Rolando Zubirán Robert
Economic Development of Nuevo Leon
View from the Top

Developing Mexico's Research Hub of Tomorrow

Mon, 09/01/2014 - 12:29

Q: How pivotal is the automotive segment to Nuevo Leon’s economy?

A: The automotive sector has been the fastest growing sector in the last three years with a growth of 45%, surpassing even traditional manufacturing. Nuevo Leon is very much a pioneer in the national context. We stand apart from other Mexican states due to our main competitive advantage, which is that we do not compete with traditional Mexican manufacturing hubs but rather against places like Illinois, Texas, Brazil, and Turkey. We produce 11% of all manufactured goods in Mexico, and with 4% of the country’s population, we produce 8% of the national GDP. Mexico has to undergo a transformation process and the only way is to shift GDP per capita. Nuevo Leon is aiming to reach GDP per capita of US$30,000, up from the current US$20,000 which is already double the country’s average. To achieve this, we need a broad-based economy, which is why we are shifting from traditional manufacturing toward more specialized sectors. One of the Governor’s aspirations for 2015 is to bring the right OEM to the state. We do not want to waste US$200 million on incentives to just attract any OEM. On the contrary, we need an OEM whose strategic market is the US for logistical purposes.

Q: As the country’s central regions continue to attract more investment, what remain Nuevo Leon’s key strengths?

A: Nuevo Leon has four main competitive advantages that stand out. The first is our human capital, as we have the highest level of education in the country, being an average of 10.5 years of schooling per person compared to the national average of 8.5 years. Secondly, our logistics platform is the main hub for the US market, since 85% of Mexico’s economic activity transits to the US. Thirdly, we are the supply chain capital of Mexico to the US. For the automotive sector alone, Nuevo Leon represents 27% of the national auto parts industry. Within a 150 mile radius across the northern quarter of Nuevo Leon and its border states you will find 67% of all the Tier 1 and Tier 2 supply chain. The Bajio region is growing on the back of a decade of economic promotion, but nonetheless the majority of investment capital from Tier 1 and 2 suppliers comes to Nuevo Leon because of our developed supply chain and logistics solutions. Finally, the last pillar of our competitive advantage is the triple helix based on the cluster strategy that we have developed since 2008.

Q: Why has the cluster approach been so important for the development of the automotive sector?

A: The founding members of the strategy were Metalsa’s Enrique Zambrano, Vitro’s Hugo Lara, and Sisamex’s Armando Mirandez who now serves as CLAUT President. During his first trip to Nuevo Leon, President Enrique Peña Nieto spoke about the importance of clusters in the automotive sector, and suggested that the federal government should emulate our model nationwide. As a result, the Ministry of Economy is using Nuevo Leon as a point of reference for building up strategic economic sectors. Although we are concentrating heavily on the automotive sector, we have a targeted strategy for identifying key players that we would like to integrate into the supply chain and that will add value to the supply process. It is for this reason that Nuevo Leon stopped going to investment fairs to promote the state. Instead, we are working with clusters to identify the essential needs of the sector. Other states might give away land to attract a company, but Nuevo Leon offers something much more valuable: a genuine business case to integrate the company into the supply chain and make it much more competitive in Mexico.

Q: What areas are you focusing on to increase Mexico’s added value as a production base?

A: We are betting heavily on R&D in the automotive sector and are working hard to tie labor supply and demand. Nuevo Leon does not suffer, like other places such as the Bajio, from a vicious cycle of human capital in which one employee can move through several companies and end up with a salary that is 45% higher due to the scarcity of labor. The problem we face is that of rotation. To fix this, we need to focus on training, making employees more efficient, and targeting the best talents for the sector through in-house programs. We are also integrating local suppliers into the supply chain. The main problem is that they often lack international quality certifications or simply their credit availability is  insufficient to sustain a 60-90 day policy that contracts often require. The sheer scale of the OEMs is also daunting as many establish contracts with their suppliers through their holding companies abroad. Another sector that is symbiotically tied to automotive is the white goods sector. This is integrated with 85% of local supply, resulting in an advantage for many suppliers since they could also be used for the automotive industry. Nevertheless, the automotive sector has higher quality assurance requirements, so we have to scale up a notch. In comparison, the automotive sector locally sources approximately 40%, and we are attempting to bring this figure up to 70%. Our local sourcing percentage is directly related to cheap labor. We are trying to shift this to add value in the high-end bracket as this is where the area of opportunity lies.

Q: What systems has the state put in place to help SMEs undergo certification processes and gain better access to finance so they can meet OEM supplier standards?

A: Nuevo Leon has several organizations that work with the clusters and with the private sector, such as the CCM (Center of Competitiveness in Monterrey). These provide very specialized certification programs that surpass established quality and credit standards. The government of Nuevo Leon helps such programs by linking them up with federal funding and existing programs that directly target the capacity building of companies. There has also been a change in terms of the responsibility of allocating resources. This used to be the duty of the state government, but now this has shifted to the federal government. This allows us to help channel resources directly to companies that most need them, through a mechanism from INADEM, the National Institute for SMEs. These links to the federal government have also allowed us to begin collaborating with Mexico City and neighboring states to put together a more intricate and linked supplier network. These particular projects even extend across the border as they involve Texas, Coahuila, and San Luis Potosi.

Q: How much are you continuing to invest in human capital development?

A: Nuevo Leon is the state with the lowest poverty percentage and we have a US$90 billion economy that exports more than all Central American countries put together. We are the big industrial machine of Mexico and human capital is no exception. We have the largest population of engineers, at over 6,000, as well as 11,000 technicians and operators. Nuevo Leon is the state with the largest population of adults with a professional education. We have the highest enrolment of students in the sciences and engineering at 15,000, and we have the largest amount of industrial parks in the country at more than 137. These parks often have technical schools located beside them, which benefit from a lot of initiatives that seek to boost their development. We are currently moving towards the IT sector and we have put in place reconversion programs to turn general engineers into software programmers. These are run in collaboration with the educational and private sectors. We pay for the training, the university provides it, and finally the company guarantees engineers a spot if they complete the program. We are doing the same in advanced engineering for R&D centers within the automotive sector. PIIT (Research and Technological Innovation Park) has become the jewel in our crown and it has been visited by many luminaries for its achievements. It demonstrates R&D capacity with practical applications. We have invested over US$400 million in PIIT and that little microcosm now has 1,300 researchers, 34% of whom have doctorates.

Q: Do you think that Nuevo Leon has the capacity to help change the perception of Mexico as a viable source of R&D?

A: This is a work in progress but there is a natural and gradual change in perception taking place. Mexico is not just attractive for cheap labor. When comparing China and Mexico, we find similarities, so where is the added value? It is in the fact that Mexico is also creating, designing, and producing. The mindset will change gradually, just as happened in Japan after the 1950s. China is starting to specialize and outsource non-specialized manufacturing to developing countries. Nuevo Leon is also experiencing this shift. We are starting to see companies creating hubs here, like GE which chose Nuevo Leon as its Latin American base to consolidate all global financial operations. We have seen PepsiCo and Schneider Electric establish their Mexican R&D centers here. Siemens is consolidating operations in Nuevo Leon, Mondelez International invested over US$600 million last year, and Caterpillar added another US$500 million. We are definitely starting to see a shift of locating R&D centers where production centers are.

Q: Do you think the security issue in Nuevo Leon still merits discussion?

A: It is really a battle of perception. You can see this in the US State Department warnings. We may have decreased crime rates by 70% over 18 months, but to remove a US warning requires five to six consecutive cycles of positive evaluations. Even though we have the results, building a reputation takes a long time while shattering it takes an instant. The best judges of the real situation, however, are the companies themselves and they will remain here. The perception of insecurity lingers but we are overcoming this obstacle and we are regaining companies’ trust.