Mexico’s Aerospace Industry Sees Opportunities in North AmericaBy Alicia Arizpe | Mon, 09/28/2020 - 09:11
Q: What initiatives is FEMIA implementing to support the local aerospace industry?
A: For the past four years, FEMIA has worked to develop local supply chains. The aerospace industry arrived rather suddenly to Mexico and grew at a 14 percent annual rate. However, the local industry has not caught up to this fast growth. Only about 3 percent of the products produced in the country are made by fully Mexican companies. We will continue to make the generation and growth of Mexican companies a priority so the country can increase its added value to the aerospace sector.
At this point, we are seeing new opportunities. The first is a global shift among major manufacturers from a global supply chain to regional blocks. Mexico, due to its location, belongs to the North American block, so this is our main market. The US is pushing to develop its supply chain in North America in order to better integrate its manufacturing practices. Mexico is the ideal candidate to replace remote countries such as China and strengthen the US supply chain.
The second area we are developing alongside NAFINSA and Bancomext is a competitive credit line for the aviation industry. This line will offer loans from MX$30 million (US$1.34 million) to MX$70 million (US$3.13 million) to SMEs that have been impacted by the pandemic. We are working closely with these financial institutions and recently held a related webinar for members of FEMIA. The best way FEMIA can support Mexican aerospace companies is by finding them new opportunities and competitive financing.
Q: What will the recovery of the local aerospace industry look like and what conditions must be fulfilled to achieve it?
A: The global aerospace industry is reliant on the aviation sector, which is beginning to see signs of a recovery. For example, China has recovered most of its domestic flights, a reference point for the rest of the sector. Analyst projections estimate that the aviation industry will recover to the levels of the first quarter of this year by mid-2021, which is surprising but excellent news for the sector. Revenue passenger kilometers (RPK), which measures the distance a paying passenger traveled, was expected to recover at a 2-3 percent rate per week but some regions such as North America and Europe are approaching a 5 percent recovery rate. This means that individuals are increasingly willing to fly and that is raising confidence among operators to continue working during the pandemic. Mexico’s aviation industry is also showing signs of recovery. Two months ago, airlines reduced their flights from Mexico City to Chihuahua to once per day but now there are 10 daily flights.
Q: When are you expecting a recovery of the local aerospace industry to its former export levels?
A: This will entirely depend on the recovery of flights. Airlines are our final consumers and their consumers are passengers. If passengers do not fly, airlines will not buy or lease aircraft. The aerospace industry depends on the RPK. While airlines at this point do not need new aircraft, we are seeing a fast recovery in regional travel and if this continues, we might see a recovery in early 2021. We expect that the sector will recover along that timeline.
International flights, on the other hand, are not expected to recover until the third quarter of 2021 as their recovery will hinge on the development and worldwide distribution of a COVID-19 vaccine. Once international flights recover, the aerospace industry will recover in turn and we expect that manufacturers will return to the production volumes that they saw at the beginning of 2020. Major aerospace companies have a 13- to 15-year airplane backlog. Once people begin traveling again, airlines will need the aircraft they previously ordered.
Q: What changes are necessary to restore confidence among passengers regarding the safety of air travel?
A: Airplanes have always used the most advanced air filter in the world, the HEPA filter, which filters 99.9 percent of particles suspended in the air. Moreover, an airplane’s certification process requires measuring the number of air particles, oxygenation in the different areas of the airplane and the number of pathogens. These measures have been implemented in all aircraft over the past 40 years as there was always the possibility of having a sick passenger. The aerospace industry has been aware of these dangers for a long time so they have implemented measures to reduce risks. Airlines are also implementing new measures such as using UV light to quickly disinfect an aircraft between flights. This is a fast, efficient way to safely disinfect the airplane and adds an extra layer of security to the other safety measures airlines have implemented.
Q: What measures should be implemented to make Mexico more attractive to foreign companies and investment?
A: The industry must transform to reach international standards. We have to understand that the aerospace industry is not local or regional; it is an international industry. An airplane manufactured here will fly all over the world and be subject to extreme weather conditions. For that reason, the sector has very strict quality standards so Mexican companies must undergo a transformation to reach those levels and compete with companies across the globe.
However, our economic region is North America, which was reiterated with the signing of USMCA. It is necessary for Mexican companies to take advantage of our close connection with the US. Mexico’s government must also develop competitive business conditions that allow the industry to thrive similar to its peers in other countries. Now, countries are competing with each other to attract aerospace companies and other countries are offering attractive fiscal incentives or other types of direct support. Mexico has to offer similar incentives to make the country attractive for the aerospace industry. The country must also provide stability for businesses to gain investors’ trust.
Q: How must Mexico’s aerospace industry transform to reach international standards?
A: Companies have to adopt the operating systems and conditions of successful multinational companies. A good example occurred in the automotive industry. The arrival of Toyota to North America was highly disruptive for the sector as the Japanese company was much more efficient in manufacturing cars than its local competitors. Manufacturing a car in Japan was 20 percent less expensive than manufacturing a similar vehicle in the US, even though manufacturing in Japan is often more expensive. This occurred thanks to Toyota’s policy of zero defects and zero waste. Thanks to their lower cost, those vehicles took over the North American market once they arrived in the country.
Mexico’s aerospace industry must undergo a similar transformation and embrace the zero defects and zero waste manufacturing principles. This will greatly reduce manufacturing costs, allowing Mexican companies to compete with those in any other region in the world. Thanks to the automotive industry, Mexico already has numerous companies that manufacture following these principles and now it is necessary for them to expand into the aerospace industry.
Q: What are FEMIA’s main action lines for strengthening the local supply chain?
A: We have two main action lines to achieve this goal. The first is to attract major suppliers of primary commodities for the aerospace industry because Mexico has very few of them. These include forging, casting and raw materials. The latter have to be imported as the industry uses highly specialized alloys, such as nickel-steel alloys, which are not manufactured in Mexico. We are working closely with several companies in these sectors to speed up their entrance into the country. This is our largest gap in the local aerospace industry as we have numerous Tier 2 and 3 suppliers.
Secondly, we have created an area within FEMIA for developing and strengthening maintenance, repair and overhaul (MRO) capabilities, as we have some important players in the country, such as TechOps in Queretaro and Mexicana MRO in Mexico City. Safran also has two MRO plants in Queretaro but the country has significant potential to do much more thanks to our proximity to the US, which has the largest fleet in the world. Performing MRO operations in Mexico would be convenient for the US thanks to lower costs and geographical position.
Q: What are FEMIA’s expectations regarding investment and employment for the coming year?
A: 2020 was a hard year for the entire aerospace industry, with significant losses in employment and a 25-45 percent reduction in demand, depending on the company’s product portfolio. In 2021, we will focus on recovering both demand and employment and we expect that by 2022, we will return to the growth rates the industry had seen over the past 15 years. The aerospace industry is essential as flying is much more efficient than driving. The sector is also evolving and increasingly betting on flying vehicles for shorter distances, while flying remains the best option to travel across the globe. For those reasons, the aerospace industry has a positive growth outlook for the next 50 years at least.
Mexico is also a large player in the aerospace sector. The country is now the fourth-leading aerospace exporter to the US and the 12th in the world. The aerospace industry is the most modern sector to arrive in Mexico thanks to its high added value. The sector provides Mexico a value content of 18-20 percent, the highest out of all economic sectors in Mexico. The industry also generates well-paid, sophisticated employment, so it is important to continue betting on the aerospace industry and take advantage of the opportunities that are arising thanks to the growing trend to operate in blocks. Mexico is the most competitive country in the North American block. This is a golden opportunity and I invite Mexico’s government and business leaders to turn their attention to this sector. It is not a volatile industry but a long-term investment that will only get stronger.