THE TIES THAT BIND

Mexico 2017 | ECONOMY | ROUNDTABLE

TBY recently gathered some of Mexico's top business leaders to discuss integrating SMEs into international value chains, the responsibilities of the public and private sectors, and the importance of SME development for Mexico.

Frederic García
FREDERIC GARCÍA
President
Consejo Ejecutivo de Empresas Globales, & CEO, Airbus Mexico
Francisco Gonzalez Diaz
FRANCISCO GONZALEZ DIAZ
Former CEO
ProMexico
Eduardo J. Solis
EDUARDO J. SOLIS
President
the Asociacion Mexicana de la Industria Automotriz (AMIA)

How do you view the integration of SMEs into international value chains, and how important is this for ProMexico?

FRANCISCO GONZALEZ DIAZ ProMexico looks for more investment to come into Mexico that will create a lasting impact. This impact is seen through suppliers and the creation of a value chain with the right certifications, talent, and products to assist companies that are investing. To do so, we have created a program called ACT, which helps suppliers develop the products companies need. We look for medium-sized Mexican companies that can integrate the supply chains of larger companies. This means we not only seek Tier 1 suppliers, which are direct suppliers, but also Tier 2 and further down. We have a methodology to identify the right suppliers with the private sector, which has had great success. For smaller companies, we have the RedExporta program, which unites smaller companies to reach a homogeneous level of product quality. We have brought companies together in order to analyze the requirements of larger companies and present proposals. This permits a more coordinated offering and allows larger companies to deal with one group, instead of dealing with multiple potential suppliers.

What is the importance of SME development within the Mexican economy?

FGD Around 89% of production comes from SMEs; however, big companies largely focus on technological development. If these two cannot join, we will not have jobs that offer added value. This will make us less competitive globally and relegate us in terms of trade. Mexico has received much foreign investment and has set a benchmark to compete with the world. SMEs employ the most people, produce the most, and provide the most taxes; however, SMEs cannot be competitive without a clear proposal.

What is the importance for CEEG members and Airbus to see SMEs integrate within international value chains?

FREDERIC García The integration of local and international value chains is extremely important. Due to a wide number of FTAs, Mexico is one of the most open economies in the world. This is also a result of successive reforms, including energy and telecommunications. According to the World Bank, free trade has brought 1 billion people out of poverty in the last 20 years. This shows Mexico is on the right track, largely by integrating itself into global value chains. We believe that by 2030 Mexico could be among the top five exporters in the world. This vision necessarily implies that global companies will help Mexican SMEs enter global value chains to help us become more competitive.


How do AMIA members view the topic of integration and links between national and international companies?

EDUARDO J. SOLIS According to INEGI, added-value reached over 50% in Mexican plants. However, the main Tier 1 automotive suppliers import over 85% of their goods. Tier 2 suppliers, who need high levels of certification and quality control, are not present. Mexico does have some companies that provide demanding processes, but they are not yet on the level needed by the automotive process. This integration could bring in between USD20 and USD30 billion of additional revenue. Global companies have high levels of quality and certification and are not necessarily looking to change suppliers. We cannot just enter and make them switch their leading suppliers. However, we can absolutely integrate Mexican SMEs, just as SMEs are participating outside of Mexico. This is a challenge for us all—in industry, government, and academia.

What challenges do you face with SMEs and local providers within CEEG and Airbus?

FG Today, around 400 aerospace companies are present in Mexico, and exports topped USD6 billion in 2015. It is estimated that in the next 20 years the market for passenger planes of over 100 seats will reach USD4.5 trillion. Of this, 70% comes from suppliers. Today, Mexico is close to 5% of the global aerospace supply chain. If the private and public sector come together, we estimate this number could reach 10%, or an export potential of around USD300 billion in Mexico. The energy reform sought to bring in USD60 billion in foreign investment to Mexico, yet the aerospace supply opportunity is five times higher. However, there are challenges. Less than 15% of companies in the Mexican aerospace value chain are Mexican. We have to grow this rate to increase the country's added value manufacturing. The second challenge is compliance. Many companies float on stock exchanges, which are highly adverse to risk. If a global company finds itself involved in a corruption or social irresponsibility case in any of its markets, its stock price will be affected, even if the case is not proven. Faced with this reality, companies try to reduce risk along their entire supply chain. If new suppliers want to enter those value chains, their culture and track record of compliance must stand up to scrutiny, even before looking at their capacity or certification. The public and private sectors must help SMEs to develop their culture of compliance. This will open the doors for them to enter global supply chains and better levels of financing, not to mention develop a culture of legality and formality.

What are the advantages for a global company in Mexico to work with local SMEs?

FGD The business development environment in Mexico allows us to aim for global benchmarks, take on best practices, and pass them on to SMEs. The advantage of having international automakers allows for the best practices to become standardized. This also brings up the need for better talent and infrastructure for companies to move up the value chain. At ProMexico, we are seeing what new materials, processes, and technologies can be used to develop Mexican companies and bring in more foreign firms.

What are the responsibilities of the public and private sectors in training and integrating SMEs?

FGD The public sector needs to provide training and enable access to financing. Mexico created the Institute of the Entrepreneur (INADEM), which seeks to provide all the resources needed for those who want to start a business. To certify companies, ProMexico helps SMEs get certifications. We have academia, which help us to develop talent at different levels. We also have the development of technicians in universities. Moreover, we need to train corporate governance skills within companies, especially to ensure compliance.

EJS The great target of our industry is to develop suppliers at the Tier 2 level. Companies do not have the certifications, training, capital, management know-how, compliance levels, technology, or clients to reach this level. It is difficult for global companies to have supplier development departments. We understand that companies are in the business of production and are not necessarily aligned with our vision of them helping increase competitiveness in Mexico by developing suppliers. The automotive industry will grow impressively in the coming years. In 2016, Mexico will produce 3.5 million, reaching 5 million vehicles by 2020. This means that the automotive boom will continue growing. There is certainly a shared responsibility between government and companies. All the programs that the federal government has created for this purpose must be directed toward large automakers and Tier 1 suppliers. We need to convince companies that there is a good opportunity with local suppliers.

FG There must be also a shared responsibility in the creation of jobs. Free trade has exacerbated the creation of both high-skilled, high-paid jobs and low-skilled, low-paid jobs. The challenge is now to create mid-level, intermediary jobs. ProMexico published in 2015 that Mexico needs 1 million senior technicians. It is precisely SMEs who offer jobs for these people. To overcome these challenges, the Secretariat of the Economy and ProMexico invited CEEG to join the National Committee on Productivity (CNP) to help develop best practices for productivity. We specifically worked on how to help SMEs enter and progress within global supply chains. The government and companies within CEEG are now working with us to identify companies that face difficulties and help them. This targets companies that are in the supply chains but which, due to a lack of capital, processes, talent, or other factors, are at risk of dropping out or having their contracts revoked. Secondly, we want to identify the need for supplies that are not present in Mexico, so we can work with ProMexico and bring local companies with the right processes and technology.