News Article

The Expected Impact of Local Content Requirements on Supply Chain

Wed, 07/19/2017 - 10:50

How does local content factor into the making of a national flag? “Where does the material, the labor force and the infrastructure investment behind its production come from?” asked Hector Rocha, Partner Energy Sector at EY, holding aloft a Mexican flag to start his presentation at the Mexico Oil & Gas Summit 2017 on Wednesday in Mexico City. “Local content is not an easy theme. What does local content even mean? Answering this question can be even scary because of its complexity.”

Rocha pointed to the significant fees that could be applied if operators fail to meet their minimum local-content requirements, fees that could reach millions of Mexican pesos in some cases. “If a company has to pay that amount because the local-content requirement is not met, the whole operation could be put in jeopardy,” Rocha warned.

The logic behind stating a minimum local content with which companies must comply is clear: provide for competition that ensures the growth of the Mexican local industry. “As a main measurement, the government fixed the minimum local content to 35 percent for operators,” Rocha said. “To know the percentage of local content operators are using, the Ministry of Economy published a methodology that, in the fewest words, divides all the expenditures made on local content by the total expenditures. Unfortunately, getting the local content expenditures is the hardest part.”

To help operators, the Ministry of Economy made providers responsible for stating the complete local-content percentage of their activities. “Mexican providers need to be aware of all the requirements and paper work that operators need to offer when stating their local-content percentages,” said Rocha.

Héctor Landeros, also from EY, highlighted the importance of operators relying on their providers’ local-content statements. “If an operator fully relies on what his provider says, he will be able to focus on hidden value-adding operations, therefore creating a better industrial ecosystem,” Landeros said. Local content should not only be a requirement but a facilitation that ensures a competitive industrial market. “If providers fight to become the preferred selection of operators, they will fight to include lean administration and activities, ultimately creating a better market,” said Rocha.

He also worries about the implications of creating an institution that certifies local content requirements. “The industry is not ready yet; there are plenty of administrative actions that can be carried out if we want to go that way and many providers may be left behind. For now, Mexico should focus on learning and improving the processes it already has.”