Development Bank Works for ConsolidationThu, 12/01/2016 - 14:47
Q: Where does Mexico stand in the global aerospace industry and what is its growth potential?
A: The global aerospace and aviation industries are valued at over US$1.64 trillion. Of this total, aviation including airlines and airports represents US$860 billion. Suppliers and OEMs represent US$680 billion and MROs represent roughly US$100 billion. The Mexico aerospace industry only exported US$6.4 billion in 2014 [US$6.69 billion in 2015 with expectations for US$7.5 billion for 2016, according to FEMIA] but has excellent potential to increase manufacturing, since it offers advantageous costs over countries with comparable characteristics. Several foreign companies operating in Mexico, generally from North America and Europe, already are taking advantage of this. For instance, GE Aerospace is employing Mexican engineers to design turbines and engine parts in Queretaro and Zodiac is designing water supply and drainage systems in Chihuahua. In some ways, aerospace manufacturing can be considered an artisanal skill because it operates low volumes but requires highly specialized individuals to achieve the high-quality standards required. Composites, for instance, are a new high-tech trend that requires specialized manual labor.
The aerospace industry has guaranteed demand for the next 10 years because at the current global production capacity it will take this long to fill the backlog of commercial jet purchase orders held by OEMs. An expected increase in air passenger numbers worldwide also is fueling this demand. The global industry is scrambling to increase its production capacity and to speed up aircraft delivery times.
Many companies are turning to Mexico to expand their operations but their growth is limited by the domestic availability of key products and processes required in the supply chain. The country still needs to nurture more Tier 1, 2 and 3 companies. If Mexico can consolidate its aerospace sector, it will operate as an important participant in the global aerospace supply chain.
Q: What principal advantages would allow national industry to compete in the global market?
A: Mexico possesses a number of competitive advantages. Its foundation is the presence of a strong national automotive industry, which is well established and supports the aerospace industry’s development. While these two industries differ in volumes and standards, they share processes, plant layouts, problem-solving skills and sustainability practices.
Mexico’s admirable machine overhauling processes and the workforce’s skill in fixing, improving and modernizing old machinery is often overlooked as a competitive advantage. Highly qualified professionals trained locally can renovate or upgrade these machines at reduced prices, a valuable skill because aerospace companies often keep old equipment for long periods of time because of its high value. The renovation of their is equipment a fantastic opportunity for both the country and these companies that do not want to waste salvable machines. The aerospace industry also is stable as companies undergo fewer mergers than many other sectors and operate under long-term supply contracts. This is beneficial both for suppliers and for banks. They can be confident that cash flow will be stable for several years.
Q: How does Bancomext support the aerospace sector?
A: Because global aerospace companies operating in Mexico are usually financed through their main offices, it has not been easy for a Mexican bank to offer services to these entities. However, Mexico needs to attract more business from these companies and from new entrants to the country’s aerospace sector because we can play an important role in financing these projects and their suppliers. Most of these multinational companies are facing gaps in the market when expanding their manufacturing operations to Mexico because the existing supply cannot always cater to their very specific requirements. The aerospace sector is highly regulated and requires participating companies to hold many certifications, such that new processes and parts manufactured in the country often have to be re-certified. This is an expensive and most importantly, a time-consuming process. For that reason, OEMs and Tier 1s prefer to bring their existing suppliers with them to new locations. In Mexico this includes companies from North America and Europe.
Manufacturing here is less expensive for the aerospace industry, representing US$84.3 of any product that costs US$100 in the US, according to the KPMG Economic Intelligence Unit. This was calculated with data from before the electricity price reduction of 2015, which would further lower overheads.
Q: How can Bancomext contribute to the consolidation of the sector in Mexico?
A: Our conviction that the sector has plenty of growth potential has led us to develop strategies to support it. Bancomext is designing specific solutions to provide financing to foreign aerospace companies entering the domestic market. We also are working in collaboration with real estate developers to offer financing for these companies. In September 2015, Airbus opened its first plant in Alabama, which we believe will benefit the Mexican industry as cost comparisons may lead direct suppliers to this plant to open offices in Mexico rather than in the US.
Bancomext manages two different support plans. One is targeted at companies with financial requirements of over US$3 million, which operate directly under a sectorial focus, and the second is aimed at companies looking for financial support under US$3 million, which we operate through financial intermediaries. We collaborate with around 51 intermediary financial institutions to finance such a large number of companies.
Q: Which special initiatives is Bancomext managing to boost domestic aviation?
A: The bank is actively financing the Mexican aviation industry and works with all major Mexican aviation airlines and some regional ones. This industry is growing fast as the number of air passengers is increasing at a rate close to 5 percent per annum, translating into opportunities for fleet expansion as well as renovation when appropriate. We also are exploring financing private aviation airlines on a case by case basis.
MRO service providers have high potential in Mexico but to date most MROs operating locally only manage basic operations. The country has the capacity to develop more complex MRO services because the primary component of any maintenance company is its highly qualified team and in Mexico, this skilled labor is considerably less expensive than in the US, our nearest competitor. Delta TechOps exemplifies the supply of well-established MROs in Mexico, providing services for Delta Airlines and AeroMéxico but with the potential to expand its services to a broader array of airline fleets.
Q: What are the main changes Bancomext hopes to see in the aerospace industry?
A: Bancomext has found it difficult to participate in transactions with OEMs and Tier 1s but we also are exploring structures involving Export Credit Agencies (ECAs) from their countries of origin as a way to propose competitive financial structures. The Mexican aerospace industry is only 16 years old so it still has a lot of room for growth. Fortunately, aerospace companies’ plans are by nature long-term and Mexico is certainly well positioned to play a vital role in these developments. It is crucial for the country to develop solutions for the next 15-20 years to generate stable industry growth for all those involved