KPMG-Global Consulting Company Sees Marked Growth in Mexico Aerospace $12 Billion Marked in the Next Decade?

Citing accelerated growth in the aerospace industry in Mexico, global consulting company KPMG continues to agree with predictions that the industry in Mexico could nearly triple to a $12 billion level within the next decade.

Much of the opportunity would come through the commercial side of the aerospace industry, according to Douglas Gates, global partner, Aerospace & Defense, KPMG. Gates pointed to forecast demand of 20,000 new and nearly 14,000 replacement aircraft in the next decade any beyond toward 2030.

WE DON'T THINK OF KPMG IN THE SENSE OF AEROSPACE BUT YET YOUR ORGANIZATION HAS AN IMPORTANT ROLE. EXPLAIN THE ROLE FOR KPMG AND AEROSPACE AS WELL AS WITHIN MEXICO.

KPMG is an audit, tax and advisory company. From aerospace and defense perspective we have over 700 people right now globally working day in and day out at major aerospace companies around the world. From a standpoint of how we support and work with the various countries, my global team works very closely with the lead partners in the countries and with the companies within those countries to identify opportunities.
We do have a broad range of capabilities; outside tax and audit which is generally where we are known. We work with supply chain, engineering, a broad range of transaction services, mergers, among other fi elds. We are a fully capable consulting house also.

AS YOU TAKE A LOOK AT THE WORK OF KPMG AND MEXICO, THE AEROSPACE INDUSTRY IS RELATIVELY NEW IN MEXICO.
HOW WOULD YOU CHARACTERIZE ITS GROWTH AND HOW WOULD YOU CHARACTERIZE THE PROGRESS?

Let me clarify. "Relatively new" in my experience in going back with Mexico goes back into the mid-80s when I worked at a large aerospace OEM and we sent wire harnesses to Monterrey.
From that standpoint its 30 years old and I think the growth has really accelerated over the last 10-to-15 years. They partnered more. They sought more foreign direct investment. They became more aggressive in the market in attracting companies.

YOU'RE POINTING TO A SITUATION THAT REALLY TAKES US BEYOND MEXICO, BEYOND THE U.S.
AND INTO A GLOBAL ECONOMY.
WHAT ARE THE CHALLENGES ON A GLOBAL SCALE THAT THESE ECONOMIES POSE TOWARD THE AEROSPACE INDUSTRY?

It's signifi cant. The way KPMG is framing it right now it's really a tale of two worlds. You have the defense posture and this globally is declining signifi cantly with the shift of budget pressures in individual countries and the shift of the dollars to more social welfare programs.
You have the commercial side, especially in the large jets where we are seeing an increase of some 20,000 plus new aircrafts and entrants to the market between now and 2030. It is an unprecedented demand on an annual basis that really provides a tremendous opportunity.

WHEN ONE TAKES A LOOK AT THE ECONOMIC CHALLENGES, ORDERING A NEW AIRCRAFT MEANS TO EXPECT A LONG LEAD TIME.
HOW DOES THAT FACTOR INTO WHETHER BUSINESS IS AFFECTED BY THE ECONOMIC UPS AND DOWNS?

While we do have very, very long lead times in certain product areas, like the large commercial jets they've been sold out and have large backlogs, I would argue that it still is very cyclical. You saw the disruptions in 2008 through 2010, vacations in the line, meaning people walking away from orders whether it be business jets or large commercial jets creating signifi cant disruptions in the production lines and across the entire supply base on a global basis and quick reactions and in many cases resulted in the lower-tier suppliers leaving the industry. Now the capacity in the commercial side is picking up again. The interesting challenge is going to be watching the global market and the global suppliers' ability to move up and adapt to that increasing capacity.

YOU NOTE THAT THERE ARE FOUR AREAS OF INTEREST.
LET'S TAKE A LOOK AT THOSE FOUR AREAS, STARTING WITH COMMERCIAL. WHAT DO YOU SEE AS THE OUTLOOK?

Commercial transportation is clearly the growth engine for aerospace and defense. Most of the projections from the large OEMs as well as independents show 20,000 something new aircraft as well as 14,000 replacements between now and 2030.
That's a production rate greater than we've had ever in the industry and the capacity challenge for the global supply base.
Commercial aviation is going to be the growth engine.
Defense is defi nitely going to be hard pressed for the next 10 plus years. The United States obviously has a large defense budget and with potential issues of up to a trillion dollars taken out in the next 10 years. That is a huge impact across the base.

THAT'S THE SECOND AREA IS MAINTENANCE, REPAIR AND OVERHAUL, MRO. WHAT DO YOU SEE HAPPENING IN THAT SECTOR?

That is really becoming a regionalized strategy. Airlines now focus on setting up MRO centers around the world. Opportunities are there in Latin America, Mexico and Asia/Pacifi c -- defi nitely a growth engine and one that provides good margin for the overall providers. It is somewhat fl at right now but in the long haul it's going to be signifi cant especially as you tie back to my previous comment of the new additional aircraft in the market over the next 20 years. Each has a maintenance, repair and overhaul tail to them that offers a huge opportunity.

IN YOUR INDUSTRY THERE IS INCREASED FOCUS ON ROTOR CRAFT – THE THIRD AREA. WE HEAR ABOUT A EURO CRAFT. WHAT DO YOU SEE IN THE CRYSTAL BALL?

I think near term it's somewhat of a fl at market both on the business and military side. I think in the long term, especially with the pressures in regional transportation in the growing Asia/ Pacifi c marketplace, helicopters in the commercial segment offer a tremendous opportunity and a tremendous growth model, and that's where we are seeing the growth in the long term. Right now somewhat fl at but long term defi nitely a growth.

DURING THE PAST SEVERAL YEARS THERE HAS BEEN A LOT OF CONCERN ABOUT THE FOURTH AREA AND THAT ONE -- THE BUSINESS JET -- CAN GET CONTROVERSIAL.
WHAT DO YOU SEE HAPPENING?

That one's probably the most concerning segment. In 2008 and 2009, the business jet market took a huge hit with literally a 50 percent vacancy in the production lines at many of the key bizjet manufacturing companies, and they haven't recovered. Our look at that says the market won't recover until the 2017 or so timeframe. Lot of exit of suppliers from the market and you've seen a lot of movement. Companies in China are now looking at acquiring U.S. biz-jet companies who are in bankruptcy. There is a lot of change in dynamics in that industry, in that segment.

LET'S LOOK AT PROJECTED GROWTH IN AEROSPACE IN MEXICO.
WE'RE SEEING NUMBERS OVER A 100 PERCENT GROWTH – UP TO 133. FROM WHERE DO THESE NUMBERS COME? HOW CONFIDENT ARE YOU THEY ARE SUSTAINABLE?

Some of the projections we're using are coming from both the Mexican government as well as the Mexican aerospace industry association. But you're looking at the trend right now of where it's moved now to about a $4.5 billion marketplace in 2012. The incline in talking to customers, seeing the movement of additional large manufacturing bases and large products, shows the potential for the market up to $12 billion by 2020.
It does look achievable.

TO MAKE ALL THIS HAPPEN CERTAIN IMPERATIVES ARE IN PLACE.
LET'S REVIEW THEM AND LET'S REVIEW THE CHALLENGES WITH THEM.

Mexico has always been a low-cost leader and Mexico has to maintain that low-cost leadership. Mexico has been a trusted provider to the aerospace industry in the U.S. and other places. They need to maintain that trusted base. They understand the regulatory challenges and the risks that go with that. I think from a challenge perspective to go along with that, Mexico needs to address and are starting to address, moving up what we call the value chain. Becoming more capable in the engineering and the complex manufacturing and the types of manufacturing they do, from composite parts to complex machine types and different materials like titanium.
We're seeing movement in that but that will take an investment among government, state and industry to make that commitment. That's the most significant prerequisite is developing that kind of national aerospace industry direction and vision and then being enable that in key investments.

HOW WOULD YOU CHARACTERIZE GOVERNMENT SUPPORT AT THE FEDERAL AND STATE LEVEL IN MEXICO?

I think they recognize that Mexico is a huge export market and a huge labor market for Mexican workforce. It's also a driver and really taking the youth of Mexico into a high-skilled, highly- paid occupation in engineering. All of that is a dynamic that it seems to be in both government levels: the national government and the state level. Industry here has recognized a tremendous growth opportunity. It does complement well with Mexico's direction within the auto industry. Again, there are a lot of complementary activities.

WE'RE NOW SEEING A STRONG MOVEMENT TOWARD EDUCATION IN MEXICO PRODUCING ENGINEERS. WHAT CONFIDENCE LEVEL DO YOU HAVE THAT THOSE ENGINEERS WILL BE ABLE TO MEET THE DEMANDS WHICH ARE TOTALLY CRITICAL IN THIS INDUSTRY?

I think when KPMG talks to industry leaders it is an imperative and in fact in some of the large companies to move to Mexico, they've made it critical that the engineering talent be developed. One of the things though is it's not left to the young engineers to come out and to be able to hit the ground running, there's a lot of partnership with those leading industry companies to develop them and give them time to mature.
It's not as if they are going to hit the ground and they're going to be expected to be a lead engineer. There's going to be some patience here but the direction is absolutely right to move this way. The commitment to the industries coming down here has to happen. They're looking for more value. I think they are on the right direction and the industries, the companies that I've talked to, won't let them fl ounder. They are committed to the success of those individuals.

WHEN KPMG TAKES A LOOK AT THAT WORD "COMPETITIVENESS" WITHIN A COUNTRY, GLOBAL, WHAT ARE THE FACTORS THAT ADD UP TO COMPETITIVENESS?

It is competitive and it's on a global basis.
It's on a state-by-state basis in Mexico; it's on a basis of Mexico versus the states in the United States. Really what they are looking for is that quality has to be a given, that you are a value added partner in the business is critical, and cost. It's not just labor cost but its total cost and the government, state and industry incentives.
There needs to be commitment to investment and continuous improvement, continuous and development. I mentioned incentives, tax cuts, training incentives things like that are absolutely critical. Transportation costs and in Mexico the states guarantee security, low transportation costs and low security costs; that goods and services are provided can be provided on time and in a safe environment.

EARLIER IN THE INTERVIEW WE TALKED ABOUT A LONGER-TERM PICTURE, EVERYBODY IS POINTING TO 2020. WHAT ARE THE MILESTONES THAT WILL SAY MEXICO IS ON TARGET?

I think part of that goes back to the call for the national kind of aerospace agenda. I think that is the fi rst critical milestone. If they're serious about it and they're willing to put that down in writing, the commitments to make the investments that are taking to drive the industry, the commitments to the education, et cetera. That's got to be a prerequisite up front. Then as you look at the way points, 2015, three years from now, where are we? Do they hit the infl ection point? I think the government projections are $7.5 billion dollars, so a $3 billion growth from now. If it hits that infl ection point it's showing the trends are in the right way. The new introductions with some of the key companies that are coming down here, are they moving up the value chain? Are more components, larger components, move value-add being required out of the Mexican industry? Some of the things we've seen of large research and development capabilities have been set up here.
Are other R&D centers opening here? Are we seeing that trajectory increase? I think those are. Within two to three years you're going to see that infl ection point. If it hasn't hit that with those key parameters then you'll know it's not going to happen or you know it will.