Image credits: Robert Bosch
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Analysis

MAR21 - Supply Chain Transformation Follows Global Disruption

By Alejandro Enríquez | Wed, 03/17/2021 - 06:00

Last year, supply chains were forced to demonstrate resilience and adaptability to avoid disruption, securing inventory and guaranteeing logistics continuity. The Mexican automotive sector was dependent on Chinese and Southeast Asian imports for specific components, mainly tooling and plastics. With the fragility of global supply chains exposed, industry leaders agreed the pandemic accelerated a trend toward regionalization. "Regionalization will occur at a faster pace in this decade than in the previous one," said Oscar Silva, Leader Partner Global Strategy Group of KPMG, during MBN's webinar, “Supply Chain Relocation and Development in North America.”

Regionalization also implies nearshoring, a buzzword when talking about the automotive supply chain. Nearshoring means companies relocating production closer to large consumer markets by taking advantage of the opportunities neighboring developing economies present. This is the case for the US and Mexico, as well as Western Europe with Eastern Europe and Turkey, for instance. Over the last year, regionalization and nearshoring trends have created two scenarios for Mexico: large Tier 1 players either expand their operations in the country or ramp up production, or Tier 2 suppliers are further developed to meet RVC requirements established in USMCA.

Tier 1 Expansion

Executive President of Mexico's National Auto Parts Industry Oscar Albin mentioned in early January 2021 that the sector expects to grow 24 percent compared to 2020, to reach US$96.9 billion in production value, close to the US$97.8 billion reached in 2019. Albrecht Ysenburg, Partner Leader of Automotive Industry of KPMG, told MBN: "We support customers relocating their operations and we have seen a renewed interest from companies to relocate operations from the US or China to Mexico. This is happening as we speak."

Government data from the Ministry of Economy highlights 2017 as the year with the highest FDI in Motor Vehicle Parts Manufacturing (NAICS Code 3363) with US$3.9 billion invested in the sector. FDI in auto parts manufacturing remained above US$3 billion in 2018 and 2019 but the pandemic dealt a blow and reversed investment to its lowest since 2009, with just US$1.37 billion invested in 2020. That being said, the sector is undergoing a transformation and to increase RVC, FDI in the sector is expected to rise.

"This is a great opportunity to attract more investment to North America because OEMs need to comply with rules of origin requirements, which will reward those suppliers that can manufacture in North America," said Alejandro Lara, Chairman of American Industries, a Mexican company that has supported manufacturing relocations for more than 40 years. "Mexico is a very competitive option for them. In fact, we are working with several Chinese companies that are inquiring about Mexico as their manufacturing base for the Americas. This is an important opportunity to further develop our Mexican manufacturing sector through Chinese investments.”

Throughout the year, MBN has documented expansion plans, investments and newcomers’ plans to enter the Mexican market. Yanfeng, one of the largest Chinese Tier 1 suppliers in the world, has just strengthened its presence in the country through a joint venture with Johnson Controls. "In North America, we have 22 active plants, four of them in Mexico and one more to be inaugurated in the near future," says Lourders Cobos, COO of Yanfeng Automotive Interiors Mexico. "In Mexico, all our plants are focused on automotive interiors but soon we will announce an upcoming plant that will manufacture seat components, as well. Interiors has cleared the path for other divisions to arrive to the region through Mexico," she says.

Jordi Torras, global CEO of major wheel trims supplier Zanini Auto Group, agrees with industry leaders in the potential the country offers to Tier 1 companies. "Mexico was our first venture outside Europe and it has always been a fundamental market for us, considering OEM production strategies. Consequently, we worked to grow our business model and operations in Mexico to supply all North American regions," he says.

Brose, a German Tier 1 supplier, has also decided to reinvest in Mexico. “After Brose decided to invest its first plant in Mexico, we now have three additional facilities, two in Queretaro and one in Puebla,” said Manuel Guevera, General Manager at Brose El Marqués Queretaro Plant, the first facility of the German supplier to be established in Mexico.
 

Tier 2 Growth Opportunities

Only half of the auto parts imported to Mexico come from North America. According to INA figures, 55.2 percent of auto parts imports in 2020 came from North America (50.2 percent from the US), while 16.2 percent came from China. These two countries are followed by Japan, Germany and South Korea in terms of import volumes with around 5 percent each. There is room to grow, either to attract investments or develop local suppliers.

"The country seems to be in a risk-averse environment but the opportunities are there. Mexico has a great number of components that are imported and OEMs and Tier 1s are actively looking for those components locally," says Alberto Torrijos, Automotive Sector Leader Partner at Deloitte Mexico. This also creates many opportunities for foreign players to launch projects in the country as Tier 2 suppliers and for Mexican suppliers to enter the supply chain.

There are usually three kinds of projects when it comes to Tier 2 developments. Greenfield projects imply starting a new production facility from scratch. Acquisitions are often seen when a global player finds a company with potential for a specific product and buys it. Finally, joint ventures have also taken place where both companies create a common understanding to cooperate together toward a common goal.

Tier 2 executives and founders agree that a proper approach is necessary to make the most out of the scenario the industry is experiencing. Guido Bagglioli and Sergio Mendoza, for example, are Co-Founders of BM Castings, a joint venture in Chihuahua between a Mexican and an Italian company focused on aluminum castings for electronic component manufacturing. "Our partnership is based on our mutual experience.

On the one hand, we have a local entity with knowledge of the local market, the way it works and all the details needed to succeed in the region. On the other, Baggioli provides technical expertise," said Bagglioli. "North America, and Mexico in particular, has a great chance to take over the business that is currently based in Asia. But a correct approach to the business is necessary,” he added.

Large Tier 1 suppliers are also supporting the development of local suppliers. Midori Auto Leather, one of the largest Japanese manufacturers of leather products for vehicles, is looking to grow its local footprint. "As our suppliers level up, we are looking forward to working alongside them to assure the quality our customers demand. Most of our engineering development operations take place in Japan but we want some of our new products to be developed in Mexico," said Shinji Kashiwagura, Director General of Midori Auto Leather Mexico.

Javier García, former Plant Manager of NSK Bearings Manufacturing, agreed with the potential of the local supply chain. "NSK in Mexico has developed a great number of local suppliers. We have an agreement with CANACINTRA regarding industrial tourism for the automotive industry, including the specifics of what companies need to become an automotive supplier," he said.

For Deloitte and other major consultancy firms, the greatest obstacle for local suppliers is quality, costs and production capacity. Some Mexican companies have successfully climbed the supplier ladder and share the keys to their success in this regard. "First and foremost, quality certifications are a must. ISO, quality systems and an organizational structure that promotes quality are essential. By certifying processes and products, it is easier to appeal to the customer," says Francisco Santini, CEO of Ripipsa, a Mexican company with over 12 facilities in Mexico and a subsidiary in the US. "Ripipsa is a Mexican company with a history of success similar to many other companies in the country that started as an entrepreneurial project," he says.

Alian Plastics is another success story in a highly competitive automotive segment. The company has bet on portfolio diversification and smart manufacturing to level up its game. It is now a Tier 2 supplier for Audi, BMW, Tesla, Magna, Faurecia and Continental, among others. "We started our smart manufacturing projects in 2019, collecting data faster and making better decisions in a really short time. 2020 was a year of consolidation and I feel very proud of our IT team. Having all the tools available to perform our job remotely and efficiently provides us with the capabilities to diversify our operations," said Felipe Villareal, CEO of the company.

Despite the complicated scenario, there is an opportunity for the Mexican supply chain. As Rene Schlegel, President of Robert Bosch México, points out, "This is the moment for Mexico and Mexicans to become rich."

Photo by:   Robert Bosch
Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst