Mexico’s Aerospace Industry 2020 Outlook

Solid fundamentals propel sector to higher altitudes

By Sergio L. Ornelas, Editor MEXICONOW

Global recession? No problem. China slowdown? Never mind. SARS? It was nothing. Passengers continue to fly, posting solid 5% or greater annual passenger kilometer growth rates in recent years.

The global commercial aviation industry flies mostly undisturbed above economic turbulences.

Indeed, one of the main trends in the global aviation industry that significantly impacts all suppliers is the seemingly unstoppable growth of the market.

In 2014 air traveling grew at 5.9% on the heels of growing low-cost air carriers. Lower oil prices in 2015 and beyond will continue to fuel the market growth.

The 2015 market outlook reports from Boeing, Airbus, Embraer and Bombardier predict the world's commercial aircraft fleet will more than double over the next two decades.

Over the last few years, virtually every OEM (Original Equipment Manufacturer) has revised its forecast upward from the prior year.

For example, Boeing's 2015-2034 “Current Market Outlook” is 3.5% higher than its 2014-2033 projection. The recent report predicts a demand over that period of over 38,000 airplanes worth about US$5.6 Trillion. About half of those aircraft will go to Asian markets.

This is, of course, great news for suppliers who will necessarily need to keep up with demand for parts, components and subassemblies.


Various reasons are behind the boost in the OEM's market forecasts. One of them is the replacement of aging aircraft, especially in the U.S. and Canada. Airbus projects a 20-year demand for about 11,000 commercial airplanes to be replaced, mostly in the single-aisle segment. Operating efficiency needs, environmental regulations and airspace modernization contribute to the retirement of older jets.

New engine programs will experience significant growth and innovation as well. GE, Rolls-Royce, Pratt & Whitney and other engine manufacturers are developing more efficient and environmentally friendly engines for the new aircraft. Composites will continue to replace metal and avionics will brighten the cockpit and enhance security.

Another demand driver for aviation is the growing middle-class. According to Airbus, global middle-class is predicted to more than double from 2.2 billion today to 5.2 billion by 2030. Most firs-time flyers come from the middle-class.

Passenger sub-markets such as the aging population, international students, business persons and tourists will continue to expand.

With the solid long-term prospects for the aviation market, suppliers of all Tiers will need to invest in the design and manufacturing technologies, to cope with the constant growing demand.

They will also need to re-design their manufacturing location landscape and start or expand operations in lower-cost regions with skilled workers such as Mexico.

By the numbers

Mexico's aeronautics parts and components manufacturing industry continues to grow at a Chinese like pace and it is well positioned to take advantage of the global aviation growth.

For the last 10 years, this sector in Mexico has managed to average about 17% annual growth in exports. And although the industry had an adjustment year in 2013, growing “only” at 9% over 2012, the export value growth rate boomed 17.1% in 2014 to reach US$6.36 billion.

Exhibit #1 illustrates the main performance indicators for the aerospace industry in Mexico including annual exports since 2004.

Based on the industry's new and expansion projects under development, the forecast horizon considers a sustained 15% exports grow rate for 2015, and a more conservative average annual growth of 12% during 2016-2020 to handily exceed US$12 billion annual exports in 2020.

At an export level of US$12 billion, Mexico would represent about one half of one percent (0.5 %) of the global commercial aircraft (30 seats or more) production value. This is without considering the defense market, estimated to be about twice as large, or the corporate and civil aviation markets. Mexico's potential market is huge and the possibility to continue to grow at a fast pace is evidently high.

Mexico continues to gain altitude in the global aerospace industry by strengthening its supply chain and moving up in product complexity. In a decade of operations, many of the key players are already into their second, third or higher number of plant expansion phases, with many developing important design and engineering departments.

This is the case of Safran from France, a firm that already has 10 manufacturing plants in Mexico and important Engineering & Design capabilities. Safran is the largest employer in the sector in Mexico with over 5,000 employees.

Exhibit #1 also shows the annual estimated foreign direct investment in the aeronautical manufacturing industry in Mexico. Since the investments are usually spread over a few years and the accounting is a bit tricky, this particular indicator is an elusive one.

But most participants in the industry agree that new investment per year (Plant, equipment & working capital) reached US$1 billion on or about 2010, and will be close to US$1.3 billion in 2015. These numbers are per year, not cumulative.

Recent new projects and expansions include: Regent Aerospace (Seats), Craft Avia Center (MRO Helicopters),Bombardier (Global 7,000 & 8,000 components), Latecoere (Wiring systems for Airbus and Doors for the Dreamliner), Embraer/Zodiac (Interior finishes and components), TechOps (MRO Delta & Aeromexico), Messier-Dowty (Structural components), Tyco (Wiring systems), Dishon (Machining), Aernnova (Structures), UTC (Nacelles) and Eurocopter (Composites) to name just a few.

The final tally for total employment at the end of 2014 reached 45,000, including engineers, technicians, direct labor and administrative staff. It is expected that jobs in the industry will keep a pace of about 5,000 new recruitments per year to reach 50,000 at the end of 2015 and 75,000 by 2020, as shown in Exhibit #1.

The aeronautical industry relies heavily on engineering and vocational training. Mexico produces, inclusive of all disciplines, about 50,000 engineers per year. Currently, there are 21 academic institutions offering over 50 programs specialized in aerospace and aeronautics for technicians and engineers.

Noteworthy is the exponential growth of college freshmen enrolled in aeronautical and aerospace engineering as illustrated in Exhibit #2. Along with the industry, in just a few years, they have gone from about 1,000 in 2006 to over 4,000 currently.

Evidently those regions that want to lure aerospace firms have to first invest in academics. This is the case of Sonora, Chihuahua, Baja California, Queretaro and Nuevo Leon, the main industry clusters, where aeronautical firms and the engineering and technical schools work together in remarkable symbiotic curricula.

Internships, pre-hiring before graduation, custom training, on-the-job training and from-training-to-job programs are common practice. State sponsored training scholarships are a widespread incentive for aerospace firms in these successful regions.

The number of aerospace companies in Mexico has not kept pace with employment and exports which have about doubled from 2010 to the present, while the former has only increased from 220 companies to about 310 during the same period of time as charted in Exhibit #1. This evidently tells us that the growth is coming mostly from organic expansions of the existing firms.

Nevertheless, the new ones keep coming: About once every month on average, a new aerospace firm or shelter contract gets under way in the industry, and very likely there will be about 380 firms at the end of 2020.

What is more important in the subject of the number of companies is their composition by country of origin and type of operation.



Exhibit #3 illustrates the change in composition of the aerospace firms in Mexico by their country of origin. Currently, U.S. firms represent 81% or about 260 companies. By 2020, it is expected that there will be about 280 U.S. aerospace corporations in Mexico, but they will be “only” 73% of the total.

Concepts of opportunity

Besides Europe's increasing participation in Mexico's aerospace industry, particularly by way of “The French Connection”, the larger story here is the forecast for an increasing number of Mexican companies in the sector.

Domestic firms, particularly small and medium Mexican companies, have traditionally had a poor record in joining the supply chain of foreign manufacturers in Mexico. Quality, volume and financial constraints have prevented the vast majority of domestic small and medium potential suppliers from obtaining contracts in the auto, electronics and medical export industries.

But in the aerospace industry things are looking different. Some of the small and medium size domestic firms in aerospace include for example: Especialistas en Turbopartes, a company that makes bearing carriers which are part of the landing of various Boeing models; Volare, an engineering firm that designs and manufactures furniture for passenger aircraft; and SOISA, a producer of seat covers for airlines that claims to make 20% of all the world's new airplane seat covers.

There are of course, large Mexican conglomerates active in the industry such as Frisa, which supplies seamless roll formed rings made from nickel and titanium alloys for engines to GE and Rolls-Royce.

Our forecast is that by 2020, there will be about 45 companies of Mexican origin in the country's aerospace industry.


The nature of the aerospace industry is one of the main reasons it is accessible to domestic firms. The aerospace industry has a low-volume/high-mix of products, where customized designs are the rule and not the exception, with frequent engineering and technological product changes.

Aerospace is also a “slow” industry, with lots of planning, engineering and quality control behind every piece. It is a “craftsmanship” world where every screw has a detailed “birth certificate”. These characteristics are generally an excellent fit for Mexican small and medium size companies.

The aerospace industry in Mexico is actually a great expansion and diversification option for those domestic companies that are already competent in the metals, machining, Engineering & Design and the automotive industries. The transition may not be easy, but it is well worth the effort.

Exhibit #4 depicts the evolution of the aerospace companies in Mexico by type of activity. Manufacturing currently accounts for over 72% of the firms in the industry, and our forecast by 2020 reflects a relative stronger growth of Maintenance, Repair & Overhaul (MRO) and Design& Engineering (D&E) firms.

At approximately a third of the cost for an engineer, a fifth of the cost for a technician and up to a tenth of the cost of direct labor of U.S. salaries, it is not surprising that the young unexplored fields of MRO activities and D&E will grow faster than manufacturing. Two examples of what can be done may be found in Queretaro:

As part of Delta TechOps' long-term plan to become a one-stop shop and operating as a third-party MRO provider, a brand new facility was built in a joint venture between Aeromexico and Delta Airlines, with capacity for up to seven aircraft to be serviced simultaneously.

Every day, over 40,000 airplanes equipped with GE engines take off, and in most of those turbines, there is at least one engineering portion supported or developed by the Queretaro GE Engineering Center's 1,500 professionals.

Few know that the concept of the “Learning Curve” in manufacturing was actually developed in the aircraft industry in 1936 by T.P. Wright. He developed a basic theory for obtaining cost estimates based on repetitive production of airplane assemblies.

By talking to aircraft parts suppliers in Mexico, MexicoNOW has learned that many compliment Mexican workers for having shorter learning curves than originally planned or expected. This, of course, is reflected in the financial results of their operations.

Please see the two-page spread in this article with the main players of Mexico's Aeronautical Industry in 2015. Please note that the Airbus schematic aircraft used in the rendering is intended to be a “generic” airplane and used for illustrative purposes only, the noted suppliers are located in Mexico and manufacture the pointed parts but do not necessarily supply Airbus.

OEMs on the move

European and North American OEMs are locating in Asia as that market continues to gain importance. But for our purpose, the biggest OEM movement is unequivocally the landing of Airbus on U.S. soil at Mobile, Alabama.

Europe's Airbus A320 family aircraft production has just recently begun as the ship carrying the first major component assemblies from UK, Spain and Germany docked at the Mobile port in late June, The first airplane delivery is scheduled for 2016.

Airbus is following the steps of Japanese and European automakers to get closer to U.S. consumers.

Alabama is already a large aerospace cluster with about 400 companies and 85,000 workers. The US$600 million plant was built on a 1,650 acre site and received an incentives package from the State and the City of Mobile in the neighborhood of US$160 million; it is expected to create 1,000 permanent jobs.

This new commercial jetliner plant is important for Mexico for two main reasons.

First, it is the nearest large aircraft facility to Mexico's northern border and sea ports, meaning that there will eventually be parts and components supply routes from Mexico to Mobile.

And second, the fact that Airbus which is part of the European Aeronautic Defence and Space Company (EADS) moves to a location in “Naftaland” means that European suppliers will follow, and many of those will look at opening operations in Mexico.

As it is widely known, in order to have a second home for the 787 Dreamliner, in 2011 Boeing established a plant in South Carolina, a union-free State, to counteract union demands back in the State of Washington. But it has now apparently bargained new terms as it is building a US$1 billion 777X wing plant in its headquarters location at Everett, Washington.

Is a Boeing final assembly facility somewhere in France next? Not likely.

Bumps of opportunity

There are of course areas that need improvement in Mexico's aeronautics industry. Let's briefly discuss four of them.

The general lack of availability of special processes such as anodizing, painting, metal coating, surface and metal treatment, non-destructive testing and others continues to be an “Achilles heel” in the sector's supply chain in Mexico.

Some large firms have managed to vertically integrate special processes in their facilities at a high cost, but mid and small size operations face product development constraints.

These missing links which are part of the Tier-2 and Tier-3 supplier base are critical for the supply chain to attain mature development.

Certification of aircraft parts and components is another essential need for the growth of the industry in Mexico. The country did execute years ago a Bilateral Safety Agreement (BASA) with the U.S. Federal Aviation Administration (FAA). But Mexico has not yet placed the necessary financial and human resources to widely certify aircraft parts.

Local certification is a slow process that moves from non-critical airworthiness parts that do not affect the safety of a flight to those that do. BASA is slowly working in Mexico but needs additional support from the federal authority to ultimately gain the full trust of the extremely demanding FAA.

A perennial problem in Mexico for the development of small and mid-size firms is the lack of capital. The aeronautics industry in Mexico offers an extraordinary opportunity for the smaller operator to join the supply chain.

The federal government should establish a special and dedicated fund for aerospace related start-ups and provide means to marry private capital with entrepreneurs.

The three most important words in the aerospace industry are: Education, education, education. Before building a single aircraft component, in the 1950's Brazil founded its Aerospace University with renowned faculty recruited from the best universities in the U.S. with impressive results as the government firm Embraer is an industry leader.

Every aerospace cluster in the world has extensive academic support for direct technical labor and engineering expertise.

Governments around the world, especially those of Brazil, the UK, France, Russia, the U.S. and Canada know that in order for their aerospace industries to reach cruising altitude, unusual and extraordinary support is needed.

Mexico's federal and state governments have supported the sector, but a lot more needs to be done in the areas of certification, academics and start-ups.

Conclusion

Over the last ten years, Mexico has managed to become the #14 country in the world's aerospace industry in terms of revenue; and it has gone from position #10 to #6 among exporting countries to the U.S. market.

Exhibit #5 shows the trading activity of Mexico with its main country partners. Mexico's trade agreements with 45 countries make it a customs free-trade “Hub”. And evidently, its location is a prime logistics and manufacturing platform for supplying the North American market.

It is reasonable to expect, that with the continued support of Mexico's private and public resources and the flow of foreign direct investment, Mexico will handily be part of the top ten producers of aerospace components soon, as early as the calendar turns to the third decade of the third millennium.