In Industrial, Logistics

Luca Nacucchio

The electronics industry is one of the most dynamic and innovative sectors in the global economy, with applications in various fields such as telecommunications, computing, health, energy, and defense. The electronics industry comprises several subsectors: consumer electronics, industrial electronics, and semiconductors, being the critical components of electronic devices, enabling the functionality of microchips, transistors, and integrated circuits.

The electronics industry in Latin America is still developing, and it faces several barriers, such as low levels of innovation, limited access to financing, and dependence on imports. The semiconductors subsector is particularly underdeveloped, as there are few local manufacturers and suppliers, and most of the demand is met by foreign companies.

This article aims to provide a comprehensive overview, including Mexico’s semiconductor manufacturing potential, Costa Rica and Panama’s collaboration with the U.S., Panama’s role as a logistics hub, and Brazil’s intricate technology partnerships. We also highlight substantial investments from major logistics players in the region, emphasizing the sector’s commitment to Latin America’s electronics industry and its potential global significance.

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The Electronics Industry in Latin America

The electronics industry in Latin America thrives due to a multitude of factors, including the escalating demand for electronic products and services across various sectors and consumer demographics, the availability of crucial natural resources and a skilled workforce, integration with both regional and global markets, and the influence of pertinent policies and regulations, like Brazil’s latest tax reform that was just approved by the Chamber of Deputies that could alleviate the tax pressure in the sector, or the Mexican government tax incentives to attract private sector interest in industrial parks.

208-2024: Market demand for consumer electronics in Latin America (USD $Bn). Argentina, Brazil and Mexico.

Key drivers of the industry encompass the surging need for electronics in sectors like telecommunications, computing, healthcare, energy, and defense, accelerated by the adoption of digital technologies such as cloud computing, artificial intelligence, the Internet of Things, and 5G. For example, Latin America’s IT and telecom sectors are poised for growth despite a moderate economic slowdown. According to IDC, IT spending is expected to outpace GDP growth, with a 12.6% increase in 2023 and a rise of over 15% by 2026. Telecommunications spending will grow by 5.7% in 2023 and close to 5% by 2026. Despite political uncertainty, businesses in the region continue to prioritize digital and technological investments, with around a third planning to maintain current investment levels. At the same time, around a fifth of them (23.5%) will accelerate their investments.

2018-2024: Transportation spending by consumer electronics companies for select LatAm economies (USD $bn). Argentina, Brazil and Mexico.

The COVID-19 pandemic has further catalyzed digital transformation in sectors like education and commerce, elevating the demand for electronics that facilitate remote work and entertainment. According to Holon IQ, investments in educational technology (or EdTech, for short) in 2021 surpassed six times the funding levels of previous years in Latin America. Also, the region’s burgeoning middle class and young population have boosted the consumption of electronic products like smartphones, laptops, tablets, and smart TVs. According to a recent Atlantico report, smartphone utilization in Latin America has risen by 40%, and the internet penetration rate has now exceeded that of India and China.

Warehousing spending by consumer electronics companies for select LatAm economies (USD $bn). Argentina, Brazil and Mexico.

Latin America’s access to vital natural resources, such as copper, lithium, and rare earths, positions it as a formidable contender in the electronics industry. Seventy percent of the lithium reserves in the world are concentrated in five Latin American countries (Chile, Argentina, Bolivia, Mexico, and Brazil), most of which is exported to Asia, where most of the manufacturing occurs.

The semiconductors subsector is one of the electronics industry’s most important and strategic areas, as it enables the functionality and performance of electronic devices and systems. The semiconductors subsector is also one of the most challenging and complex subsectors, as it requires high levels of investment, research, development, and innovation, a sophisticated and integrated supply chain, a skilled and specialized workforce, and a favorable and stable regulatory environment. The semiconductors subsector is dominated by a few global players, such as the United States, China, Taiwan, South Korea, and Japan, which account for most of the production, consumption, and trade of semiconductors worldwide.

The tech industry initially experienced a surge in demand for chips and electronic products during the COVID-19 pandemic, primarily due to the shift towards remote work and schooling. However, the situation has since reversed, leading to an oversupply of chips and subsequent challenges for the industry.

Many companies saw record profits and sales during the pandemic as individuals and businesses rushed to meet their electronic product needs for remote work and education. This unprecedented demand caused a boom in the industry, resulting in high sales and profitability for tech companies.

The need for these products decreased as time passed and pandemic-related restrictions eased. The initial demand for electronics during the pandemic has now translated into an oversupply of chips and electronic goods, accumulating items on store shelves. This overstock has led to declining sales and revenues for tech companies.

2019-2023: Market demand for semiconductors for select Latin American economies (USD $bn). Argentina, Brazil and Mexico.
2019-2023: Transportation spending in the semiconductor industry for select Latin American economies (USD $bn). Argentina, Brazil and Mexico.

The Electronics Industry in LatAm’s key markets

Mexico, Costa Rica, Panama, Brazil

Mexico: Strong Growth Potential but Challenges Loom

Mexico could play a significant role in the semiconductor industry, particularly in assembly and packaging. While chip design is still a stronghold in the United States, advanced semiconductor manufacturing occurs mainly in countries like Taiwan. With increasing concerns about supply chain vulnerabilities and the desire to reduce dependence on China, Mexico is among the countries competing to attract semiconductor-related investments.

A strategic partnership between the United States and Mexico in the semiconductor industry can benefit both countries significantly. The U.S., a leader in semiconductor design, can bolster its domestic production by leveraging Mexico’s manufacturing and assembly capabilities, reducing dependence on Asian outsourcing, and gaining a competitive edge in the global market. Simultaneously, Mexico can increase its exports of tech products to the U.S., fostering economic growth while reducing its reliance on Asia. This collaboration promotes supply chain resilience, economic development, job creation, and geopolitical independence, strengthening the ties between these neighboring nations and offering mutually advantageous opportunities.

Mexico’s advantage lies in its expertise in assembly, as seen in the automotive and medical devices industries. This expertise can be extended to semiconductor assembly and packaging. Many technology manufacturing companies are looking to rebalance their supply chains away from East Asia, and Mexico’s geographical location, industrial base, and cost structure make it an attractive destination. Companies such as Intel, Skyworks Solutions, Texas Instruments, and Infineon Technology have already established a presence in Mexico. They are expanding their microprocessor research and development capabilities, testing, and manufacturing. Foxconn has also set up its headquarters in Mexico, and there are ongoing discussions with TSMC about launching operations in the country.

In Guadalajara, Jalisco, Mexico, there is a validation and test center where the Intel Xeon chips, the company’s most advanced semiconductors for the cloud market, have been validated. Intel is working on training workers with specialized skills in this industry in collaboration with the Mexican government, also focusing on artificial intelligence. Many workers going through the validation center in Guadalajara continue to work in the plants Intel is building in the United States, with plans to reach 3,000 workers in the next few years.

However, Mexico must develop a strategic plan and incentives to lure these companies effectively. The government’s role is crucial in ensuring the availability of essential resources like electricity, water, and clean energy for long-term investments. Additionally, fostering an ecosystem that supports economies of scale, similar to what China, Vietnam, and Taiwan have achieved, is essential for Mexico’s success in this industry.

Nonetheless, installing a new semiconductor foundry in Mexico presents several challenges. One significant hurdle is the massive capital investment required. For example, according to Intel, “Squeezing billions of tiny transistors onto ever-smaller computer chips requires one of the most complex manufacturing processes humans have devised. A fully equipped new fab costs about $10 billion and takes 6,000 construction workers about three years to complete.” The ongoing projects of TSMC in the U.S., costing $40 billion, exemplify the scale of investments required, emphasizing the substantial financial commitment involved.

Another challenge is the intense competition within the global semiconductor industry. The World Fab Forecast Report reveals that semiconductor companies are building a record number of 33 new factories in 2023, yet none of them are destined for Mexico. This highlights the competitive nature of the sector and the absence of Mexican facilities in expansion plans.

Moreover, the need for long-term political and contractual stability is crucial. Major chip manufacturers are unlikely to invest in Mexico without the assurance that governmental commitments and industry regulations will be consistently upheld. This challenge underscores the importance of a stable and supportive regulatory environment to attract semiconductor investments.

While there is speculation that Mexico could benefit from U.S. legislation like the CHIPS and Science Act, it’s apparent that the primary focus is on strengthening American manufacturing and technological leadership, with no specific provisions for Mexico. This implies that the journey to establish semiconductor facilities in Mexico may be prolonged due to U.S. legislation’s absence of direct incentives.

Costa Rica: Intel’s Favorite

Costa Rica’s role in semiconductor manufacturing has been pivotal in the global semiconductor ecosystem’s expansion, a reality shaped by the collaborative efforts of the U.S. government and this Central American nation. This partnership offers mutual advantages, including Costa Rica’s strategic proximity to global supply chains and its rich pool of skilled human resources. As part of this alliance, Costa Rica stands to benefit from a substantial portion of the $500 million allocated by the U.S. State Department over five years through the CHIPS Act and the Itsi Fund, starting in fiscal year 2023, aimed at expanding global semiconductor manufacturing. The U.S. State Department will closely collaborate with the Costa Rican government to enhance and diversify the global semiconductor ecosystem. Recognizing Costa Rica’s significance, the United States values it as a reliable partner in securing the semiconductor supply chain.

While specific next steps with Costa Rica are still in the works, the funding provided by the CHIPS Act will be directed towards several crucial objectives, including securing critical material inputs, strengthening international policy coordination, expanding and diversifying production capacity in the Indo-Pacific region and the Americas, and ensuring national and international security. Intel, in parallel, plans to invest a substantial $1.2 billion in Costa Rica over the next two years to prepare its existing operations for developing next-generation semiconductor technologies. This investment underscores Intel’s unwavering commitment to Costa Rica, a critical player in this growing sector. Since it arrived in 1997, the company has fostered a workforce of over 2,000 employees across its three large centers in the country. Intel’s three centers in Costa Rica include the Research and Development Center, the Processor Assembly and Testing Facility, and the Global Services Center.

Panama: Luring with Logistics

Panama is playing an essential role in the semiconductor industry, driven by the vulnerability of global supply chains and geopolitical instability. U.S. semiconductor chipmakers, recognizing the importance of chips for national security under the CHIPS Act, actively seek reliable alternatives to secure their production processes, leading them to Panama. The semiconductor industry traditionally relied on distant Assembly, Testing, and Packaging (ATP) facilities in East and Southeast Asia for the final stages of chip manufacturing. Panama has emerged as a solution to mitigate supply chain risks and enhance U.S. national security, positioned as a hemispheric hub for ATP and a global distribution center.

There’s an opportunity in Panama for warehousing and ATP facilities, given its proximity to major U.S. semiconductor plants, a compatible time zone, and economic stability. Logistically speaking, the Panama Canal, famously known as the world’s most crucial logistics hub, ensures access to global supply routes, guaranteeing uninterrupted operations. Panama’s steady political and economic environment, investor-friendly climate, and incentive programs make it an attractive destination for long-term commitments. It also boasts free trade agreements with over 60 countries, including the United States, further enhancing its appeal as a global trade gateway. On top of it, Panama’s status as a regional hub for international freight carrier DHL contributes to its logistical prowess, cementing Panama as a dependable solution for American companies in Latin America.

Brazil: Balancing Alliances

Brazil is building relationships with the United States and China in semiconductors and technology cooperation. In its partnership with the United States, Brazil is focusing on broader economic and strategic collaboration, with the text highlighting increased bilateral trade and cooperation in environmental and clean energy initiatives, which may involve semiconductor technology indirectly.

On the other hand, Brazil’s relationship with China is more specific and technology-oriented. Brazil and China have signed memoranda of understanding (MOUs) related to semiconductors, and the Brazilian President, Luiz Inacio Lula da Silva, expressed a commitment to advancing semiconductor technology in cooperation with China. Brazil is open to collaborating with China on semiconductor projects and is keen to attract Chinese investment and technology in areas like 5G. The partnership with China also includes plans for scientific and technological research and industrial innovation cooperation, indicating a deeper engagement in technology-related fields. Also, there was an announcement of a bilateral initiative with Argentina to produce semiconductors, underscoring a regional commitment to addressing global chip shortages and fostering sovereignty in semiconductor production.

Brazil’s pursuit of a strong presence in the semiconductor industry has experienced ups and downs, but the country is actively working to strengthen its position in the semiconductor industry. For example, the Banco Nacional de Desarrollo Económico y Social (BNDES), a key driver of industrial expansion and infrastructure development in Brazil, has recently approved $18.9 million (99 million reales) in financing for HT Micron – founded in 2009 as part of a cooperation agreement between Brazil and South Korea – to support the development of a new semiconductor line used in smartphones and tablets. This investment aims to address the growing demand for 5G equipment while expanding Brazil’s semiconductor production capacity, and the funding will be used to acquire the necessary machinery to produce uMCPs (Universal Flash Storage Multi-Chip Packages), replacing the eMCPs (Embedded Multi-Chip Packages) currently produced by the company.

The Brazilian government recognizes the importance of strengthening the domestic high-tech industry. It aims to enhance Brazil’s competitiveness in the global semiconductor supply chain while boosting skilled job creation and improving the trade balance. This project reflects Brazil’s commitment to revitalizing its semiconductor industry and expanding into a strategically vital field that plays a significant role in various sectors.

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Key Logistics Players in the Region Serving the High-Tech Industry

Major players in the logistics industry are making substantial investments in South America and the Caribbean, aiming to enhance supply chain infrastructure, capabilities, and connectivity.

Maersk has expanded its presence in South America and the Caribbean by inaugurating a 14,000 square-meter fulfillment center in Colombia and a 3,500 square-meter fulfillment center in Panama, part of a $200 million investment in Colombia to enhance its logistics infrastructure and support customers’ supply chain needs, strengthening its position as a logistics integrator.

DHL Supply Chain has committed US$560 million in investments in Latin America until 2028 to enhance its omni-sourcing strategy, focusing on strengthening its operations across the region by decarbonizing its domestic fleet, expanding and retrofitting real estate assets and warehouses, and implementing technology, robotics, and automation solutions. These investments aim to improve logistics capabilities in healthcare, automotive, technology, retail, and e-commerce sectors. The company is increasing its presence with over 240 locations, expanding its operations and facilities in Brazil, Chile, and Mexico.

Ceva Logistics plays a crucial role in supporting Mexico’s booming electronics industry in Nuevo León, which hosts 157 companies accounting for $4.5 billion in annual exports. Ceva Logistics, alongside other industry leaders, recently committed over $1.5 billion to local suppliers in a local event called Nuevo León Home Appliance Cluster Business Meeting that connects small and medium-sized enterprises with the industry, focusing on quality, innovation, and sustainability.

DSV, a Danish cargo and logistics company, is expanding its presence in Nuevo León, Mexico, with a new 11,000-square-meter industrial plant in Apodaca, set to be completed by July 2024. This marks their fourth regional facility and a $30 million investment, creating 350 jobs. DSV already has three plants in Apodaca and one in Ciénega de Flores, totaling 331,000 square meters across Mexico. Globally, they operate 400 warehouses with over six million square meters of capacity. The expansion aims to strengthen its logistics presence and customer proximity, considering its strategic location near the US and ongoing infrastructure and security enhancements for the Port of Colombia as a secure and efficient northern border entry point.

Next Steps

We recommend that firms evaluating the potential of Latin America in the high-tech industry take the following steps:

Identify clear goals: Is your plan to expand your regional operations or service offering? Or do you want to map potential clients or suppliers?

Research the Latin American market: There are many different countries in Latin America, each with its unique advantages and disadvantages.  Which markets offer the best opportunities?

 Evaluate potential partners: Once you have chosen a country, you may need to evaluate potential partners or acquisition targets,

Our company’s 30 years of experience in the region can expand your team’s capabilities, speed up the data-gathering process, and offer an objective additional source to cross-check the internal insights and data your group has gathered.

Contact us for more information.

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