Mexico is a land of industrial contradictions. An average daily wage for a common labourer is $4, but factory executives often earn more than their counter-parts in the USA. News headlines scream of rampant violence, especially along the eastern and western coasts and northern and southern borders yet most factory towns enjoy far lower homicide rates than most American cities.
The nascent aerospace industry is also full of structural non-sequiturs. It is rich in top-tier aerospace suppliers but unusually poor in the lower-tier service companies that form the lifeblood of sustainable industry clusters. Local industry leaders insist Mexico is not a lowest-cost source of supply just as firmly as the largest OEMs argue cheap labour is the country’s only asset in the global supply chain. Its proximity to the US border drove Mexico’s meteoric growth as an aerospace supplier in the last 15 years, but the border itself is a logistical bottleneck, with goods-laden lorries lined up for miles either side of security checkpoints.
Despite the dichotomies, Mexico’s aerospace cluster has prospered like no other. Indeed the flight of so many OEMs and upper-tier suppliers to Mexico has stunted aerospace growth in some regions of the USA, Canada and Europe, even as global output of commercial aircraft has reached all-time highs. Since 2004, Mexico’s aerospace cluster has grown at an average annual rate of 16%, according to the national FEMIA aerospace industry association. Annual exports by the cluster have leaped from $1.4 billion to $6.69 billion over the same period.
Growth is not tied to any one sector but reaches across the supply chain, from wiring to landing gear to engine components to wings to metallic and composite aircraft structures. Notably, final assembly and customer delivery are the two functions most visibly absent from the aerospace industrial landscape in Mexico, with the historic exception of a biplane produced a century ago during World War I. The country’s factories now make all the necessary pieces but ship them across the border or to Europe to be assembled, tested and delivered to customers.
But the country’s aerospace growth shows no sign of slowing. Factoring in announced projects, FEMIA forecasts annual sales will rise to $7.5 billion by 2020, representing an average 12% annual growth rate over the next five years.
Mexico may even become an aircraft manufacturer by that time, although modestly. Upon the launch of the country’s first air show last year, Oaxaca Aerospace launched development of the PE-210A Pegasus, a Burt Rutan-inspired two-seater with a canard and pusher-propeller. It is by no means a threat to the Airbus-Boeing duopoly, but it's a start.
Beyond 2020, however, the pace of aerospace industry growth in Mexico is unlikely to hold steady without deep structural changes within the cluster. Most Tier 1s and OEMs expected a local supply chain to materialise in Mexico shortly after they arrived, but it hasn’t. The logistical quagmire at the border must be addressed. Most importantly, OEMs and local industry leaders must come to a consensus on Mexico’s true value in the supply chain, and adjust production capacity accordingly.
The structural issues facing the Mexican cluster are still years away from slowing the industry but the tensions are already visible. At the FEMIA-sponsored MexicoNow Summit held in April in Las Vegas, duelling visions of the industry’s future clashed in consecutive presentations by a roster of the cluster’s most influential leaders.
Jose Garza, a Boeing director of supplier management in China and Mexico, made his point as bluntly as possible to the assembled representatives of Mexican suppliers, including many Tier 1s he personally pushed to set up in Mexico.
Safran
“Cost is your only advantage if you’re in Mexico,” Garza told the summit. “There is no imperative that we should go to Mexico, as there are imperatives that we should go to other countries. That means if you want to win work you have to be cost competitive. You have to be better by 10 times than the next guy.”
Boeing is ramping up production of the 737 and 787 over the next four years. At the same time, suppliers are asked slash prices in return for a larger piece of a bigger pie as aircraft deliveries rise. Some suppliers did not satisfy Boeing’s demands and were replaced, which is how Heroux-Devtek became the landing gear supplier for the 777. Boeing is willing to consider new suppliers, but only at the right price.
“Whatever you are manufacturing, whatever you are providing, somebody else is already doing it and they are doing it well, and that’s why they are on the airplane,” Garza says. “If you want to replace somebody, you have to be as good or better, and you have to be extremely cost competitive.”
Garza’s message was partly aimed at the company’s Tier 1s, many of which are supplying Boeing from Mexico. Safran, for example, makes 95% of the wiring for the 787 in Chihuahua, a state on the border with the USA. But Garza also issued a challenge for homegrown Mexican suppliers, which today make up only a small percentage of FEMIA’s membership. These companies would seem to have the most significant cost advantage in a price war with Boeing’s existing suppliers, but they are losing contests, Garza says.
“The organic Mexico supplier base has not been as successful when we tried to bid them directly. The bids are coming in too high and you are not winning the work if you are a Mexican supplier,” Garza says. “We know it’s not because of labour. It should not be material. It should not be logistics. So it can only be a lack of sophistication in the bidding process within your competitive base. You have to be not just better by 1%. We will not take the risk of moving work for a 1% saving. It has to be more than that.”
Garza’s remarks put him on the opposite side of a growing debate about the industry’s future. FEMIA president Benito Gritzewsky argues Mexico’s aerospace industry, much like its automotive industry, is moving beyond the category of a “lowest-cost” source in the global supply chain.
Boeing’s suppliers are “not coming in to open facilities to take advantage of low-cost labour. That’s part of the past”, Gritzewsky says.
The statistics, however, appear to support Garza’s viewpoint. In 2013, David Coffin, an economist for the US International Trade Commission, estimated aerospace suppliers in Mexico enjoy a 32% cost advantage over the US workforce. Higher transportation and other costs erode nearly half of that saving, resulting in a 15.7% cost advantage for Mexican aerospace suppliers over those in the USA.
On the other hand, Gritzewsky is right that cost is often not the most important factor when aerospace suppliers — for Boeing, or others — decide to set up in Mexico. The country’s many trade deals, including the 22-year-old North American Free Trade Agreement (NAFTA), strong intellectual property protections and proximity to final assembly sites in the Americas are also factored into the business case for the decision.
For Aernnova, the choice to set up a factory in Mexico followed a global search. By 2008, the Spanish aerostructures supplier had decided it must expand outside its home country. Aernnova considered lower-cost options in China and India, says Javier Pérez Alcaide, director-general of Aernnova Mexico, speaking to the MexicoNow Summit.
Ultimately, however, Aernnova’s leadership wanted a site closer to major customers, such as Bombardier in Canada, and Bell Helicopter and Textron Aviation in the USA. In 10-15 years, India and China might have established OEMs of the same size, but in the near-term it made more sense to set up a factory in Mexico, even if labour costs are slightly higher, Alcaide says.
Eight years later, Aernnova Mexico employs 700 people working 500,000 labour hours annually at two sites, he says. The company’s target is to double production capacity and output by 2020. The growth plan has been based on slowly increasing the scope of work at the two sites. At first, Aernnova simply transferred work from Spanish factories to the new factories in Mexico. That included the engine cowlings of the Embraer E190 and vertical stabilisers for the Bombardier CRJ700 and CRJ900, with sheet metal supplied by a Kaman Aerospace factory elsewhere in Mexico.
From the beginning, Aernnova’s vision for the Mexican sites included a plan for them to develop new business, not just build components previously ordered from the company’s sites in Spain.
“It happened in 2010 or 2011 with a deal to supply the wings of the Hawker Beechcraft family [of aircraft],” says Alcaide. “It’s been a very intense two, three, four years.” The wings for the Baron, Bonanza and King Air were moved from Beechcraft’s factory in Wichita, Kansas to Aernnova’s factor in Queretaro. Aernnova has also picked up a contract to supply the structures for the Bell 505, a light-single helicopter expected to achieve airworthiness certification in the near future.
“We have been involved in large aerostructures and we have been able to demonstrate some critical [components], like wings, can be assembled with the right quality and right time in Mexico,” Alcaide says.
Of course, that same formula hasn’t always worked. Bombardier, for example, had ambitious plans for a new factory in Queretaro. It would assemble the composite wings of the Learjet 85 and fabricate and assemble the fuselage of the nine-seat business jet.
Questions were raised about the effectiveness of curing composite structures in Queretaro, a location with an elevation of more than 1,500m/5,000ft. But Bombardier executives said they had learned ways to cure the composite resin in such high elevations with lower ambient air density. By 2013, Bombardier executives said they had agreed on a way forward with the US Federal Aviation Administration on how to certificate such a composite-skinned business jet. In the end, the company put the Learjet 85 on hiatus in January 2015, then cancelled the programme 10 months later.
But the aerospace industry has come to stay in Mexico. Bombardier may have dropped the Learjet 85, but still plans to make the aft fuselage for the large cabin, ultra-long-range Global 7000 and 8000 business jets in Queretaro. Labour savings are certainly part of that calculation, but clearly not the only component in the business case.
Safran’s Labinal subsidiary is a case in point. The wiring specialist was among the first companies to establish operations in Mexico, in 1996, with a plant in Chihuahua and about 300 workers. It now employs 4,500 people making the wiring for the 787 and the Airbus A380.
“We are absolutely convinced that Mexico has the potential to become one of the world leaders in the aerospace industry,” says Daniel Parfait, director general of Safran Mexico. “This is why we continue to have an important investment in this country.”
Source: FlightGlobal.com
