Mexico’s Aerospace Industry Nonstop

Mexico’s Aerospace Industry Nonstop

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Will an aircraft ever make its maiden flight from a factory in Mexico?

The global aviation industry is finally in a frank but bumpy recovery mood and Mexico is well positioned to take advantage of the situation.
While worldwide passenger flight hours continue to increase and new aircraft orders keep on piling up, the major global manufacturers are struggling with supply chain and delivery time issues.

As we conducted the global aerospace industry research for this issue, it became evident that there is a definite but cautious sense of anticipation for a sustained increase in sales and production. New aircraft programs are underway all across the globe, and Mexico is already an important part for some.

Mexico continues to grow its aeronautical industry which is developing to become a long-term and competitive manufacturing platform for many international aviation firms. But Mexico needs to overcome important challenges before it claims a top spot in the global aerospace industry. So far, the flight has been great and nonstop.

Asia and Single-Aisle Airplanes

For the past 47 years, around mid-year, Boeing has released a world forecast of commercial aircraft demand by type and market region. Boeing is optimistic about the global aviation industry long-term health. Its outlook report indicates that although volatile fuel costs, political upheaval in the Middle East and North Africa, and unresolved government debt in many industrialized economies create risk of a renewed downturn, commercial aviation has weathered such shocks to the system in the past.

Recovery has followed each event as the industry reliably returned to its long-term growth rate of approximately 5 percent per year. Passenger air traffic rose 8 percent in 2010, after declining about 2 percent in 2009. Boeing predicts that the persistent resilience of air travel is expected to sustain 6 percent growth in 2011 and keep the growth rate at or above the historical trend through the middle of the decade.

In its 2011 twenty-year forecast for aircraft sales for the period 2011- 2030, Boeing sees single-aisle transports capturing 70% of 33,500 deliveries of new passenger and freighter jets. The need to replace older, less efficient airplanes will account for 40 percent of the projected market for new airplanes. The 2011 forecast anticipates 13,360 airplanes will be replaced over the next 20 years. This reflects rising fuel prices and the increasing economic burden of using older, less capable, and less efficient airplanes.

Average annual passenger traffic of 5.1% in the 20-year period will push demand for aircraft past the US$4 trillion mark for the first time since Boeing started to issue its long term forecast. This is shown in Exhibit #1.

Compared to Boeing's 2010 forecast of US$3.6 trillion market for 30,900 aircraft, the 2011 numbers represent an increase of 12.7% and 8.4%, respectively. According to a Boeing spokesman: "We're at the beginning of an up cycle. Economic growth, world trade and airline liberalization point to a healthy long-term demand." Passenger growth will climb from 4.9 trillion revenue passenger kilometers (RPK) currently to 13 trillion RPKs in 2030.

The global aviation industry's growth has shifted from North America and Europe to Asia and single-aisle airplanes have moved with it. Since 2010, the Asia-Pacific region became the world's largest airline market, and in 2011 Boeing sees the twenty-year demand in that region for 34 percent of the total deliveries or about 11,450 airplanes for airlines' fleet replacements and expansions.

Not surprisingly, within the Asia-Pacific region, China is the largest market with a projected 7.5 percent annual traffic growth rate. Its greatest demand is for single aisle, 100 to 200-seat regional jets. Following Asia Pacific, by percentage of deliveries, are Europe, 23%; North America, 22%; Latin America, 8%; and the Middle East at 8% as shown in Exhibit #2.

Vendors across the aerospace industry supply chain are delighted that the outlook for sales is bright. But they will not enjoy the benefits unless they perform at a higher gear.

Supply chain woes

Boeing's Dreamliner aircraft is no longer a dream. Three years overdue, billions of dollars over the budget and after thousands of engineering changes, Boeing's 787 Dreamliner will finally be flown with paying passengers. By the end of 2011, Japan's All Nippon Airways will likely have inaugurated the Dreamliner's first official commercial flight from Tokyo to Hong Kong.

The Dreamliner is an energy-saver and innovative airplane which was a struggling nightmare for Boeing to complete. The delays and cost overruns have been blamed on the outsourcing of the aircraft's manufacturing to a very large number of suppliers around the world. And who in the industry can forget the endless string of delivery delays of Airbus' A380? After more than two years of delays, in late 2007, the A380 made its first commercial flight for Singapore Airlines.

As of August, 2011, there had been only 54 aircraft deliveries from the firm 236 units ordered and in backlog. Some industry experts tag the delays to errors in the large international supply chain. Airbus expects to finally ramp up to a target production of three airplanes per month in 2012. Because of these airplanes' technological innovations and size, and public notoriety, these two examples may sound like extreme cases of delays in the industry. But they are really more typical than not. Many programs for smaller aircraft, even general aviation trainers seem to suffer this phenomenon.

In fact, in the aeronautical industry, success and profits is kin to those manufacturers and programs that are able to manage the complexity of the supply chain, and the multi-year, relatively long haul periods of design, engineering and production. On the production floor of the aerospace industry, there are two concepts that are perennial, persistent to the nature of aircraft manufacturing: The concept of "Low-volume / High-mix" production runs and the concept of recurrent engineering changes.

For example and to make a simple comparison: In the electronics industry, where very short product design time frames and quick manufacturing dominate, engineering changes are mostly taken care of in the product development phase and "High-volume / Low-mix" runs prevail in the production lines.

China's manufacturing success is precisely based on its "High-volume / Low-mix" production skills and zero engineering changes. The Chinese are highly effective producing millions of items of the same kind, with very "Low-mix" of product design, and no engineering changes once production gets going.

And this is where Mexico comes into the picture as a great alternative for the global aerospace industry. Mexico is very competitive in "Low-volume / High-mix", custom, production runs. And considering the North American market, Mexico, because of its proximity, is also ideal to manage engineering changes.

And there is more to it.

Except for some new high-tech processes, airplane manufacturing is considered a very low automated industry. It is actually a highly labor intensive industry, highly skilled labor intensive, that is.

Indeed, for all practical purposes, airplanes are truly "hand-made".

Does this mean that Boeing and Airbus are going to rush and open assembly plants in Mexico? No, but the fundamental industrial bases exist for Mexico to continue to develop its aeronautical industry with a definite sense of sustained growth.

Mexico's report card

MexicoNOW has been covering the aerospace industry of Mexico for the past five years. The industry statistics continue to be staggering in spite of the sluggish economic recovery but on the heels of a brighter global aerospace outlook. Mexico's report card is a clear evidence that the country represents a competitive niche for the global aerospace industry.

Look closely at Exhibit #3which shows the performance indicators of Mexico's aeronautical industry for the period from 2004 to 2011, as well as a short-term forecast for 2013 and a longer-term projection for 2015. Mexico's annual exports of aviation parts and components continue to grow and will be just short of US$4 billion during 2011.

Very strong growth is expected in this indicator in the short-term. By 2013, it is possible that exports will reach US$5 billion; this is twice the 2007 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 by 2015.

Some industry participants expressed that the latter figure is extremely conservative and suggest the level of exports will exceed US$10 billion in 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, including more engineering and R&D centers such as the ones created by GE in Queretaro (Turbine design and engineering) and Honeywell in Mexicali (Non-metallic materials laboratory).

By mid 2011 there were 260 manufacturing facilities in Mexico producing parts for the global aviation industry. This is almost four times as many plants as there were in 2004. By 2013, there will be over 300 aeronautical plants, and by 2015 Mexico is expected to boast over 350 facilities. Currently, the State of Sonora ranks #1 in Mexico with the largest number of plants (40).

In terms of annual investment in facilities and equipment, the industry exceeded US$1 billion for the first time in 2009 and reached US$1.1 billion in 2010. This is over four times fold the level of investment it had in 2004, which was about US$250 million. The final tally for 2011 is expected to be near US$1.2 billion.

In 2010-2011, significant investments came from Triumph in Zacatecas (US$200 million); Hawker-Beechcraft (US$100 million) and Cessna (US$67 million) in Chihuahua City and Goodrich Aerostructures (US$92 million) in Mexicali, among many others.

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, it has developed a modest number of higher quality jobs for machining but it is lagging in special processes, materials and finishes that require higher levels of capital.

Back in 2004, employment was at a mere 12,500 workers. By 2011, the number of jobs in the industry reached approximately 33,000, which represents an annual compounded growth rate of 15% for seven years! MexicoNOW's informal survey of industry consultants, operating plants and OEMs' and suppliers' announcements and plans resulted in a forecast of 37,000 aeronautical jobs for 2013. Some of the projects announced for this time period include multi-million dollar investments by Eurocopter in Queretaro and Fokker Aerostructures in Chihuahua City.

By then Mexico will have created three times as many jobs in the aeronautical sector than it did in total up to 2004 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 42,000 jobs.

Exhibit #4 shows the relative size of Mexico's employment versus the main aerospace clusters in various states of the U.S. for the period 2004-2010. Note that Mexico is about as large as the aerospace clusters of Kansas and Connecticut.

Manufacturing Costs

Mexico's main competitive advantage is, of course, its lower manufacturing costs. In particular, the cost and quality of human resources in Mexico are renowned in the global manufacturing community. And for the aerospace industry, the cost for direct labor, technicians and engineers in Mexico is extremely attractive.

It is not a secret that the global aerospace industry is very hungry for competitive manufacturing costs. Total ownership manufacturing costs, that is. When a U.S. or European aerospace industry parts manufacturer computes its total cost of production and logistics to supply the North American market, it will quickly conclude that China is not even an option. Let alone market proximity and intellectual property considerations.

As China develops its own aerospace industry to service its huge market, suppliers will look to locate over there, but only to service the OEM's located in Asia not the ones in North America or Europe. It is safe to state that for the next 10 years at least, China will not be a significant factor in Mexico's aerospace industry development. Mexico is really currently competing with the aerospace suppliers' home base.

As part of its 'Guide to International Business Location', KPMG conducted a detailed financial study of a typical aircraft manufacturing operation in various locations in the world. For this study, they considered a 76,000 ft2 facility, with 85 total employees and annual revenues of US$29.8 million. In their cost model, KPMG actually computed the pro-forma financial statements in detail.

The results, comparing 10 countries are shown in Exhibit #5. The financial model computes a bottom line "Cost Index" for the operation. Mexico's "86.1" cost index ranks #1 in this study.

To illustrate a more specific dollar comparison, the graph also shows the results for "Profit before income taxes as a percentage of revenue". In this example, the operation in Mexico would yield US$7.45 million in profit before income taxes, compared to US$1.96 million in the U.S. and US$2.59 in France.

This means that by locating the facility in Mexico, the manufacturer will save, or make, about US$5 million per year. Or put in another way, this study exemplifies that relocation to Mexico from Europe or the U.S. may offer savings of about 16% to 18% of total annual revenue.

Will an aircraft ever make its maiden flight from a factory in Mexico?

The aircraft pictured on the cover of this edition of MexicoNOW is Bombardier's Learjet 85. This is the first business jet with both fuselage and wings built primarily from carbon composites. A composite airframe improves aircraft performance, requires less maintenance and increases passenger comfort. It is the latest in aircraft technology which debuted in the design of Boeing commercial airplane the "Dreamliner".

There are currently 1,300 employees working on the Learjet 85 aircraft program across Bombardier's sites in Belfast, Queretaro, Montreal and Wichita. Montreal is where the design and engineering of the aircraft is developed. Belfast produces resin wing spars and skins which are shipped to the Queretaro facility, where the composite fuselage is produced and final wing assembly takes place.

Final aircraft assembly of engines, avionics and finishes is planned to be conducted at the Bombardier's facility in Wichita, Kansas where flight tests are made and customer delivery takes place. The Learjet 85 is scheduled to enter into service in the marketplace in 2013.

Figuratively, this is as close as Mexico currently is in producing a complete aircraft. Other fuselage and structures programs by Cessna, Bell Helicopter and others are at a similar stage of development. Mexico is building up its general supply base and produces many aircraft parts for turbines, avionics, structural components, accessories and finishes, but the supply base is still relatively thin and in its early stages of development.

Mexico still lacks a supply base for the hundred plus of aerospace qualified processes such as machining and surface treatment of large monolithic parts, titanium components and other exotic materials. In addition, the special processes require large capital investments and the potential volume of demand in Mexico is very light and most of the time does not justify the investment.

It is very hard to build an airplane in Mexico if many of its parts have to be sent back to the U.S. for processing. There is also the obstacle of certification. Mexico is just at the crawling stages of becoming a mature, trustful and capable certifier as required by the U.S. and European aviation authorities for aircraft airworthiness.

In addition to the above hurdles, there is the "Marketing" barrier. It does take a lot of time to gain the customer confidence that an airplane with final assembly in a developing country is going to be as safe and up to the quality standards as those produced in the U.S. and Europe. It took Brazil many years to gain the excellent reputation that Embraer enjoys today in the marketplace.

But it is not impossible.

Following is a statement in writing from Bombardier about its operations in Mexico: "Bombardier Aerospace's manufacturing operations in Querétaro, Mexico were established in 2006 and complement the company's other existing manufacturing sites. Operations in Mexico, which employ approximately 1,100 full-time employees, allow Bombardier to develop a manufacturing capacity that reduces its reliance on third parties for structural aircraft components and greatly contributes to the reduction of operating costs and increased profitability."

And, the information release actually states: "Bombardier hopes that, as new markets emerge, the Mexico site will have the capacity for final aircraft assembly."


In a nutshell, Mexico is on the right track to someday complete the final assembly of an aircraft, but it has a huge amount of work to do and challenges to overcome before it accomplishes this objective.

It is tempting to state a time frame for when new aircraft will make their maiden and test flights from a factory in Mexico. Besides the Learjet 85, there are other opportunities in smaller business and general aviation aircraft. And why not dream about a commercial size airplane program? Our wild guess for this event to happen is between 15 and 25 years.

But nowhere in the world has the aeronautical industry succeeded without the decisive and significant support from the government. The world's top OEM's frequently engage in formal and informal arguments about their competitors' unfair government support and subsidies.

Evidently, if Mexico wants to complete the cruise flight to build complete aircraft, its federal government must allocate a lot more financial and support resources to:
#1...Significantly increase and geographically multiply the aerospace academic capability.

#2...Truly elevate and create the administrative infrastructure for professional and internationally reliable certification status.

And #3...Provide substantive fiscal incentives and loans to special processes projects in the aeronautical supply chain.

The above aeronautical industry specific initiatives must be incorporated into an industrial policy that includes the precise financial means and tools along with the rules that industry participants can expect. The aeronautical industry development policy should not be a mere whitepaper of good intentions. It must contain, for example, the formation of a significant fund from which state governments and private and public academic institutions can obtain money to install industry specific technical and engineering curricula.

It is clear that the aerospace industry in on the radar of the federal government and that it has already undertaken important initiatives to support the industry through customs, certification and educational initiatives.

But a lot more needs to be done. There is a true golden opportunity to strengthen and position the aeronautical industry of Mexico among the best in the world on a sustainable growth course. Nonstop.
Sergio L. Ornelas has 30 years of experience in international trade and direct foreign investment. He has business degrees from Babson College, Southern Methodist U. and Harvard; he was head of the State of Chihuahua Industrial Promotion Agency in 1980-5 and General Director for Intermex Industrial Parks through 2000. He is MEXICONOW's editor.
He may be contacted at: