Mexico’s Aerospace Industry Climbs Higher

Industry must overcome dragging sources

The opening of various new aerospace parts plants in Mexico in 2010 indicates the industry’s confidence in Mexico’s capabilities as the country’s battered economy emerges from recession.

New manufacturing facilities throughout Mexico by North American and European international aeronautics companies continue to signal the trend of competitiveness for the industry.

New plants and expansions in 2010 by major manufacturers include: Safran, AE-Petsche and Bombardier in Queretaro; Cessna, Hawker Beechcraft, Zodiac and Textron in Chihuahua; Triumph in Zacatecas; Daher Socata and BE Aerospace in Sonora and very likely soon Eurocopter in Nuevo Leon, among others.

Mexico’s aeronautics industry cruised through the recession practically undisturbed by the economic storm. Driven by competitive wages for direct labor, technicians and engineers and its ideal location next to the largest aviation marketplace, managers of international aerospace firms continue to uncover additional competitive traits in Mexico.

On top of strong financial savings and return on their investments, global aerospace companies operating in Mexico enjoy solid intellectual property protection, a deep pool of workers, NAFTA import-export benefits and mature logistics.

Although, concerns about security, high utility costs and bureaucratic red tape, are a drag on the industry’s climb to higher altitudes.

Other dragging sources include the still modest academic curricula and technical training resources; global competitive government incentives for the aerospace industry and the yet developing special processes supply base.

But the extraordinary marriage of Mexico and the aerospace industry continues to climb higher. The industry fundamentals fit ideally in Mexico. Consider for example, how expeditiously, the “High-mix / Low-volume” nature of manufacturing in the aerospace industry and its frequent requirements for engineering changes can be handled from Mexico’s “near-shore” location.

And how European aeronautical companies quickly leveraged the advantages of operating from Mexico’s “dollarized” manufacturing region, helping them offset their ailing costs in Euros back home under dollar denominated supply contracts with U.S. customers.

PERFORMANCE INDICATORS

MexicoNOW has been covering the aerospace industry of Mexico annually for four years now. The industry statistics continue to be staggering in spite of the economic recession in general and the slowdown in the global aerospace industry in particular.

This is additional important evidence that Mexico represents a competitive niche for the global aerospace industry.

Look closely at Exhibit #1 which shows the performance indicators of Mexico’s aeronautical industry for the period from 2001 to 2010, as well as a short-term forecast for 2012 and a longer-term outlook for 2015.

Back in 2001, employment was at a mere 7,500 workers. By 2010, the number of jobs in the industry reached approximately 31,000, which represents a growth of 313% in nine years. In terms of employment, the aeronautical industry in Mexico is now as large as the aerospace manufacturing cluster of Montreal, Canada, a metro area renowned in the global aerospace community.

This level also continues the doubledigit annual growth in employment and represents an average compounded annual growth rate of almost 17%! MexicoNOW’s informal survey of industry consultants, operating plants and OEMs’ and suppliers’ announcements and plans resulted in the following forecast of aeronautical jobs for 2012: The level of employment will get to approximately 37,500 workers. This is an increase of 39% for the three year 2009-2012 period. In just three years, Mexico will create more jobs in the aeronautical sector than it did in total up to 2003, since its inception in the late sixties, when the very first aerospace facility was established in Mexicali.

And by 2015, the industry is conservatively expected to grow to 42,500 jobs. In comparison, Boeing’s main location in Seattle represents a total employment for the state of Washington of approximately 70,000 workers.

In terms of annual investment in facilities and equipment, the industry exceeded US$1 billion for the first time in 2009. This is about five times the level of investment it had in 2001, which was about US$200 million. The final tally for 2010 will very likely be near US$1.1 billion.

MexicoNOW’s forecast based on opinions from industry executives indicates that at least through 2015, the annual level of foreign investment will be above the US$1 billion level. This will depend on the types of jobs Mexico is able to support in the future. The country is highly matured in labor intensive operations such as wire harnesses, but it needs to further develop the higher quality jobs for machining, special processes and engineering that require high levels of capital.

In spite of the reduction of aircraft deliveries throughout world markets, Mexico’s annual exports of aviation parts and components continue to grow and will top US$5 billion during 2010. This is multiple times the export levels of recent years as shown in the graph.

And even stronger growth is expected in this indicator in the short-term. By 2012, it is possible that exports will reach twice the 2009 level. As the brand new operations get past their learning curves, and older plants expand and attain economies of scale, export production levels will likely increase to about US$7.5 billion in 2012 and US$10 billion by 2015.

The aeronautical industry will continue to grow strongly in Mexico in the short and mid-term. If business conditions continue to be favorable, the supply chains in the various regional clusters will reach more mature stages.

By the end of 2010, there will be over 270 facilities in Mexico producing parts for the global aviation industry. This is more than four times as many plants as there were in 2001. By 2012, there will be over 300 aeronautical manufacturing facilities, and by 2015 Mexico will blast past the 400 mark.

SEGMENTATION BY TYPE AND ORIGIN

According to Jean Claude Bouche of The Monterrey Aerocluster, out of the total companies in direct operations in Mexico’s aerospace industry in 2004, only 3% performed MRO (Maintenance and Repair Operations) and 4% were involved in engineering, while the majority, 93% were involved in manufacturing.

Monterrey Aerocluster’s forecast is that by 2015, there will be more MRO and engineering operations in Mexico, about 20% of each, while the share of manufacturers will be 60%. Please see Exhibit #2.

GE, Honeywell and Goodrich are among the engineering and R&D group with sizable operations in Mexico. Indeed, engineering salaries in Mexico are not as inexpensive as India’s or China’s, but at a third of the cost of their U.S. and Canadian counterparts, Mexico’s engineers are quite competitive and nearby in the same time zone.

Unlike other major foreign investment industrial sectors in Mexico, which are dominated by the U.S., the aeronautical industry’s ownership source base is well diversified.

Exhibit #3 shows that in 2004, 80% of the aerospace firms in Mexico were from the U.S., only 5% were European and about 15% domestic. But they are diversifying rapidly. Monterrey Aerocluster expects that by 2015, 25% will be European, 5% Asian, 25% Mexican and the U.S. share will be down to 45%. Note that the size of the pie grows from 65 to 400 plants during that period.

Mexico’s aeronautical industry is climbing higher fast. The landscape of the firms is getting packed as illustrated in the two-page Exhibit #4. Note that the cities of Monterrey, Chihuahua, Queretaro, Mexicali and Empalme (State of Sonora) have built a reasonable industry mass that evidences a definite cluster formation; it is also very likely that a couple of new clusters will surface in other cities soon.

Mexico has many deficiencies in regards to its global competitiveness for attracting industry. These include well overdue reforms for energy, telecommunications, labor, education and others that are not implemented as a result of the gridlock in Congress. In addition, serious solutions are urged in terms of security and red tape.

Nonetheless, the aerospace industry continues to flourish in Mexico. But there are three specific areas that directly influence the aerospace industry in Mexico and that can very well be corrected in a relative short period of time: Industry incentives, BASA and industry specific education.

SPECIAL PROCESSES

According to Luc Beaudoin, Vice President of Aerospace for The Everest Group, Mexico needs to “unlock” the aerospace supply chain.

Beaudoin, a former Bombardier executive explains: “To this date, the majority of the parts used in aerospace assembly work in Mexico are manufactured abroad as there are yet a limited number of aerospace quali- fied machining operations in Mexico; for instance for large monolithic parts, titanium parts or other exotic materials”.

“OEMs in Mexico are working hard at attracting their proven machining and special suppliers to co-locate with them but these suppliers are confronted to a dilemma,” said Beaudoin, “Their operations are very capital intensive; for instance a single CNC machine costs anywhere from half a million to several million. In addition, in order to supply complete finished parts to the OEMs, special surface treatments are required”.

“As Mexico lacks a supply base for the hundred plus of aerospace qualified processes, the aerospace special suppliers are confronted to a difficult choice; either to incur the additional operating costs of trucking the parts back and forth to the U.S. for the special processes or build in-house surface treatment capabilities at great capital expenses, financial and technological risks”.

At the end, the business decision of these aerospace suppliers boils down to: High investment in machinery, diluted operational and cost efficiency due to lack of tier-2 suppliers for processes and local distributors of aerospace alloys; little labor savings as machining is not much labor intensive; plus the whole compounded by the difficulty of firming up commercial agreements with OEMs to secure minimum volumes.

So the aerospace development in Mexico is in a relative gridlock: OEM’s slow down their growth due to lack of an established local supply chain; Tier-1 are reluctant to invest in Mexico due to lack of Tier-2; Tier-2 does not invest in Mexico as there is insuf- ficient market.

The Mexican Governments acknowledges the issue but have not yet founded significant mechanisms to overcome it; presumably in hope that a solution will come from the OEM’s or the natural forces of the market.

In part, this attitude originates from the metrics used by the Governments which largely assess the value of foreign investments on the number of jobs created rather than the nature of the investment and its strategic relevance for the development of the country.

Mexico’s aerospace industry would gain significantly if public extraordinary funds would be made available to few and key aerospace tier-1 and tier-2 suppliers bringing critical contributions to the supply chain.

“You cannot build an airplane if every part has to be sent back to the US for processing”, said Nick Criss, Executive Director Industrial Services -Mexico for Cushman & Wakefield.

“Unfortunately, in Mexico, none of the clusters have yet reached to critical mass to provide sufficient business for the typical processor to make the move. And the clusters cannot reach critical mass without the processors. Clearly, there is a need for government intervention to break this impasse”, he explained.

The Federal and State governments need to identify the critical special processors required for each cluster and for those, set aside the normal criteria for incentives based on headcount, and focus monetary incentives to offset the high capital investment required by these firms. The payback will come not from these firms but from the accelerated job growth of OEMs and Tier Ones who can now move to higher levels of value and integration without interrupting production to ship parts for processing.

No other single action by government could accelerate development of the sector in Mexico. The investment would be modest in relation to the incentives given to OEMs and large Tier Ones and would allow those large players to reach their full potential in Mexico.

BASA

On September 18, 2007, Mexico and the U.S. executed the Bilateral Aviation Safety Agreement commonly known as “BASA”.

On October 2008, this agreement was ratified by the Senate and soon thereafter, the U.S. and Mexican governments issued the Implementation Procedures for Airworthiness that cover: Design approval, production activities, export airworthiness approval, and technical assistance between authorities.

According to Carlos Angulo, Senior Partner of Baker McKenzie: “The BASA international treaty provides bilateral cooperation parameters to permit mutual aircraft related certifications in matters related to manufacturing of airline parts and components, maintenance, fight operations, and in general, for air wordiness procedures”.

In the manufacturing arena, Mexican inspectors can under the BASA certify the manufacturing of aircraft parts in Mexico that can be used to be integrated for the manufacturing of an aircraft, and the U.S. would be obligated to grant Federal Aviation Agency (FAA) certification for such purpose.

“Mexico has full legal capability of granting airworthiness certification, and is in the process of training its inspectors to do so under BASA. This capability will be in place hopefully in the months to come”, said Angulo.

Unfortunately, this long-waited-for initiative is not for real yet. Still, today, for all practical purposes, manufacturers have to export their products into the U.S. and get FAA approval. Once Mexico finishes its process of training its inspectors, it would not be any longer necessary to export the products and obtain the FAA certification. Once this process is finished, Mexico will have a further competitive edge in the aerospace industry.

Many in the industry wonder why the responsible entities do not get this process completed.

EDUCATION

In order to sustain its climb, Mexico’s aeronautical industry needs to continue to improve its efforts in industry specific education.

It was not until the arrival of Bombardier in 2005, that governments in Mexico realized the need for public funding of aerospace technical training.

Since, noteworthy academic efforts have been undertaken in Mexico to support the aeronautical industry. Among the most notable ones are the establishment of the National Aerospace University at the Bombardier campus in Queretaro, the specialized aerospace programs of the Monterrey Institute of Technology in Nuevo Leon and the Aeronautical High Technology Training Center in Chihuahua City.

Also, in 2007, the National Polytechnic Institute, along with other academic institutions interested in aeronautics, created The Mexican Council of Aerospace Education (COMEA). Their mission is to foster the professional competence of aeronautics engineers and technicians. But in the aerospace industry, you can’t ever do enough in academics.

It is clear that the development of the aviation industry in any country or city is directly related to the quantity and quality of aeronautics academic programs.

For example, Brazil’s Embraer was able to design and manufacture an aircraft only after literally billions of dollars were invested in aeronautics education and R&D, including the formation of Brazil’s University of Aeronautics, founded with faculty and researches that Brazil recruited from the likes of M.I.T. and other aeronautics leading U.S. universities.

The message is simple. Federal and state governments and private institutions need to increase the aeronautics curricula offering.

The effort must be across the board for all the skills needed in the aeronautics supply chain including high-end avionics engineering, manual skills for drilling holes and punching rivets in fuselages and materials technology for special processes.

The global aerospace industry is about to embark in a major recovery. Mexico must be ready to take advantage of it and facilitate the climb of its industry to higher altitudes.