megatrends shaping the mexican aerospace and defense sector

Megatrends shaping the Mexican aerospace and defense sector A Point of View

Produced by Global Markets — EY Knowledge

08 April 2014

Contents

1. Megatrends

2. A&D sector in Mexico

3. Aerospace clusters

4. Macroeconomic environment

5. Regulatory landscape

Megatrends shaping the Mexican aerospace and defense sector

EY has identified eight megatrends that could impact Mexico’s aerospace and defense (A&D) sector

OEMs are focusing on fuel-efficient

and environment-friendly products to

gain a competitive advantage.

Companies are taking measures to

increase productivity and control

costs to meet demand while

remaining profitable.

Business jet and single aisle

segments are growing fast, driven by

demand from developed markets.

OEMs are bringing manufacturing in

proximity of the US, to shorten lead

times

Aerospace companies are focusing

on orders from the Middle East, Asia,

Africa and Latin America to improve

their revenues.

OEMs are considering vertical

integration and strategic alliances to

build global supply chain networks.

Companies are coordinating with the

government to fulfil increasing

demand for skilled workforce.

Regulatory measures and formation

of geographic aerospace clusters

specializing in niche skills will boost

Mexico's aerospace sector.

1.

2.

3.

4.

5.

6.

7.

8.


Megatrends in Mexico’s A&D sector

OEMs are focusing on fuel-

efficient and environment-friendly

products to gain a competitive

advantage.

Companies are taking measures

to increase productivity and

control costs to meet demand

while remaining profitable.

Companies are coordinating with

the government to fulfil

increasing demand for skilled

workforce.

1.

2.

3.

► OEMs are increasing investment in R&D to develop fuel-efficient products and

reduce the effect of volatility in fuel prices. Boeing’s upcoming 737 Max and Airbus’

A 320 Neo will offer 15%-20% better fuel efficiency as compared to existing

standards. Engine manufacturers are also coming up with fuel-efficient engines such

as CFM International’s LEAP and Pratt & Whitney’s PW1000G.

► Aerospace companies are manufacturing a substantial portion of their new fuel-

efficient products in Mexico. For instance, Bombardier is manufacturing 85% of the

composite materials for Learjet85 at its Mexican facility.

► Aerospace manufacturing and aeronautics need constant supply of skilled human

talent with knowledge in engineering and technology. Moreover, Knowledge Process

Outsourcing (KPO)-based services such as engineering and design of component

and software, which require skilled engineers, are gaining popularity.

► Companies, academics and government agencies in Mexico are collaborating to

improve on the research and development (R&D ), engineering and training facilities

in the country. Examples of such collaborations include the UNAQ university and

LABTA test laboratory in Queretaro.

► OEMs such as Boeing and Airbus have huge production backlogs. A&D

manufacturers across the supply-chain are focusing on increasing production rate to

keep up with the growing demand.

► Companies are also taking cost control measures such as right sizing and lean

manufacturing to remain profitable amid uncertain global macroeconomic

environment.



OEMs are considering vertical

integration and strategic alliances

to build global supply chain

networks.

Regulatory measures and

formation of geographic

aerospace clusters specializing

in niche skills aerospace clusters

will boost Mexico's aerospace

sector.

5.

6.

► Mexico has Free Trade Agreements (FTAs) with over 45 countries including the EU

and the US, making it one of the most conducive countries to international trade.

Agreements such as NAFTA eliminate tariff and non-tariff barriers to trade and

investment in Mexico. BASA facilitates cross-border aviation-related trade and

services.

► Mexico has developed a strong regulatory framework for protecting intellectual

property rights, making it attractive for the R&D work of aerospace OEMs. It has also

developed geographic clusters of aerospace manufacturing to enhance

competitiveness.

► Aerospace companies are increasing efforts to improve and globalize their supply

chains. For this, they are looking for partners across the globe. They are also

acquiring small, niche suppliers to vertically expand the supply chain.

► The Mexican authorities are attempting to develop and organize the local supplier

network in aerospace clusters such as Nuevo Leon. This would help the local

Mexico A&D companies to integrate with the global supply networks of large OEMs.

OEMs are bringing

manufacturing in proximity of the

US, to shorten lead times 4.

► Companies are moving manufacturing closer to the US and other regions with high

customer demand. For example, Airbus moved some of its component

manufacturing processes from its Asian facility to the Mexican one.

► This is expected to shorten lead times, increase control over supply-chain and

reduce transportation costs.



Business jet and single-aisle

segments are growing fast,

driven by demand from

developed markets.

Aerospace companies are

focusing on orders from the

Middle East, Asia, Africa and

Latin America to improve their

revenues.

7.

8.

► Given the pressure on defense expenditures in developing countries, A&D

companies are focusing on international markets. Moreover, flying hours in emerging

countries such as China have increased in recent years.

► Manufacturing in Mexico will help companies increase their presence in Latin

America and cater to the increasing aerospace market in Mexico. Mexico is the

second largest market of business jets in the world and is expected to see an

exponential increase in the single-aisle market.

► Business jet demand was affected by the global economic recession. Nevertheless,

it saw a modest increase in 2013, driven by increased deliveries to US customers.

Furthermore, it is expected to increase for the next 10 years at a steady rate.

► With major companies including Boeing, Airbus, Bombardier, Embraer, Mitsubishi

and COMAC coming up with next-generation of single-aisle aircraft , the segment

has huge growth potential.


A&D sector in Mexico

Mexico aims to become the 10th-largest supplier of aerospace products by 2020.

5,040

0

1,000

2,000

3,000

4,000

5,000

6,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Mexican aerospace exports (in million US$)

10%

11%

79%

Development andengineering

Maintenance, repair,overhaul (MRO)

Manufacturing

Segmentation of A&D companies in Mexico

► The percentage of Mexican companies will increase from 8% in 2012 to 16% in 2020, while the percentage of US companies will decrease from 84% to 64% in the same period.

Source: Ministry of Economy (SE), DGIPAT

Source: MexicoNow research

A&D sector in Mexico has been growing at a CAGR of 20% since 2002.

Mexico-based A&D companies will gain market share within the industry.

► Mexico is the 12th-largest exporter of aerospace products globally and is the 6th-largest supplier to the American industry. It has been the world’s largest recipient of foreign direct investment (FDI) in aerospace in the last three years.

► A&D companies in Mexico employ 34,000 employees in 18 states.

► The number of aerospace manufacturers in Mexico is expected to grow by 85% by 2020 to around 500 from the current 270 companies.


The aerospace industry in Mexico has evolved in a short timespan.

2007-2008

Mexican aerospace sector develops

rapidly

► Becomes 15th largest exporter in

the global aviation industry and one

of the largest recipients of FDI in

aerospace sector

► Has ~300 aerospace

manufacturers

Current

► Number of small aerospace

companies start operations

2000 2005

Mid-1970’s

► Major foreign manufacturers

Honeywell & Westinghouse

started fabricating basic

components for US defense

aircraft in Chihuahua.

Aerospace firms increase

focus in Mexico

► Companies started

exploring additional

locations in Tijuana,

Mexicali and Sonara.

► Has ~65 manufacturers

2004

Organized aerospace sector

begins

► Bombardier becomes the first

international company to shift

its production to Mexico from

Ireland and Japan.

Marked establishment of:

► National Aerospace School

► Supplier Park

Regulatory initiatives by government

► Mexico drops import duties on aeronautics

components.

► Bilateral Aviation Safety Agreement (BASA) signed

with US to facilitate cross-border aviation related trade

and services.

*A “pôle de compétitivité” (competitiveness cluster) brings together large and small firms, research bodies and educational establishments, all working together in a specific region to develop synergies and cooperative efforts around a shared theme.

Mexico declared “Pole de Competitivite*” for the

French Aerospace

► Mexican and French government establish high

level committee to evaluate collaboration initiatives

in the areas of aerospace education and

supporting investments and developments of

suppliers.


Aircraft contributes to more than three-fourths of Mexico’s total defense imports.

22 61

109

226 267

2008 2009 2010 2011 2012

Mexican defense import trend (US$ million), 2008–2012

*Others include Russia, Canada, Netherlands, Denmark and Israel.

1%

3%

5%

6%

10%

76%

Artilary

Ships

Armoured vehicles

Sensors

Engines

Aircraft

Mexican defense imports by category (%), 2008–2012

10%

12%

13%

32%

34%

Italy

France

Others *

US

Spain

Mexican defense imports by country (%), 2008–2012

► Mexico’s domestic defense capabilities are restricted to the production of armored vehicles, small arms and ammunition and helicopter maintenance services.

► The rise in capital expenditure allocations and the need to modernize weapons arsenal are expected to further increase defense imports.

Source: Strategic Defense Intelligence

Mexico’s defense imports are expected to increase.




Single-aisle and business jet markets are expected to be the most important commercial segments for Mexico.

700 800

1,700 1,800

1,900

2,400

3,100

2,400 2,600

2,700

3,000

825 800 825 850 850 875

900 875 925 975

950

2013 2014E2015E2016E2017E2018E2019E2020E2021E2022E2023E

Estimated single-aisle and business jet market in Mexico in US$ million (2013-2023E)

Single aisle Business jet

► Mexico has the second-largest fleet of

business jets, after the US and Latin

America’s largest business jet fleet.

► The market saw a modest increase, as global

deliveries increased by 1% in 2013 to 678

aircraft.

► The recovery is driven by increased

deliveries to US buyers on account of

improved economic growth.

Single-aisle aircraft is expected to be the

most important segment of commercial

aircraft in Mexico.

The business jet market is on the path of

recovery.

► The consolidation of airlines and demand for

fuel-efficient aircraft is giving a boost to the

single-aisle market.

► In 2012, Interjet sought 40 A320neo while

Volaris sought 30 A320neo and 14 A320

aircraft.



Revenue expenditure accounts for the majority of the defense budget.

4.14 4.51 5.27 5.52 6.16 6.36 7.03 7.86 8.84 9.74 0.29 0.21 0.25 0.21 0.35 0.37 0.43 0.41

0.47 0.54

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Mexico defense expenditure (US$ billion), 2009-2018E

Revenue Expenditure Capital Expenditure

12%

26%

62%

Air-force

Navy

Army

Mexico defense budget breakdown, 2013

CAGR Revenue expenditure* 2009-13: 10.5%

CAGR Capital expenditure** 2009-13: 11.2%

Revenue expenditure 2014-18:11.24%

Capital expenditure 2014-18: 10.1%


► 81% of the revenue expenditures is spent on defense personnel, including remuneration and benefits for the defense staff,

Mexico’s fight against drug cartels will drive defense expenditures.

High revenue expenditures are due to personnel costs.

► Key opportunities for equipment suppliers are expected in surveillance equipment, special operation helicopters, and maritime patrol aircraft.


* Revenue expenditure includes expenditure on salaries, pensions and maintenance of current equipment

**Capital expenditure includes expenditure on buying fresh equipment


5%

0%

5%

10%

15%

20%

-10% -5% 0% 5% 10% 15% 20% 25%

US

Russia

UK

France

China

India

Israel

Defense expenditure in Mexico is expected to grow at a rate only behind Russia, India and China.

* Size of the bubble represents 2013 defense budget allocation

Defense expenditure CAGR 2009-2013

Defe

nse e

xp

en

diture

, C

AG

R 2

01

4E

-2018E


Mexico

Brazil

Korea Saudi Arabia

Japan

Italy

Germany


Mexico formulated a national flight plan, Pro-aereo, to give a boost to the aerospace sector.

To feature among the 10

largest suppliers in the global aerospace sector

> US$12 billion

export

Goals for the Mexican aerospace sector till 2020 (as per Pro-aereo)

50% local content to

be used in raw materials and products in the aerospace

industry

110,000 workers in

aerospace

Strategies for achieving the targets

Develop the domestic and

international markets

Create niches and instruments to

support consistent and sustained

growth

Better integrate the supply chain

Strengthen and develop capabilities

with a linked supply chain

Develop a skilled workforce

Create well-defined technical and

training programs and education-

industry links

Adopt the necessary technology

Develop specialized clusters, new

areas of technology, R&D labs and

new materials

Develop public-private partnerships

Assist the industry with an institutional

frame, incentives, financing,

international covenants and

infrastructure


Criminal activities and logistic hurdles pose challenges.

► Mexico’s mountainous terrain, a largely unguarded border with its Central American neighbours and

vast coastlines create numerous smuggling routes for criminal networks.

► Several large drug trafficking organizations (DTOs) dominate the Mexican underworld. Other smaller

groups smuggle weapons, humans and other illegal goods through and across the country’s borders.

► Uncertainties around border crossings are of special concern for aerospace manufacturers,

especially in the case of players implementing lean manufacturing programs.

► Cross-border transactions involve complex documentation procedures. Inspection at the US-Mexico

border checkpoints can involve a delay of between 30 to 72 hours. This poses a challenge to the

implementation of lean concepts such as just-in-time (JIT).

► As per the Mexican customs brokerage practices, LTL shipments have to cross the border individually,

rather than share space with others’ freight leading to longer transit times.

► As an alternative to LTL, small players that do not handle adequate materials for a full truckload have

to hire a third-party logistics service provider (3PL). These providers charge a high premium for their

services, which poses a concern for small players.

An average of 1,500 freight hijackings are recorded in Mexico each year.

Delays at US border checkpoints pose a challenge for lean manufacturing.

The lack of an Less than Truckload (LTL) network increases logistic costs for small players.

1.

2.

3.

Challenges of A&D manufacturing in Mexico


Aerospace clusters

Aerospace clusters enable companies to strengthen their competitiveness.

► Bombardier wants to lower its production cost, strengthen its supply chain and increase its competitiveness through

manufacturing in the Queretaro cluster.

► Airbus Helicopters aims to meet offset requirements, increase dollar exposure and improve competitiveness in Latin

America through manufacturing faculties in Mexico.

Mexico has five geographic clusters which aim to develop specialized niches in the aerospace industry.

Baja California intends to be

a KPO leader for fuselage

systems and power plants.

Sonora is maximizing its potential

for manufacturing turbine and

engine components.

Chihuahua is positioned to

become a manufacturing hub for

high-tech and dual-use goods.

Nuevo Leon is a potential center

of excellence in aeronautical

innovation, engineering and

manufacturing.

Queretaro is focusing on

complex machining

processes and MRO.

International OEMs are opening facilities in Mexico to improve their market position in Latin America.

Baja California Sonora

Chihuahua

Nuevo León

Queretaro


The five aerospace clusters contribute 67% of Mexico’s total aerospace exports.

Exports

(in US$)

% of

Mexico’s

export

Number of

companies Manufacturing capabilities Long-term vision Major companies

Baja

California

1,391

million 28% 60

Precision machining, metal

plate conformation, electrical

and hydraulic systems,

complete integration testing,

interior design

KPO leader for fuselage

systems and power plants

Honeywell,

Gulfstream, Eation,

Rockwell Collins,

Lockheed Martin,

Goodrich

Chihuahua 568

million 11% 28

Electrical systems for aircraft,

helicopter structures and

assemblies, metal

components, engine

components

Manufacturing hub for high-

tech and dual-use goods

Cessna, Textron,

Honeywell,

Beechcraft

Sonora 174

million 4% 48

Interior cabin systems and

components, engine

accessories, starting systems

and electrical power systems,

special processes

Leading turbine

manufacturer

Goodrich, Semco, BE

Aerospace, Precision

Aerospace

Queretaro 673

million 13% 34

Propulsion systems, airframe

structures, subassemblies and

subsystems, engine

components, landing gear

systems

Hub for complex machining

processes and MRO

Bombardier, Safran,

Eurocopter, Galnik,

General Electric

Nuevo

Leon

555

million 11% 28

Advanced manufacturing,

maintenance and repair

Center of excellence in

aeronautical innovation,

engineering and

manufacturing

Honeywell, Rockwell

Collins, Hamilton

Sudstrand


Baja California intends to become a KPO leader for fuselage systems and power plants.

► High enrollment in engineering and technology courses will boost talent supply. Baja California has 24,349

students enrolled in engineering and technology courses, out of the 905,441 students nationwide.

► Baja California has coordination of the triple helix. Companies and government agencies, together with the

academia, formed the International Aerospace Supplier Forum in 2013 to discuss business opportunities in the region.

Export value: US$1,391 million

Contribution to

Mexico’s export:

28%

Major

companies:

Honeywell,

Gulfstream, Eaton,

Rockwell Collins,

Lockheed Martin,

Goodrich

Key highlights Capabilities of Baja California cluster

Strengths of Baja California Cluster

Manufacturing

capabilities

Knowledge-

based

capabilities

► Precision machining

► Metal plate conformation

► Electrical and hydraulic systems

► Complete integration testing

► Interior design of aircraft and cockpit

Goals of Baja California cluster

By 2020, Baja California will be the main export hub

of high-value, knowledge-based services

(KPO) for Mexico’s A&D industry.

By 2025, it will strive to make Mexico a

a KPO leader for fuselage systems and

power plants in Latin America.


Chihuahua is positioned to become a manufacturing hub for high-tech and dual-use goods.

► Chihuahua has a large pool of talent. It houses 59 universities and technology schools, 65 technical schools and 2

R&D centers.

► Chihuahua has the only research center in advanced materials, nanotechnology and metrology in Mexico. It

facilitates the growth and development of the aerospace industry in the cluster.

► Companies in the cluster can use restricted technologies. Manufacturing permission from the US Department of

State and Department of Defense allows companies to use restricted technologies.

Export value: US$568 million

Contribution to

Mexico’s export:

11%

Major

companies:

Cessna, Textron,

Honeywell,

Beechcraft

Key highlights A&D manufacturing in Chihuahua

Strengths of Chihuahua cluster

10%

10%

10.10%

26%

43.90%

Precision machined

Harness

Engine and parts

Fuselage and parts

Landing gear

Goals of Chihuahua cluster

By 2016, Chihuahua will be the leading hub

in Latin America in terms of high technology and

dual-use goods.

By 2021, it will reduce its dependence on molds,

tooling and specialized services imports to 50% of

the current size.

Source: ProMexico


Sonora is maximizing its potential for manufacturing turbine and engine components.

► Interior cabin systems and components

► Engine accessories

► Starting systems and electrical power systems

► Special processes

► Casting: investment casting, die casting and sand casting

► Heat treatment: vacuum heat treating, passivation, brazing,

Sintering, CAD plating

► Surface Treatment: HVOF spray, VPA, plasma spray, platinum

and gold plating, sulphuric anodise, chromic anodise, prime and

paint


Contribution to

Mexico’s export:

4%

Major

companies:

Goodrich, Semco,

BE Aerospace,

Precision

Aerospace

Key highlights

Short term goal Medium term goal Long term goal

Vision

Sonora as a leading turbine manufacturer

Develop special business models

Create cost competitiveness in the value chain

Leverage its geographic location and international perception

Develop human talent

Integrate supply chain in Sonora

Higher education development for Mexican managers

Strategies of Sonora aerospace cluster

Products and services of the Sonora cluster


Queretaro is focusing on complex machining processes and MRO.

► Propulsion systems

► Airframe structures, subassemblies and subsystems

► Engine components

► Landing gear systems

► Queretaro has a coordinated relationship between the state government and the industry. The three parties

coordinate to initiate strategic projects such as:

1) Queretaro Aerospace Industry Network for Investigation and Innovation (RIIAQ)

2) Testing and Aerospace Technology Laboratory (LABTA)

3) The Aeronautical University of Queretaro (UNAQ)

► The cluster has appropriate infrastructure and optimum business conditions. Infrastructure and the business

environment in Queretaro are designed to complement the value chain in complex machining processes, surface

coating, heat treatment, sheet metal, forging and casting.


Contribution to

Mexico’s export:

13%

Major

companies:

Bombardier,

Safran, Eurocopter,

Galnik, General

Electric

Key highlights Products and services of the Queretaro cluster

Strengths of Queretaro cluster


Nuevo Leon is a potential center of excellence in aeronautical innovation, engineering and manufacturing.

► The cluster has manufacturing experience across various industries. Currently, it has manufacturing facilities for

industries such as automotive, metal work, appliances and aerospace.

► Technical schools offer customized programs for state technical institutes. They offer careers and specialties in

engines, CNC machining, welding on advanced materials, among others.

► Nuevo Leon has advanced manufacturing capabilities and a strong supply network. This cluster has the

capability to host highly specialized sectors such as aeronautics.


Contribution to

Mexico’s export:

11%

Major

companies:

Honeywell,

Rockwell Collins,

Hamilton

Sudstrand

Goal

► Development of parts suppliers that manufacture high-value-added items for major OEMs and Tier 1 suppliers.

► Integration of local suppliers in the aviation industry value chain

► Export locally engineered and manufactured aerospace components to North America, Europe and major market leaders in the industry

Key highlights

Strategy

Strengths of Nuevo Leon Cluster

► Advanced manufacturing

► Maintenance and repair shops

Products and services of the Nuevo Leon cluster


Mexican suppliers have diverse manufacturing and repairing capabilities.

► General Electric Advanced Engineering Center (GEIQ) is the largest global engineering center

for GE Aviation.

► It is focused on the repair and manufacture of large engines and turbines.

► It operates 21 manufacturing plants and employs over 11,000 people.

► It has operations in the Queretaro and Nuevo Leon regions.

► GE plans to invest an additional US$20 million on its existing facility in 2015 for enhancing

research and designing capabilities.

► It also has a presence in Mexico through the assembly plants of partners such as Mabe,

IUSA, Prolec GE and AMI GE.

► Honeywell is focused on designing parts and components and on the repair and manufacture

of medium and small engines.

► It has 20 centers with over 14,000 employees in Mexico, which represents 10% of Honeywell

employees worldwide.

► It has operations in the Baja California, Chihuahua and Nuevo Leon regions.

► Safran is focused on the repair and manufacture of medium-sized engines.

► It operates 8 manufacturing facilities and employs over 4,000 people.

► It has operations in the Queretaro and Chihuahua regions.

Key suppliers in Mexico

General

Electric

Honeywell

Safran


Eurocopter’s Mexican facility addresses Airbus’ key objectives of overseas deployment.

Meet offset

requirement

Increase

competitiveness

in Latin America

Increase exposure

to dollar zone cost

base

► The company plans to invest up to US$550 million in the facility.

► The factory is expected to perform both component manufacturing and helicopter assembly by 2014-15.

► The plant will be running with mostly Mexican staff, trained in Mexico and Europe, by 2017.

► Airbus Helicopters invested US$100 million in a 130,000-sq ft factory.

► The factory will manufacture tail booms for Ecureuil and emergency exit doors for Airbus A320, A330 and A340 cargo.

► The investment would help the company meet offset requirements of a 2010 supply contract with the Mexican Air Force and Navy.

To take advantage of Mexico’s competitive manufacturing costs, Airbus moved door manufacturing work for Airbus A3xx series from its Asian facility to Eurocopter’s (now Airbus Helicopters) Mexico facility.

Key objectives of the overseas

deployment strategy Manufacturing facility in Queretaro

Current status Future plans


Bombardier plans a full aircraft assembly in Mexico.

► Currently, 85% of Learjet 85’s composite parts and materials are manufactured at Bombardier's facility in Queretaro.

► Manufacturing in Mexico will help the company strengthen its supply chain, take advantage of lower production costs and increase its competitiveness in the Latin American market.

Electrical systems:

Manufactured and installed in Mexico

Fuselage/Body:

Manufactured in Mexico

Horizontal and vertical stabilizers:

Manufactured in Mexico

Wings:

Manufactured in Ireland and assembled in Mexico

Engines:

Manufactured in Canada and assembled in the US

* This image is for illustration only. This is not a real picture of Learjet 85.


Baja California and Chihuahua: product capabilities

Product Capabilities Eaton Goodrich Gulfstream Honeywell Lockheed

Martin

Rockwell

Collins Cessna

Hawker

Beechcraft Honeywell Textron

Aero-engine

components

Aero-structure compts.

fuselage

Aero-engines and

structures

subassemblies

Aero-engine fabrication

Aircraft construction

and assembly

Avionics

Electric and electronic

Communication system

Electrical cable

accessories

Fuel and fuel systems

Hydraulic system and

equipment

Raw material supplier

Safety and survival

equipment

Tooling

Standard parts

Baja California Chihuahua

* Operates MRO


Nuevo Leon, Queretaro and Sonara: product capabilities

Product Capabilities Hamilton

Sundstrand Honeywell Bombardier General Electric

BAE

Systems BE Aerospace Goodrich Semco

Aero-engine

components * *

Aero-structure compts.

Fuselage

Aero-engines and

structures

subassemblies

*

Aero-engine fabrication

Aircraft construction and

assembly *

Aircraft interiors

Avionics

Communication system

Electric and electronic *

Electrical cable

accessories

Fuel and fuel systems

Hydraulic system and

equipment

Raw material supplier

Safety and survival

equipment

Tooling

Standard parts

Nuevo Leon Queretaro

* Operates MRO

Sonara


Macroeconomic environment

Mexico’s macroeconomic fundamentals are favorable for investments in the A&D sector.

Proximity to the US

makes Mexico an

attractive outsourcing

destination for US-

based companies.

Mexico’s undervalued

currency favors exports.

Mexico offers lower

wages and a higher

quality of labor force as

compared to other

emerging markets.

Mexico offers a stable,

competitive and

conducive business

environment.

Mexico’s macroeconomic environment


Mexico offers a stable, competitive and conducive business environment.

Brazil

(B)

Russia

(R)

India

(I)

China

(C)

Mexico

(M)

Indonesia

(I)

South Korea

(S)

Turkey

(T)

Ease of doing

business rank (among

189 countries), 2014

116 92 134 96 53 120 7 69

Global

competitiveness rank

(among 148 counties),

2013-14

56 64 60 29 55 38 25 44

3.6

4.1

5.1

5.7

4

4.2

3.9

4.2

3.7

5.6

4.2

3.3

Institutions

Infrastructure

Macroeconomic environment

Health and primary education

Higher education and training

Goods market efficiency

Labor market efficiency

Financial market deveopment

Technological readiness

Market size

Business sophistication

Innovation

Components of global competitiveness rank*

* Scores on a 1-7 point scale where 1 stands for worst, 7 stands for best. Source: World Economic Forum

Source: Ease of Doing Business, World Economic Forum


Mexico offers lower wages and higher quality of labor force as compared to other emerging markets.

► In 2012, the hourly compensation cost in the manufacturing sector in Mexico was US$6.36, as compared to US$11.20 in Brazil.

► Mexico has almost 4.9 engineering students per 1,000 people, compared to 3.6 in the US. About 65,000 engineering majors students enrol every year in Mexico.

3.8

4.44

4.83

5.18

5.73

5.85

6.02

Brazil

China

Indonesia

South Korea

India

Russia

Mexico

Labor force quality (rating on 1-10 scale)

Source: ProMexico


Mexico’s undervalued currency favors exports.

The Mexican peso is undervalued against the US dollar by 40%. Companies based out of the US and Europe can buy aircraft components from manufacturers in Mexico at cheaper rates as compared to local manufacturers.

-66.8%

-50.2%

-43.3%

-40.7%

-40.0%

-25.0%

-18.7%

13.5%

India

Indonesia

Russia

China

Mexico

South Korea

Turkey

Brazil

Currency valuation for BRIC/ MIST countries (as of January 2014)*

* Valuations are on the basis of the Big Mac index published by The Economist, based on the theory of purchasing power parity (PP). Positive value denotes over valued currency while negative value denotes under valued currency

Source: The Economist


Proximity to the US makes Mexico an attractive outsourcing destination for US-based companies.

► Spanning 3,141 km, the US-Mexico border

constitutes 72% of Mexico’s total land

boundary.

► This is the most frequently crossed

international border in the world. The

number of loaded truck containers legally

crossing the border increased by 6% from

3.3 million in 2011 to 3.5 million in 2012.

Key highlights of the US-Mexico

border

Shipping transit time and costs from Mexico are lower.

Closely aligned political values help build strong relations.

Similar time zone eliminates need for extra working hours.

Similar cultures create favorable work environment for expatriates.

Shipments from emerging countries such as China and India take several

weeks. In the case of Mexico, smaller packages can be shipped through land at

low rates. Shipments from distant countries, on the other hand, require air

freight with high cost per kg.

Employees in Asia, Africa and the Middle East have to work in shifts or work for

extra hours to coordinate with the global headquarters. This is not the case with

facilities located in Mexico, as its time zone differs by only two hours from that of

Washington DC.

Working as an expatriate in African and Asian countries becomes challenging

due to differences in culture and language. Being closer to the US, Mexico’s

work culture is similar to that of the US. In addition, Mexico’s official language,

Spanish, is widely taught in US schools.

Both Mexico and the US have a democratic political structure, as opposed to the

communist setup in China and the autocratic government in some of Middle

Eastern countries. As a result, Mexico and the US are able to easily negotiate

business and trade related concerns.

1.

2.

3.

4.

Advantages of Mexico’s proximity to the US


Regulatory landscape

The Mexican Government is minimizing trade barriers and promoting a favorable business environment.

IMMEX allows export of

temporarily imported

goods, strengthening

export competitiveness.

Intellectual Property (IP)

regulations and industry

certifications boost

investor confidence.

Multiple trade

agreements promote

international trade.

Mexico’s regulatory environment


Multiple trade agreements promote international trade.

Mexico has 10 FTA with 45 countries including the EU and the US, making it one of the most favorable

countries for international trade.

Products do not need to be examined

internationally before shipping them off to

consumers for further assembly operations, thus

eliminating complexity and cost.

The bilateral FTA was signed in 1994. It has been

instrumental in boosting Mexico’s trade with Canada

and the US and in strengthening the aerospace

industry in Mexico.

The NAFTA agreement eliminates tariff and

non-tariff barriers to trade and investment.

► In 2007, the countries agreed to facilitate the

acknowledgment of each other’s: ► Airworthiness authorizations ► Environmental testing ► Approval of civil aeronautical products ► Qualification evaluation of flight stimulators

► The agreement allows Mexico’s aeronautical

authority to certify parts, components, aeronautical

systems and even complete aircrafts manufactured

and assembled in Mexico destined for the US and

other aerospace markets

The BASA agreement has become an important

component in Mexico’s relation with the US.

► The provisions of the BASA agreement apply to cooperation in multiple segments of aviation, including: ► Maintenance ► Flight operations ► Environment certification

The BASA agreement facilitates cross-border

aviation-related trade and services.


IMMEX allows export of temporarily imported goods, strengthening export competitiveness.

► Established in 1965, a maquila (or IMMEX) operation is a Mexican manufacturer that is wholly owned by a foreign

parent. It allows foreign companies to:

► Temporarily import goods and services that will be manufactured, transformed or repaired, and then

re-exported without payment of taxes, compensatory quotas and other specific benefits.

Streamlined system for importing

goods and avoiding Mexico’s

general import tax

Low or no import duties on

equipment and materials used

for manufacturing products in

Mexico

No payment of compensatory

quotas and taxes for domestic

purchases incorporated into

products for exports

Mexico has received FDI of US$4.2 billion, primarily owing to the IMMEX program, between 2008 and 2012.

Reduced custom fee to 1.76%

(from 8%) of the value of

machinery

Need to pay VAT, but immediate

credit for “certified” companies


Intellectual Property (IP) regulations and industry certifications boost investor confidence.

Stringent IP

protection

regulations

► The country has developed a strong legal

infrastructure for protecting intellectual

property rights.

► The Mexican Institute of Industrial

Property is responsible for the

enforcement of all industrial and

intellectual property laws in Mexico.

Encourage

local

companies to

attain global

industry

certifications

► The country promotes the certification of

all the associates with international

recognized certifications, such as

AS/EN/JISQ 9100, AS/EN/JISQ 9110,

AS/EN/JISQ 9120, CAA, FAA, BASA,

NADCAP, ISO 9001:2000, ISO

9001:TICKIT, ISO 14001:2004, EASA Part

21, EASA Part 145 and EASA Part 147,

which are required by the aerospace

authorities of the world.

► World Intellectual Property Organization

► Paris Convention for the Protection of

Industrial Property

► Nice Agreement Concerning the

International Classification of Goods and

Services for the Purposes of the

Registration of Marks

► Lisbon Agreement for the Protection of

Appellations of Origin and their International

Registration

► Patent Cooperation Treaty

► Singapore Treaty on the Law of Trademarks

► Trademark Law Treaty

► Vienna Agreement Establishing an

International Classification of the Figurative

Elements of Marks

► Strasbourg Agreement Concerning the

International Patent Classification

► Locarno Agreement Establishing an

International classification for Industrial

Designs

Mexico has signed multiple treaties

for IP protection.


Key contacts

Andres Lerch

Partner

Tel: +525552838696

Email: [email protected]

Francisco Bautista

Senior Manager, Global Trade and Investment, Incentives

Tel: +525552831454

Email: [email protected]


mailto:[email protected]

mailto:[email protected]

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megatrends shaping the mexican aerospace and defense sector

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