Carlos Robles
Vice President of the Central Region
Mexican Federation of the Aerospace Industry (FEMIA)
/
Expert Contributor

Deep Trouble, Big Opportunity: COVID-19 Impact on the Industry

By Carlos Robles | Wed, 05/20/2020 - 09:32

Three months ago, the Mexican aerospace industry was heavily focused on finding ways to continue expanding as one of the world’s Top 10 global suppliers. The efforts were concentrated on developing the supply chain, getting the right skills for human resources joining the industry and collaborating with local authorities to help them understand this is a global sector that needs support to flourish but which, in return, provides good foreign direct investment, well-paid jobs, and a positive trade balance through added-value activities.

Unfortunately, nobody saw the COVID-19 pandemic coming and how it has altered reality. Suddenly, OEMs and suppliers have had to stop activities, close facilities and re-forecast production schedules. Some companies individually and then with the Mexican Federation of the Aerospace Industry (FEMIA) officially asked the government to declare the industry as “essential” in order to continue working. The answer: None. The impact: Huge. 

There are companies within the aerospace ecosystem in Mexico that are funded by foreign capital and normally deliver most of their production to their countries of origin. Cash flow might not become an issue in the short term, but the supply chains have been affected drastically on both sides, impacting demand and the ability to produce and deliver. The inventories in aerospace, unlike the automotive industry, do not rely in big stocks and very low turnovers. Volumes are quite small and the level of customization is very high. Global supply chains were already stretched and struggling to cope with demand, simply because that demand is by far bigger than installed capacity. The first issue will not only be the scarcity of materials and components but the harmonization of the whole supply chain. While some OEMs are already trying to restart operations, the lack of parts will complicate the delivery of assemblies and ultimately aircraft. The lead times are so long with so many subprocesses that losing one week of production often takes months to be recovered. The impact is so huge that it will be interesting to see how long it takes for all processes to stabilize. And that is assuming that airlines will survive and demand aircraft at the same rate. 

If that was already a very challenging time for the industry, most Mexican companies funded by local capital were in the process of consolidating their operations and volumes. A few were spinoffs from other industries, such as oil and gas or automotive. Those companies have a diversified source of income, therefore a bigger chance to survive. But most Mexican firms that are dedicated to aerospace will have a hard time with cash flow as they try to survive the pandemic and the shutdown declaration without any government support. 

I firmly believe that the damage is already done and now it is time to start thinking about how to react once activities can be formally resumed. First, the aerospace industry needs to go back to operations as soon as possible. It seems that the automotive industry will come back in May, mostly due to the pressure of OEMs in the US, for which Mexico plays a big part as a supplier. The aerospace industry is in a similar situation. According to Mexico’s Ministry of Economy, more than 75 percent of the exports in aerospace production go to the United States. Worse, many US defense firms have suppliers in Mexico and they are being affected by the uncertainty of the Mexican government. The Pentagon is urging that vital companies in Mexico be allowed to restart operations. The industry associations in Canada, Mexico and the United States are in constant communication to harmonize the re-opening of facilities. I really hope activities will be resumed this month but if that is not the case and we are not being heard by the local government, we will need to push from the exterior through diplomatic channels and business associations to force the decision. The government needs to understand that we are part of a global supply chain and that a customer that is not served by a Mexican supplier will look for different suppliers somewhere else immediately. 

Resuming operations is only the first step. Once that problem is sorted out, it is going to be really interesting to see how the Mexican companies in the sector position themselves. Some companies will disappear, some will survive. There will be joint ventures, and some will need to diversify out of the aerospace sector in search of volumes and as a result, sustainability. I foresee a very uncertain business environment for the sector in Mexico for between six and 12 months. The world as we knew it is in reset mode, but personally I do think the rebound will be strong. If you are a foreign firm and were thinking about opening operations in a low-cost country, this might be the context you were looking for. That also applies to those that continue to have operations in the sector, or want to come in, as there will be many opportunities. If there is a lesson for the aerospace industry globally, it is that single-source contracts are a big risk that need diversification to multisource suppliers. Mexico should be a natural option because of its skilled labor, demonstrated value-added performance and access through trade agreements to all the big players globally. To grasp the opportunities and make the most of them, I propose that companies start thinking about six important actions:

  1. Listen to and understand both sides of the demand chain. Talk to your customers to understand their new needs and demands. Understand how their operations were impacted and how they see the future in the short, mid and long terms. Then talk to your suppliers, communicating how you see demand in the future, how you are impacted and understand if they are still in good shape to keep supplying for you. That connection on both sides of demand should be translated into a proper harmonization of operations, demands and production scheduling.
  2. Keep an eye on qualified labor that will sadly become available soon as production rates will be decreased and most of the big OEMs and sub-tier suppliers will need to let people go. Skilled labor in the Mexican aerospace environment is scarce and this is an opportunity to fulfill some organizational gaps you might have had in your company. 
  3. Think outside the box and find new business models not previously served, such as MRO or engineering services. Think about your certifications and those market sectors you never had the time or the focus to address. As there will be companies disappearing in your core activities, there will be some disappearing from other activities that you can serve. 
  4. Look to establish a local supply chain. Most of the raw materials and sub-tier products are coming from abroad to be assembled or modified to its final form and then exported again. Think about developing a local supplier. You would be creating local employment, which will be much needed, and on top of that, you will be increasing your competitiveness as costs would be reduced. And if you are on the other side of the chain, try finding new customers to supply locally with the right pricing strategy. 
  5. Regardless of the industry you serve, if you have capacity available, find ways to increase its usage. This works for companies already in aerospace or as an alternative from other sectors. Diversification is the new key to survival. If you do not have more than three customers in the sector, you are doomed. 
  6. Companies and business associations urgently need to convince the Mexican government that the sector is vital for the economy. It needs care, attention and most importantly, support. Whatever effort made to be heard and understood will be welcomed. The present administration does not even know what has been done in Mexico and the potential the industry has to play a key role in the global arena, which would benefit thousands of Mexicans with well-paid jobs and opportunities to grow.

Without a doubt, the COVID-19 pandemic represents the biggest challenge faced in the short history of the aerospace industry in Mexico. It will reset the players and the way they operate, but one thing is certain: If we want to play in the big leagues and take our portion of market share, this is our moment to show resilience and rise from the ashes to take ownership of the opportunities that the global industry will present.  

Photo by:   Carlos Robles