Automation Insights

But what specific location options are there for the automation industry in Latin America? 

If you turn your gaze towards Latin America, you quickly notice that countries with attractive production conditions are tempting – and not in short supply. Mexico and Brazil in particular, which are among the strongest and largest economies in the Latin American region, stand out in international competition with their very individual location advantages. 

Some German automation companies, such as Kuka & Balluff, are already leading the way and expanding their production sites in Mexico. 

Mexico’s greatest asset in terms of attractiveness as a business location is its geographical proximity to the USA, the world’s largest economy. Even though the relationship between the two neighbors has repeatedly been marked by tensions, especially during President Donald Trump’s time in office, the two countries share much more than just a national border. 

Since the introduction of the North American Free Trade Agreement (NAFTA), Mexico has been part of a free trade zone with the USA and Canada, which has reduced barriers and intensified trade between the countries. The NAFTA agreement was replaced in July 2020 by the USMCA (“United States-Mexico-Canada Agreement”), which is more protectionist and aims to promote domestic production in the USA. However, almost 80 percent of Mexican exports still go to the USA, making Mexico the USA’s largest importing country.  

Mexico is thus becoming the USA’s extended workbench, particularly for products with a low to medium level of vertical integration. In addition to Canada and the USA, foreign companies can also take advantage of the reduced or eliminated import and export duties resulting from the free trade zone by relocating their production to Mexico and exporting the products to the USA or other parts of the world. However, in addition to the tariff exemption provided by the free trade agreement, Mexico also offers another lucrative production incentive in the form of a special economic zone – the maquiladoras.   

Maquiladoras are factories that are located in the Mexican border region along the US border and produce under the management of multinational companies. This involves the installation and final assembly of imported preliminary products, which are then (re)imported duty-free into the USA as finished products or distributed on the global market.  

The business of the maquiladoras is strongly geared towards the close relationship with the parent company, as the capital-intensive individual parts are manufactured in the USA or abroad and then assembled in Mexican factories. The low Mexican wages, which, at the equivalent of EUR 13.29 per day, are now often lower than those in China (strong regional differences) and the duty-free re-importation to the USA mean that production costs can be massively reduced. Other tax incentives for maquiladoras include exemption from corporation tax and VAT as well as additional deductions for wage costs that can be claimed in the tax return. 

Whether a factory is actually a maquiladora or not is determined by the Mexican Secretary of the Economy. The official designation is important in that only legal maquiladoras are authorized to import duty-free from abroad and take advantage of the above-mentioned tax benefits. 

In addition to the economic benefits of investing in maquiladoras, however, managers need to be aware of reputational risks. Investments are often criticized by the public because of the low environmental standards on site. Companies based in Germany in particular, which are required by the Supply Chain Act to protect human rights and the environment within the supply chain, must therefore pay particular attention to working conditions within the maquiladoras. 

In addition to human capital and customs concessions, which make Mexico particularly attractive as a production location, it is, in particular, the protectionist and subsidy measures of the USA that benefit the Latin American neighbor and thus attract foreign investors. However, it must be borne in mind that economic policy measures are strongly linked to the government in office and can therefore only be guaranteed in the short to medium term. It remains to be seen to what extent the US presidential elections in autumn 2024 will influence existing subsidy programs. 

Currently, there is hardly any other G20 country where the production of renewable energies is as cost-effective as in Brazil. This phenomenon can be largely attributed to natural resources such as the almost infinite natural resources of water, wind, sun, and biomass, which are widely available in Brazil thanks to its geographical location. This unique potential makes the country one of the most promising suppliers of green hydrogen and other renewable energy sources. However, transporting energy to the established industrialized countries is associated with high energy losses, which is why it seems more efficient to locate energy-intensive processes directly in Brazil.

Powershoring describes the relocation of production facilities to countries that provide cheap, renewable energy in large quantities. In this way, companies can use their production to reduce their CO2 footprint cost-effectively. This is an opportunity to decarbonize the supply chain and become more global at the same time, especially for industries that are under high cost pressure and have to comply with strict environmental regulations.  

Another positive aspect is that Brazil obtains renewable energy from various sources and is therefore not dependent on specific weather conditions or seasons. In 2022, the country was able to generate 92 percent of the electricity used from renewable energies, with the most important forms of energy generation being the following: 

• Hydro power (63%): Rivers such as the Amazon and the Paraná offer considerable hydro power potential and make the country one of the world’s largest producers. 

• Biomass (7.7%): As the world’s leading producer of sugar cane, Brazil has large quantities of biomass that can be used for the production of bioethanol and electricity. 

• Wind energy (12.1%): Thanks to its long coastline, Brazil has considerable wind resources and has also developed into a significant market for wind turbines. 

• Solar energy (4.4%): Due to its geographical location, Brazil is exposed to a high level of solar radiation. The number of solar installations is continuously increasing and is also supported by government incentives. 

However, Brazil’s wealth of resources and geographical advantages are also offset by disadvantages, such as the “Custo Brasil”. This refers to increased operating costs that are attributable to country-specific circumstances. These include, for example, high taxes, complex bureaucracy, inadequate logistics, and a lack of legal certainty. 

Nonetheless, the country has been heavily industrialized in recent years thanks to capital-intensive investments. This increases the attractiveness of the location for current investors due to the network effects that can be utilized with existing companies and the improved availability of skilled workers. Some German companies from the mechanical engineering and automation technology sectors are already based in Brazil, such as Bosch and Festo, which have set up a sales company as well as a production plant and logistics warehouse in Sao Paolo. 

Looking at the key points that play a role in the evaluation of production locations, it quickly becomes apparent that the two countries are convincing in different dimensions and otherwise offer similar framework conditions.  

Both Mexico and Brazil have predominantly balanced political systems. The two national currencies, the peso and the real, have also shown a certain stability against the US dollar for some time now. In addition, production costs are low, which is reflected in the fact that the automotive industry, among others, is investing heavily in Mexico and Brazil.  

It is therefore impossible to say in general terms which of the two countries is better suited as a production location for automation companies. Rather, every company must ask itself which of the two major cost levers  

1. tax advantages through access to the free trade zone in Mexico 
2. cheap renewable energy in Brazil 

is of greater significance for the future success of the company.   

In the best-case scenario, an increasing presence of multinational players creates a win-win situation in both countries: immigrant companies benefit from location-specific advantages and potential synergy effects from clusters, while Latin American countries further expand their economic position through industrial development. 

Kittelberger, D. / Rosenstiel, P.