Francisco Bautista
Advanced Manufacturing & Mobility Leader
EY
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View from the Top

Opportunities Coming to Mexico despite Crisis

Fri, 12/11/2020 - 16:12

Q: How would you describe the state of Mexico’s aerospace and aviation industry?

A: The situation with Mexico’s aerospace industry is actually very complex. Cash flow has become a big issue since the beginning of the pandemic. We can see it affecting the entire aerospace industry, combined with passengers who are hesitant to travel. We do not expect a resolution in the short term.

Having said that, the aerospace industry is one of the few industries in the world that has backlogs. Airplanes continue to be produced and companies continue to place orders, maybe at a slower rate, but most large aviation companies have seven- to eight-year backlogs. We do not expect the industry to slow down on the manufacturing side. However, there are challenges to be addressed. When the pandemic hit, aerospace was not considered a priority industry. Should strict lockdowns come back, this could have major implications for the manufacturing process.

Overall, I think aviation is one of the hardest-hit sectors in the economy and, unfortunately, it will continue to be that way at least for the next two to three years, unless we see additional support for companies.

Q: Cluster presidents have mentioned that the aerospace sector is likely to recover once aviation recovers. When will the aviation industry see levels similar to 2019?

A: Our global specialists have set that date between 2023 and 2024. My concern is in the short term, with what will happen during the second wave of the pandemic. As we know, the second outbreak has had had a significant impact on several industries. We also know for a fact that implementing a full lockdown is not the solution. It did help the medical system but it is not the solution to the problem. We also have some big questions coming regarding what will happen once the first vaccines are administered. If everything goes well, we can assume recovery will come between 2023 and 2024. However, we cannot dismiss the fact that should the second outbreak worsen, it could throw out every single projection.

Q: How can companies be better prepared for the second wave?

A: That is a tough question. Cash flow and operational efficiency will continue to be the top priorities. As long as companies can take care of that, they will be fine. Most companies have super-strict measures to control internal outbreaks and make sure employees are not being infected in-house. However, that is only half of the story as employees only spend part of their day there. Outside restrictions will continue to be a problem because no matter how strict companies are, if those measures are not followed by individuals outside of companies, they are all for nothing. We need to send a clear message that taking care of yourself is taking care of other people.

Companies will also need to find that balance of prioritizing the projects they need to invest in while remaining cost competitive in the present. If they stay in survival mode, there is a significant chance that three years from now, they will have to make a massive investment to get ahead or even remain in business.

Q: How is EY helping companies during this period?

A: We have capabilities in different areas, from consulting to tax, strategy transaction and insurance. What we see today is that some companies are really stringent about going after cash flow while others are focused on regulation and significant changes that could impact their business, like outsourcing. Nobody is ready for so many changes. We are helping a company from a supply chain perspective regarding tax regulation and consulting services related to increasing operational efficiency to face the future. We need to be as proactive as we can.

Q: How do you expect the outsourcing reform will influence the aerospace industry and Mexico’s manufacturing competitiveness?

A: It will not change the aerospace industry but it could entail significant costs. If you have to make employee transfers or go through merger processes, that implies a significant cost. There are many comments regarding the implications for social security. The clients we work with had to undergo different strategies to address the current regulations on social security during these times and adding the reform to that is a really complex situation. Outsourcing is defined in the new reform as subcontracting personnel for the company’s gain. The corporate mission of many companies tends to be vague, as businesses mature and evolve. In that sense, there could be a great number of activities that could be considered outsourcing. This is not healthy for any industry.

There will be a significant effect on competitiveness in this scenario. In fact, the scenario has been constantly changing since the new administration entered office and things change dramatically in a matter of months. All companies are willing to comply with the law but there has to be a strategy. The purpose of the reform is to combat companies that have abused outsourcing but you cannot cut down the entire tree just because one apple is rotten. In that sense, the reform sends an uneasy message because if investments are received tomorrow and the environment changes again, that will harm competitiveness because it will come at a price for companies as they need to have a specialized team for that specific project.

Q: What other challenges is the industry facing?

A: As in most industries, companies are facing the evolution of products coming to the aerospace industry. New aircraft will need new capabilities. Similarly, the material innovations in the body of the 787 and the Dreamliner will continue. The use of more efficient materials, while lowering the industry’s carbon footprint, has become a pressing issue. That being said, efficiency is an essential aspect of the sector. Aerospace companies have made this a priority from an operational perspective and now regulation is catching up in countries where efficiency and sustainability are top priorities. We have a very sound and competitive aerospace sector as a country, but as regulations diminish competitiveness in one place, they also create competition in others.

Q: How likely is it that more investment will come to the country following the crisis?

A: Opportunities remain because the country still enjoys many competitive advantages. From that perspective, there is definitely opportunity for new companies to actually reach Mexico. With the supply chain, one of the key issues is to concentrate all the suppliers in one place because the pandemic has shown that an entire country can be shut down from one day to another and supply chains need to be more resilient.

Overall, I agree there are opportunities but the timing can vary. Some have said that we will see a wave of Chinese companies within the next six months but we do not see that happening in the short term, although it could happen in the middle to long term. Circumstances force companies to think carefully about these decisions. You do not want to make a rushed decision, especially in the aerospace industry. For certain components, apprentices can take from one to two years to learn their craft before they can actually take a spot in the production line. Aerospace companies cannot be easily transferred from one country to another. New variables are making the analysis much more complex. New investments should also be driven by market growth to build additional capacity. Adding it all up, it is unlikely that such investment projects can begin within six months.

From a manufacturing perspective, we see the local aerospace industry ramping up over the next one to two years. We foresee additional capacity and investments on equipment and new products lines. There is still room to grow.