Mexico’s Aerospace Industry Outlook 2020

Headwinds seem to be part of every country’s flight plan in 2012 and 2013.

Global economic growth for 2012 was disappointing at 2.2% and 2013’s final GDP tally is not expected to be stronger. Europe and the U.S. continue to struggle with economic policy, the former flirting with recession and the latter with a weak recovery.

Economic growth in China, India and Brazil slowed down and other emerging economies, including Mexico, are following suit as 2013 ends. Turmoil in the Middle East, gasoline prices and financial volatility are not helping the global picture either.

Despite uncertainties, global commercial aviation is faring well with 5% plus annual growth in passenger traffic in both 2012 and 2013, once again showing a remarkable resilience in weathering the sluggish world economy.

Global air cargo, military aviation and general aviation are not doing as well, but they are certainly out of the doldrums of prior years.

Fortunately, most analysts predict that global growth in 2014-2015 will be above 3% and that the aviation industry of the world will continue to grow annually at 5% or more powered by the emerging economies of Asia Pacific, the Middle East and Latin America with their growing consumer demand and international trade.

Mexico continues to gain altitude in the global aerospace industry by strengthening its supply chain and moving up in product complexity. In less than a decade of operations, many of the key players such as Honeywell, Safran, Bombardier, Zodiac, Cessna, Beechcraft and others are already into their third, fourth or higher plant expansion phases, some even including important design and engineering capabilities.

Mexico’s competitiveness will help it to improve its position in the global industry, which Boeing is forecasting to be about US$4.8 Trillion in the next 20 years for commercial aviation alone (Jets over 30 seats), representing over 35,000 new airplanes.


And if you consider the defense market, estimated to be about three to four times the size of the commercial segment, plus the private, general aviation market, you are talking about a total aircraft market worth well over US$20 Trillion during 2013-2032. That is US$20 plus 12 zeros in 20 years, or about US$2.7 Billion per day!

The pie is enormous and Mexico is contributing with parts, components and subassemblies to all the aircraft market segments. For example, according to FEMIA (Mexico’s Aerospace Industry Association), the number of OEM suppliers with operations in Mexico include 36 for Airbus, 26 for Boeing, 13 for Bombardier and 17 for Embraer.

To put things in perspective, Mexico currently supplies about two days worth of value of the global aviation market, or about one half of one percent. Evidently, the potential for growth is significant.

In this article, we will review the current and future conditions of the aerospace industry in Mexico and the trends and challenges that are shaping the outlook of this exciting industry through 2020.

DEVELOPMENT

As shown in Mexico’s Aerospace Industry Main Projects Time-Line in Exhibit #1, the history of Mexico’s manufacturing aerospace sector is relatively recent and very dynamic.

Dating back to the mid-seventies when Honeywell and Westinghouse started fabricating basic components in Chihuahua City for use in U.S. defense aircraft, the industry remained pretty much dormant for many years until 2004.

Prior to this year, the products were very basic, non-critical parts, such as harnesses. Global companies were primarily interested in Mexico because of its low labor cost; there was no presence of major OEMs. Nevertheless employment grew from a few thousand jobs in the early nineties to about 12,500 in 2004.

Besides competitive costs and geographical proximity to the U.S. market, Mexico offered a hub of freetrade agreements, a promising technical young labor force and effective intellectual property protection.

The federal government and some states envisioned the potential of the aerospace industry in Mexico and laid out the welcome mat along with incentives and red-tape reducing initiatives.

Once Bombardier announced its intentions to develop capacity in Queretaro in 2005, the word of its blessing of Mexico spread across the global industry; and as a result, other OEM’s in the U.S. started to look south of the border and some from Europe across the ocean to evaluate potential operations in the low-cost manufacturing platform of NAFTA-land.

Mexico’s competitive advantages worked their magic and by 2012, the country leaped to being the 14th largest exporter in the global aviation industry, and one of the largest global recipients of foreign direct investment for the sector.

The icing on the cake for Europeans was the ability to manufacture in a dollar based location, thus avoiding the high cost of manufacturing in Euros to comply with dollar denominated contracts with their U.S. customers.

All these factors contributed to make Mexico, the location of choice to serve American markets.

THE PLAYERS

Exhibit #2 tracks the industry’s number of corporations since 2004 and shows a forecast for 2015 and 2020.

The number of companies in the aerospace sector in Mexico will likely reach 290 by the end of 2013. This includes manufacturing (79%), maintenance and repair operations or MRO’s (11%) and Design & Engineering services (10%).

There are 9 OEMs with aerospace operations in Mexico: Bombardier, Cessna, Beechcraft, Bell Helicopters, MD Helicopters, Eurocopter, Embraer, Gulfstream and Fokker. They have different degrees of product integration in Mexico, ranging from full scale subassemblies and fuselages to less critical parts such as aircraft interiors.

Among the most important programs there are for example: Bombardier’s campus in Queretaro which includes the assembly of the aft fuselage of the Global business jets and the composite manufacturing of the Lear 85 fuselage; and Textron’s facility in Chihuahua assembling the cabin and wiring of the Bell 429 helicopter shown on the cover of this edition.

Some of the most important Tier-1 suppliers include Honeywell, General Electric, Safran, Daher, Senior and Sargent among others.

There are 80 aerospace companies with more than 250 employees and 15 with over 500. The largest operator is The Safran Group; with 20 years in Mexico the French firm has nine plants and close to 5,000 employees. One of Safran’s subsidiaries alone, Labinal, employs close to 3,000 workers and it is the undisputed largest aircraft wiremaking facility in the world.

Over 75% of the aerospace firms are located in clusters in five states: Baja California, Chihuahua, Nuevo Leon, Queretaro and Sonora. It is in Sonora where the most productspecialized cluster has developed for the manufacturing of aero-engine components supported by highly specialized suppliers of coatings and special processes.

The number of new companies in Mexico’s aerospace industry will likely increase to 340 by 2015 and to 450 by 2020. This company count includes any new subsidiaries, affiliates or joint ventures of aerospace corporations already operating in Mexico, because as the big players expand, they oftentimes form a new company for a different product, division or business venture.

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 234 companies. By 2020, it is expected that there will be about 288 U.S. aerospace corporations in Mexico, but they will be “only” 64% of the total.

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 in Mexico by their country of origin. Currently, U.S. firms represent 81% or about 234 companies. By 2020, it is expected that there will be about 288 U.S. aerospace corporations in Mexico, but they will be “only” 64% of the total.

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; and KUO Aerospace, a machined components manufacturer which is a division of one of Mexico’s largest global industrial companies.

Our forecast is that by 2020, there will be about 80 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 lowvolume/ 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 needs a detailed “birth certificate”. These characteristics are generally an excellent fit for Mexican small and medium 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 70% of the firms in the industry, and our forecast by 2020 reflects a relative stronger growth of MRO’s 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’ longterm plan to become a one-stop shop and operating as a third-party MRO provider, a brand new facility is being 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 GE Engineering Center’s 1,500 professionals.

Please see the two-page spread in this article with the landscape of the main players of Mexico’s Aeronautical Industry in 2013.

THE WORKERS

The density of aerospace business clustered around Airbus in the Toulouse region is making it quite difficult to find qualified personnel. Initial reported shortages centered on design engineers for new programs, but as the assembly lines have accelerated; the recruitment shortfall has shifted to manufacturing staff as well.

This is one of the reasons, other than to gain better access to North American customers and enjoy more competitive manufacturing costs, why Latecoere decided to grow aggressively in Hermosillo, Sonora, where an ample supply of engineers and workers is available.

The existing 100 strong workforce site, fabricates electrical wiring. Latecoere plans to quadruple the work force each year until 2015, with aero structures manufacturing due to be added by the end of 2013. The company expects aero structures to generate the largest sales volume, but the labor-intensive wiring business will employ the majority of the staff.

The new joint-venture between Embraer and Zodiac Aerospace in Chihuahua is consolidating the work from Tijuana, Brazil and California, to build practically the entire composite interior finishes for many of Embraer’s aircraft models.

The jets’ main cabin ceiling, floor, bins, galleys, lavatories, safety units and other interiors’ components will be fabricated in the new entity named EZ-AIR for which an initial workforce of 150 is in place. The company plans to grow to about 500 employees by the first part of 2015. The fact that all of EZ-AIR’s production is exported to Embraer’s manufacturing complex in Santos, Brazil, speaks highly of the aerospace capabilities in Mexico.

These two examples tell the story of the rapid pace of hiring in the aerospace sector in Mexico. Nevertheless, our employment forecast of 72,000 workers by 2020, shown in Exhibit #5, turns out to be rather conservative when compared to FEMIA’s more optimistic objective of an 110,000 headcount by then.

The sector’s final employment level at year-end 2013 shall be around 35,000 and it will likely reach at least 45,000 in 2015. At a hiring pace of approximately 5,000 plus workers per year Mexico’s aerospace industry might be over the 70,000 mark by 2020.

By then, if things turn out well, Mexico will have just about the same number of aerospace workers that the State of California’s aerospace sector has; and more than the State of Texas or the State of Kansas, but still short of the State of Washington’s, where the main Boeing operations are located.

THE INVESTMENT

Please see Exhibit #6 with the performance indicator for foreign direct investment in the sector. Notice that it has grown from about US$250 Million in 2004 to a sustained annual investment of over US$1 Billion through 2013.

Actually, during the period of 2008- 2012, the total investment was approximately US$6 Billion. The final tally for 2013 is expected to be at US$1.4 Billion.

For the last 5 years, other than the U.S., Mexico has had the highest level of actual and announced foreign direct investment of the aerospace sector in the world. The alltime total of investment in the aerospace industry in Mexico is estimated to be about US$18 Billion.

These investments go into construction of buildings, purchase of machinery, equipment, and tooling and working capital. A portion of the foreign investment from 2012 and most of 2013’s are actually being deployed as you read. So capacity is being built and expanded at a sustained pace year-on-year, and it will subsequently translate into jobs and eventually into production and exports.

In order to increase the level of investment as shown in our forecast, at a rate of about US$1.5 Billion per year, the government (Federal and States) must continue to facilitate the operation of the companies through more mature certification procedures and more investment in industry specific education and skills.

Mexico does have the Bilateral Aviation Safety Agreement (BASA) with the U.S. for aerospace products reciprocal quality certifications; and late last year, Mexico became part of the Wassenaar Arrangement, along with 40 other countries, which paves the way to have better access to defense and sensitive technology aerospace products manufacturing.

The paperwork is on the right track, but the government needs to deploy more human and administrative resources to actually support the companies through the certification procedures.

As for education, Mexico has over 20 academic centers that offer some kind of aerospace curricula ranging from technicians to advanced degrees. Baja California, Queretaro, Nuevo Leon, Sonora and Chihuahua have some of the leading institutions. But a lot more needs to be done if Mexico is going to continue to fuel the huge appetite of the aerospace industry for talent.

At this stage of the game, Mexico needs to build the skills backbone of the industry. The academic focus should be towards the bottom of the pyramid. Mexico needs technicians, machinists, programmers. Those are the types of people that will make the aerospace industry in Mexico gain altitude.

There is a lot of focus on aerospace engineering designers and that type of “higher-end” academics. But the real core for growth is in building more massive specialization programs for machining, wire harness assembly, fuselages; this is what will give the country a huge competitive advantage.

THE EXPORTS

At the end of the day, after planning, locating, investing, building and hiring, the companies must ring the cash register and push product out through the loading dock doors. One way of measuring output is by means of the record of exports as shown in Exhibit #7.


This is a very interesting graph that has an “exponential” behavior. Please notice that exports grow from US$1.3 Billion in 2004 to about US$6.1 Billion in 2013. This is a compounded average annual growth rate of 20% which is outstanding by any industry standards.

The relative conservative forecast of exports reaching US$8 Billion by 2015 and US$12 Billion in 2020 is in line with FEMIA’s and it has some worth noting dynamics.

Please notice that while employment increases by 2.5 times from 2010 to 2020, exports nearly quadruple in that time period. This is of course a significant increase in productivity over time as a result of the aerospace industry typical slow starts and long learning curves.

Many aerospace operations in Mexico are now going through those initial, slow and painful stages of ramping up, but once they get going the pay-off is very attractive.

In conclusion, Mexico needs to keep doing the right things to facilitate the soft landing of more projects. Mexico needs to work harder in academics and the build up of the supply chain along with the availability of more special processes, and get closer to the day when a new turbine is fired up for testing in Mexico or even better, when a new airplane makes its maiden flight from an airport in Mexico.