Mexico’s Welcome Mat Attracts Aerospace Manufacturers
In the past decade, Mexico’s welcome mat for the aerospace establishment has found an industry eager to manufacture “south of the border.”
The obvious attraction is Mexico’s lower wage-structure: some say that in Mexico manufacturers pay a tenth of what equivalent assembly jobs cost in the U.S.; others cite a differential of about a third from what is paid in Europe. This discrepancy is best explained by the costs of different skill levels, and by a hesitancy to be too specific on a subject that raises political hackles back home.
But lower wages tell only part of the story for why Mexico, a nation of 115 million, now counts 270 aerospace factories within its borders. On national and state levels, the country is aggressively pursuing “high-tech” aerospace jobs as part of a broadening of its industrial base beyond automobiles and electronics, for which it is already a major producer. U.S. shoppers may think of Mexico mainly in terms of summer vegetables in the winter, but the World Bank reports that industrial products account for 90% of its export earnings. The bank ranks Mexico as the world’s 13th largest economy in nominal terms and No. 11 in purchasing power. “Hecho en Mexico”—Made in Mexico—is more common everywhere, including in aerospace.
The aerospace influx has not happened overnight. Its roots date to the mid-1970s when U.S. companies, a mix of multinationals and lower-tier suppliers, began sending basic parts manufacturing and assembly tasks across the border, mostly to border towns like Tijuana and Mexicali but also deeper into the country to cities like Monterrey. Service operations followed, as did company research activities.
However, it has been in the past decade that Mexico’s aerospace manufacturing growth has mushroomed. Political reform led it to pursue a global free trade agenda vigorously and its 1994 signing of the North American Free Trade Agreement (NAFTA) benefitted Mexico greatly. Still, it took about a decade for the aerospace sector to take off. Until 2004, growth was scattered, says Queretaro state Gov. Jose Calzada. Not anymore. “We’ve seen incredible changes in just the last five years,” he says.
The boom times are a testament to Mexico’s geography, its embrace of free trade and adoption of legal mechanisms that provide a “soft landing” for foreign-owned factories. Local leaders clear red tape and amaze U.S. and European executives at how quickly they can put up factories. A typical response comes from Peter Huij, a senior Fokker Aerostructures executive in Chihuahua, about how quickly the company went from bare earth in May 2011 to a completed 75,000-sq.-ft. factory in November: “It would be impossible in Europe.”
Behind all of this is Mexico’s Maquiladora factory system for supporting foreign companies, which allows them to control their own destiny, importing raw materials such as aerospace-quality alloys, or wiring and then exporting the finished product tax-free. Foreign manufacturers commonly turn to a large service provider—Intermex and American Industries Group are leaders for the aerospace sector—that lease buildings to their clients and handle their human resources, tax and other business needs under Mexican law. About 80% of the aerospace companies in Mexico use such services. Of the 36 Maquiladoras registered by the Mexican government last year, six were in aerospace, including a GKN Aerospace plant in Mexicali, Latecoere in Hermosillo, coatings specialist Ellison Surface Technologies and Rolls-Royce turbine supplier JJ Churchill in Guaymas and a fourth division for Zodiac in Chihuahua.
Under the Maquiladora system, Mexico allows resident foreign companies to control 100% of their businesses. They do not face the “local partner” rules so common elsewhere that limit foreigners to a maximum 49% share.
“They make it easy for you to do business down here,” says John Gardner, strategic program manager at Kaman Aerostructures, another newcomer in Chihuahua. “They provide a ‘soft landing,’ to get a quick startup—a good startup. We got a lot of support up front and afterward.”
Besides lower costs, the business case for going abroad is often a need to penetrate a particular market. That is particularly true in China but is far less meaningful in Mexico for original equipment manufacturers (OEMs). Eurocopter is an exception. The French-German company says the country is a prize sales territory. “It’s the most promising economy in the region, perhaps better than Brazil, says President/CEO Lutz Bertling, naming Eurocopter’s other hot new growth market in New World sales. Eurocopter opened a $100 million, 130,000-sq.- ft. factory in Queretaro in February as an offset for a large Mexican military purchase. Making such “proximity” manufacturing investments is “part of our DNA,” he says.
But for most, tapping into Mexico as a sales market is less important than the country’s geography, trade policy and political and economic stability. “Our main reasons for being here are, number one, to be close to the U.S. market and number two, to be close to the U.S. dollar market,” says Stephane Lauret, Safran’s national executive for Mexico and South America. The Mexican peso is pegged to the U.S. dollar, giving Europeans a currency hedge against the Euro. Nafta allows Safran to operate in a low-wage environment with access to the U.S. market. About 80% of everything Safran makes in Mexico, from Labinal’s 787 wiring harnesses and Messier-Bugatti-Dowty landing gear to Snecma’s CFM56-7B low-pressure compressors, is shipped across the U.S. border.
There is another, more subtle, reason why Mexico’s star is rising. As they search for industrial development opportunities, the country’s leaders emphasize their goal is for Mexico to become a key player in aerospace’s global supply chain. The message is not new, they have followed it for years—and succeeded—as automotive assemblers. However, what is not on the political agenda is a national aspiration to begin competing in aircraft, engine and major systems development or manufacturing. Of course, national ambitions are subject to change, but Mexico’s focus on the valued-supplier role plays well with manufacturers concerned about the security of their intellectual property (IP) when they work in markets such as China, where a well-financed state agenda of competing with Western OEMs has been announced.
Besides IP protection, there are other benefits to this good-supplier attitude. Mexican workers are widely praised for their eagerness to meet their employers’ standards. “Mexican workers want to learn the U.S. way,” says Alfred Espirio, senior vice president of international finance for General Electric in Mexico. “In China and India, they want you to do it their way.”
Mexico’s aerospace industrial growth has followed a classic leader-follower pattern. Safran’s first push was 25 years ago in Reynosa making electronics for cars. The company wanted to see how things went. Its first big aerospace bet was placed in 1998 when Labinal bought a General Dynamics wire harness factory in Chihuahua as part of a broader push in North America for Boeing contracts. Largely because of Labinal in Chihuahua, Mexico has become Safran’s third largest industrial base, behind France and the U.S.
But no one can reserve Mexico exclusively for themselves. Labinal’s biggest competitor, Latecoere, says it will build a factory in Hermosillo, Sonora’s capital, that will employ 400 by 2015 to make harnesses through its LATelec subsidiary. However, the factory’s output will be more diverse than Labinal’s; it also is to produce transport passenger doors.
Westinghouse and Honeywell were the first U.S. companies to arrive in Chihuahua, making components for the defense industry in the 1970s. The mountainous city has a farming, mining and automotive supply background with touches of the U.S.—Home Depot, Starbucks, Sam’s Club. There also are 32 aerospace factories scattered across it in industrial parks, some neighboring car factories, and others for consumer electronics, such as China’s giant Foxconn. Most of the aerospace activity has arrived since 2007 and the city has established itself as headquarters for general, business and rotorcraft manufacturing dominated by U.S. concerns, including MD Helicopters, Bell Helicopters, Cessna and Beechcraft.
The leader-follower rule is even stronger in Santiago de Queretaro. The capital city is about 140 mi. north of Mexico City and came to aerospace later than areas along the U.S. border. Its lifestyle, with an old town filled with cafes and historic churches, is especially appealing to Europeans. Observers of the progress of Mexico’s aerospace industry count Bombardier’s 2006 decision to locate in Queretaro as the start of the influx by other big companies, whether OEMs or major suppliers. In Queretaro alone, Meggitt, CFM, Messier-Bugatti-Dowty, Precision Castparts, AE Petsche, Aernnova and Eurocopter have all taken up residence near Bombardier.
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