The Emergence of Aerospace Clusters in Mexico

The market is growing because of the certain longevity of aerospace manufacturing in North America.

Over the past six years, Mexico has seen the birth of an organized aerospace industry that now employs over 27,000 workers in more than 200 companies. In June, Rolls-Royce plc — the world’s second-largest aircraft engine manufacturer — announced it would be producing critical components for its latest generation of engines in the State of Sonora. What makes Sonora, a late entrant to the aerospace manufacturing arena, and Mexico, a preferred destination for aerospace manufacturers?

Initial impulse
Since the early years of this century, aircraft engine manufacturers have been developing very aggressive strategies to lower their bill of materials. Certain engine components, due to their substantial volume and relative simplicity, became strong candidates for low-cost sourcing, in particular the machining of blades and vanes for compressors and low-pressure turbines. Then, some original equipment manufacturers strongly encouraged several of their most prominent Tier 1 suppliers to establish low-cost machining capabilities in Mexico. These aerospace investments came subsequent to investments in similar capabilities for industrial gas turbines (IGT), such as GE Toshiba Turbine Co. established in Monterrey in 1999.

This initial wave of aerospace investments in Mexico is the result of the industrial maturity gained by the country since its participation into the 1994 North American Free Trade Agreement (NAFTA). Mexico industrialized rapidly through foreign investments, gaining access to the best manufacturing practices and processes of the world. Initially, the automotive industry boomed, resulting in a complete and integrated local supply chain. By the early 2000s, the aerospace industry saw Mexico as a proven location to outsource and invest for the future. Aerospace manufacturing came as a natural extension of their significant success in the car industry.

Mexico in the global landscape
Mexico was not an obvious outsourcing and off-shoring destination for aerospace, in contrast to other emerging countries that had aerospace manufacturing capabilities inherited from their past self-defense requirements. But one important factor played in its favor: proximity to the North American market. Despite the fact that the coming decades will see significant growth and participation in the aerospace market by Middle East and Far East countries, the world’s main market and cluster of aerospace manufacturing will remain in North America.

Contributing to the strategic importance of Mexico as a location is its relevancy for the European aerospace companies. For a long time, the Western aerospace industry was a strong duopoly between Europe and North America. Fortunately, in recent decades, the aerospace and defense industries have admitted foreign participants to the market, creating an opportunity for European companies to become suppliers to the North American OEMs. Therefore, the need to manufacture in North America became increasingly important. In addition, the common currency for sales of aerospace products worldwide is the U.S. dollar. With a strong Euro, the European companies were in a hurry to hedge their manufacturing costs in a currency strongly tied to the U.S. dollar — a condition that greatly favored Mexico.

Aerospace 2.0
For these fundamental reasons, and many more, the aerospace industry in Mexico has reached a compounded annual growth rate of more than 15% over the last 10 years, and has expanded in several new segments. The aero-structures segment, in particular, has seem significant growth by companies such as Bombardier, Cessna, Hawker Beechcraft, Gulfstream, Bell Helicopter, Eurocopter, just to name a few.

The growth has not been only in terms of product volume, but in terms of technologies. For instance, Bombardier is manufacturing its first all-composite fuselages and wings for its new generation Lear 85 business jet in Mexico. This demonstrates that Mexico is no longer considered only as a location for outsourcing the machining of simple components.

As complexity and volume of aerospace work rises in Mexico, the need for a complete local and integrated supply chain increased, too. The major OEMs and Tier 1’s established in Mexico, and those companies devising sourcing strategies for Mexico, acknowledge that their efficiency and cost savings would duplicate if they could ensure the integration of the supply chain, reducing the complexity of the logistic chain.

However, this is easier said than done, in particular in aerospace. First, developing new aerospace suppliers in foreign locations such as Mexico or Asia is a very difficult process that only a few large conglomerates can undertake. The difficulty arises from the high-level barriers to entry into aerospace, such as the stringent certification processes, like AS-9100 and Nadcap, making the passage to aerospace a tedious and expensive process.

Consequently, consolidating a supply chain in Mexico for an OEM largely involves encouraging its existing and proven suppliers to establish a manufacturing operation in the country. As well, this has it share of difficulties. Generally, the field of Tier 2 aerospace suppliers are small and mediumsized enterprises. For many of these, considering an offshore manufacturing investment is a significant challenge, both commercially and operationally. This is where Mexico demonstrates its true value in comparison to other low-cost offshore locations. It is a destination within the reach of the vast majority of smaller participants of the aerospace industry, in contrast for instance to China.

Supplier strategy and integration
Located in northwest Mexico, Sonora is one of the locations in the country where aerospace investments are concentrated. Its proximity to the west coast of U.S., where over 35% of the aerospace industry is located, makes it a highly relevant destination.

Sonora has received aerospace investments thanks to its location and its shelter programs — a convenient third-party service that allows companies to expedite their operational startups without being concerned by the burden and specificity of setting up an administrative infrastructure in a foreign country.

The state is recognized for its capabilities in aero-engine and industrial gas turbine components manufacturing originating from early investments by companies such as Goodrich Turbomachinery. Very early, the local investors understood the importance of integrating the value chain. Esco Turbine Technologies joined the cluster as a supplier of investmentcast turbine blades to the Goodrich facility established nextdoor, and to other customers outside Mexico. Other engine components machining operations joined the cluster over time, resulting in a critical mass of activities that makes the location increasingly interesting to other Tier suppliers and OEMs. A few years ago, Rolls-Royce acknowledged the potential of the region, and encouraged suppliers like Trac Precision Machining to establish in Sonora.

Now, the state is in position to integrate the supply chain further. Bodycote, the global thermal processing specialist, is establishing a capability in support of both aero-engine components and industrial gas turbines, as are additional diffusion coating and thermal processing companies. These highly specialized investments are now possible as there is sufficient demand to make the investments viable.

Mexico will continue to grow its presence in aerospace, as it is still at its infancy. By now, the large OEMs have embraced Mexico in their long-term strategies. The next big wave of investments will be by the Tier suppliers, which will have to consider increasing their support for the offshore or sourcing strategies of their OEMs if they want to retain their status of suppliers of choice.

Luc Beaudoin is the principal of AeroShores Management Consulting. He provides advisory services to manufacturing companies considering operations in Mexico, and specializes in the aerospace sector. Contact him at [email protected].
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