Mexico: From Maquilas to Aerospace?

♠ Posted by Emmanuel in , at 12/05/2007 12:29:00 AM
With China shaking the world, other developing countries have been seeking ways to move away from direct export competition with that exporting powerhouse. Mexico has been known for setting up maquiladoras on the US-Mexico border [gimme some water!] to take advantage of less expensive Mexican labor in industries such as textiles, but we all know how China is affecting that particular trade and many others like it. So, here is a somewhat circuitous and unlikely story that demonstrates globalization for you. Here are its three steps: First, global demand for aerospace products has been fueled not by decrepit US airlines but emerging market carriers with big ambitions like Emirates Airlines. Second, US aerospace manufacturers have been well-placed to take advantage of this surge in airplane demand with a dive-bombing dollar. Third, however, these American manufacturers have had trouble sourcing components from faraway places where the supply chain is longer than desired in today's just-in-time manufacturing culture.

What's the solution? You guessed it: farm out aerospace component assembly to nearby Mexico which has just ditched import duties on aerospace components to take advantage of this burgeoning trade. True, the aerospace sector constitutes a small slice of Mexican industry at the moment, but given the continuing boom in the global aerospace sector, the Wall Street Journal expects Mexico to be well-placed to use its traditional comparative advantages of relatively inexpensive labor and geographical proximity to the US of A to avoid competing head-on with China. (The Seattle Times also has an informative take on this trend.) While the PRC itself is seeking to develop an aerospace industry of its own, its designs are still largely based on Western ones, meaning that Mexico probably has more breathing room if it goes down this path:

Mexico has felt the downside of globalization in recent years as cheaper Asian manufacturers of everything from electronics to auto parts have undercut the advantages provided by looser North American trade barriers. Now, Mexican officials are turning to another sector they hope will put down deeper roots: The booming North American aerospace industry.

Mexico has moved to make it even easier for foreign companies to do business south of the border. Already, big names in aerospace such as Goodrich Corp. of the U.S. and Bombardier Inc. of Canada have set up facilities there. The nation offers proximity and easy reach at a time when aerospace giants are under pressure to hit deadlines and deliver new aircraft to customers. Aerospace officials also say they are impressed by Mexico's deep talent pool. And if Mexico successfully bolsters its aerospace industry, it will demonstrate that skills burnished servicing the automotive sector can be transferred to higher-end markets.

American manufacturers, eager to cut costs, raced to build factories in Mexico after the North American Free Trade Agreement was adopted in 1993. Thanks to Nafta, the number of Mexicans employed by maquiladoras -- plants that assemble and export goods made from imported parts -- doubled to more than a million by 1999, making Mexico a leading producer of garments, auto parts and electronics.

But in the past several years, Asian factories, with their even lower labor costs and seemingly endless supply of workers, lured business and jobs away from the maquiladoras. Mexico's biggest advantage may be its location. For years, major aerospace manufacturers such as Boeing Co. have farmed out a growing share of their work to suppliers in Japan, China and elsewhere. But these arrangements can make it a challenge to get finished components back to the companies' main factories for final assembly. The choice often boils down to waiting weeks for delivery by ship or paying for costly space on a cargo jet. [The world ain't flat quite yet.]

With demand for new jetliners and other aircraft at record levels, however, companies are under greater pressure to cut shipping time and increase production. Many U.S. aerospace companies already have built up considerable capacity in Mexico to feed the industry's production hub in Southern California.

Last year, Mexico dropped all import duties on aeronautic components. "It's something we never did for garments or automotive parts or electronics," says Eduardo Solís Sánchez, investment-promotions director for Mexico's Economy Secretariat, who calculates $1.2 billion has been invested in Mexico's aerospace sector since the start of last year.

In September, Mexico concluded a four-year campaign to forge a bilateral aviation-safety agreement with the U.S. Federal Aviation Administration. The deal ultimately will remove barriers for an industry itching to outsource production to Mexico. It contains provisions that will let manufacturers certify and ship components directly from Mexican factories, rather than sending them to the U.S. for completion and safety checks.

The number of Mexican workers employed by aerospace production has doubled in recent years to 16,500. While that is a small share of the 1.2 million jobs in the country's export-assembly sector, it is expected to grow.

In September, Goodrich broke ground on a 350,000-square-foot facility in the Mexican state of Baja California to make a variety of parts, including engine casings and thrust reversers. A Goodrich plant in Sonora produces turbine blades and damper seals for all of the major engine companies. Aerospace manufacturers who count Goodrich as a supplier "have applied pressure up and down the supply chain" to continually cut costs," says Bob Yancey, president of Goodrich's engine-components business. The plant at Sonora has been such a success that Goodrich is doubling it to 70,000 square feet.

While Mexico last year exported less than 2% of the $25 billion in parts imported by the U.S. aerospace industry, that number is expected to increase along with the complexity and value of the components made there. Five years ago, Mexican workers were used for relatively menial work such as weaving the intricate wire bundles used in airplanes. Today, they are producing complete fuselages and landing-gear systems, with plans to export finished airplanes for Bombardier Aerospace Corp. by 2012.

Nowhere is this transformation more apparent than in the state of Querétaro, in Mexico's central valley. A booming auto-parts hub a decade ago, Querétaro has suffered with Detroit's downturn. Now, General Electric Co. and a local partner are developing a $100 million commercial aerospace park there, on land donated by the government.

GE says the development will be the first "aerospace cluster" in Mexico, housing anchor tenant Bombardier and about 20 other suppliers, as well as a government-funded school to train workers. Bombardier expects to pour $250 million into the site over the next 10 years and to have four to six facilities in the park, with a goal of eventually assembling complete commuter jets. Just as the major automobile companies drew clusters of suppliers to their Mexican plants, Mexico expects Bombardier to help draw other companies south.

Consultant Luc Beaudoin, director of the Everest Group, which advises companies setting up operations in Mexico, notes that work on components for Bombardier's new 50-seat Challenger jet has been relocated to Querétaro from places like Japan, Taiwan and Belfast, Northern Ireland.

Mexico's gains aren't sitting so well with labor unions in the U.S. "In aerospace, we're not building kites," said Mark Blondin, an aerospace coordinator with the International Association of Machinists and Aerospace Workers, which represents workers at Boeing, among others. "Long term, workers in Mexico could become highly skilled, but you don't get there overnight."