Industry

Sonic Boom

Aerospace

Following an average 18.7% annual growth rate since 2004, the aerospace industry in Mexico is increasing its attractiveness to global manufacturers, with many of them expanding their operations in the […]

Following an average 18.7% annual growth rate since 2004, the aerospace industry in Mexico is increasing its attractiveness to global manufacturers, with many of them expanding their operations in the country. Proximity to the North American market, lower labor costs, and the availability of qualified engineers are among the main drivers of investment. In addition, the government of Mexico has established tariff incentives to attract interest from overseas suppliers and support those already manufacturing in the country.

According to the Mexican Federation of Aerospace Industries (FEMIA), the aerospace sector, which has 238 companies generating close to 30,000 jobs in the country, represents a total investment of around $15 billion. Exports increased more than 32.7% in 2011, reaching $4.34 billion. These factors indicate that the industry will continue to develop and attract aerospace companies to the country in the coming years. In an interview with TBY, Javier Pérez Alcaide, the Director General of Aernnova, affirmed that the industry will continue to grow at a very fast pace. When choosing a location to begin operations, Pérez explained that the North American market was the main driver. “Mexico represented a bridge from where we could get new businesses, new contracts, and opportunities with American original equipment manufacturers [OEMs],” he said. Currently, Aernnova is the only Tier 1 company operating in aerostructures in North America.

Price is another decisive factor when establishing operations in Mexico, with labor costs offering savings of between 25% and 30% over countries such as the US and Japan, according to executives. Pérez pointed out how an increasing number of foreign companies are beginning to see the benefits of Mexico as a close and convenient place to do business. “If you take cost out of the picture, companies think about their proximity to their customers and how comfortable they feel with you being only a few hours away from their partners,” he said.

Strategic agreements including the free trade agreement between Mexico and the EU (FTA EU-MX) signed in 2000 make the country particularly attractive for foreign investors. Mexico has free trade access to the main trading blocks of NAFTA and the EU, a competitive advantage that benefits aerospace companies interested in Mexico and reduces production costs. Combining the rules of origin of each agreement, companies in the EU can enjoy a host of incentives. Products that have content from both Mexico and the EU have a tariff advantage for import into the US and Canada, and all finished products that comply with NAFTA rules of origin are not subject to US or Canadian import duties.

In addition to this, Mexico implemented a variety of sector promotion programs that grant preferential tariffs to non-NAFTA components incorporated into finished products that are exported all over the world. EU aerospace investors gain by importing components under the program, as long as the components and final products exported to the US and Canada meet the government’s guidelines. A number of industrial components may be brought into Mexico at reduced tariff rates. Establishing preferential tariffs for import and export of aircraft parts, machinery, and equipment has attracted huge amounts of FDI to the aerospace sector.

Mexico’s aerospace industry has also seen an increase in tier 1 and 2 companies with a focus on final assembly. In order to build an aircraft, many companies have outsourced a large part of the work, which was previously manufactured domestically. In addition to this trend, a number of major OEMs regard Mexico as a place to externalize a portion of the supply chain, seeking suppliers that can absorb large packages and manage the supply chain behind them. Currently, aerospace companies established in Mexico purchase many parts in the US or Europe, even when assembly is carried out locally. According to Pérez, over the next few years Mexico will see the development of an aerospace supply chain that today is non-existent. “The trend will be that many suppliers will begin to set up shops here in Mexico, and the money going to Europe, Canada, or the US will stay here and contribute to our sales and exports,” he said.

Querétaro’s aerospace cluster shows how Mexico is climbing the manufacturing chain. The state’s industry began with textiles, food, and beverages in the 1950s. Auto parts suppliers came later, and in the 1990s, the region made an effort to diversify as a low-cost center for aerospace.Seeking to enlarge its manufacturing footprint, Bombardier chose Querétaro as one of its four shortlisted sites for investment. Officials then sought to strengthen their attraction by cooperating with the National Aeronautic University of Querétaro (UNAQ) via a state initiative with support from the federal government. Since 2009 the scheme offers courses in basic training to graduates, providing companies in the cluster with employees for high-tech jobs and luring in more investors. Companies such as Aernnova and Bombardier, which recently announced an increase in its workforce to 2,200, will rely on UNAQ as they expand their operations.

The industry has developed more sophisticated products as it grows. In an interview with TBY, the Vice-President of Bombardier, Réal Gervais, expressed the company’s long-term commitment to Mexico, with investments totaling $500 million. Gervais explained that Mexico represents a platform from which to compete in the region. Electrical harness manufacturing has become the center of excellence for Bombardier’s operations in the country, where they are also developing fuselages for the newest members of the Global aircraft family, the Global 7000 and the Global 8000. Bombardier is also manufacturing components for Learjet 85 aircraft in Mexico, which represents a $250 million investment. Gervais stressed the importance of harmonizing regulations to give Mexico international edge for the manufacturing of high-quality products in the country. The proximity of Bombardier’s headquarters in Canada and similar time zone are a clear advantage for product development, which operates 24 hours a day. Shipments can arrive in days, and executives can coordinate plans during working hours. “Time zones are very important if you want to move quickly, and now we can fly two or three engineers from Montreal in four hours,” Gervais told TBY.

In 2007, Mexico and the US signed the Bilateral Aviation Safety Agreement (BASA). With BASA in place, Mexico’s aeronautical authority certifies parts, components, and aeronautical systems manufactured and assembled in Mexico that are destined for the US and other markets. BASA implies significant cost reduction, especially for companies importing parts and components designed to be converted into systems or aircraft sections.

According to ProMéxico, the country has become the most attractive investment destination for aerospace manufacturing and the sixth-largest for R&D investments. For Gervais, the government’s commitment to infrastructure, certification, and training has placed the country in a relevant position as a manufacturing and innovation center. “Mexico needs to continue these efforts to achieve the industry’s maximum potential,” he said.