Mexico prepared for new wave of investment in aerospace sector

 - June 9, 2009, 5:17 AM

Mexico’s fast-growing aerospace sector is here at the Paris Air Show in strength once again (Hall 3 Stand D24), and the latest projections for its future suggest it is set to get bigger still in the next six years or so. Much of the growth in the past few years has come from foreign OEMs opening new facilities and expanding existing properties in their increasingly urgent pursuit of lower production costs and access to markets.

But the country’s indigenous industry has also been growing, as evidenced by the increased number of Mexican exhibitors here at Le Bourget this week. In many cases, these exhibitors are officials from Mexico’s states, vying with each other to attract inward aerospace investment.

According to new research by Jean-Claude Bouche, a senior aerospace consultant at the Monterrey Institute of Technology, the country could be home to as many as 1,000 aerospace companies, including 400 manufacturers, by 2015. By then the Mexican industry could be employing 40,000 people and generate exports to the U.S. alone valued at $12 billion. What’s more, Bouche believes Mexico could produce its first complete aircraft by 2015–in theory having an airframe ready for display here at Le Bourget in June of that year.

As of the end of 2008, the Mexican aerospace industry consisted of about 660 companies (including 190 manufacturers). It employed 20,000 people and generated $3.4 billion in exports to the U.S. By comparison, the Canadian city of Toronto currently accounts for about 17,000 aerospace jobs. Bouche argued that Mexico is on track to have as large an aerospace industry as the city of Montreal–albeit with fewer staff of engineer grade (that is, more shop-floor personnel).

Back in January, Mexico Now magazine staged two one-day conferences in London and Toulouse. European aerospace executives attending the events heard details of the cost savings that can be achieved in Mexico, but also learned that the country’s appeal goes beyond price alone and extends to factors such as growing availability of skills and improved access to key markets such as its giant U.S. neighbor.

“Mexico is definitely going to be on the world aerospace map,” said Bouche. He predicted that by the end of 2009 three significant Western aerospace firms will have established new operations in Mexico: one from France, one from the UK and another from Canada.

According to Bouche the next wave of inward aerospace investment in Mexico will increasingly be led by companies from outside North America. He said that by 2015 about a quarter of the country’s industry will be owned by European firms and 5 percent by Asians. By then, he believes that about 25 percent of the industry will be controlled by Mexicans.

Another anticipated trend is that Mexicans will ascend the aerospace food chain in terms of the complexity of the work they undertake. Bouche expects to see the proportion of engineering and design work to reach 20 percent by 2015 (having already increased from just 4 percent of total activity in 2004 to 15 percent last year). He expects to see Mexicans develop expertise in areas such as honeycomb structures and avionics.

Foreign Investment
To date much of the aerospace investment has been concentrated in the Mexican states of Sonora, Chihuahua, Queretaro, Baja California, Nuevo Leon and Tamaulipas. Other states such as Guanajuato and Coahuila are vying for investment increasingly–in some cases as part of a move to reduce dependence on a dwindling automobile sector.

In March, BE Aerospace opened a new facility in the state of Sonora, which is due to establish a new free trade zone at Obregon in August. Last year, Queretaro received a major boost with Bombardier’s decision to establish a major composite aerostructures operation there mainly to contribute to its new Learjet 85. Honeywell has an advanced avionics test and engineering facility at Mexicali.

GKN, which has had a Mexican presence for almost 30 years, is to invest a further $55 million to build a 155,000-sq-ft components factory in Baja, California, where Goodrich Aerostructures is spending just over $92 million for a facility to build nacelles for the Boeing 787 and Airbus A350 widebody airliners. MD Helicopters’s plant in Monterrey is building complete fuselages for 500, 530F, 520N helicopters and it will add the 600N model to its portfolio this year.

The 2007 signing of the Bilateral Aviation Safety Agreement (BASA) between the U.S. and Mexican governments should prove to be an important landmark in boosting Mexico’s credibility in the global aerospace community. It is soon expected to be followed by an equivalent agreement between Mexico and Canada. According to Bouche, BASA is effectively the first step toward the U.S. Federal Aviation Administration accepting the certification powers of its Mexican counterpart, which could ease the way for the development of an indigenously produced aircraft.

In an increasingly global aerospace marketplace, Mexico is vying with countries such as China and India for foreign investment. Delegates to the January Mexico’s Aerospace Industry conferences heard that production costs in the country are between 30 and 45 percent less than in Western countries (depending on variable factors such as duties and costs associated with establishing a new business), but that its labor and other costs are still higher than those of the leading Asian companies.

However, both legal experts and company executives with experience doing business in the country told the conference that Mexico offers a much surer foundation for foreign aerospace investors on key issues such as legal protection of intellectual property rights and ease of technology transfer–both of these being areas in which China has been found wanting.

Competitive Costs
According to Luc Beaudoin, aerospace vice president with The Everest Group management consultancy, the new competition from OEMs in China, Russia and India is a big factor driving Western companies toward the more competitive cost environment offered by Mexico. Increasingly, having a low-cost base like this is becoming a condition for getting selected for some of the larger aerospace programs and in some cases there is even a specific requirement to have a manufacturing presence in Mexico, which is itself a growing market for aircraft. “Having access to a low-cost supply base like this is one of the keys to surviving as one of the decreased number of approved suppliers these days,” Beaudoin told conference delegates.

However, Beaudoin also cautioned that, in some cases, the customers of companies setting up shop in Mexico are all too aware of the cost savings available and try to siphon these into contract prices even before the foundations have been laid on a new factory there. “This is actually stopping some investment there [in Mexico] until agreement can be reached that the investment has to be win-win for everyone involved. The trouble is that customers want the whole savings now,” he stated.

Beaudoin said that misconceptions about Mexico can present internal barriers to companies successfully implementing their offshore investment strategy in the country. “You don’t have to compromise [on issues such as product quality] to be in Mexico,” he insisted. “Mexico is an emerging country in learning so don’t let Mexico dictate what your Mexican operation should be but, instead, instill in your new Mexican operation what has made your company a leader. People there are ready to learn.”

Research presented by Mexico Now editor Sergio Ornelas demonstrated that the peso has maintained consistently good value for foreign companies during a period when a strong imbalance between the U.S. dollar and the euro has proved to be very damaging to European companies. A recent correction in which the peso lost almost 40 percent of its value against the dollar has made Mexico’s currency especially attractive as a cost base for both American and European firms.

In Ornelas’s view, Mexico’s appeal for inward foreign investment benefits hugely from its close business ties to the U.S. and from the decade-old North American Free Trade Agreement. He added that the appeal would be greater still if the country could improve the following factors: better tax incentives, more user-friendly loan structures, clearer fiscal rules, a more coherent government industrial policy, reform of labor laws and rules governing the energy industry (for which costs are still high), and a more developed supplier base. Conference delegates were strongly advised to enlist the support of specialist inward investment companies to help them to navigate the potentially obstructive red tape in Mexico’s still formidable bureaucracy.

One other definite plus in the country’s favor is strong government-backed investment in aerospace education aimed at better equipping Mexico’s workforce for its increasing role in the industry–including establishing an aeronautical university
in Queretaro.