Why a Sustainable Supply Chain Is a Must for Aerospace Industry

Global supply chains are under pressure. The world has changed and, in the last two years, global events have drawn a new geopolitical, geoeconomic and geobusiness reorganization. Today, there are opportunities and threats that must be capitalized on by governments, the private sector, society and civil organizations to guarantee an evolution of the economic system and international trade in an inclusive manner, generating a positive impact on the environment, society and the long-term profitability of companies.

Today, we have to understand that we are living through a series of environmental, social, political, technological and environmental trends that are redefining a new "world order." The current international trading system has its foundations in the reconstruction of the global political and economic system after World War II. Since the ‘80s, the process of "globalization" has created strong cross-border links on the real side of the economy through the "Global Supply Chains" (CSGs) managed by large global companies. The CSGs proved to be a vehicle for increasing efficiency, rapid transmission of technological changes, and linking local employment to global production. A country's growth could be linked to increased foreign trade. 

In this same period of acceleration of globalization, certain fractures also began to appear. At the beginning of the 21st century, the international economic and trading system was put to the test, questioning how to determine whether private sector operations have an impact on environmental, social and governance (ESG) areas. Additionally, on Dec. 11, 2001, China achieved its incorporation into the World Trade Organization, becoming a global competitor and, specifically, of Mexico with respect to the US, our main trading partner. In 2006, the United Nations Principles for Responsible Investment (PRI) report required that, for the first time, ESG criteria be incorporated into financial assessments of companies.

In environmental terms, in 2009 the Stockholm Resilience Centre published the nine processes that regulate the stability and resilience of the planet. The scientists proposed nine quantitative planetary boundaries within which humanity can continue to develop and thrive for generations to come. Crossing these boundaries increases the risk of creating an abrupt or irreversible environment on a large scale. Since then, the planetary boundaries framework has generated enormous interest in how to align the intentional and unintended effects of business to the environment.

Additionally, in 2015, all United Nations member states approved 17 goals as part of the 2030 Agenda for Sustainable Development, which establishes indicators, targets and a plan to achieve these goals. The Sustainable Development Goals (SDGs) were developed in a spirit of calling governments, the private sector and civil society to action to end poverty, protect the planet and improve the lives and prospects of people around the world. In the wake of the 2030 Agenda, many organizations included the SDGs in their corporate or sustainability strategy.

Despite corporate efforts to contribute to the SDGs, when reviewing the Annual Sustainability Reports it is evident that they lack a clear and standardized methodological approach; there is no correct alignment with the corporate strategy; the "sustainability strategy" refers to a list of good wishes and intentions that have no correlation with the business strategy; do not clearly reflect sustainable and inclusive supply chain redesign with material impact; lack performance and outcome indicators correctly aligned with the business and the SDGs; the justification for aligning the business with the SDGs is a semantic and hypothetical exercise and is not based on the marginal contribution to the specific indicator of the SDGs, among others. In summary, most sustainability reports at the national and international level lack a comprehensive measurement and governance framework that allows managing and validating the real results of positive impact on the ecosystem where they operate.

A New Global Order 

In the 2000s and 2010s, the dominant focus within global supply chains was cost efficiency, logistics speed and geographic concentration of suppliers. In the face of geopolitical changes and other recent developments, this approach has been overtaken. On the one hand, it is clear that, under a top-down approach from macro to micro, international trade and global supply chains generated benefits of interdependence, growth, and economic and social stability. On the other hand, that same interconnectivity also generated risks and vulnerabilities. These vulnerabilities were evidenced by the COVID-19 pandemic and the war in Ukraine.

The pandemic affected global supply chains, exposing their bottlenecks, inefficiencies and natural opportunities. The global lockdown changed consumer preferences and, as a consequence, the demand for products and services, having repercussions on the chains of different sectors, especially in manufactured goods. Governments in developed countries injected fiscal resources into the population to minimize the impact of falling incomes, stimulating more than proportionally the demand for goods than for services. The response of aggregate demand was much faster than the response of the supply of goods and services.

In this pandemic environment, logistics and storage costs were impacted. Supply chains were put to the test. The war between Ukraine and Russia in February 2022 redefined, from a geopolitical perspective, the economic map of globalization. Russia and Ukraine, as the world’s main grain exporters, are unable to continue their agricultural exports, increasing disruptions in the supply chain. Fossil energy products are also under pressure from European and US economic sanctions on Russia and zero-carbon agendas. 

The economic sanctions imposed on Russia, through the interdependence of international trade between countries, make it clear that trade ties can now be used as a "weapon" against unwelcome partners. The geopolitical tensions we are witnessing have their origin in the polarization of ideas between the political-economic systems of democracy versus autocracy. The ideological foundations under which the post-war world order was developed are exhausted and it is time to redefine it.

Sustainable Supply Chain Development

Given the above, what we learned is that trade relations can be used as economic weapons. Company managers are increasingly concerned about having supply chains that are not only efficient, but robust, close and secure. The world is moving toward a more fragmented system, into blocs that share common geopolitical values and perspectives. As a result, it will choose to rely less on jurisdictions where companies are exposed to greater economic, legal, political, social and environmental risk. In a more fragmented world, corporate strategy will now be focused on developing inclusive, participatory and equitable ecosystems (economic systems).

In this sense, the recomposition of a "new world order" is being carried out through the relocation of the CSGs to more "friendly" geographies, where countries have trade agreements and legal certainty. The geopolitical and geo-economic environments represent a great opportunity for Mexico and, especially, for the aerospace sector to take advantage of the relocation of the industry's supply chains. In this sense and despite a deficient economic policy, according to the Ministry of Economy, Mexico registered, from January to September 2022, US$32.15 billion  in FDI, 29.5% higher than the figure for the same period of 2021 (US$24.83 billion). Of that, in the same period ,the aerospace industry received US$4.33  billion in the transportation equipment subsector.

According to the Mexican Federation of the Aerospace Industry (FEMIA), 79% of the companies operating in Mexico are manufacturers of aerospace products. The capabilities of Mexican manufacturers include various Tier 1, 2 and 3 components, ranging from propulsion systems and aerostructures to landing system components, precision machining, plastic parts, surface treatments, and electrical and electronic systems, among others. Aerospace companies registered with FEMIA went from 100 in 2004 to 370 in 2020. 

We are at a time when international trade needs to be recalibrated from a bottom-up approach. That is, from the main stakeholders to supply chains. This implies that to transform an entire ecosystem, both the external supply chain and the internal value chain of an organization must be taken into consideration. Corporations will have to develop a more complex, bold and transformative strategy that brings together "partners" of an ecosystem to define technical standards, make joint investments, develop resilient supply chains, ensure legal protection of operations, and attract sustainable financing, among others.

Moreover, according to Banxico's "Business Opinion on the Relocation of Companies to Mexico" survey, companies  ranked the ongoing trade conflict between China and the USand the USMCA rules of origin as major factors in the relocation of companies to Mexico. Therefore, for the moment, it will not only be about having economic efficiencies, but also about how to develop trade relations with countries that have values, philosophies, geopolitical vision, economic systems in common; that is, develop an ecosystem that is more conducive to doing business. Again, a new trust will have to be built between the trading partners and interest groups that are part of the ecosystem. Supply chains must be configured from an ESG materiality point of view, aligning business and sustainability objectives, under a new approach of regional integration and materiality of positive impact.

How do we develop global supply chains in a new world order with positive impact?

First, it is necessary to establish an ambitious transformation strategy where there is greater value creation with significant results for all actors of the ecosystem. This means that the supply chain in question must be characterized, identifying who are the main participants and what are their interests.  The second step is to identify those actors who have common environmental, social and economic interests to contribute to the transformation from an unsustainable supply chain to a sustainable one.

The next process is to catalyze sustainable financing toward the transformation strategy. That is, any transformation process requires projects that, in turn, require financing. There are resources in international markets that can be earmarked for ESG-compliant projects. It is important to keep in mind that financial markets, whether banking or capital, are beginning to establish criteria and principles to finance companies in a sustainable way. The result is the transformation from an inefficient and unsustainable supply chain to an efficient and sustainable supply chain under ESG and circular economy criteria.