MUSCLE & MACHINE

Mexico 2014 | INDUSTRY & MINING | REVIEW: INDUSTRY

Mexico's industries are growing, and fast. The country's electronics and automotive industries are global leaders, while significant growth is being witnessed in aerospace.

In early August 2014, Mexico opened its energy industry to the private sector, a landmark move whose economic implications are set to further trickle down to all of Mexico's industries, where incredible growth is already underway. What is important in this move is not only that the new law opens a host of opportunities for oil and gas and associated services companies, but also brings a higher level of competitiveness to the country's manufacturing activities, beckoning increased efficiency and effectiveness in the automotive, aerospace, electronics, and chemicals industries.

Industry made up 35% of Mexico's GDP in 2013 and continues to growth in strength, especially in lieu of the country's 44 free-trade agreements (FTAs)—twice as many as China and four times as many as Brazil. Foreign ties and a strategic location have been the backbone of Mexico's industrial success.

Despite PEMEX's admired role in Mexico, the new law will be a crucial part of boosting economic growth in Mexico, especially at the helm of nine years of falling oil and gas output. Grupo Financiero Banorte SAB estimates that the advent of foreign oil and gas giants such as ExxonMobil and Chevron will drive in as much as $50 billion in private investment per year by 2020.

MANUFACTURING SECTOR

HSBC estimates that Mexico may become the world's eighth-biggest economy by 2050, and the Boston Consulting Group predicts manufacturing will attract $20 billion to $60 billion into Mexico by 2018. Manufacturing has picked up pace in recent years as a result of changing global dynamics and various reforms head-speared by President Enrique Peña Nieto.

With China's rising wages, companies around the world are now looking for cheaper, more geographically-convenient alternatives, with Mexico emerging as the clear beneficiary. As an example of this shift, the trade between the US and Mexico has risen to over $500 billion per year.

In line with production, the export market for manufactured goods is growing. The North American Free Trade Agreement (NAFTA) was implemented in 1994, and since then Mexico's exports have increased 10-fold. The country's many FTAs have also added on to the country's export market success.

AUTOMOTIVE DRIVES AHEAD

The automotive industry reigns with the highest profit margin among other rising industries in Mexico. In August 2014, Mexico stepped above its regional rival Brazil in the output of its automotive industry. Famed for its prolific car output, Mexico walks the talk with impressive growth—the country's export-driven production of cars and light trucks rose 7.5%, to some 1.86 million vehicles, during the first seven months of 2014 compared to the same period in 2013. This growth is partly a result of new assembly plants, such as that of Nissan in Aguascalientes, Hondo in Celaya, and Mazda in Salamanca.

With eyes now on Mexico as a location to reduce production costs, automotive companies are also tuning in. In 2013, Chrysler announced it would invest $1.3 billion to open two production plants and Audi has put forth $1.3 billion to build an automotive plant, the single-largest in the company's portfolio.

President and CEO of Mazda Mexico, Leopoldo Orellana, told TBY of the perks of operating in the automotive industry in Mexico, with its strong free-trade agreement base, “Mexico has access to 45 countries, including the US, Canada, Japan and the EU, which means a potential market of around 40 million vehicles. At the same time, Mexico has a particularly favorable geographic location. Mexico also enjoys an excellent logistics infrastructure and labor costs are highly competitive. Meanwhile, the workforce is highly qualified and skilled."

Mexico exports nearly 83% of its automotive production, mostly to the US and Canada. Faustos Cuevas, the director of Mexico's automakers association, the AMIA, told the Wall Street Journal that he expects production to hit 3.2 million vehicles in 2014.

ELECTRONIC WAVES

Like many other industries in Mexico, the country's electronics industry has proved itself a leader in the global market over the past decade. Mexico is home to the world's sixth-largest electronics industry and it is the second-largest electronics exporter to the US. Its hub is in the state of Jalisco, which has received upwards of $14 billion over the past decade in electronics investments. In 2012, Mexico saw electronics output worth $62.1 billion.

With 80% of the largest international electrical and electronics companies doing business in Mexico, it is no wonder the country has made a name for itself in the industry. These big firms, including Singapore's Flextronics, Jabil Circuit and Sanminda SCI of the US, and Canada's Celestica, have set up shop in the northern region of Mexico, particularly in Baja California, Chihuahua, and Tamaulipas. More than 60% of the audio and video electronics industries operate out of Baja California. Flat-screen televisions comprised 25% of the country's electronic exports, and Mexico is now ranked as the world's largest exporter of televisions. The influx of FDI—nearly $21 billion from 2000 to 2010—has allowed the electronics industry to also focus heavily on computer equipment and the manufacturing of spare parts for communication devices.

As of 2011, more than 730 large-scale manufacturing facilities were operating in Mexico, a figure that can be explained by manufacturing cost savings. Audit firm KPMG's Competitive Alternatives 2010 report rated Mexico as having the lowest component manufacturing costs in the industry. In comparison with other industrial powerhouses, such as Canada, the Netherlands, the UK, France, Germany and Japan, Mexico exhibited 18.2% savings.

FLYING UP THE LADDER

While the automotive and electronics industries topple their global competitors, the country is honing in on other industries to achieve similar feats. Mexico is currently focused on aerospace developments in an effort to become one of the world's top-10 aviation suppliers. Exports have grown three-fold since 2006, reaching some $4.5 billion in 2012. Aviation exports doubled from 2009 to 2012, reaching $5.4 billion. It is expected that some 450 companies will work in aerospace and export sales will amount to approximately $12 billion by 2020.

Querétaro has become home to a cluster of aerospace activity, both in production and research and development. GE operates the industry's largest research and development center in Querétaro and will invest $20-million more to the General Electric Advanced Engineering Center in 2015 on account of its success.

In 2005, Canada's Bombardier became the first foreign firm to build a $200-million aerospace factory on undeveloped land, where it relocated production from Ireland and Japan. From 2005 to 2013, the company spent some $300 million in Mexico, employing 1,800 people. In February 2013, the French-German-Spanish helicopter manufacturer, Eurocopter, which makes up 50% of the helicopter market in Mexico, inaugurated a $100-million, 12,000-sqm manufacturing plant in Querétaro. The company has invested $100 million towards producing helicopter tail-booms and doors for Airbus A320 and A330s. In 2013, Eurocopter announced its plans to invest approximately $550 million in Mexico over the coming 15 years.

France's Safran is Mexico's largest aerospace firm with an engine workshop in Querétaro. It has recently branched out of the Querétaro bubble and opened its fourth facility near the US border, at Chihuahua. Like Safran, Brazilian company Embraer, which is the third-largest aircraft manufacturer, and France's Zodiac, an equipment manufacturer, plan to open a production facility together in the Chihuahua area. Other players in Mexico include France's Duqueine and Spain's Turbo Propulsores and Aeronova.

RECOVER CHEMICALS

Perhaps the most directly affected by the government's newest legislation to privatize its energy industry, and gladly so, will be Mexico's chemical industry. It encompasses more than 350 companies and 400 production plants, mostly located in Veracruz, Tamaulipas. Mexico City, and Nuevo León.

Managing Director at Lanxess, Francisco Corona, told TBY, “Mexico imports almost 70% of the raw materials that are consumed. For this reason, the chemical sector in Mexico has decreased its contribution to GDP over the past 10 years from 10% in 1987 to 1.2% in 2013. This is the real challenge for the chemical industry in Mexico. We need to improve production in order to fulfill demand." This fall in the chemical industry's performance is largely owing to the dearth of domestic supply or raw materials, outdated energy supplies, environmental regulations, foreign-trade policies, infrastructural setbacks, labor laws, and domestic price controls.

However, the future looks bright. From 2012 to 2016, investments are expected to reach $2 billion annually. Having always been strongly connected to PEMEX, which supplied feedstock and was the firms' main customer, chemical companies will now have an onslaught of private players to deal with in the future, opening opportunities and inciting much-needed growth.