Energy politics cloud Mexican bid to join U.S. semiconductor rush

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MEXICO CITY (Reuters) – Mexico’s hopes of reaping an investment windfall from a U.S. drive to boost North American semiconductor production risk foundering on companies’ concerns over energy supply, overdependence on fossil fuels, and a lack of financial incentives.

U.S. Commerce Secretary Gina Raimondo said in September a $52.7 billion U.S. bill known as the Chips Act would also create “significant opportunities” for Mexico in the energy and water-intensive semiconductor industry.

But according to interviews with over a dozen people privy to investment discussions, if Mexico does not move quickly to improve power transmission networks and renewable energy access, as well as craft competitive incentives, it may lose out.

The United States is building huge plants that make high-tech chips, the most expensive part of the semiconductor business. Mexico, meanwhile, has its sights on more accessible parts of the supply chain like design, packaging and testing.

To create those jobs, the country must allay business fears over electricity supply sparked by President Andres Manuel Lopez Obrador’s campaign to give market control to Mexico’s cash-strapped, fossil-fuel dependent national energy companies.

His pursuit of “energy sovereignty” by helping utility Comision Federal de Electricidad and state oil firm Petroleos Mexicanos while limiting privately-funded renewable output has flummoxed manufacturers trying to lower their carbon footprint.

“Mexico’s current energy policy is severely undercutting the country’s ability to attract new investment, especially when it comes to strategic sectors such as the semiconductor industry,” said Neil Herrington, senior vice president for the Americas at the U.S. Chamber of Commerce.

Lopez Obrador’s office did not reply to requests for comment for this story.

Used in industries from telecoms, defense and carmaking to computing, semiconductors hit the headlines during the COVID-19 pandemic when supply dried up, causing serious production bottlenecks in global manufacturing.

Unlike the United States, Mexico has yet to spell out what inducements it will offer firms to help North America reduce reliance on semiconductor hubs like Taiwan in light of protracted uncertainty in U.S.-China relations.

“The government has done almost nothing on attracting investment and incentives,” said Roberto Arechederra, economy minister of the opposition-run western state of Jalisco, whose capital Guadalajara is known as Mexico’s Silicon Valley.

Lopez Obrador, a leftist resource nationalist, says conditions for investors are “unbeatable”, and points to foreign direct investment headed for its best year in nearly a decade.

But gross fixed investment remains 11% lower than when he was elected in mid-2018, official data show.

Officials, executives and lawmakers say without a better power grid, the Mexican semiconductor push will struggle. U.S. Energy Secretary Jennifer Granholm had in January already warned Mexico’s treatment of energy firms could hamper growth.

“You can’t do stuff like that if you want to be a team player,” said Henry Cuellar, a Democratic congressman who chairs the U.S.-Mexico Interparliamentary Group. “Especially in being part of a North American supply chain. It’s all inter-related.”

Mexico has vowed to present nearshoring incentives by the end of February, and Economy Minister Raquel Buenrostro said last week a planned business corridor in southern Mexico could become a center for semiconductor investment.

States like Jalisco, home to a major Intel Corp (NASDAQ:INTC) facility, are offering their own incentives like tax breaks and cheap land, said minister Arechederra.

Much of the impetus for cooperation on semiconductors originated in Mexico, executives say.

In June 2021, Carlos Salazar, then-president of Mexico’s Business Coordinating Council, pitched the idea to U.S. Commerce chief Raimondo on a visit to Washington, he told Reuters.

Pledges to strengthen supply chains followed, and in August 2022 Mexico held a conference targeting semiconductor investment with firms including Intel and Skyworks Solutions (NASDAQ:SWKS) Inc, a major employer in the border city of Mexicali.

Josep Marce, Skyworks’ vicepresident of operations in Mexico, urged the country to seize the window of opportunity.

That means Mexico needs to keep investing in energy and water infrastructure, and do so sustainably, he told Reuters, pointing to clients’ pledges to help tackle global warming.

While industry giants such as Taiwan Semiconductor Manufacturing Co Ltd and Intel have announced multibillion dollar investments on the U.S. side of the border, Mexico has yet to unveil major projects that could supply those factories.

“The United States is thinking regionally, Mexico is still thinking as one country,” said Luis Manuel Hernandez, head of Mexican manufacturing export industry group Index. “If we want to be at the big table, we need to take different decisions.”

GOLDEN AGE?

In July, tensions over energy boiled over into a formal dispute with United States and Canada, who argue Mexico is discriminating against their companies.

On Monday, Mexico’s government said it wanted the spat resolved to give companies confidence to invest in the country.

Lopez Obrador says past, corrupt governments rigged the energy market to favor private interests at the state’s expense.

In Jalisco, national energy policy has put on hold seven private renewable power projects – five solar and two wind – encompassing $1.1 billion in total investment, according to figures from the state’s energy agency.

Businesses are taking note, especially in carmaking.

Julian Eaves at CW Bearing, a Chinese-owned automotive supplier in central Mexico, said firms want to leverage the country’s location and competitive labor costs.

But winning new business depends on firms showing customers how they will lower global emissions — a goal government policies are hindering, he said.

“This is a potential golden age for Mexico,” said Eaves, CW’s director of operations and manufacturing for North America. “But it hasn’t evolved to meet market requirements.”

Francisco Fiorentini, executive vice president of industrial park developer PIMSA in Mexicali, estimated that if government policy was not inhibiting power supply, foreign investment in the state of Baja California could have been up to 45% higher.

Mexicali became a warning beacon for investors in 2020 when Lopez Obrador canceled a largely completed billion-dollar Constellation Brands (NYSE:STZ) brewery there after holding a referendum against the plant, arguing it jeopardized water supply.

Hernandez of Index said Baja California and Chihuahua, another border state closely integrated with the U.S. economy, had during the past three years lacked about 1.8 Gigawatts of combined power supply to capitalize on existing demand.

Mexico has made progress working with academia to accelerate training of engineers and analyzing where U.S. firms could convert factory floors to focus on assembly, packaging and testing of semiconductors, said Monica Duhem, who until October oversaw efforts at the economy ministry to lure investment.

But though the president would privately reassure businesses that investing in Mexico was worthwhile, his frequent public denunciations of energy firms fed doubts, she said.

“Multinationals said to me: ‘What’s your strategy on transitioning to renewable energy?'” Duhem recalled.

There are signs policy is shifting.

Foreign Minister Marcelo Ebrard said recently Mexico needed to invest $50 billion to double its renewable power capacity by 2030 as he discussed investment in semiconductors with executives in the border city of Tijuana.

“If you’re not producing with clean energy,” he said, “you won’t be able to export to the United States.”