represented a substantial effort to enhance human resources, allowing them to improve their living conditions. However, despite the development of capacities, the impact on the local supply system is still limited. The project also shows that the cooperation has been effective, meeting the private initiative and public resources’ needs. However, Mexico has shown itself to be more pragmatic with a policy aimed at facilitating FDI through tax incentives but without an effective proposal to take advantage of the resources obtained by the IDC. Mexican SMEs are a vital sector in the Mexican economy. They represent an important source of economic resources as they account for over 90% of Mexican families’ income. This sector is so diverse and fragile that it requires a timely and follow-up strategy to become a key part of an industrial policy. Japan has already assisted in enhancing this sector, including them in Japanese automotive industries and taking advantage of collaboration with Japanese SMEs already installed in Guanajuato.

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JICA international cooperation in Mexico has focused on workforce specialization required by the potential sector in the region, opening the opportunity to train quality professionals. However, there is still no strategy encouraging graduates to stay in the state and join Japanese corporations or promote SMEs. Therefore, Mexican institutions are responsible for taking advantage of cooperation, promoting national development, and encouraging support programs for local SMEs. Mexico has received, through cooperation, Japanese manufacturing knowledge and techniques, which can later trigger the development of supply chains in the region. However, without a national industrialization policy, the results are partial, and the benefit is transitory.

References AMEXCID (2011) ¿Qué hacemos? https://www.gob.mx/amexcid/que-­hacemos. Accessed 06 Oct 2022 AMEXCID (2015) México y Japón forman especialistas del sector automotriz en El Bajío. Agencia Mexicana de Cooperación Internacional, Mexico. https://www.gob.mx/amexcid/ prensa/mexico-­y-­japon-­forman-­especialistas-­del-­sector-­automotriz-­en-­el-­bajio. Accessed 11 Sept 2022 Conalep-Irapuato Archive (2019) National College of Technical Professional Education Irapueato, Guanajuato Internal Files. Accessed 08 Nov 2019 Development Assistance Committee - Organization for Economic Cooperation and Development Japan (2022) Development cooperation profiles Japan, OECD library. https://www.oecd-­ ilibrary.org/sites/b8cf3944-­en/index.html?itemId=/content/component/5e331623-­en&_csp _=b14d4f60505d057b456dd1730d8fcea3&itemIGO=oecd&itemContentType=chapter. Accessed 06 Nov 2022 Diosdado Interview (2019) Personal interview with Dr. Alberto Diosdado, General Director of CONALEP - Guanajuato. 3 de octubre de 2019 El Sol del Bajío (2019) Egresan 149 alumnos: Trabajarán en la Industria Automotriz, México. https://www.elsoldelbajio.com.mx/local/egresan-­149-­alumnos-­trabajaran-­en-­la-­industria-­ automotriz-­3904114.html. Accessed 03 Mar 2022

Global Business Reports Guzmán – Anaya, Leo (2017) Spatial determinants of Japanese FDI location in Mexico in Revista Mexicana de la Cuenca del Pacífico. México: Universidad de Guadalajara. Año 6, núm. 17 (13–35) Guzmán  – Anaya, Leo (2018) The impact of Japanese Training programs on local automotive suppliers’ productivity in Mexico’s State of Guanajuato. In: Falck-Reyes M, Guzman-Anaya L (eds) Japanese direct investment in Mexico’s transport equipment sector macro impact and local responses. Springer, Singapore, pp 110–133 Ishikane K (2015) Revising Japan’s ODA charter: aiding National security. Washington DC, Meeting of February 13, 2015. Brookings Institution. http://www.brookings.edu/~/media/ events/2015/02/13-­japan-­national-­security/20150213_japanoda_transcript.pdf. Accessed 10 Oct 2021

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Japan External Trade Organization (2022) Encuesta sobre la situación de los negocios de las empresas japonesas en América Latina (Año Fiscal 2021) Resultados de la Encuesta Japan External Trade Organization (JETRO) Departamento de Estudios de Mercado Externo Marzo 2022. https://www.jetro.go.jp/ext_images/mexico/topics/12231413259.pdf. Accessed 09 June 2022 JICA  – Proyecto 1 (2015) Proyecto de Formación de Recursos Humanos para la Industria Automotriz en El Bajío en México. JICA – México, Mexico. https://www.jica.go.jp/mexico/ espanol/activities/c8h0vm0000acqbg4-­att/areas_1.pdf. Accessed 10 Oct 2022 JICA  – Proyecto 2 (2018) Proyecto para el Fortalecimiento de Clúster Automotriz en México. México: JICA – México. https://www.jica.go.jp/mexico/espanol/activities/c8h0vm0000acqbg4-­ att/areas_2.pdf. Accessed 22 Nov 2022 JICA (2018a) Actividades en México. Áreas Prioritarias 2018 (Actividades en Ejecución). https:// www.jica.go.jp/mexico/espanol/activities/areas.html. Accessed 10 Dic 2021 JICA (2018b) Industrial development and public policy. JICA Annual Report 2018 (46–47) JICA (2022) Jica’s vision. JICA, Tokyo. https://www.jica.go.jp/english/about/mission/index.html. Accessed 09 Nov 2022 Japan-Mexico Economic Partnership Agreement (2005) Acuerdo de Asociación Económica México  – Japón, México: Secretary of Economy. https://www.economia.gob.mx/files/texto_ acuerdo.pdf. Accessed 09 June 2022 JICA-México (2018) Cooperación Japonesa. áreas prioritarias. https://www.jica.go.jp/mexico/ espanol/activities/areas.html. Accessed 15 Oct 2022 Keohane R (1993) Intituciones y poder estatal. Ensayos sobre teoría de relaciones internacionales. Grupo Editor Latinoamericano, Buenos Aires Lugo-Sanchez MG, Guzmán-Anaya L (2021) Spatial clustering of foreign direct investment: The case of Japanese automotive suppliers in Mexico. México y la Cuenca del Pacífico 10(21):118. http://www.mexicoylacuencadelpacifico.cucsh.udg.mx/index.php/mc/article/view/720. Accessed 26 May 2022 MOFA (2015) Cabinet decision on the development cooperation charter, Japan, Ministry of Foreign Affairs (provisional translation). http://www.mofa.go.jp/files/000067701.pdf. Accessed 25 Nov 2022 SRE (2020) Relaciones económicas de la Embajada de México en Japón. https://embamex.sre.gob. mx/japon/index.php/es/embajada/economica-­esp. Accessed 13 Oct 2022 Mexico Industry (2017) Retos y oportunidades del sector automotriz de Guanajuato. Llegarán 4 proyectos de inversión japonesa a Guanajuato. Medio de Información de la Industria Manufacturera. https://mexicoindustry.com/noticia/retos-­y-­oportunidades-­del-­sector-­ automotriz-­de-­guanajuato. Accessed 10 Oct 2021 Morales F, Carbajal SY (2019) El sector automotriz en México y su transición del TLCAN al T-MEC. In: XXXII Congreso anual de la Asociación Mexicana de Estudios Internacionales, Monterrey, Nuevo León: Facultad de Ciencias Políticas y Relaciones Internacionales de la Universidad Autónoma de Nuevo León, 4 de octubre National Institute of Statistics and Geography (2021) COMUNICADO DE PRENSA NÚM. 790/21. https://www.inegi.org.mx/contenidos/saladeprensa/boletines/2021/EDN/EDN_2021.pdf. Accessed 15 June 2022 DENUE (s.f.). Directorio Estadístico Nacional de Unidades Económicas. [Conjunto de datos]. Directorio Estadístico Nacional de Unidades Económicas. https://www.inegi.org.mx/app/ mapa/denue/default.aspx. Accessed 10 Dic 2023 News CONALEP  – JICA (2017) Vinculación del Proyecto, Gobierno de México. https://www. gob.mx/conalep/es/prensa/vinculacion-­del-­proyecto-­conalep-­jica?idiom=es. Accessed 18 June 2022 Prado JP (2014) La cooperación internacional para el desarrollo de México. Un análisis de sus acciones, institucionalización y percepciones. Rev Mex Cienc Polít Soc 59(222):51–86 Ramírez DL (2020) Japón y su cooperación internacional para el desarrollo en la región del bajío mexicano: análisis del proyecto de formación de recursos humanos para la industria automotriz JICA – CONALEP. Dissertation, Instituto de Investigaciones Dr. José María Luis Mora

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SICE-OAS (2022) Acuerdo de Asociación Económica México – Japón. http://www.sice.oas.org/ tpd/mex_jpn/studies/puntos_s.pdf. Accessed 20 June 2022

Interviews Diosdado, A.  General Director. Consejo Nacional de Educación Profesional (CONALEP), Guanajuato (2019, October 3). Personal interview

Chapter 5

The Role of Keiretsu in the Spatial Distribution of Japanese Automotive Production Networks in Guanajuato 2016– 2020. A Social Networks Analysis Maria Guadalupe Lugo-Sanchez Abstract  Previous literature regarding the spatial distribution of Japanese automotive production networks focuses on regional factors. However, data limitation of empiric studies is observed when the role of the keiretsu is analyzed. This limitation is primarily due to the fact that Japanese firms do not publicly inform about their affiliation with a Keiretsu group. When information is available, it is reported for firms established in Japan and not generalizable to affiliate firms abroad. This study attempts to fill in these gaps in the literature by employing quantitative research methods and employing data at a local level. The keiretsu type of an organization is analyzed using Social Network Analysis for Japanese automotive firms in Guanajuato, Mexico. The results highlight that major automotive companies such as Toyota, Honda, and Mazda are topologically close and share ties among them. Assemblers share supplying firms and maintain exclusive relationships with a low number of firms. This type of production preference allows firms to benefit from shared supplier development and allows suppliers not to be tied to one client. The pandemic’s effects on production have demonstrated the necessity to reconsider processes that allow the automotive industry to enhance supply chains by fortifying cooperative ties. The analyzed Keiretsu system is observed as a complicated, intertwined, and collaborative network in the State of Guanajuato. Keywords  Keiretsu · Automotive industry · Mexico · Japan · Social Network Analysis

M. G. Lugo-Sanchez (*) Human Resources Department, CUCEA, University of Guadalajara, Guadalajara, Mexico e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 L. Guzman-Anaya (ed.), Japanese Cooperation and Supporting Industry in Mexico’s Automotive Sector, New Frontiers in Regional Science: Asian Perspectives 72, https://doi.org/10.1007/978-981-99-3985-5_5

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5.1 Introduction The study of keiretsu has interested many scholars and researchers by offering an approach to understanding the complexity of the dynamics that allowed Japan to reach economic prosperity in an adverse environment and to determine which corporate governance characteristics are useful. In the traditional keiretsu system, participating suppliers and buyers work closely, forming a unique association. This association results in improvements for all the parties involved by acquiring a deeper understanding of the requirements and needs of consumers and adapting their production to meet the customers’ demands. However, keiretsu is more than modifying production practices: it comprises a process of deep trust, collaboration, goodwill, and knowledge exchange among participants; therefore, the buyers usually maintain long relationships with key suppliers. The term Keiretsu is defined as clusters of independently managed firms intertwined by governance mechanisms such as president’s clubs, partial cross-­ ownership, and personnel exchanges (Lincoln and Shimotani 2010). Grabowiecki (2012) identifies that the essence of Japanese corporations is the membership of business groups. Keiretsu is a form of organization of a group of firms, where together, they scheme, invest, trade, and cooperate toward their collective self-­ preservation (Miwa and Ramseyer 2006). In addition, a financial institution participates in the group, supplying various services: the keiretsu group receives financial advice from the bank, credits, and qualified personnel incorporated into their management. By doing so, the keiretsu group shields its stock from foreign or outsider buyers, maintaining the group’s control. Keiretsu typically conduct their business within the firms belonging to the group, keeping finance and trade-related matters internally. Keiretsu controlled the Japanese economy until the first half of the 1990s: Mitsui, Mitsubishi, Sumitomo, Fuji, the Daiichi Kangyo, and Sanwa were the most important groups. Keiretsu derives from an older form of organization, the zaibatsu. Zaibatsu is an organizational form where multiple firms that participate in different industries are controlled by a family or holding company. The structure of zaibatsu could be either similar to pyramidal business groups or follow a hierarchical system that allowed a small number of Japanese families to gain control over large sectors of the country’s economy by organizing multi-tiered subsidiary businesses (Miyajima and Kawamoto 2010). Lincoln and Shimotani (2010) identify that Mitsui, Mitsubishi, and Sumitomo were the most prominent prewar zaibatsu and that, by 1937, the “big three” controlled about 12% of the total corporate capital in Japan. By the war’s end, the amount had grown to 23%. The cold war broke out in Europe in 1948, and communism spread throughout Asia and Europe. The United States then viewed Japan as a bridge connecting the communist countries and the United States. The latter stopped the dissolution of zaibatsu and revived zaibatsu groupings to strengthen the economy of Japan (Morikawa 1992). The firms, however, created a network of dispersed companies around banks that allowed them to hold shares of other companies, facilitating the

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financial linkage within the group, and were called keiretsu. This dispersion (occasioned by the attempt of the government of the United States to eradicate zaibatsu) permeated and defined the new form of organization. For instance, keiretsu is interpreted as the incorporation or composition of “previously individual elements into a whole,” suggesting that companies are joined together loosely (Kensy 2001). Some keiretsu developed from old zaibatsu, but new groups also emerged (Wozniak 2009). Keiretsu’s popularity peaked during the decade of the 1980s, not only in the manufacturing industry, with the companies associating closely with their buyers but also in business schools, where they sparked an interest in understanding the traditional keiretsu system. In the meantime, another trend rapidly gained popularity in the Western world: the manufacturers now focused on the prices due to the rise of the emerging economies offering low-cost production due to their low wages. It is considered that keiretsu died when Japanese producers started to cut costs in their manufacturing processes. According to Aoki and Lennerfors (2013a), it was later restored and reinvented by companies in the Japanese automotive industry by globalizing their supplier ties, opening to new markets, and becoming more aware of their costs. The new keiretsu survived a crisis that affected the Japanese automotive industry during the decade of the 1990s when their competitors started programs aimed to cut costs drastically and turned to mega-suppliers. At the same time, the Japanese economy entered a period of stagnation followed by the burst of the economic bubble, forcing the Japanese automakers to allow foreign investors into their otherwise closed keiretsu groups to cut costs and maintain their competitiveness in the automotive industry (Aoki and Lennerfors 2013a). On the other hand, Mexico is a recipient economy of FDI, for which a few statistical studies have been conducted regarding location factors. Some studies identify low wages, the size of the Mexican market, proximity to the northern countries, and the signing of the NAFTA trade agreement as reasons for firms’ location in the country (Blomström and Kokko 1997; Love and Lage-Hidalgo 2000). However, empirical studies that seek to determine location factors and regional distribution within the country are even scarcer (Jordaan 2012). For the case of Mexico, the previous literature has focused on macro and regional-­ level factors in explaining the distribution of FDI. Lichtensztejn (2014), at a national level, finds that FDI flows are positively correlated with GDP levels and openness to free trade while it is negatively correlated with FDI restrictions and crime levels. Jordaan (2009), on the other hand, using state-level data, finds that demand, wages, schooling, labor quality, regional market location, and agglomeration economies explain the regional distribution of FDI. A significant limitation in the previous literature is that they fail to analyze the specific case of Japanese FDI in Mexico using disaggregated data and analyzing certain factors that seem to influence the location decision of Japanese investors: Public policies, agglomeration economies, and keiretsu-type organization preference. The study is organized as follows: the discussion of prior theoretical and empirical research on the keiretsu as a factor for FDI location follows. The

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empirical model and data sources are presented in the third section. Results and conclusions are shown in Sects. 5.4 and 5.5, respectively.

5.2 Literature Review In terms of the role of the keiretsu in the location decision of Japanese investment, studies have found that this type of organization facilitates agglomeration and creates positive externalities for the participating firms. Also, this seems to be more robust for the automotive industry (Head and Ries 1996; Smith and Florida 1994; Mayer and Mucchielli 1998; Huallacháin and Reid 1997; Belderbos and Carree 2002). Belderbos and Carree (2002) find that keiretsu plant agglomeration is present in the automotive and electronics industry in the United States, and this type of organization extends to developing countries. The study identifies leading “core” firms and other member firms of the group. It confirms an impact from agglomeration effects and other regional factors that differ depending on market orientation and firm size. According to Hackett and Srinivasan (1998), the keiretsu influence on the location decision of firms is related to the costs involved in searching for and switching to suppliers of parts and components that are not part of the keiretsu. The latter incentivizes group member firms to replicate existing supplier relationships abroad. Belderbos and Carree (2002) highlight that this is observed in the vertical type of keiretsu, characterized by an intensive inter-flow of information among firms, where the core firm assists member firms in relocating to the host country. In this case, the study finds that a “core” firm locates abroad, searching for appropriate locations, and the member firms follow the core firm’s lead. Head et al. (1995) similarly highlight the importance of keiretsu in the location decision of Japanese firms. The empirical literature highlights the difficulties in testing the keiretsu hypothesis. Japanese firms do not publicly inform about their affiliation to a keiretsu; the information available is for the case of firms established in Japan and not generalizable to affiliate firms abroad. Chavarro-Jiménez and Guzmán-Anaya (2018) attempt to test the keiretsu hypothesis for Japanese firms in Mexico but fail to identify the supplier affiliation to a keiretsu group and suggest this analysis for future empirical work. Kito et al. (2014) study the Toyota supplier network and identify critical structural features using measures from Social Network Analysis and network science. The study identifies key firms and reveals the overall heterogeneity composition of the network. The study also shows the presence of constituent sub-networks where their structure depends on factors such as product categorization, geographical closeness, and business alignment. Although the study reveals essential aspects in forming production networks, it focuses the keiretsu analysis and discussion solely on the Toyota case.

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It is important to point out that the relationship between the Japanese car assembler and its suppliers is organized in the “vertical type” of keiretsu, where a company interacts with its suppliers in the tier directly below them. However, some authors question the keiretsu structure as a Japanese production system and suggest that this is only particular to certain firms (Miwa and Ramseyer 2006). Interestingly, authors such as Nishiguchi (1994) and Nobeoka (1997) argue that the keiretsu is a more complicated system of interlinked Keiretsu pyramids where suppliers are tied to more than one automotive assembler which results in an “alpine” structure. These claims are supported by Kito et al. (2014), showing the complexity and intertwined nature of keiretsu networks. Another body of literature has focused on the economic performance of firms that constitute the keiretsu. Ahmadjian (1997) argues that automotive suppliers that link a large proportion of their output to a single customer perform similarly to more independent ones. The economic benefits of belonging to a keiretsu group seem related to shields against exogenous shocks and redistribution of profits between high and low-performing firms. The redistribution appears to be related to encouraging suppliers to make customer-specific investments. The authors mention that this is also associated with Japan’s cultural, social, and institutional context. On the other hand, Sambharya and Banerji (2006) note that lower levels of supplier-client dependency in automotive firms positively affected supplier-firm performance. Furthermore, the keiretsu affiliation was not significant in supplier-firm performance. In Japan, business groups are called keiretsu, a unique network organization that gathers or, more accurately, “cluster” industrial and financial corporations. The definition of keiretsu in economic literature often stems from categorization designed for American or European organizations to define their Japanese counterparts. However, the latter may lead to erroneous evaluations and conclusions. Empirical studies on the benefits or detriments of keiretsu have been conducted, with mixed conclusions. For instance, Calder (1989) affirmed that keiretsu was a key factor for Japan to achieve fast industrial development and economic growth since the beginning of the 1950s. The role of keiretsu after the second world war was crucial to Japan’s economy: according to Grabowiecki (2012), keiretsu was a critical factor in achieving economic and infrastructure growth in addition to closing the productivity and technological gap between Japan and other developed nations; Kensy (2001) found that the nine largest trading companies are responsible for more than 50% of the countries total exports; of all the groups, only Mitsui, Mitsubishi, Sumitomo, Fuyo, DKB and, Sanwa cluster about 650 firms that employ over 2 million people, controlling 20% of corporate profits and more than 2% of world production during the same period. For some authors, keeping all the trade and financial activities inside the group results in more efficient firms (Miwa and Ramseyer 2006). The long-term orientation of the groups allows for data accumulation and better decision-making processes that significantly reduce their risks (Womack et al. 1990). The collaboration goes beyond trade: production and research of keiretsu members represent an advantage against their competitors that are not affiliated with any group. In

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addition, the strategy followed by Japanese companies belonging to a keiretsu group positions those firms in the adaptability field, unparalleled. Another benefit related to keiretsu in its vertical form comes from the close relationship between the network members: when companies work and cooperate closely, technology transfers occur. According to Wachowska (2012), knowledge spillovers happen naturally because suppliers are integrated with development projects for larger companies. The author finds positive and significant effects on productivity and innovation for both participants in the network. On the other hand, Paul Samuelson identifies keiretsu as simply “cheating” because the groups follow the structure of large oligopolies (Samuelson 2000). Furthermore, Bader (1994) mentions that keiretsu allegedly incur in international “predatory pricing schemes,” pushing competitors out of markets and allowing keiretsu to form monopolies and profit from higher prices. Keiretsu groups have also been accused of unfair business practices and, by working almost exclusively with network members, have effectively blocked foreign competitors from accessing Japan’s market (Wachowska 2012). Lincoln and Gerlach (2004) find that the horizontal keiretsu effects are not significant and that the big six groups behave as scheming oligopolists that extract monopoly rents from companies that do not belong to the keiretsu group. Caves and Uekusa (1976) argue that the Keiretsu group’s ratio of prices—opportunity costs is very efficient for the group members; however, outsiders are subject to profit maximization by the dominance of the keiretsu members across different markets. Kimino et al. (2012) conducted a study to evaluate the effects of keiretsu on inward FDI in Japan and examine horizontal and vertical networks to determine how they influence the decision of foreign companies to enter the market in Japan. The authors do not find evidence of keiretsu as an element in discouraging FDI to Japan. The classification most frequently used for keiretsu is horizontal or kinyu and vertical or shihon. Horizontal keiretsu refers to non-hierarchical groups of prominent companies that originated and derived from the original zaibatsu, which are linked to a shared central bank due to its credit associations that allows it to benefit other members of the group with preferential treatment. For instance, Mitsui, Mitsubishi, Sumitomo, and Yasuda are considered horizontal keiretsu because they enclose important banks. Vertical keiretsu works with major manufacturers instead: they are networks of subsidiaries that operate within larger corporations and are subordinate to them by long-term production–distribution relationships and capital (for example, Matsushita, Toyota, Toshiba, and Hitachi). As Grabowiecki (2012) points out, the vertical–horizontal division does not entirely reflect the complexity of the relationships conducted in both types of networks. Therefore, this keiretsu type is a group of manufacturers or supply chains consists of suppliers, distributors, and subcontractors that follow a vertical division of labor gathered around industrial firms. In turn, the suppliers participate actively in the design and development of products and processes; thus, it is recognized as a model of manufacturing best practice (Lincoln and Gerlach 2004). Research

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suggests that the close cooperative ties that characterize vertical keiretsu allow knowledge transfer to affiliated companies. Both forms of keiretsu have evolved and even survived globalization and economic changes. Dow et al. (2011) studied the evolution of vertical and horizontal keiretsu, measuring the stability of the networks through economic and competitive phases across time. In the case of vertical keiretsu, economic recessions translated into weak linkages; on the other hand, horizontal keiretsu ties were reinforced, showing more stability in times of crisis.

5.2.1 Keiretsu in the Automotive Industry In the automotive industry, the structure followed by keiretsu is pyramidal. It comprises suppliers organized as follows: the first-tier suppliers provide services/products to the manufacturer, the second tier works for the first tier, and the third for the second. The assembler occupies the top of the pyramid, and the levels below comprise hundreds or sometimes thousands of suppliers (firms). The studies that have empirically analyzed the keiretsu in the automotive industry are Shimokawa (1985), where the author finds different types of keiretsu type of organizations within the Japanese automotive industry. The author explains the origin of vertical integration in the sector: as a result of the initial low technological level in Japan, limited and dated processes of manufacturing (casting, plating, smelting, among others) by one producer prompted to create a system that would guarantee the on-time supply of quality parts from specialized producers. As a form of organization, keiretsu varies within the Japanese automotive industry in terms of flexibility or rigidity of the principle of market competition. It means that, within the keiretsu, the free entry or exit of producers to the supply chain is limited for the primary parts producers and less rigid for secondary or tertiary part producers. As a result, the author finds that keiretsu works as an intermediary between companies and markets. Solis (2003) analyzes the relations of keiretsu in three countries: Japan, Mexico, and the United States. In the case of the automotive industry, keiretsu relations are positive. However, this is not the case for the electronics industry, which suffered sluggishness regardless of the keiretsu type of organization. It means that even under the organizational principles of keiretsu, the differences between industries can influence the outcome of the sectors. Dyer (1996) compares the case of the automotive industry in Japan versus the United States and finds that keiretsu alliances translate into advantages in the auto industry by seizing the benefits of inter-­ firm asset co-specialization. Still, those alliances may result in liabilities for other sectors where the networks and coordination are less complex. Liker and Choi (2004) compare keiretsu relations for Toyota and Honda companies, contrasting the ties between these companies and their suppliers compared to the relationships that US companies in the automotive industry have with their suppliers. The authors found that keiretsu positively impacts its suppliers, which

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translates into quality improvements in production and reduces the delays and production times of the inputs. Ahmadjian and Lincoln (2001) argue that keiretsu governance forms are evolving from a network type to arms-length and top-to-down management. The authors analyze the changes in the administration of Toyota with two of their suppliers: Daihatsu and Denso. The supply network implemented for both cases has a hierarchical form of management; however, in the case of Daihatsu, Toyota adopted its transactions, whereas its long-term partner Denso reduced its dependence by increasing Toyota’s know-how on the production of electronic components. Aoki and Lennerfors (2013b) analyze the Toyota companies established in different countries and find that the company manages to establish relations of keiretsu type outside Japan. In addition, in a subsequent study, the authors analyze the vertical kind of keiretsu for 1991–2011 of Toyota, Nissan, and Honda, assuming the hypothetical disappearance of this form of organization. They found that far from disappearing, keiretsu has remained and strengthened even further, evolving toward hybrid and new forms of governance. Finally, Kato et al. (2016) analyze the benefits of belonging to keiretsu for the case of Tier 1 and Tier 2 suppliers in the automotive industry. According to their study, the Tier 1 suppliers belonging to keiretsu have few benefits to being integrated into these production chains; this is similar for Tier 2 suppliers. For them, belonging to keiretsu does not translate into competitiveness improvement. However, independent Tier 2 suppliers have the propensity to become more competitive.

5.3 Empirical Model The importance of FDI location determinants was recognized in the 1960s, especially in locating US companies in developed nations, which is considered a macro perspective of FDI determinant analysis. In the following decade, however, the emphasis switched to a micro perspective, focusing on understanding the reasons at the firm level why companies chose to establish their production in foreign locations instead of exporting their products to those destinations. Orthodox economic theory cannot be used to examine FDI or MNEs since it assumes market structures with perfect competition, which means that in perfect competition, companies do not have the market strength or attributes that enable MNEs to prosper. As a result, market imperfections provide the ideal setting for MNEs to gain ownership advantages and exploit foreign manufacturing through them. Theories that explain FDI behavior have been developed since the 1960s. The first approaches to explain FDI were based on the Heckscher-Ohlin and MacDougall (1960) and Kemp (1964) models (Assunção et al. 2011). In these models, FDI was motivated by a combination of low labor costs and exchange risks (favorable circumstances in some developing foreign markets), where higher profits could be made. The increase in FDI at the world level prompted research on the determinants that explain this type of investment. As a result, in the empirical and theoretical

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literature, there is a vast catalog of determinants that try to illustrate the direct investment of multinational companies in specific areas. The eclectic or OLI (Ownership, Location, Internalization) paradigm stands out among the models discussed, with an institutional approach and the New Theory of Trade1 model. Following the OLI paradigm, the FDI determinants associated with the location dimension are infrastructure, human capital, economic stability, and production costs. The OLI paradigm of Dunning encompasses both internalization theory and traditional trade theories (Dunning 2002). It systematizes the benefits for foreign enterprises, tying them to the chosen entry options (Faeth 2009). The Dunning model establishes that there will be advantages to selecting the FDI as long as the factors of ownership advantage (O), location advantage (L), and internationalization advantage (I) are met simultaneously. The value of a company possessing assets such as cutting-edge technology, exclusive production techniques, patents, management skills, and other assets that can bring profits in the future is referred to as ownership advantage (Dunning and Lundan 2008). Location is significant when a company benefits from its presence in a specific market by taking advantage of special tax regimes, lower manufacturing and transportation costs, market size, access to protected markets, and lower risk. Internationalizing activities, for example, helps eliminate market failures such as the imbalance of international resource allocation, lowering transaction costs, and reducing the danger of copying technologies. As a result, selecting a specific place depends on unique factors that favor it (Ietto-Gillies 2005). Dunning’s eclectic paradigm significantly contributed to the literature by combining numerous complementary theories and establishing a collection of characteristics (ownership, location, and internalization) that affect multinational corporations’ operations. The key to this perspective is the application of these variables to commerce, international production, and international production organization, implying that the same analytical framework may cover the three primary modes of internationalization (exports, FDI, and licensing) (Assunção et al. 2013). Under this perspective, the importance of the keiretsu can be associated with the ideas discussed by the eclectic paradigm.

5.4 Empirical Framework 5.4.1 Network Analysis Social Network Analysis (SNA) allows the quantitative measurement and visualization of relationships between actors (individuals, groups, organizations) by modeling these relationships and analyzing the links between them. This methodology  The theory discusses market size, market growth, openness of the economy, and factor endowments. 1

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helps to spatially represent these actors within a network, where the distance between them represents their similarities or differences. Furthermore, the SNA considers the network as a whole; analyzing a single node or some nodes lacks interpretative meaning. Haythornthwaite (1996) argues that SNA may be used to study the exchange of resources among actors (individuals, groups, or organizations) where patterns of resource exchange reveal themselves as social networks, with actors represented as nodes and the exchange relationships as connectors among nodes. Kim (2015) employs SNA for the Korean automotive industry and suggests using centrality measures to interpret the network results and identify key firms. The author concludes that SNA metrics can help understand and analyze the structure of an automotive supply network. It is necessary to satisfy the following principles to use the SNA methodology: (1) balance: it describes the particular pattern of the symbols of the lines that make up the network; if all symbols are positive, then the network is balanced. If there is a single negative sign, the balance is lost, and the existence or permanence of that link in the network is jeopardized; (2) triad: the presence of fewer than three agents cannot be considered a network (Scott 2000). Furthermore, according to what was proposed by Salas Durazo and Murillo García (2014), for a group of organizations to be considered a network, it is necessary the existence of cooperation links. The latter means that the emergence of connections depends on the same agents. In addition, there must be a mutual agreement between them to create this link. The authors add that because agents seek to satisfy their goals, asymmetries, and centrality can be created in the decision-making process. Salas Durazo and Murillo García (2014) propose a methodology that allows the analysis of micro-interactions within organizations through the relationship of the SRA theory with the homophily theory. The above will enable them to explain the integration and cooperative work between the agents belonging to a network. Identifying the role of keiretsu in forming production networks is a complicated task. Kito et al. (2014) employ SNA to study Toyota’s production network, identify key firms, and show the overall heterogeneity composition of the network. However, identifying the role of the keiretsu in determining the relationships within the network is difficult since the keiretsu is a more complex system of interconnected relationships where suppliers may be tied to more than one automotive assembler (Nishiguchi 1994; Nobeoka 1997). Tsujimoto et al. (2014) analyze the cooperation between Toyota and Panasonic from the network analysis perspective; the authors find that this cooperation results from adaptive behavior in response to the speed of change in the business environment in the automotive industry. Thus, the study by these authors focuses on the analysis of the networks explicitly formed by the individuals who participated in the collaborative research processes because the formation of this cooperation network was a key factor in the integration and development of new technologies, resulting in spillovers for both companies. The work of Gerlach (1992) aims to study Japanese cooperation networks using the methodology of Social Network Analysis. The study employs the block model and determines that the financial hierarchy and the position of the companies in the

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network are essential to identify the agents’ relationships and that the companies’ membership in the economic groups is significant. According to Salas Durazo and Murillo García (2014), the social network methodology can be used to analyze and identify the factors that trigger cooperation ties at the group and organizational levels. It is novel, then, to analyze from an organizational theory approach how Mexican and Japanese companies, which are the object of our study, are structured and linked to form cooperation networks that allow them to stock up on the necessary inputs for production. This type of analysis is novel in the keiretsu literature and for Japanese automotive supplier networks in Mexico. The present study employs SNA to reveal the composition of the automotive production networks and the keiretsu’s role in forming these networks.

5.5 Results Data was gathered from the Toyo Keizai Directory 2020 and the National Registry of Foreign Investment from Mexico’s Secretary of Economy for the keiretsu analysis. In total, 122 Japanese automotive supplier firms were identified in Guanajuato. Afterward, the individual connections of each firm with other firms were identified through the Toyo Keizai directory (2014, 2015, 2016 and 2019) and by revising each firm’s website to identify the procurement to other Japanese companies and firms of different nationalities. Additionally, all the firms were georeferenced by confirming their address, identifying their coordinates in Google Maps, and converting them from WGS-84 projection to ITRF-2008 in ArcGIS. In total, 606 connections were discovered for the Japanese automotive firms in Guanajuato. Finally, the data were analyzed using the Gephi 0.9.2 software. The software allows for different representations of the network. In the first instance, the network was represented under the random layout. The results are presented in Fig. 5.1. The results elucidate that automotive assemblers are crucial to the formation of the network. Figure 5.1 shows the relationship between Japanese automotive suppliers in Guanajuato and clients located in Guanajuato and other states. The figure highlights the names of those firms with more connections. The Japanese automotive assemblers Toyota and Honda show the largest number of links to automotive suppliers with 46 and 39 connections, respectively, and to a lesser extent, the cases of Mazda (26 connections) and Nissan (25 connections). A key player in the industry is the firm U-shin Autoparts, which has 34 connections and supplies all automotive assemblers included in the analysis. This firm is also a supplier for Ford and General Motors. A second network representation was under the “Fruchterman Reingold” layout, which stimulates nodes as mass particles and edges as strings. This layout is useful to represent and understand the figure’s topology, where topologically close nodes are placed in the same vicinity, and further connected nodes are placed far from each other. This type of representation facilitates the identification of disconnected nodes. The results in Fig.  5.2 highlight the closeness of the nodes among the

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Fig. 5.1  Random Social Network Analysis of the Japanese automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

Japanese automotive assemblers located in Guanajuato state (Toyota, Mazda, Honda). It also shows that some major Japanese automotive suppliers are topologically located outside of the network (U-Shin Autoparts, Fukoku Mexicana, Katolec, Showa Autoparts, NSK, KYB, Kinugawa, Hiruta). These results indicate that Japanese automotive suppliers are not necessarily linked to one keiretsu and may supply more than one automotive assembler. The analysis continued with the representation of the network for the automotive assemblers. Figure 5.3 represents the SNA of the Japanese automotive assemblers and their linkages with Japanese automotive suppliers. The network is represented under the “label adjust” function in Gephi. This functionality is a special type of algorithm to avoid label overlapping. The nodes’ size represents the assembler’s importance in terms of the frequency of edges. Something to highlight is the importance of Toyota in the automotive network in Guanajuato compared to the other assemblers (Honda, Nissan, and Mazda). The fact that Toyota was established in Guanajuato in 2019, while Mazda and Honda were established in 2014, increases the relevance of this firm in the network. Toyota registers 46 connections, Honda 39, Mazda 26, and Nissan 25. Even though Nissan plants are located in Aguascalientes and Morelos, they are connected to the automotive suppliers in Guanajuato. The individual keiretsu networks are presented in the next section.

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Fig. 5.2  Fruchterman Reingold Social Network Analysis of the Japanese automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

Figure 5.4 represents Honda’s supplier network in Guanajuato. Honda has two assembly plants in Mexico, one established in El Salto, Jalisco, in 1995 and a second plant in Celaya, Guanajuato, in 2014. Previous studies have noticed that Honda has not developed in a standard Keiretsu form and qualifies instead as a vertical Keiretsu. Honda has deep ties with the financial institutions of the Mitsubishi group but is not considered a member of the Mitsubishi group. The company is believed to rely on trust and goodwill rather than explicit contractual obligations where the development of suppliers is organized and encouraged (Aoki and Lennerfors 2013a). In 2012, Honda started to search for suppliers outside of its group to achieve production growth; however, this rapid expansion brought quality issues incentivizing the company to turn to its keiretsu once again. Analyzing the SNA of Honda’s suppliers, many supplying firms are shared with other Japanese assemblers. This type of production preference allows the firm to

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Fig. 5.3  Label adjust Social Network Analysis of the Japanese Automotive assemblers and their linkages to Japanese automotive suppliers in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

Fig. 5.4  Random Social Network Analysis of Honda’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

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benefit from shared supplier development, and supplying firms are not tied solely to one client. Honda, however, does maintain exclusive supplier relationships. Firms such as Katolec, Hiruta, RDCM, TST Manufacturing, Viscotec, and K-Tech Industrial are identified as unique suppliers to Honda company. For the case of Mazda, the SNA network is presented in Fig. 5.5. The company began operations in Mexico in 2014. Interestingly, Mazda built a supplier industrial park within the Salamanca Mazda complex. Supplier firms in the supplier industrial park include Y-Tec Keylex Mexico, Daikyo Nishikawa Mexicana, and Aki Seat Manufacturing Mexico. Something observed through the SNA is that although several suppliers are located within the Mazda-built industrial park, this does not limit their dealings with other Japanese companies. For example, Daikyo Nishikawa is also a supplier to Toyota, Nissan, and Honda, and Aki Seat Manufacturing to Toyota. Something to also notice is that Mazda, through a joint venture with Toyota, produced the Yaris-R model in its plant from 2012 to 2020. Some unique suppliers for Mazda include Keylex, located in Mazda’s supplier industrial park, and Kawada, Matsuju, and Tritech Autoparts, located in industrial parks within the region. This finding indicates that geographical closeness to an assembler does not limit the

Fig. 5.5  Random Social Network Analysis of Mazda’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

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dealings of Japanese suppliers to other Japanese firms. Tagawa et al. (2012) analyze the organizational structure of Mazda’s Keiretsu using the “SNW model” to examine the structural importance of the organization’s network. The findings indicate that Mazda’s Keiretsu structure determines the corporate performance of the firms that conform to the network. Nissan has a long history of presence in Mexico. The company began to produce automobiles in the country in 1966 under the company plant name CIVAC. Mexico was the first country to produce Nissan automobiles outside of Japan. The first Nissan plant was built in 1982 in Aguascalientes, and a second plant was built there in 2013. The company does not have a plant presence in Guanajuato state, but from the SNA analysis, it has dealings with firms located in this state. Nissan has its Keiretsu influence in Aguascalientes state. However, from the SNA, it was noticed that the company does not have unique suppliers in the state; in other words, it shares suppliers with other Japanese assemblers located in Guanajuato. These results show that the Keiretsu organization does have some control over firms that are geographically closely related to the assembly plant. According to Aoki and Lennerfors (2013b), the evolution of Nissan’s Keiretsu was influenced by the arrival of Carlos Ghosn in 1999. His goal to revive the company was accompanied by a cost reduction plan where the multinational sold its holdings in most supplier firms appearing to shift toward a Western model. However, by 2004, Nissan shifted its position with a new purchasing policy that revived the keiretsu. The company invested in one large supplier firm and re-established goodwill and trust as central issues in dealings with vendors. Nissan has established collaboration programs with suppliers, where the firm’s engineers take up process-­improvement projects in conjunction with the supplier firm’s engineers. This practice is also present in Honda and Mazda (Fig. 5.6). Figure 5.7 shows the Guanajuato automotive supplier network for Toyota assemblers. The company ranked ninth in the Global 500 list in 2015 and was considered the largest company in Japan, with 344,109 employees worldwide. The company started operations in its Guanajuato plant in 2019 with an established production capacity of 100,000 vehicles. The plant produces the Tacoma truck for the North American market. Analyzing the suppliers for Toyota, the company shares suppliers with other Japanese companies and includes suppliers unique to the company. For example, firms such as Fuji Oozx, Corporación Mitsuba, G.S.W., and Tsubakimoto Automotive are the sole suppliers of Toyota. The morphological and functional form of Toyota’s keiretsu supply network is argued to contribute to its competitive advantage (Richter 2000). Kito et al. (2014) claim that the Toyota supplier network follows a barrel-shaped tier structure, not a pyramidal one, as theoretically indicated in the keiretsu literature. This type of structure allows suppliers to locate in different parts of the world and permits them to supply to other clients resulting in a complex and woven network. The results from the SNA analysis indicate that this type of keiretsu network is also present in Mexico, where most firms are suppliers of multiple Japanese assemblers.

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Fig. 5.6  Random Social Network Analysis of Nissan’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

5.6 Conclusions The importance of the keiretsu in the conformation of Japanese supplier networks was conducted using Social Network Analysis (SNA) and data from various sources in Guanajuato. The database comprised 122 Japanese supplier firms with 606 connections identified from the Toyo Keizai Directory 2020 and information from each firm’s website. The results showed that automotive assemblers are key players in forming networks under the keiretsu system. Toyota and Honda register the highest number of connections, with 46 and 39, respectively. From the supplier side, the firm U-shin auto parts are connected to 34 firms in the supplier network in Guanajuato. The SNA analysis was also conducted using the “Fruchterman Reingold” layout, where the findings indicate that Toyota, Mazda, and Honda are topologically close and share ties among them. Also, major Japanese automotive suppliers such as U-shin auto parts, Fukoku Mexicana, Katolec, Showa Autoparts, NSK, KYB, Kinugawa, and Hiruta are topologically located in the outskirts of the network,

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Fig. 5.7  Random Social Network Analysis of Toyota’s automotive network in Guanajuato. Source: Author’s calculations using Toyo Keizai Shinpo Sha (2020) data and company website information. Notes: The figure was generated using the Geph 0.9.2 software

indicating that they are not necessarily tied to one keiretsu and may supply more than one automobile supplier. The SNA analysis was conducted for each automotive assembler to observe the connections with Japanese suppliers. The main finding from this analysis was that Japanese assemblers share supplying firms with other assemblers and maintain exclusive relationships with a relatively low number of companies. This production preference permits firms to benefit from share supplier development, and suppliers are not tied to one client. The results are consistent with Nishiguchi (1994), Nobeoka (1997), and Kito et al. (2014). They claimed that keiretsu is seen as a more complicated system of interlinked Keiretsu pyramids or what was referred to as an “alpine structure” where suppliers are tied to more than one automotive assembler showing the complexity and intertwined nature among keiretsu networks. For example, Mazda built a supplier park within its manufacturing plant complex, and the supplier firms located there supply Mazda and other Japanese assemblers. Furthermore, Mazda produced Toyota automobiles in its plant through a joint venture from 2012

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to 2020, highlighting the cooperation structure of the Japanese keiretsu system in Mexico. The results have shown that Japanese suppliers in Guanajuato seem to benefit from this type of keiretsu organization, where goodwill and trust are centerpieces in their dealings with their clients. Previous literature has also shown that collaboration programs between assemblers and suppliers are present, and future research should analyze these types of programs in the case of Mexico. The COVID-19 crisis had adverse effects across all industries, and the automotive industry was no exception. At the beginning of the pandemic, due to security measures and to avoid contagion, the assemblers stopped operations. Later, in the automotive industry, the disruption of the production chains was due to the paralysis of mobility and the shortage of domestic and international supplies. Consequently, many car producers were again forced to stop production and close their plants. On the demand side, a drop in demand for new vehicles was observed worldwide. In addition to the challenges faced by the manufacturers, shortages of critical inputs like semiconductors, high turnover due to sickness absence, and the need to ensure safety and modify or adapt the production area to meet the demands of social distance also caused complications. The Japanese auto industry experienced a drop in global sales caused by a fall in demand and production. Furthermore, there is uncertainty about future production costs caused by changes in the prices of raw materials, labor, energy, and capital. The latter impacts sales, production, and innovation and represents new technological challenges. The technological advances of the units suffered setbacks due to the shortage mentioned above, and occasionally, some of the most modern units had to be assembled with parts with technology already exiting the industry. Consequently, car manufacturers have had to postpone the production of new models. In response, some Japanese companies have initiated joint ventures to become more resilient and overcome the many challenges. The industry has adopted more flexible forms of production and has returned to the “just in time” (JIT) production model. Concerning productive value chains, Japanese companies have faced high dependence on their parts and components with China, their leading trading partner in this area. One lesson that the problems with supply chains in the automotive industry, derived from the COVID pandemic, have taught us has been the search for solutions for the procurement of inputs. The proximity to the US market places Mexico in a privileged location that favors nearshoring as a possible solution. Nearshoring is a strategy in which nearby countries with a similar time zone are chosen to transfer part of their production, in contrast to traditional offshoring, whose objective is the search for suppliers that allow saving production costs, usually allocated in Asia. The pandemic severely impacted supply chains, highlighting how vulnerable offshoring is. Due to favorable circumstances like proximity to the United States, its leading trading partner, the T-MEC that facilitates trade, the performance of the

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manufacturing industry, and particularly the automotive sector, nearshoring represents an opportunity for Mexico. There are 114 nearshoring investment projects from October to December 2021 in Mexico, of which 51 are from the United States, 23 are from China, seven are from South Korea, and four are from Japan. Strategies for attracting investments have been implemented to benefit from this trend. For the first time, the governments of Mexico and the United States are collaborating to benefit from nearshoring trends that are advantageous to both countries. The aim is to construct a cutting-­ edge border to increase competitiveness and attractiveness in the nearshoring process. In this regard, the manufacturing industry is being encouraged to diversify the processing of its parts and components. As a result, Japanese automakers will have better protection in their supply chains by relying on multiple countries for inputs; this represents an excellent opportunity for Mexican suppliers to enter the production chains. A trend in the automotive industry is the commitment to electric vehicles. For instance, producing an electric vehicle decreases the demand for components necessary for its operation. However, the shift to hybrid or electric units has not gained the traction it needs. Despite the environmental benefits associated with electric vehicles, the public has yet to gain enough confidence in the purchase, mainly because the technology for these vehicles is being developed at a slow pace. The Keiretsu network analysis presented in this chapter is limited to the state of Guanajuato. Other states have a strong presence of Japanese automakers. Future studies can also include companies from different origins in an attempt to find similar patterns of suppliers’ network ties in the Mexican automotive industry.

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