ALEJANDRO BRAVO
Lead Partner of the Aerospace Sector
KPMG Mexico
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View from the Top

ADDED VALUE KEY TO COMPETITIVE INDUSTRY

Fri, 12/01/2017 - 14:29

Q: What can Mexico do to become more competitive and continue to attract more foreign direct investment?

A: The only answer is to manufacture components with added value. It is true that Mexico has experienced significant growth, namely in the manufacturing industry. Now, we have to add more engineering expertise and more technology into component production to boost supply chain growth. The products manufactured in Mexico do not necessarily require high technological value to be added; we need to change this situation and start producing more specialized components, building on our expertise in fuselages and engines, among others. The more components we produce with more added value, such as aircraft computers or aircraft, satellite and rocket circuits, the more the industry will contribute to increasing the value of Mexican exports.

Q: How can Mexican companies become more integrated into the global aerospace manufacturing chain?

A: The aerospace industry presents several entry barriers. New participants need large investments and technology, but certain elements work in our favor. During the past few years, Mexico has become well-known for its engineers and technicians. We now have a qualified workforce in several industries, including aerospace. Another advantage is our geographic location next to the US, which is the main aerospace market. So far, we have been successful and are reaping the benefits of these two elements.

To successfully enter the global production chain, Mexican companies need a high level of investment in technology and human capital. Mexican industry has done things in the right way, as a recipient of FDI and investment from Mexican companies as well. Certain Mexican companies have grown in such a manner that they are acquiring foreign companies in other parts of the world. We are on the right track, but we need to keep up the investment in and training of our human capital.

Q: Do you think it is feasible for Mexico to assemble a complete aircraft?

A: It would be very complex. Reaching a level of complete aircraft assembly does not happen overnight. In Embraer’s case, it took decades to become the OEM it is now. There are companies betting on Mexico performing the assembly of a complete aircraft at some point, but I do not see it happening in the short term.

Several companies are working toward complete aircraft assembly and the government’s 2020 plan has ambitious goals for the industry regarding exports, companies operating in the country and FDI. But I would foresee a complete assembly as more likely to happen in 10 or 15 years.

Q: Does Mexico have the sufficient talent to meet Pro- Aéreo’s objectives?

A: We are very much in line with the plan and there are certain states that have excelled. It is something we are working on as an industry. Specialized companies, such as those located at the border with the US, are constantly training technicians, and UNAQ has become a major producer of engineers and technicians for the aerospace industry.

Although the specialization of the industry has made bringing engineers and technicians from abroad necessary, the expectation is that Mexico will be self- sufficient in terms of aeronautic specialized human capital to cover the industry’s needs with national talent. This represents job opportunities and the level of specialization required means that these jobs are well-paid. There are many incentives to achieve self- sufficiency.

Q: How will the renegotiation of NAFTA affect the Mexican aerospace industry?

A: Almost 90 percent of the products manufactured in Mexico are sent to the US but to accurately say how the renegotiation will affect the industry, we need to know exactly which parts of the treaty will change. To date, it seems that the aerospace industry is not a target in the talks.

There is a general level of uncertainty regarding Mexican exports, as most of Mexican production is sent abroad. But the aerospace industry is dynamic and we would not expect it to suffer drastically. Aerospace requirements and orders make it perfectly possible that the sector will emerge unscathed.

In terms of parity exchange between the Mexican peso and the US dollar, which has favored the dollar, this is expected to have an impact but not as significantly as on other industries. Most of the components that are produced in Mexico are exported and, at a global level, the aerospace industry is mostly priced in dollars. We could even see a scenario where dollar prices are beneficial as components priced in pesos will contribute to a final product sold in dollars.

Q: What are the aerospace industry’s expectations for 2017 and beyond?

A: The markets with the highest growth expectations are the Asia-Pacific region, led by China and India, and Latin America, led by Mexico and Brazil. Across the world and including Mexico, aircraft orders are increasing, boosting the need for more cost-efficient processes, so the industry is trying to find new ways of doing things and improving its processes. We expect the aerospace market to continue growing, in light of upcoming aircraft fleet renovations and an increase in aircraft orders for the largest OEMs in the next 20-30 years.

The automotive industry’s future is not comparable, as needing to manufacture large volumes at pace is distinct from the aerospace industry which is slower, but more detailed. It is almost artisanal. It has taken Mexico many years to reach a solid position in the global market and the aero clusters have made significant headway toward consolidating Mexico’s reputation. Nuevo Leon in particular has opened itself to foreign investment and its characteristics, such as infrastructure and proximity to the US, could boost its growth in the future.

We expect the industry to develop at the same level it has shown in past years, and that the industry’s requirements will continue driving its growth. To continue at this pace, we need not only governmental support but also input from companies and academia. There is still much to be done to achieve Pro- Aéreo goals and while we did not expect such uncertainty in our neighbor’s political landscape, we are on the right track.