Mexico’s Aerospace Growth to Reach New Heights
There is a bright future for the aerospace sector in the coming years in Mexico, according to Carlos Robles, Vice President of Bombardier Queretaro in his keynote speech at Mexico Aerospace Forum 2018 this Wednesday at the Hotel Sheraton María Isabel in Mexico City. “The future of the aerospace sector is bright,” he said. “The sky is the limit and the opportunities keep growing at a steady pace.”
The context in which the aerospace sector operates in Mexico and internationally has challenges, but the opportunities are greater, he said. “The political context, the fluctuations in the exchange rate, the renegotiation of trade agreements and México’s presidential elections are factors that create a complex environment for the sector,” he explained. But he highlighted that this impact has not stopped the sector’s steady growth.
According to Robles, the aerospace sector has experienced sustained growth over the last few years, positioning it as a strategic axis for the country. “In the last 10 years the sector has had an annual growth rate of 14 percent, positioning it as the fastest growing sector in the country,” he said.
However, the sector’s steady growth also presents challenges for the companies and the sector itself, he warned. “The main challenge is the coordination of more than 360 industrial installations that operate in the sector, which are a key to support the success and continuous growth of the aerospace sector in Mexico,” he explained.
Other challenges that impact the development of the sector are related to the training of the labor force and the development of strategic alliances to become competitive as a sector. “One challenge is to encourage talent development to satisfy the steady growth of the aerospace sector,” he continued. A third challenge he identified was the transformation of Mexico’s supplier competitiveness by reducing costs to compete with players coming from regions such as Asia.
Robles closed his speech sharing the upcoming opportunities for the country. “By the end of the year, the aerospace sector is expected to provide more than 56,000 directorate positions and surpass the current export rate,” said Robles.
He said he thinks Mexico has a positive reputation as an aerospace hub but that there is still plenty of room for it to grow. “Whenever a potential client comes to Mexico for the aerospace sector, there is an image of a growing sector with potential opportunities. The outlook is very positive,” he concluded.
New Trade Environment Demands Further National Development
After over a year of negotiations, the new USMCA treaty was signed by Former President Enrique Peña Nieto, US President Donald Trump and Canadian Prime Minister Justin Trudeau. Despite uncertainty in the automotive sector due to changes in rules of origin, the aerospace sector was mostly unaffected, according to Luis Lizcano, Director General of FEMIA.
“Even though we expected slower growth in the industry’s production and export results due to the NAFTA renegotiation, we experienced quite the opposite,” said Lizcano during the first panel of Mexico Aerospace Forum 2019 held at the Sheraton María Isabel hotel in Mexico City. As moderator, Lizcano opened the discussion highlighting the growth in aerospace exports of US$1 billion for a total of US$8.6 billion in 2018.
Luis Aguirre, President of the National Council for the Maquila Industry and Export-oriented Manufacturing (INDEX), said no big changes were made to regulations focused on the aerospace industry moving from NAFTA to USMCA. “There are more advantages because the new treaty gives more certainty to trade, strengthening customs and information exchange,” he said. “Paperwork on certifications of origin was also simplified to expedite operations.”
This, however, does not mean the industry is free of turbulence. “USMCA will reconfigure the supply chain,” said Antonio Velázquez, Director General of Aeroclúster of Querétaro. Approximately 80 percent of Mexico’s exports go to the US, so Velázquez said companies will have to be very smart in keeping their competitiveness and operations. “Traceability will also be very important under the new treaty. Compliance with rules of origin will be stricter, demanding companies increase the technological content in Mexican production.”
Aguirre also mentioned that the only dark cloud remaining after the signing of USMCA was the lingering tariffs on steel and aluminum imports implemented by the US. Even though these were used as a negotiation tactic by the Trump administration to force Mexico and Canada to adopt US terms, the tariffs have not been lifted. Both Peña Nieto and Trudeau urged the US government to address the issue during the signing ceremony but Trump said this issue will be resolved separately with each of its partners.
Nevertheless, René Espinoza, President of the Chihuahua Aerocluster does not see this as such a grave problem for the industry. “Mexico imports raw materials that are later transformed and exported once again to the US, which minimizes the impact of steel tariffs,” he said. “There has been a slight impact in sourcing costs but most of the certified mills for aerospace production are in the US anyway.”
Regardless of the outcome, USMCA negotiations did shine a light on Mexico’s dependence on the US and Canada regarding exports, which raised the question of whether the country could diversify its operations and participate in more global markets. “There has always been an opportunity for diversification and the CPTPP has opened even more doors for the country,” said Aguirre.
According to Espinoza, the country is already starting to diversify its operations and even though Mexico’s aerospace industry is still young, global markets like Europe are already paying attention to Mexico as an important manufacturing hub. “The USMCA negotiation was a perfect launching pad to generate more interest from other international regions,” he said.
Panelists agree, however, that more is still to be done to boost the country’s position and the government has a major role to play in this process. “Participation of the federal government is the best way for the industry to grow,” said Espinoza. “Unlike the automotive or electronics industry, if the government does not participate, there will be no development.” He highlights the cases of Brazil and Quebec, where government participation was key to creating two of the largest OEMs in the industry: Embraer and Bombardier. “Once the private sector and the government decide to create a company, that is when the industry can truly take off,” said Velázquez. “That is what we need right now in Mexico.”
Before reaching that point, the country must strengthen its supply chain and keep betting on talent to support manufacturing and technology development processes. Just like in other industries, the country has been very successful in attracting transnational companies. Now, it needs to trust the national industry. “There should be more fiscal incentives for national players and support for SME growth,” said Velázquez. “Participation in defense programs is also critical for the industry, because it will open the door to a whole new world of projects and technology.”
Aguirre stressed the importance of specific government involvement in key axes. “The new Minister of Economy, Graciela Márquez, has vowed to increase local content in Mexican exports,” said Aguirre. “That can only be achieved through supporting programs in education, financing and training for national players.”
Landing SMEs in Aerospace Value Chains in Mexico and Abroad
While the Mexican aerospace industry has experienced double-digit growth rates in the last years, there are still several challenges to counter for Mexican SMEs to get onboard global supply chains.
“It is necessary to develop an aerospace industry with a strong national capital, which means developing SMEs,” said Jorge Gutiérrez, Dean of UNAQ, during the “Opportunities for Mexico’s SMEs in the Local Manufacturing Chain” panel of Mexico Aerospace Forum 2018 that took place on Wednesday at Sheraton María Isabel in Mexico City. Roberto Corral, Vice President and General Manager of Innocentro agrees and underlines that SMEs are the powertrain for company development in various countries including Germany. “The secret for SMEs to take the next step in their advancement is that they start developing their own products,” he adds.
Eugenio Marín, CEO of TechBA Madrid-Montreal and TechBA Aerospace, points out that industrial diversification is a huge challenge for SMEs. He points out that the main issue is usually not technical capacities or even access to capital, but in the mindset of Mexican SMEs. “The Mexican manufacturing industry is used to waiting for large foreign companies to come and buy their products and sometimes even lack a commercial department,” he points out. “SMEs need to look forward to become global companies.” On the other hand, Claire Barnouin, Executive Director of Monterrey Aerocluster, says Mexico must learn how to sell its engineering capacities because the country offers several advantages in that regard. “The country needs to go from a scheme where SMEs lack control over component designs to one in which they develop more added-value projects,” she points out.
Marín points out that a study carried out by TechBA discovered that there are about 182 SMEs in Mexico that are interested in entering aerospace value chains. He adds that 90 percent of these SMEs are not hindered by the lack of capital or experience to engage in aerospace processes. For instance, he says 74 percent of the SMEs studied do not understand how to integrate into the aerospace supplier base and up to 82 percent have no aerospace clients. “We expect to help them achieve that in less than three years,” points out Marín. “Our job is to help companies fill these gaps.”
He adds that Mexican SMEs face the challenge of a lot of idle capacity that usually means a cost of opportunity. In lieu of this situation, TechBA has created a series of transfer centers where SMEs can reach aerospace clients in order to develop one-stop-shops.
Looking ahead, Marín says TechBA is in talks with the new federal administration to create FONAERO, which will be a fund destined to support the development of SMEs. “We need to boost the penetration of SMEs in the aerospace supplier base,” he underlines. In this area, Gutiérrez adds that the triple-helix does not work without companies’ capacities, but that the absence of public policy with a long-term perspective also weighs on the development of SMEs. Corral adds that without the support of public authorities it will be difficult for the industry to develop beyond the attraction of OEMs’ FDI. Barnouin points out that it is necessary that the new government carries on the efforts that have been made previously.
Similarly, Eugenio underlines that Mexico’s aerospace industry is competing against the world. He points out that while nations such as China have developed their industries through offset policies, Mexico remains a competitive country despite lacking these incentives.
In terms of the role of universities in supporting SMEs’ development, Gutiérrez underlines that there are over 30 academic institutions training technicians, engineers and researchers for the aerospace industry and developing aerospace technology. Barnouin underlines that these institutions have the role of training the labor of the future. “In comparison, aeroclusters must offer academic institutions a feedback on the competences that talent needs to develop,” she points out.
FAMEX as a Promoter of Mexico’s Aerospace Industry
The Aerospace Fair of Mexico (FAMEX) provides a key space to promote trade and growth of the national aerospace industry in Mexico and abroad, explained Wing Gen. Rodolfo Rodríguez, President of FAMEX in his presentation at Mexico Aerospace Forum 2018 this Wednesday at the Hotel Sheraton María Isabel in Mexico City. “It is the biggest aeronautical event in Mexico and one of the biggest in Latin America. It is a key event to support Mexico’s growing opportunities in the sector,” he said.
Mexico’s general overview positions the country as a strong regional and global economic player, as well as a top player in the aerospace sector. “Mexico is the 15th global economy, the second strongest economy in Latin America and in third place worldwide in investment attractiveness for the aerospace sector,” shared Rodríguez.
To further boost the development of the aerospace industry, FAMEX has a wide range of activities, events and collaboration among different actors to promote holistic development of the sector in Mexico. “FAMEX encourages FDI in our country and academic conferences to promote the training of personnel working in the field of aeronautics,” he said. “It also promotes business opportunities through key events where big companies and SMEs can benefit from this.”
Given the changes that Mexico has experienced in recent months, Rodríguez in the name of FAMEX invited the attendees to participate in the upcoming FAMEX 2019 event that will take place from Apr. 24-27, 2019 at the Santa Lucia Military Air Base. “FAMEX-19 will be the new federal government’s first official event where aerospace companies from Mexico and abroad can show the next administration why it is important to continue investing in the aerospace sector,” he continued.
Rodríguez shared with the audience the importance of continued promotion of the collaboration between public and private players in the industry. “The efforts between different actors in the aerospace sector, both public and private have been key to its continuous growth,” he added. “We are proud of the broad participation of MROs, OEMs, the government and other players through tax incentives, investment programs and international promotion.”
To conclude, Rodríguez shared with the audience that the growth expectations for the aerospace sector are positive and the government recognizes its importance to promote the economic growth of the country. “In the global economy up to 2050, Mexico is projected to become the 7th strongest country in the world,” he said. This importance is mirrored in the Ministry of Economy’s proposal to attract 90 new aeronautics companies by 2025 for a total of 420. “Exports are predicted to exceed US$12 trillion and Mexico will rank in 10th position in aeronautic production worldwide,” he said.
NAIM is No More; Regionalization the Way to Go
Even before entering office, the new President Andrés Manuel López Obrador (AMLO) issued a popular consultation to get feedback from the population on the construction of NAIM. The result green-lit an alternate development in Santa Lucia. But, is this enough to solve the connectivity issues plaguing the country? Maybe for the short-term, said Francisco Bautista, Leading Partner of the Aerospace Industry at EY during a panel of experts at Mexico Aerospace Forum 2018 (MAF) held at the Sheraton Maria Isabel hotel this Wednesday.
“Santa Lucía is a short-term solution, maybe for the next 15-20 years,” he said. At the moment, the Santa Lucia project is still at a conceptual stage and there is no certainty of when the project could begin or end. Furthermore, panelists agreed it does not contemplate further development of the aviation industry.
“Industry growth has been exponential since 2010, especially with the introduction of low-cost airlines,” said Bernardo Moreno, CEO of Redwings. Both executive aviation and MRO services have felt the surge in the industry, even considering the economic and political hurdles the country is currently facing. “Demand in MRO services has already surpassed the available offer,” said Jesús Navarro, CEO of Mexicana MRO. “The company had to reject 10 services between February and June 2018 because of lack of space. Furthermore, the company had not planned new hangars at the Mexico City Airport because we were planning to move by 2021.”
This challenge could be even further exacerbated according to Navarro, following AMLO’s strategy to decentralize government dependencies. “This situation will create more demand, which means we will have to strengthen routes that do not go through Mexico City,” he said.
The problem for Moreno, however, is that growth has been focused on the same routes and toward the center of the country. Mexico has favored its four main airports: Mexico City, Cancun, Guadalajara and Monterrey. Yet, no attention has been given to regional airports and aerodromes that could help alleviate the pressure currently on the Mexico City Airport.
A regional infrastructure development effort, therefore, could be key to solve part of these issues but there are some challenges in implementing this strategy. Although transportation costs are increasing beyond the offering of low-cost airlines and security concerns are pushing people to fly more, infrastructure in smaller airports and aerodromes has not grown at the same pace as demand.
“Insecurity and the drug war have led to the closing of many runways and we have failed to open more,” said Moreno. “We need a national hub to have a single connection point with other countries – maybe an intermodal one – but we need stronger regionality.”
Juan José Simón, Director of SAE said regionality could help detonate the economy in otherwise overlooked regions of the country. “Aerodromes have to be reopened to increase connectivity and also reactivate the economy in regions like the north of the country,” he explained.
Regulation has been an obstacle for regional development. According to Moreno, aerodromes are forced by the DGAC to operate under the same conditions as larger airports. Because of this, even though the aerodrome might experience demand of only 30 passengers, DGAC forces the facility to have the same number of employees to operate thus disincentivizing investment.
“We will soon feel the impact of the lack of infrastructure,” warned Navarro. “Eventually we will fill all slots available in 24 hours. After that, airlines will have to start operating with larger airplanes. Once we reach this point, tourism and economic development will stall.” Moreno added that this will lead to an industry plateau. “There might not be an impact on the economy but there will be no further growth,” he said.
Clear Skies with a Chance of Turbulence: A Promising Aerospace Future
The Mexican aerospace industry has clear skies ahead with a chance of turbulence rooted in letting opportunities pass by, said Felipe Sandoval, General Manager of Safran Seats and Aerosystems Operations and President of FEMIA in the closing presentation of Mexico Aerospace Forum 2018 at Sheraton María Isabel on Wednesday.
Sandoval said the data supports a positive outlook for the sector in Mexico. He points out that Mexico is the top producer of engineers of OECD, that the middle class is expected to grow substantially in the short term and that the global aircraft fleet will more than double by 2037.
“The growth of the aerospace industry is astonishing,” said Sandoval. “This is one of the industries with the greatest added value in the country both economically and in terms of human development.” He underlined that Mexico’s aerospace industry grows at a rate of 14 percent per annum and that every dollar generated at the top of the aerospace pyramid means US$75 are generated in the supply chain. “It is the industry that generates the most value to the country,” said Sandoval. “For every US$1 that enters Mexico as FDI, US$0.22 stays in the county.”
In terms of Mexico’s aerospace supplier base, Sandoval highlighted that Mexico already has most of the large, world-class aerospace players including both OEMs and Tier 1s, but the Tier 2 and Tier 3 levels have lagged behind. “FEMIA has gone distances to develop local suppliers,” he said. “But there are great areas of opportunity.”
Sandoval explained that while Mexico has evolved to more effectively compete within the global aerospace industry, the country needs to map the industry’s gaps and design strategies to take advantage of them. For instance, he pointed out that Mexico has been traditionally an importer of technology but must develop its own in order to move forward.
According to Sandoval, the country could take advantage of the lessons learned from the development of the automotive industry to develop the aerospace one. He said that in the case of automotive, the Mexican government designed, laid out and executed a strategy to succeed. “We need to learn lessons from what we did right in the automotive industry and apply it in the aerospace sector,” he suggested. He added, however, that the automotive industry has commoditized and is sensitive to economic impact while the aerospace industry maintains its momentum thanks to a solid demand for aviation.
Sandoval explained that Mexico needs to specialize in mechanical systems, which is already a sector where it has a competitive advantage. On the other hand, he said the country also needs to maintain its lead in terms of new materials, which could strengthen its position in the global aerospace industry.
He warned, however, that aerospace is not a national industry, but a global one that plays by macroeconomic rules. “Whatever happens in Mexico has close to no impact on the global industry,” he said. “But Mexico should better take advantage of the opportunities that this industry offers.” He said that demand for aircraft is on the rise and growing on the back of rising demand for plane tickets globally. “OEMs are building planes like they were making popcorn,” added Sandoval. “All of them have backlogs of between 12 and 15 years.”
Sandoval closed his presentation by underlining the objectives of the Mexican aerospace industry by 2020. He said the country will be among the 10 most important nations for the global aerospace industry, that this sector’s exports will be worth over US$12 billion. He said this industry will offer over 110,000 quality jobs. “Opportunities are in front of us. It is up to us to take advantage of them to generate value for our country,” he said. “We face clear skies, but turbulence lies in not making actions based on a national strategic plan.”
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