Indirect Suppliers in Need of Local Sourcing Improvement

Mon, 09/01/2014 - 15:51

The indirect supplier base to the automotive industry, made up of those at Tier 2 level and below, is receiving mounting attention from both the public and private sectors as an area ripe for development. Major OEM investment into Mexico has brought with it hoards of investment from Tier 1 suppliers, with OEMs required to meet strict local content levels of 62.5% to benefit from tariff free exportations under the NAFTA agreement. This has made it necessary and virtually obligatory for many traditional direct suppliers to set up base with their OEM clients in Mexico. The sheer levels of investment required to supply a major Tier 1 automotive company, however, have made it impossible for most small suppliers lower down the chain to similarly establish new plants in Mexico. According to AMIA data, Tier 1 suppliers currently import 90% of their required inputs into Mexico, presenting both a challenge for companies trying to increase localization efforts and a significant opportunity for investments at this level.

AMIA’s President Eduardo Solís explains that there are six key areas where Tier 2 and 3 suppliers are particularly in demand: machining, forging, stamping, plastic injection, casting, and molding. These six areas make up 80% of the demand from the Tier 1 segment. However to enable companies to capture opportunities within these areas, ensuring increased access to financing is crucial. “We know that there are at least three or four major issues impacting the development of the lower-level supply chain. The predominant is lack of financing,” asserts Solís. Supplying a large Tier 1 company involves major financial commitment, with required machinery and infrastructure being prohibitively expensive for those that lack adequate levels of working capital. The second most pressing issue involves standardization of processes and technological capacity development, with certifications such as ISO 9000 and QS 9000 being mandatory. Thirdly, the right human capital development is necessary to ensure adequate provision of the many specialisms required, and finally, the right corporate mindset is essential to allow companies to interact effectively with sophisticated global conglomerates.

One of the main tasks facing the government in order to address the challenge of developing these suppliers is the implementation of the right public policy to support SME development. AMIA states that the government is on the verge of announcing a program called Pro Auto that will address the creation of public policies designed to strengthen Mexico’s supply chain. “Pro Auto will be key in supporting Tier 2 and 3 suppliers in pinpointing the exact issues that are impacting the industry and preventing smaller companies from passing muster as Tier 1 providers,” explains Solís. The governmental program will unite different entities in supporting the segment including CONACYT, NAFINSA, Bancomext, and ProMéxico, who will join forces to offer a single window for the needs of the Tier 2 and 3 segments. A number of international indirect suppliers have successfully established footholds in Mexico and can provide insight into what it takes to both thrive and survive at this level. MPE Mexico, a subsidiary of a 40-year-old Italian company, provides injection molding, blow molding, and conventional molding to major Tier 1s, including ZF Sachs and GKN Driveline. The company’s General Manager, Olga Jiménez, explains that MPE has taken the decision to remain specialized and resist the temptation to expand too quickly, which means knowing when to turn away some of the many opportunities being presented by growing industry demand. “We have chosen to pursue slow and steady controlled growth, thereby assuring the best quality and performance to a small quantity of customers,” says Jiménez. This echoes the advice of Ford’s Purchasing Manager Leo Torres, who urges suppliers to specialize and not try too hard to “be good at everything.”

There are many niche areas presenting opportunities for those with specialist skills, such as the tooling and texturing market, with 95% of tools currently being imported into Mexico. Mold-Tech, a company specializing in the texturing of new molds, carries out texturization and repairs for Tier 1 suppliers, including TRW Automotive and Kasai. “MoldTech is currently the only option of its kind in the Mexican market. Customers that do not work with us have to look for options in the US,” explains Mold-Tech General Manager Mario Partida. Partida expects to see increased demands for molding repair in Mexico, as in-country toolmakers start building new tooling systems, and is positioning itself to be able to supply the predicted demand.

While the industry scrambles to increase the numbers of locally based indirect providers, some shrewd direct suppliers are taking advantage of supply gaps to branch out their own business lines. Japanese OEM seat supplier Tachi-S, which for the first time in 2013 produced more materials outside of Japan than inside, has identified opportunities to supply other Tier 1 providers itself. It has two new plants in Mexico that make trim covers and manufacture pour-in-place headrests, allowing it to integrate many of the commodities that are typically outsourced by Tier 1s. If indirect suppliers can successfully establish themselves in the automotive supply chain, the rewards to be reaped are plentiful, both for the suppliers themselves and the wider industry.