Ricardo Haneine
Partner at A.T. Kearney
A.T. Kearney
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View from the Top

The Road to Improved Competitiveness

Sat, 09/01/2018 - 12:22

Q: How have technology and digitalization impacted the development of manufacturing operations in Mexico?
A: Most plants built after the late 1990s already included advanced automation processes and employed a minimal number of workers compared to older facilities. New plants still have work stations managed by few employees but they are restricted to specific tasks such as quality control. Automation has definitely displaced a considerable number of workers from the industry and digitalization, as well as the arrival of Industry 4.0, will eliminate another layer of the workforce. Today, labor is still an important factor of production in companies’ cost-competitive strategies but if digitalization were to reach a critical level, Mexico’s advantage as a low-cost manufacturing country supported by qualified technical talent would be at risk.
We have studied the root of Mexico’s competitiveness and one of a key aspect is labor productivity adjusted by cost. OEMs and suppliers have reached the highest productivity levels within the manufacturing industry. This rate is much higher than the cost level related to labor. Salaries in Mexico are much lower compared to other automotive manufacturing countries, which offers a clear advantage when adding the productivity levels that the national workforce can reach. China, for example, has increased productivity considerably but its labor costs have also risen accordingly thus reducing its relative competitiveness.
Q: How sustainable is Mexico’s competitiveness?
A: The only way to remain competitive is to increase productivity. That can only be achieved by increasing the added value that the country can offer and the capabilities of its local talent. Companies need to find a way to participate in the earliest stages of product development with design and engineering processes. The percentage of engineering activities currently done by OEMs in Mexico is minimal but we have enough capable talent to participate more actively. Many Mexican engineers are even moving to OEMs’ home countries to collaborate on design operations.
There is also an opportunity to reduce our imports and increase the value of local production. Even though the automotive industry is thriving, its contribution to the national GDP is limited to 3 or 4 percent due to the lack of domestic auto part production. Mexican Tier 1s offer highly competitive costs but further down the production chain, the country’s offering is quite fragmented. This has been one of the main complaints from international companies for over 30 years. Every new government administration has established the development of the local supply chain as a priority and even though the industry has improved, it has not done so to its full potential.
Q: If the government has made the development of the national supply chain a priority for 30 years, why has the country not advanced to its desired state?
A: There has not been enough articulation between the industry and the government. There has been improvement if we consider that in the 1970s we used to manufacture only harnesses and other maquila components. However, the country’s true potential shows we still have a long way to go. Having a stronger Tier 2 and Tier 3 base could be a trigger for further investment, but strategies to support SMEs and train them on how to improve their financing strategies should be expanded.
Q: How ready is Mexico to support the coming investments from new OEMs and suppliers?
A: Availability of human capital is becoming a challenge across most clusters. There are not enough urban development initiatives nor mobility options for workers to come from other regions to address the needs of the fastest-growing clusters. Logistics infrastructure is also proving insufficient to support the rising level of exports. The projected investment in port infrastructure does not match the need for technology and modernization to remain competitive in both time and quality of service.