TPP to Boost Competition, Force EfficiencyThu, 09/01/2016 - 15:36
Q: What impact will competition from Asia-Pacific companies have on local industry after the Trans-Pacific Partnership (TPP) deal?
AT: Free trade agreements (FTAs) have a positive impact on commercial operations. The implementation of TPP will create a more competitive environment because the local content clause was altered from that in previous trade agreements, boosting the number of foreign companies here and increasing competition among local suppliers. Mexican entities will have to develop the local supply base by making Tier 2 and Tier 3 companies active participants in the automotive value chain. From a commercial perspective, FTAs offer important business opportunities. But they also generate more competition and companies with public capital are always forced to become more efficient. They will need to invest in high-value equipment and provide added value products to the supply chain. The TPP will undoubtedly open new markets to Mexico. The agreement is unlikely to alter the 83 percent trade balance Mexico manages with the US but the industry will have more options for diversifying.
MN: If the TPP goes through, Mexican industry will benefit from national content clauses that will reduce the impact of new competitors in the market. Asian companies offer quality products and competitive prices but Mexico has a uniquely privileged location near the US. This lowers logistics costs and transport time.
Q: How prepared are local companies to tackle the challenges posed by the TPP?
MN: The level of preparation for a change in conditions depends on which aspect of the value chain is assessed. We have many opportunities to improve in raw materials. We import large amounts of resources, demonstrating a need to develop local suppliers. Assembly plants could increase their added value if they use local suppliers, which should make investment in this segment a priority. Even though some programs exist to support the industry, the government should play a more active role, encouraging the development of local supply chains with incentives and training.
AT: We cannot generalize about the supply chain being ready or not. Ecosystems are being created by Tier 1 companies that are training and assisting suppliers. Many Mexican companies are not ready in terms of capital and infrastructure to compete and meet the specifications this openness will demand. Local suppliers need to update their logistics processes to comply with volume requests. Justin-Time (JIT) operations will be complemented by Justin-Sequence (JIS) processes and local suppliers’ delivery services will need to be improved. Certain sectors are ready to implement these changes but many are in need of investment, talent and alliances with stronger partners.
Q: What are the challenges faced by local suppliers when trying to work with an OEM?
MN: Due to its competitiveness, the automotive industry it has very low profit margins. OEMs pressure suppliers to lower their costs but small suppliers have very little room to maneuver, especially regarding financial operations. Obtaining financing from a third party or using financial factoring companies represent an extra cost. OEMs need to be more flexible regarding the conditions they impose on local suppliers to create win-win situations. Convincing OEMs to use local suppliers is difficult. Usually when a new OEM establishes in the country it already has contracts with suppliers it uses in other countries. Ideally, OEMs would research potential local suppliers. Mexico has many suppliers that could work with big OEMs but they need assistance and guidance to meet the industry’s requirements.
AT: For foreign companies, one of the advantages of using local suppliers is that the price is always in Mexican pesos, eliminating the risks of a volatile exchange rate. Local suppliers also offer more competitive costs. Deloitte can help by issuing recommendations for the industry’s development. We have been persistent in informing companies about the risks of an unarticulated industry and that competitiveness can only be ensured through the development of local suppliers.
Q: How does local supplier development add value to a product?
AT: One of the biggest challenges we will face in the next few years is becoming a country that not only manufactures but is also an active participant in added value activities such as R&D. The number of researchers and developers in Mexico is very low. For the country to create an advanced innovative manufacturing system, we need more investment in talent development.
MN: OEMs usually need to make significant investments to train researchers and engineers. Recently graduated engineers start generating real value for their employers after their second year in the company. Unfortunately, in our country curriculums are more theoretical than practical. Many OEMs are investing in R&D departments, which benefits the entire supply chain. Those are individual efforts that need to be replicated throughout the country in different industries. It is difficult to achieve technological integration and innovation in the lower levels of the supply chain. Tier 2 and Tier 3 companies do not have the same level of automation as a Tier 1 or an OEM. Getting to that point of automation requires an important investment that would potentially threat the company’s financial stability.