Mexico's Aerospace Industry Road Map

Flight Plan

Mexico’s Aerospace Industry Road Map

Copyright ©2011 by ProMéxico. All rights reserved.

Index

Camino a Santa Teresa No. 1679, Col. Jardines del Pedregal, Del. Álvaro Obregón C.P. 01900 México, D.F. www.promexico.gob.mx [email protected] 2th edition Mexico City, Mexico, 2011

Introduction 11

PROMÉXICO

1.1 Maturity Profile of the Mexican Aerospace Sector

Carlos Guzmán Bofill ProMéxico’s CEO Ana María Rivas Llamas Chief of ProMéxico’s Management and Finance Unit

17

Juan Ángel Vargas Plata Chief of ProMéxico’s Business Inteligence Unit Juan Carlos Téllez Girón Barrón Chief of ProMéxico’s Institutional Relations and Support Unit Luis Anthony Olivé Hawley Chief of ProMéxico’s Investment and Business Promotion Unit Ilse Oehler Grediaga Image and Communications Director Sebastián Escalante Bañuelos Managing Coordinator Itziar Gómez Jiménez Editor Natalia Herrero Martínez Copy Editing Rodolfo Karim Arias Designer Elaborated by:

All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without previous written permission from ProMéxico. Whereas every effort has been made to ensure that the information given in this document is accurate, ProMéxico accepts no responsibility for any errors, omissions or misleading statements in this document. Also, no warranty is given or responsibility is accepted, as to the standing of any individual, company or other organization mentioned in this document.

2. The International Market 2.1 “Fixed Wing Widebody” 2.1.1 Airbus A350 XWB 2.1.2 Boeing 787 2.1.3 Boeing 747-8 2.1.4 Boeing 777 developments / replacements 2.2 “Fixed Wing Narrowbody” 2.2.1 Replacements for the Boeing 737 and Airbus A320 2.2.2 “Bombardier CSeries” 2.2.3 New Market Competitors 2.2.4 COMAC C919 2.2.5 Irkut MS21 2.3 “Fixed Wing Regional Jets” 2.3.1 Mitsubishi Regional Jet 2.3.2 Sukhoi Superjet 2.4 “Fixed Wing Regional Turboprops” 2.4.1 New ATR and Bombardier Q400X 2.4.2 Executive Jets

Carlos Casas Guerrero Chief of ProMéxico’s Export Promotion Unit

Manuel Sandoval Ríos María Cristina Carreón Sánchez Diego Humberto Ortíz Porcayo Ronald Eduardo Pérez Díaz José Mariano Moreno Blat

1. The Mexican Aerospace Industry

27

3. SWOT Analysis

33

3.1 Strengths vs. Weaknesses 3.2 Opportunities vs. Threats

4. Road Map for the Mexican Aerospace Sector

39

5. Strategic Lines 5.1 Talent 5.2 Innovation 5.3 The Global Supply Chain 5.3.1 Baja California 5.3.2 Chihuahua 5.3.3 Sonora 5.3.4 Central-Northern Corridor 5.3.5 Northeastern Region 5.4 Supplier Development 5.5 Quality Global Infrastructure 5.5.1 Bilateral Air Safety Agreement

55

6. Strategic Milestones 6.1 Nationally manufactured aircraft with high content of Mexican integration and engineering 6.1.1 Certifications 6.1.2 Certification Programs 6.1.3 Bilateral Air Safety Agreement 6.1.4 Engine development in Mexico and integration of national innovation networks 6.2 Aerospace and Defense (A+D) Manufacturing Platform 6.2.1 Strategic Trade 6.3 Integrated Platform of Aviation Services in Mexico 6.3.1 Maintenance Center of the Americas (MRO) 6.3.2 International Civil Aviation Training Center (CIAAC) 6.3.3 Intelligent Management of Mature Fleets (Tarmac) 6.3.4 Mexican Space Agency (AEM)

69

7. Programs and Intervention Mechanisms 7.1 ProAero and Advanced Manufacturing (Vertical Support System for the Aerospace Industry and Design, Engineering and Advanced Manufacturing) 7.2 Industrial Compensations 7.3 Talent Management Program 7.4 Special Economic Zones 7.5 Customs System Improvement

79

Conclusions

81

Directory of Aerospace Companies in Mexico

83

1. WESTERN CORRIDOR

127

2. EASTERN CORRIDOR

145

Baja California Chihuahua Guerrero Jalisco Sonora Coahuila Nuevo León Tamaulipas Yucatán

3. CENTRAL CORRIDOR

Aguascalientes Distrito Federal Estado de México Guanajuato Puebla Querétaro San Luis Potosí Zacatecas

165

4. ENGINEERING AND RESEARCH CENTERS

167

5. SUPPLIERS

Introduction

Introduction Mexico’s aerospace sector is considered strategic not only because of its growth rate and the related economic spillover, but especially, because of technology and methodology transfers related to the development of high-tech and innovation sectors. While Mexico has quickly become an aerospace manufacturing hub, the challenge is to leverage this window of opportunity to develop innovation capabilities, attract companies from the services sector (MRO, engineering, etc.) and incorporate aerospace and defense high-tech into our country. To achieve this, Mexico must evolve quickly from an industry that is based on competitive costs, to one based on the country’s integration capabilities, to an economy based on knowledge, innovation and services. From this standpoint, the definition of competitiveness constitutes countries’ capacity to retain and attract talent and investment. In a knowledge-based economy, this competitiveness is defined in terms of innovation and the understanding of markets and their evolution. Countries with higher economic, technological and competitive growth, have been successful because they have developed strategies that have furthered their development and sustained growth while focusing on highly competitive sectors. 9

Mexico’s Aerospace Industry Road Map

The essence of a business strategy and planning is in the alignment of activities and available resources, to create sustainable competitiveness in the market. This requires a full understanding of the nature of medium- and long-term change in the business environment in terms of opportunities and external threats, and the set of weaknesses and strengths of the industry and its environment. To respond to this demand, the Road Map is the most suitable planning approach to address the above scenarios. In its first version, the National Flight Plan is intended as a starting point to establish a national strategy aimed at windows of opportunity that result from international trends and technologies. Now comes this second version, which focuses mainly on the completion and results of the Mexican aerospace industry’s action plan. In other words, it is a snapshot of the national strategy that is constituted by strategic lines, projects and actions based on the unique capabilities of Mexico’s aerospace industry.

10

1. The Mexican Aerospace Industry

11

The Mexican Aerospace Industry

Mexico’s Aerospace Industry Road Map

In the last decade, given manufacturing capabilities and available talent, the world’s leading aerospace companies have found in Mexico the ideal destination for the development of their manufacturing strategies. With this, Mexico became the country with the highest investment attraction in the area of aerospace manufacturing for the 1990-2009 period. But more importantly, Mexico became the sixth destination in the world for engineering and development investment for the aerospace industry during this period. Major Manufacturing Investments* 1990-2009** 35 30 25 20 15 10 5 0

Mexico

China

USA

Russia

India

Poland Malaysia Japan Morocco

* Includes joint ventures and organic investments for 121 largest OEMs; excludes acquisitions ** 2009 data is as at 31 August 2009

Source: AeroStrategy

Major Engineering / R&D Investments* 1990-2009** 20 18 16 14 12 10 8 6 4 2 0

Russia

USA

India Singapore Korea

Mexico

China

* Includes joint ventures and organic investments for 121 largest OEMs; excludes acquisitions ** 2009 data is as at 31 August 2009

12

Japan

Brazil

Source: AeroStrategy

The development experienced by the sector due to this growth in aerospace investments caused the export level to triple in a 6-year period, exceeding 3 billion dollars by the end of 2008. Furthermore, the solidity of Mexico’s aerospace industry enabled a trade balance surplus to be maintained in spite of the 2009 economic slowdown. The current export level recorded for 2010 is 3.26 billion dollars, the highest amount to date in aerospace exports.1 Mexico’s aerospace sector is sustained by five main axes: Manufacturing; Engineering; Design; Education (training, coaching and education) and Maintenance, Repair and Overhaul (MRO). Currently, over 70% of aerospace companies in Mexico focus, partially or totally, on component manufacturing.2 For their part, Maintenance, Repair and Overhaul (MRO) companies account for close to 23% of total companies, and focus their main capabilities on providing maintenance for turbines and engines, auxiliary power units, fuselages, electric-electronic systems, landing systems, among others. Finally, services and engineering companies account for close to 13% of the industry. For 2010, 232 aerospace companies had registered in Mexico. Most of them are foreign companies that supply mainly markets in the United States, Canada, Germany and France. These companies employ more than 30 thousand people, and this figure is expected to increase in the coming years given the talent available in Mexico. In terms of components developed in Mexico, around 23% of companies have engine manufacturing and maintenance capabilities. The industry also has capabilities in the manufacture of fuselages and, in particular, their parts (15%). In addition, 7% of companies manufacture electrical systems and another 4% manufacture and maintain undercarriages. These statistics are reflected in the study carried out by the Ministry of Economy, ProMéxico and the Boston Consulting Group to identify Mexico’s advantages and limitations, in terms of attracting foreign direct investment, and select the country’s strategic industries. In the study, the transportation equipment manufacturing industry is classified as a priority and high-impact sector in the medium and long term, defining it as an important export platform to the United States.

1

Ministry of Economy, General Direc-

torate of Heavy Industries, “Aviation/ Aerospace Industry”, 2009. 2

Ministry of Economy, FEMIA and

ProMéxico, “Results of the Aerospace Industry Survey”, 2010. The total sum of the percentage surpasses the 100% this is due the fact that certain companies have more than one capability

13

The Mexican Aerospace Industry

Mexico’s Aerospace Industry Road Map

E= Emerging G= Growth M= Mature D= Decreasing

The institute of manufacturing of the university of Cambridge developed the concept of sector development strategies. In this study, the institute classifies sectors based on their degree of global development and the degree of development of this sector on a national level. This classification is divided into seven areas, each of which represents a sectoral strategy based on the industry’s development. The strategies are as follows: D

6

7

4

4

M

2

2

4

4

G

E

2

1 E

1

3 G

3

3 M

5

5 D

Area 1: Where industrial policy overlaps with science and technological policy while new industries support themselves as they emerge for the first time. Area 2: Refers to the protection of the emerging industry, where countries try to penetrate an existing industry in the world and protect themselves while they negotiate the learning curves and industryrelated costs. Area 3: In this category, the country has significant leadership as an industry develops. Area 4: When the industry is mature, the focus will be mainly on increasing productivity and competitiveness, providing transition support to industries that are in decline, or imposing fees and adopting protectionist measures to maintain the industry. 14

Area 5: Where the country’s industry is in decline but may be emerging or growing in the global context. Any possible intervention here depends on whether the country is losing an industry due to international competitors or if it is moving outside an industry that is no longer relevant in its context. Area 6: Although by definition there is a small and relatively stable number of producers in the country while the global position is deteriorating, it is more likely that this industry really is in decline and it would not be wise to support it. Area 7: If the industry was in decline before it developed in the country, it is more likely to be an industry in real global decline. In the case of Mexico, the aerospace industry is located in area 2 of the chart, which recommends that national strategy aims at protecting an emerging sector. Global development level

1.1 Maturity Profile of the Mexican Aerospace Sector

D Animation

M

G

Videogames

Automotive ITC’s Electronic Advertisement Motion pictures

Aerospace Energy Mining

Metal and mechanical

Multimedia E Learning

E E

G

M

D

Domestic development level

This strategy determines that, in an attempt to penetrate the global aerospace market, Mexico’s aerospace sector must develop learning and cost curves. This can be done by inserting national innovation capabilities through the attraction of global innovation projects. Without a doubt, the growth of the Mexican aerospace industry is both exponential and dynamic. However, it is important to understand that in the future this growth will be subject to the industry’s ability to generate endogenous innovation frameworks and consequently increase the degree of value-added products manufactured in Mexico. 15

2. The International Market

17

The International Market

Mexico’s Aerospace Industry Road Map

3

Datamonitor only uses information

from the following countries to measure global impact: Argentina, Brazil, Canada, Chile, Colombia, Mexico, Venezuela, the United States, Belgium, the Czech Republic, Denmark, France, Germany, Hungary, Italy, the Netherlands, Norway, Poland, Romania, Russia, Spain, Sweden, Ukraine, the United Kingdom, Australia, China, Japan, India, Singapore, Korea and Taiwan. 4

Aircraft designed to transport up to

100 passengers.

18

Datamonitor estimates that the aerospace and defense industry global market grew 8.7% annually in the 2005-2009 period, reaching 920.6 billion dollars.3 The defense sector represents 71.8% of the total market, while the aerospace sector (civil) accounts for 28.2%. It is estimated that the industry will reach a value of 1,190 billions by 2014. Globally, aircraft design and manufacturing activities are carried out by a few companies. The leading large commercial aircraft manufacturers are Boeing and Airbus (EADS division), while Bombardier, Embraer and ATR have become the leading regional aircraft manufacturers4 with a market share of 46, 35 and 19%, respectively. The leading executive jet manufacturing companies are Gulfstream, Cessna, Learjet, Embraer, Bombardier and Dassault Aviation, while there are three leading engine manufacturers: GE Aviation, Pratt & Whitney and Rolls Royce. The leaders in the defense sector are: BAE Systems, The Boeing Company, EADS N.V. and Lockheed Martin Corporation. Another important segment of the aerospace industry is maintenance, repair and overhaul (MRO) services. According to global forecasts, the number of aircraft in operation will increase in every region of the world over the next 20 years, boosting international demand for MRO services. The industry is expected to reach 68.2 billion dollars by 2019. The five leaders in this area are: Singapore Technologies Aerospace (ST Aerospace), Lufthansa Technik AG, Air France Industries, KLM Engineering & Maintenance, Hong Kong Aircraft Engineering Company Limited and TIMCO Aviation Services. For its part, the global helicopter market is dominated by Europe and the United States; however, while the US leads the army sector, the European Union has established itself as a leader in the production of civil helicopters. The top manufacturing companies in this sector are: Eurocopter, Agusta Westland, Bell, Sikorsky and Boeing Rotorcraft Systems, among others. Leading aircraft manufacturing companies are expected to work on the following programs:

2.1 Fixed Wing Widebody 2.1.1 Airbus A350 XWB The Airbus A350 XWB design has been finalized and the aircraft has become a very attractive commercial proposition, with close to 500 firm orders at the end of 2010. It is expected to start operating in 2013 and to compete with the Boeing 787 and some Boeing 777 models in the next 20 years. To date*, versions offered on the market have Rolls Royce Trent XWB engines.

*

December 2010

2.1.2 Boeing 787 The Boeing 787 model has been showcased in several well-known calendar issues. The model’s first flight was on December 15, 2009, and it is not expected to begin operation until at least 2011. In spite of these setbacks, the program is expected to be successful with close to 800 orders by the end of 2010 and the company’s recent decision to establish a second production line. The model is offered with Rolls Royce Trent 1000 and General Electric GEnx 2B turbines.

2.1.3 Boeing 747-8 The 747-8 model was introduced in 2010. While the passenger version has not sold as well compared to the A380 model, this model has found a strong niche in cargo aircraft. The model has a General Electric GEnx-2B engine.

19

The International Market

Mexico’s Aerospace Industry Road Map

2.1.4 Boeing 777 developments / replacements

120

120

300

100

100

80

80

60

60

40

40

20

20

0

0

Source: ADS and UK Trade and Investment, “UK Aerospace International Strategy”, 2010

100

150

50

100

Value ($bn)

200

Build 2009 Build 2018 Total value 2009-2018

50 0 MS-21

0 CSeries

Total value 2009-2018

150

250

C919

Build 2018

200

A330 Series A320NSR B7376/7/8/9 B7737RS

Build 2009

Build (Units)

Value ($bn)

400

B780

B770

350

B760

140

B747-0

140

B747-400

160

A380

160

A350

180

A340

250

450

180

A330

Build (Units)

Boeing discussed several future projects, including a narrow body version of the 787-10 model, upgrades to the 777 models, as well as other new designs.

Even so, both replacement programs are still significant and expected to produce close to 700 aircraft orders a year with a value close to 500 billion dollars through a 10-year period.

Source: ADS and UK Trade and Investment, “UK Aerospace International Strategy”, 2010

2.2 Fixed Wing Narrowbody 2.2.1 Boeing 737 and Airbus A320 Replacements

No specific turbine has been selected for either of these programs. The main candidates are the Pratt and Whitney 1000G Geared Turbo Fan (GTF) and the Rolls Royce ek CFM Leap-X.

Boeing and Airbus continue to delay their narrow body development programs, which will not come into service until 2020. The lack of availability of turbines that are efficient enough in terms of fuel savings seems to be one of the main reasons for the delays.

20

21

The International Market

Mexico’s Aerospace Industry Road Map

2.2.3 New Market Competitors

2.2.2 Bombardier CSeries In July 2008, Bombardier launched its program and currently maintains an order volume of 90 aircraft and an option for an additional 90 aircraft for Lufthansa, Republic Airways and Lease Corporation International. In the next 20 years, Bombardier estimates that its market will cover 6,300 aircraft, representing more than 362 billion dollars in revenues. Bombardier expects to earn half of its income from this model. CSeries, which will begin operations in 2013, will have the latest technological advances, such as an increased use of composites and aluminum-lithium in structures; a new generation of turbines - Pratt and Whitney 1000G PurePower turbine; fly-by-wire and advanced aerodynamics. 250

450 400

300 250 200

150

Russia has limited knowledge of composite advanced manufacturing capabilities that will be necessary for the program’s development. Russia’s United Aircraft Corporation (UAC) selected suppliers to primarily work on the aircraft’s fuselage. It is expected that this model will be integrated and ready for operation by 2016. The PW 1000G Pure Power turbine was chosen for the Irkut and Hydromash will supply other essential parts, such as landing gear.

50

100

Build 2009 Build 2018 Total value 2009-2018

50 0

China is increasing its national capabilities for aero-civil turbines, although reaching the aforementioned initial operation date seems unfeasible, especially due to pressures in the operative requirements of international demand. China has admitted that its initial plants for the Commercial Aircraft Corporation of China (COMAC) will run mainly on foreign turbines, but its capacities are expected to allow the Asian country to provide domestically-manufactured turbines. The Chinese selected the LEAP-X, which is manufactured by CFM, the strategic alliance between Safran and GE.

2.2.5 Irkut MS21

100

150

2.2.4 COMAC C919

200 Value ($bn)

Build (Units)

350

China and Russia have projects for a new 150-seat aircraft in the Boeing 737 and A320 market. The program authorities are forecasting an initial operation date in 2015-2016.

MS-21

CSeries

C919

A330 Series A320NSR B7376/7/8/9 B7737RS

0

Source: ADS and UK Trade and Investment, “UK Aerospace International Strategy”, 2010

22

23

The International Market

Mexico’s Aerospace Industry Road Map

2.3 Fixed Wing Regional Jets

2.4 Fixed Wing Regional Turboprops

2.3.1 Mitsubishi Regional Jet

2.4.1 New ATR and Bombardier Q400X

Officially launched in the last quarter of 2008, this aircraft is planned for segments that are smaller than the Bombardier CSeries; therefore, its main competitors are the stretched Embraers and Bombardier regional jets. In this segment the success factor depends on turbine efficiency. For this purpose, Mitsubishi has selected the Pratt and Whitney PW1217G Geared Turbo Fan turbine.

Bombardier and ATR have announced a narrow body version, that resulted from regional turbo-prop models, to cover the expected demand in the 90-seat segments. At this time, neither company has concrete plans to make any announcements.

2.3.2 Sukhoi Superjet

The executive jet market was dramatically affected by the 2009 crisis and is not expected to recover before 2012. However, the segment continues to be very attractive due to the high introduction range of new models and the reduction of barriers to replace and relocate suppliers. By analyzing the market expectations of the leading OEMs and their main programs, we can conclude that the aerospace industry’s expected growth for the next 10 years is influenced by the companies’ ability to comply with introduction times and scheduled deliveries for the coming years. In Mexico, part of the capabilities needed for these programs is being developed; therefore, it is crucial to identify a way to further Mexico’s involvement in this programs, as well ase the development of the capabilities needed to attract more of them to Mexico.

30

100

25

10

20

5

0

0

Build 2009 Build 2018 Total value 2009-2018

Superjet100

40

MRJ-70/90

15

ERJ-170/ 175/190/195

60

ERJ-135/ 140/145

20

CRJ700/900

80

CRJ1000

Build (Units)

120

Value ($bn)

Various prototypes of this model are already in the flight test stage, but the market entry date is still being delayed. The turbine used for this model is SAFRAN/NPO Saturn SaM 146, and most Tier 1 suppliers are French with Russian partners.

2.4.2 Executive Jets

Source: ADS and UK Trade and Investment, “UK Aerospace International Strategy”, 2010

24

25

3. SWOT Analysis

27

SWOT Analysis

Mexico’s Aerospace Industry Road Map

STRENGTHS * Availability of human capital (trainable, young and cost-competitive) * Mexico is a manufacturing hub with world class companies

5

KPMG, “Competitive Alternatives”,

* Competitive costs derived from the Dollar zone

WEAKNESSES * Lack of certifications * Weak supply chain and low integration of national suppliers * Low education level (in general) and lack of relevance of available talent

2010.

THREATS * International competition * Input price increase * Insecurity

OPPORTUNITIES * Creation of consolidated purchase compensation systems * Market expansion * Continued military spending in the United States to seek options that combine low cost and safety

3.1 Strengths vs. Weaknesses Aerospace companies emphasize the availability of human capital and competitive costs as the main strengths of Mexico’s aerospace industry. The global industry’s opinions match various studies that have underlined Mexico’s comparative advantage in terms of costs. According to KPMG, our country is ranked first in terms of operation costs compared to the industry’s leading countries5. This advantage in costs results largely from the country being part of the Dollar zone, its free trade agreements and macroeconomic stability, among other factors. In addition, according to the National Association of Universities and Higher Education Institutes (ANUIES) there are 745,000 engineering and technology students in Mexico, that is, 30% of the country´s total university population. Moreover, close to 114, 000 engineering and technology students graduate each year and there are more than 900 postgraduate engineering and technology programs in high- level Mexican universities.

28

According to the OECD, the performance of Mexico’s higher education system in the area of engineering has improved substantially in the last decade: the ratio of graduates in tertiary postgraduate programs in science and engineering is above the OECD’s average.6 This generation of talent represents a solid foundation on which to train engineers with the skills and abilities that are specific to the industry’s needs. With this purpose, the Mexican Council for Aerospace Education (Consejo Mexicano de Educación Aeroespacial or COMEA), which represents close to 11 university committees, support efforts for the development of these skills and abilities. It is interesting to note that some of the most important limitations identified by companies relate to human capital. For many companies, the low level of education and the lack of relevance of specialized talent are two of the main weaknesses for the development of the Mexican aerospace sector. Thus, human capital is both one of the major strengths and one of the main weaknesses of the sector, because despite the large number of engineers and technicians available in the country, they are not specialized in the aerospace sector. In fact, close to 40% of companies admitted to having difficulties finding Mexican executives because there are only a few individuals who have both the executive profile and knowledge of the sector. The same is true of technicians and workers who lack the skills required by the sector. On the other hand, companies admit that there are skilled Mexican engineers, but hiring them is a very complicated process. The third main strength identified by aerospace companies in Mexico refers to the country’s installed industrial capacity. This capacity puts Mexico in the spotlight as a manufacturing hub with world-class companies. Undoubtedly, the base of companies in Mexico from the automotive, electric-electronic and metal-mechanics sectors is proof of the experience that Mexican companies have in advanced manufacturing processes. This can be seen in the Index of Technological Development of Exported Products* issued by the OECD, in which Mexico is above the organization’s average, approaching the level of Korea and Japan. While it is not simple to automatically migrate many advanced manufacturing processes to the aerospace sector, this foundation of manufacturing capabilities constitutes a very competitive starting point.

6

OECD, “Reviews of Tertiary Education, Mexico”, 2008. * OECD perspectives on global development 2010

29

SWOT Analysis

Mexico’s Aerospace Industry Road Map

3.2 Opportunities vs. Threats Competition from other countries is identified as the main threat for the Mexican aerospace sector. On this issue, the European company EADS performed a comparative analysis among the four countries that are considered strategic for the development of aero-space industries: Mexico, China, India and Russia. The analysis was performed based on four factors that are considered key to aerospace development in emerging countries: • • • •

Market access: offset policies and potential size of the market. Value by cost: productivity, capacity, skills, wages, taxes, trade. Resources: sovereign funds, incentives, engineers, raw material. Risk management: macroeconomic factors, exchange factors, supply chain risks, wage inflation risks.

China and India have a clear advantage in terms of market access due to the large size of their internal markets. In terms of cost value, Mexico, China and India have similar comparative advantages, above Russia; however, Russia surpasses the rest of the countries in terms of resource availability. Mexico has the greatest risk management advantages, and the country’s aerospace market is relatively balanced compared to the analyzed competitors’ markets. 30

MARKET ACCESS

MEXICO

INDIA

RUSSIA COST VALUE

Source: EADS, 2010

The largest weakness identified by the industry was the lack of certified supply, particularly from composites material suppliers. Although some Mexican companies already have certifications, such as AS9100 and its variants, NADCAP, FAA and DGAC, which are a requirement for the basic entry to an industry that prioritizes safety, the development of a complete certification and quality plan for companies that are interested in penetrating this market is a priority. The fact that many Mexican companies and talent are familiar with strict quality methodologies, such as the automotive sector (TS, Six Sigma, Lean Manufacturing), is an advantage. However, not every company has the required certifications, and in the aerospace sector, where safety is the main driver for companies’ growth, this becomes a transcendental matter. This lack of certification among Mexican suppliers results in another very important weakness of the Mexican aerospace sector: low integration of the low-level local supply chain.

RARE RESOURCES

CHINA

RISK MANAGEMENT

On the other hand, the most noteworthy opportunities are: the creation of consolidated purchase compensation systems, market diversification in which the Mexican aerospace sector can participate, including the opportunity that the defense industry market presents for Mexico on a global level. These opportunities, combined with the aforementioned strengths, are a springboard for the various strategic milestones presented below. From SWOT’s results, a cross-study on internal and external factors was made in order to define strategies to further strengths and leverage opportunities (Maxi/Maxi), to overcome challenges (Mini/ Maxi), to confront risks (Maxi, Mini) and to reduce weaknesses and avoid threats (Mini/Mini). INTERNAL FACTOR / EXTERNAL FACTOR

STRENGHTS

WEAKNESS

Opportunities

Maxi/Maxi Strategies to enhance and exploit opportunities strengths

Mini/Maxi Strategies to overcoming challenges

Threats

Maxi/Mini Strategies to address risk

Mini/Mini Strategies to reduce weakness and avoid threats

From these analyses, the main strategies to consider are defined in this update of the National Flight Plan. 31

4. Road Map for the Mexican Aerospace Sector 33

Road Map for the Mexican Aerospace Sector

Mexico’s Aerospace Industry Road Map

4.1 International Trends and Drivers This map presents the main trends and drivers of the global aerospace industry, which provide an overview of the various market tendencies that establishes the lines of the future development. 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Technological

Light compounds and alloys

Energy costs

2015

2016

2017

2018

2019

Supply increase -->

Young people low recruitment --> Engineering

Social

2014

New generation engines

Navigation systems new generation

Economic Environmental Political and legal

Global crisis and recession

EE, China and India as low cost sources

CO2 emissions tax in the EU, as of 2012 all flights from the EU to the rest of the world

Climate change

Feasibility of military production agreements in Mexico Regulation of scrap aircraft

BASA Certifications

Aircraft manufacturing perspective Local and Global Supply chain perspective

Aircraft parts recycling or reuse

Product development (decrease costs) OEM low profitability

Regional logistics

Drop in OEM Suppliers

Collaboration approach of the supply chain

Aggressive acquisitions

Trends and drivers

Low I&D investment Quality and guaranties costs

Global and local competitor positioning

Need for Leadership

Insufficient capacities

Advanced manufacturing processes

LEAN Approach

Market Aircraft models Widebody aircrafts (A380, B747) Long range (A330/340/350, B777/ 787)

Cultural change

Free (sale of complementary services )

Low cost

A380 EIS B787 EIS

A350 EIS

Boeing/Airbus

Short range (150 seater typ)

C-Series Bombardier

Regional Business Jets

A350.1000

B777 Refresh

Learjet 85 parts manufacturing by UNAQ students Superlarge Bus Jets AW 101 Int

Helicopters

State

Unmanned aircraft systems Military

AW 149

A400M

New LM Civil Commercial

JSF Lift fan

Tactical UAV

AW 101 Refresh Single Pilot Airliner Eurofighter Upgrade

UCAV

Source:Mexican Aerospace Technology Road Map Version 1

34

35

Road Map for the Mexican Aerospace Sector

Mexico’s Aerospace Industry Road Map

2005

2006

2007

2008

2009

2010

2011

2012

STRATEGIC MILESTONES

2004

2013

2014

2015

2016

2017

2018

A+D Manufacturing Platform

Aircraft with high National content

Aeronautical Services Hub

2019

Certifications Market Segments

AERIS

STRATEGIC PROJECTS

MRO Center Strategic Commerce

Intelligent Management of Mature Fleets International Civil Aviation Training Central

Industrial compensations

Special Economic Zone

Supply Chain Development AEM Price Club Talent Management Exchange Programs

BASA Certification Programs Regional Executives Low Pressure Turbines

ACTIONS

Talent, Innovation, Global Supply Chain, Global Quality Infrastructure

Strategic Lines

High Value Design and Engineering

Habilities in Composite Materials (Landing gear)

Wassenaar

Australia Group Resolution 1540

ASPAN Offset

Buy Mexico

Strategic and government acquisitions Logistics Development Customs System Development of suppliers (PNUD Program, ACT)

36

37

5. Strategic Lines

39

Strategic lines

Mexico’s Aerospace Industry Road Map

7

UNESCO.

Mexico has the industrial, technological and talent capability to become the leading country in the Latin American aerospace industry, which is why the goal of the proposed national strategy is to turn Mexico into the leading aerospace center in Latin America by 2020. To achieve this goal, academia, government and industry must continue to work together and support the fulfillment of strategic lines identified by this triple helix. To that end, the country’s strategy for the sector centers on the following axes: 1. Efficient and effective talent management (attraction, retention and development). 2. Innovation from the perspective of the integration of national innovation networks into international topics and networks. 3. Integration of the national supply chain to the global supply chain. 4. Supplier development, productive integration and cluster development. 5. Alignment with global quality infrastructure.

5.1 Talent One of Mexico’s main windows of opportunity can be identified in the foreseeable lack of engineers and technicians in developed countries, primarily in the United States and Canada. Currently there are fewer engineers available in the US in both absolute and relative terms.7 The number of permanently resident citizens who graduated from engineering programs in the US fell drastically during the 90s. According to various analysts, this scarcity will grow due to a combination of low training rates for technicians and the fact that industry professionals come mainly from the “baby boomer” generation that is in the process of retiring. This situation will become critical by the end of this decade because there will not be enough replacements. The situation takes even more relevance considering that intellectual property issues and intellectual property related to the aerospace and defense industry do not make it easy to subcontract specialists from countries not related to or in competition with the US and their allies (i.e., from India or China). This puts Mexico in a privileged position for attracting critical engineering and technology projects. 40

In turn, Mexico’s engineering and technology student population is growing significantly.8 In absolute terms, the number of engineers who graduate every year has exceeded the level in the United States; in relative terms, the number of engineering graduates per 1,000 inhabitants in Mexico is almost three times higher than the United States. This translates into an increase in availability of these professionals in Mexico. It is worth noting that 745,000 university students in Mexico are enrolled in engineering and technology courses, that is, 30% of the total university population. In addition, close to 114,000* students from engineering and technology programs graduate every year. Furthermore, there are over 900 postgraduate engineering and technology programs in high-level Mexican universities. In that sense, the OECD emphasizes that the performance of Mexico’s higher education system in the area of engineering has improved substantially in the last decade: the ratio of graduates in tertiary postgraduate programs in the areas of science and engineering is above the OECD’s average.9 By seizing this window of opportunity, which will peak in 2013, our country will find a competitive advantage not only in terms of manufacturing costs but also in innovation and design opportunities.

As the A&D Workforce is Expected to Decline...

11%

38%

39%

9

Business Week.

OECD, “Reviews of Tertiary Education, Mexico”, 2008.

* The number of graduated students is an estimate of the National Institute of Statistic and Geography, based on the document “Informe General del Estado de la Ciencia y la Tecnología”, published by the National Council on Science and Technology. Mexico, 2009.

...New Science & Engineering Talent is Unlikely to Keep Pace

Workforce Age Distribution 23%

8

Under 35 35-49 Over 50

Science and Engineering as % of Total U. S. Undergraduate Degrees

10% 9% 8% 7% 6%

89

92

95

98

01

04

07

Source: Lockheed Martin

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Strategic lines

Mexico’s Aerospace Industry Road Map

For Mexico, this will mean specific actions to strengthen the quality of graduates, adapt study programs to meet industry needs, increase international training programs for human capital specialized in the aerospace industry and place special emphasis on the negotiation of NAFTA’s mobility programs. 10

ProMéxico, “Mexico at a Glance”,

5.2 Innovation

2009 with data from the Bank of Mexico. * OECD Perspectives on global development 2010

42

In the last 20 years, Mexico’s commercial openness has been the main driver behind its economic growth. Structural reforms, the country’s entry into the WTO, the signing of NAFTA and the Maquila/IMMEX Program, have positioned Mexico as a relevant country in global trade. This can be seen in the fact that Mexico currently concentrates 2.16% of global trade and is the leading exporter in Latin America.10 While this commercial openness has helped maintain Mexico in a competitive position in terms of exports volume, it has not created a base of suppliers, endogenous innovation and intellectual property to raise the added value of goods produced and Mexico’s strategic position in the innovation market. It is interesting to note that OECD ranks Mexico as one of the countries with the highest rate of technological sophistication (3.25)* in terms of manufactured goods, above the OECD’s average (2.96) and close to countries such as Japan and Korea. However, technology assimilation and transfer processes in Mexico have been unable to develop the talent and equivalent methodologies. In other words, Mexico is working with advanced technologies, especially on products that are exported, the level of investment in R&D grows year after year and so does the number of graduates from engineering programs. However, we are far from having an innovation culture that motivates industries to create new domestic technologies or that integrates efficiently to international innovation networks. In other words, the ingredients for a national innovation ecosystem are there but a leveraging strategy is missing. To that end, the National Science and Technology Council (CONACYT) has created the AERI (Strategic Alliances and Innovation Networks for Competitiveness) program, in order to enhance coordination among research institutions, academic institutions and companies.

Today, one aerospace AERI has been established for the Querétaro cluster based on the region’s human capital. This AERI’s primary areas of focus are: materials, manufacturing processes, coatings, friction welding and technology development for a “green airplane.” It is precisely in Querétaro where one of the country and General Electric’s main engineering- and development-based innovation projects is being developed. This project involves component design in latest generation turbines for the civil aviation market, such as the GP7200 engine for the Airbus A380, currently the world’s largest airplane, or the new GEnX turbine for the Boeing 787 “Dreamliner.” Also in Querétaro, ITR’s Engineering Center designs low pressure turbines. In turn, AERI ADRIAA, the Alliance for the Regional Development of the Automotive and Aerospace Industry, is made up of local nodes in cities from the Baja California-Sonora-Chihuahua region with the highest industrial and academic presence. This AERI’s main goal is to increase companies’ industrial participation by generating proprietary technologies and strengthening human capital programs in the region. There is also a proposal for the creation of a network in Baja California, coordinated by Honeywell. Honeywell’s plant in Mexicali is working on systems integration testing on the new A350 airplane, which should come into service by mid-2012. What’s more, it has the second largest Engineering Center, after one in the United States. The above capabilities, together with the talent available in Mexico, must be the axes on which the leveraging strategy is built. This strategy will allow the successful models of regional innovation companies to be duplicated.

5.3 The Global Supply Chain As mentioned in the first version of the National Flight Plan, the Mexican regions with aerospace companies are connected to the world’s leading manufacturing corridors. In the north west, Mexican aerospace companies connect or could connect with installed capabilities in the California-Seattle corridor; the north-central region of Mexico could be (and for some companies already is) an opportunity for Mexican companies to connect to the capacities of the American43

Strategic lines

Mexico’s Aerospace Industry Road Map

Canadian Texas-New England-Montreal corridor.Given the above, the vertical integration of the supply chain (supplier development) is, perhaps, the main challenge for the sector in the short and medium term. Although the current development of supplier companies in the electric and automotive sectors is a basis from which the aerospace sector can draw methodologies, processes and certifications, we must also remember that while the transformation of suppliers to these sectors may be correct, it is neither direct nor simple. Supplier development, therefore, must take into account important gaps in the aerospace supply chain, where suppliers cannot be transferred from other sectors and where we must begin by creating national companies in these niches or attracting companies from other regions and developing strategic alliances with Mexican companies. A map of manufacturing capacities by region was used to identify the gaps and windows of opportunity in the Mexican aerospace industry supply chain, which showed in the initial phase the 35 leading Mexican exporting companies and companies listed with engineering and design capabilities. From this analysis, the regions can be described according to cluster, as follows:

5.3.1 Baja California

Airframe Assembly and Sales

On-Board Avionic Systems

Electronic and Electrical Components and Parts

Propulsion Systems

Engines and Components

Engine Accesories Electronic Systems and Subsystems

Airframe, Structures, Subassemblies, and Subsystems Fuselages and Structures Interior Cabin Systems and Components Environmental Control Systems

Starting Systems and Electrical Power Sources

Fuel Systems Landing Gear Systems Hydraulic Systems

Components and parts suppliers

Turbotecnología

Note: Capabilities marked in purple relate to manufacturing and innovation activities.

• Mexicali: this area focuses its innovation capabilities on full integration testing of aircraft (Honeywell Lab in Mexicali) and interior design (Volare). In manufacturing, the cluster specializes in precision machining and metal plate shaping processes. Some companies have internal capabilities for special processes, thermal and surface treatments. • Tijuana: the manufacturing region focuses on precision machining, electric and power systems, hydraulic systems and interiors. MRO activities are also performed on engine parts. • State’s particular vocations: interiors and electric power systems.

Source: Business Intelligence Unit, ProMéxico, 2009.

44

ProMéxico is currently coordinating the creation of Baja California’s aerospace sector road map, in conjunction with the state cluster.

45

Strategic lines

Mexico’s Aerospace Industry Road Map

5.3.2 Chihuahua

5.3.3 Sonora

Airframe Assembly and Sales

Airframe Assembly and Sales

On-Board Avionic Systems

Electronic and Electrical Components and Parts

Propulsion Systems

Engines and Components

Engine Accesories Electronic Systems and Subsystems

On-Board Avionic Systems

Airframe, Structures, Subassemblies, and Subsystems Fuselages and Structures Interior Cabin Systems and Components Environmental Control Systems

Starting Systems and Electrical Power Sources

Landing Gear Systems Hydraulic Systems

• This region specializes in fuselage and parts manufacturing, precision machining for engines and their parts, and harness manufacturing. In terms of innovation, the state has become specialized in engine parts design in high-temperature areas and the optimization of electric and wiring systems. There is a high concentration of activities and manufacturing for the military and defense industries. • State’s particular vocations: Military industry and design of mechanical parts and advanced manufacturing processes. • ProMéxico is currently coordinating the creation of Chihuahua’s aerospace sector road map, in conjunction with the state cluster.

Engines and Components

Engine Accesories

Fuel Systems

Components and parts suppliers

46

Electronic and Electrical Components and Parts

Propulsion Systems

Electronic Systems and Subsystems

Airframe, Structures, Subassemblies, and Subsystems Fuselages and Structures Interior Cabin Systems and Components Environmental Control Systems

Starting Systems and Electrical Power Sources

G.S. PRECISION, INC.

Fuel Systems Landing Gear Systems Hydraulic Systems

Components and parts suppliers

• Companies in Sonora have focused their manufacturing capabilities on engine parts and the integration of companies with this approach. The cluster has developed special manufacturing capabilities for highly complex engine parts. • ProMéxico is currently coordinating the creation of Sonora’s aerospace sector road map, in conjunction with the state cluster and University of Cambridge’s Institute for Manufacturing.

47

Strategic lines

Mexico’s Aerospace Industry Road Map

5.3.4 Central-Northern Corridor

5.3.5 Northeastern Region

Airframe Assembly and Sales

Airframe Assembly and Sales

11

On-Board Avionic Systems

Electronic and Electrical Components and Parts

Propulsion Systems

Engines and Components

Engine Accesories Electronic Systems and Subsystems

On-Board Avionic Systems

Airframe, Structures, Subassemblies, and Subsystems Fuselages and Structures Interior Cabin Systems and Components Environmental Control Systems

Starting Systems and Electrical Power Sources

Landing Gear Systems

Components and parts suppliers

Mexico City: • Mexico City airport and its air traffic have evolved naturally for the development of the leading MRO centers in Mexico (Mexicana MRO continues operating with international airlines) and collaborates with various centers to train maintenance technicians. Querétaro: • Because of its innovation capabilities, this is the main pole for turbine design in Mexico. The pole focuses on manufacturing and assembles complex fuselage parts (engine components and subassemblies and thermal and surface treatments).

Engines and Components

Engine Accesories

Fuel Systems

Hydraulic Systems

48

Electronic and Electrical Components and Parts

Propulsion Systems

Electronic Systems and Subsystems

Ministry of Finance and Public Credit, “Customs

Airframe, Structures, Subassemblies, and Subsystems

Information”, 2008.

Fuselages and Structures Interior Cabin Systems and Components Environmental Control Systems

Starting Systems and Electrical Power Sources

Fuel Systems Landing Gear Systems Hydraulic Systems

Components and parts suppliers

Mostly metalworking and manufacturing companies support the aerospace sector in this region. In particular the leading Mexican-owned company in the sector (measured by exports) located in Nuevo León is Frisa, which exports iron forgings to various countries. The Central-Northern corridor includes two of the country’s main airports with the related flow of aircraft which accounts for a specialization in repair and maintenance activities. For this reason, the corridor stands out as having the highest potential for the development of the Center for Complete Aerospace Services, presented in the following sections. The main deficiencies of both corridors can be identified in the relative non-existence of tooling suppliers, which leads to net imports of close to 2.5 billion dollars11 in tooling and specialized molds for Mexico’s manufacturing industry. There is also a lack of specialized companies for special processes and metalworking processes. In addition, the development of suppliers of raw materials is paramount. This lack of suppliers and the fact that some parts must be certified abroad (due to the lack of a network of labs and inspectors), result in some assemblies having to cross the border several times to complete the manufacturing process. 49

Strategic lines

Mexico’s Aerospace Industry Road Map

50

5.4 Supplier Development

5.5 Quality Global Infrastructure

There are several supplier development programs in Mexico; the Ministry of Economy works with the support of the United Nations Development Programme (UNDP) on a supplier development model. This program is based on training certified consultants with the necessary abilities to improve production chains. Also, ProMéxico implements the Transnational Company Alliances (ACT) model approach, which seeks to leverage the strong interest of many transnational companies established in Mexico to grow their businesses here, particularly by increasing national supply and transferring operations. The application of the ACT model aims to integrate the aerospace sector supply chain through the identification of the main goods imported by OEM companies; lines of investigation to identify national suppliers which are qualified and certified to the required standards; and whether companies’ current installed capacity can supply those requirements. If there is no national supply, the system supports a program that attracts projects to transfer operations in order to establish international supply companies in Mexico. To date, the ACT model has identified 29 OEMs with relevant imports and products that can be potentially substituted from Mexico. Based on these figures, a conservative 12% of the 2.37 billion dollars currently imported is expected to be substituted. As part of the efforts to coordinate institutions, companies and agencies for supplier development, the National Council of Tractor Companies (CNET) was created with the primary aim of generating coordination models and scale economies to develop and attract suppliers. As mentioned in the first version of the map, a Sourcing Council for supplier development is currently being coordinated to articulate the efforts of the sector’s leading companies.

Safety and quality systems are pillars of the development of the aerospace industry. Through quality systems, aerospace companies around the world guarantee that their products and services meet the requirements of the international market. To comply with international quality systems, countries must invest correctly in the development of national quality infrastructure for their value chains in several industries. Quality Infrastructure (QI): • Promotes sustainable economic development. • Strengthens the private economy by increasing companies’ competitiveness. • Provides the conditions to integrate associated countries into the global trade system. • And institutionalizes. Mexico’s national quality system is founded on the axes of accreditation, certification, standards, testing and metrology. The main accreditations of Mexico’s aerospace industry are those that focus mainly on manufacturing processes. To that end, the Ministry of Economy is working with the support of the UNDP on a Mexican supplier development model for accreditations, mainly NADCAP, AS9000 and AS9100. Described in the first version of the National Flight Plan and with Conacyt’s sponsorship, the capabilities of three highly renowned centers in Querétaro (Cidesi, Cideteq and Ciateq) were integrated to develop the Laboratory for Aeronautic Testing and Technologies (www. labta.com.mx). This alliance will provide technical services, testing and technology infrastructure for parts and equipment evaluation, as well as technical and administrative support for supplier development. ProMéxico, Techba and FEMIA were involved in the design and conceptualization process. The latter will allow the testing and certification of aircraft components manufactured in Mexico.

51

Strategic lines

Mexico’s Aerospace Industry Road Map

Mexico is one of the countries that is privileged with a bilateral aviation safety agreement. Therefore, it is worth mentioning that Mexico has the procedures needed to implement the BASA in design and manufacturing processes (IPA). In that regard, ITR has performed tests with fuel drain valves for Boeing 727 airplanes, from design to manufacturing, to obtain the BASA for this process. The next natural step will be to continue developing implementation mechanisms for maintenance activities (MIP) that enable the MRO project to be completed. For its part, DGAC evaluates the establishment of alternate headquarters in various aerospace clusters and the development of specialized testing labs in different regions. From the private standpoint, a few companies have been developed which specialize in non-destructive testing and inspection services for companies and aircraft, for example, Compoende Aeronáutica. The strategic lines presented in this section represent the axes that will underpin the strategy defined by the players in the National Flight Plan. The next chapter will describe the projects proposed by these players in order to reach the milestones established in the first version of the National Flight Plan.

52

Value Chain Applicable to all products and processes

5.5.1 Bilateral Air Safety Agreement

National QI ISO Guide 62, 65, etc. ISO 9000 ISO 14000 HACCP, etc. Product certification CE, GS, etc.

Accreditation

ISO 17025

• Products • Processes

Standards

International standards Certifies

Verification

PACAPLAC

Certification

National standards

Tests, analysis, inspections

i.e. IAF ILAC

Calibration reference materials

ACCSQ Comparative measures

Tests Traceability

ISO, CODEX

Competition tests

Metrology • Calibration laboratory • Chemical metrology • Verification system

BIPM APMP

Source: Physikalish Technishe Bundesanstalt. Quality Infrastructure

53

6. Strategic Milestones

55

Strategic Milestones

Mexico’s Aerospace Industry Road Map

The milestones defined in this strategic foresight exercise are:

6.1.1 Certifications

• Nationally manufactured aircraft with high content of Mexican integration and engineering. • Development of the aerospace and defense manufacturing platform. • Integrated platform of aviation services in Mexico.

As emphasized in the section on quality global infrastructure, the world’s aviation industry is governed by high security and air certification standards, so countries that are capable of ensuring compliance with these standards have a significant competitive advantage over their competitors. Since these are some of the main aerospace business drivers, the development of mechanisms in these matters becomes a basic need of the Mexican industry. Close to 35% of aerospace companies in Mexico have AS 9100 certification and close to 24% have ISO 9001 and NADCAP certifications.12 Of the NADCAP processes: 26% are related to non-destructive testing, 22% to thermal treatments and 17% to iron forgings. As mentioned in the section on the SWOT study, a complete certification plan is needed to allow all Mexican companies to have the certifications required to do business in the aerospace industry. Two main proposals have been put forward:

6.1 Nationally Manufactured Aircraft with High Content of Mexican Integration and Engineering The development of national capabilities to manufacture an aircraft and have it take off in Mexico, especially in an industry that centers on safety, requires the guarantee of quality and shows a supply chain in complete alignment with international standards. From the point of view of certification, it demonstrates a fully operational bilateral agreement (BASA), a network of test labs and a certified supply chain. A national aircraft with high content of Mexican engineering shows the country’s ability to integrate its innovation networks to international networks and to comply with standards for this type of development. The challenge for Mexico’s aerospace industry would be to go from a vision of Manufactured in Mexico to a vision of Manufactured, Designed and with a High National Content in Mexico. The challenge of integrating an aircraft with high national content is pivotal for the aerospace industry in Mexico. The strategic lines that must be developed to reach this milestone have themselves an excess of important critical mass in matters such as certification, human capital development, production chain, and collaboration in innovation matters, among others. Undoubtedly, this critical mass affects the industry’s business growth for the coming years, as well as the growth in industrial development in the regions that focus on this sector. To achieve this milestone, it is crucial to work on the following strategic projects and on any actions needed to complement them. • Certifications. • High value design and engineering. 56

6.1.2 Certification Programs

12

Results of the Aerospace Industry

Survey 2010, performed by the Ministry of Economy, ProMéxico and FEMIA. This survey included interviews with the leading 35 companies of the aerospace sector, which represent 80% of aerospace exports in Mexico. 13

According to UNDP, certification

costs can range from 6 thousand to 35 thousand dollars, depending on the degree of maturity of a company’s quality system.

The certification program supported by UNDP, FEMIA and the Ministry of Economy, focuses on assisting Mexican suppliers (especially SMEs) in the certification of their processes with NADCAP and AS9100. Through the program, supplier companies are helped with implementation costs and access to the schemes required to comply with certification systems for special processes and manufacturing of aircraft parts. The Fondo PyME (SME fund) provides businessmen who are part of this program a 70% grant to cover certification costs.13 While the initial goal of the program is to support the 40 companies that exist in the Mexican aerospace industry, the plan is to replicate it in the whole universe of aerospace companies.

57

Strategic Milestones

Mexico’s Aerospace Industry Road Map

6.1.3 Bilateral Air Safety Agreement Aimed at streamlining BASA’s operative process, one analysis proposal is the creation of a public-private entity in which the certification and business processes are carried out by a recognized private entity, and the exercise of authority to certify compliance with the agreement is the responsibility of the DGAC (General Direction of Civil Aviation).This framework will prevent the DGAC’s certification processes from being subject to budget allocation (limited by law); therefore its main advantages are: • Benefits for the aerospace industry, which will have access to more certification and higher quality services. • Benefits for the DGAC, which will be able to fulfill its tasks and responsibilities more efficiently. • Benefits for certifying entities, due to the creation of more jobs in infrastructure construction and operation.

6.1.4 Engine Development in Mexico and Integration of National Innovation Networks Mexico’s aerospace industry has projects based on high value design and engineering capabilities, among which are ITR’s low pressure turbines, GE’s project to design the GX turbine (involving more than 120 engineers), the project to generate the turbine for the Airbus 380, and the projects in the northern region of the country to design and develop prototypes of high-temperature parts for new generation engines. These capabilities have created a highly specialized group that can spearhead the integration of these capabilities to international innovation networks for new generation engines. The main challenge for Mexico’s aerospace industry is to combine and focus these capabilities in a national project that leads to the design and construction of an aircraft with high national content. Several projects are being developed in Mexico which represent an opportunity to reach this goal. The most relevant is Bombardier’s Learjet 85, which will be the company’s first airplane manufactured with composite materials. Simultaneously, Hawker Beechcraft, Cessna and Gulfstream, located in the northern part of Mexico, are developing projects to integrate capabilities into complete aircraft manufacturing in Mexico. 58

Several efforts are being made in clusters and universities to develop manufacturing capabilities of composite materials and other related advanced manufacturing topics.

6.2 Aerospace and Defense (A+D) Manufacturing Platform Mexico can be considered as the Manufacturing Platform of the Americas because of its comparative and competitive advantages, which put it in the ideal place for the development of manufacturing projects and engineering design; and with exports that exceed the total of all Latin American countries combined. As previously mentioned, the low rate of student enrollment in engineering programs in the United States, Canada and the European Union, added to the fact that the majority of engineers in these countries are “baby boomers” on the verge of retirement, create the conditions for a talent crisis (i.e., the War Talent). All of the above, plus the inability to subcontract professionals from India or China for matters that are sensitive to defense, and the fact that Mexico is the country with the highest number of graduates from engineering programs per year in America, make Mexico the ideal place to develop innovation and manufacturing projects for the aerospace and defense (A+D) sectors. To leverage this window of opportunity, Mexico’s national supply chain must be honed and aligned with international needs. Consequently, it is important to take into consideration the analysis of market segments and their projections to determine in which segments the country can be competitive. In addition, the technology development programs presented in the first version of the National Flight Plan must be reconsidered to select those in which Mexico can participate. Mexico is considered to be a pacifist country in which intellectual property is protected. Due to intellectual property protection issues and national security matters, India and China are not eligible to receive strategic military projects or those that put technology leadership at risk.

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Strategic Milestones

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Furthermore, the ability to reactivate the Security and Prosperity Partnership of North America (SPP) positions Mexico as a strategic partner and as part of a North American security block. The SPP was created to synchronize the national agendas of North American countries - Mexico, the United States and Canada - with two main missions: to promote their economic growth, competitiveness and quality, and to develop a common focus in terms of security, through a security agenda. This positions Mexico as the best-suited country for the development of the Defense Manufacturing Center project. Eventhough there are companies with manufacturing, design and engineering activities related to the defense industry, the best way to further this capacity is to integrate Mexico to strategic trade regimes.

6.2.1 Strategic Trade The opportunity to develop an A+D Hub was identified early in the process when the first version of the aerospace road map was defined. This generated the creation of a work group formed by Honeywell, Safran and General Electric. One of the pillars identified by this group is the establishment of strategic commerce regimes, which will be developed mainly by establishing export control. This work group evaluated the potential market under the assumption that Mexico will adhere to export control regimes. Mexico receives 15.9% of the United States’ total exports (not including Canada), but only 4% of exports are regulated in control lists. The consideration is that if the export of goods included in control lists from the US to Mexico increase at the same rate as the rest of trade, this will result in access to an additional market with a value of 9.94 billion dollars. Adherence to such a regime represents an economic benefit because member countries only “authorize” controlled investments for goods production in the territories of other member countries. On that account, the industry determined that the signing of export control agreements brings the following opportunities to the aerospace industry: • Investment attraction, penetration of transnational companies that produce latest generation technology, access to high-tech contracts. • Promotion of development in other sectors due to the diversity of goods and technologies which could be accessed.

60

• Latest technology transfer and generation of added value. • Strengthening of industries that already have a significant technology base, such as the aerospace and software industries. • Legal certainty in foreign trade operations by enabling trade relations among countries that share the same control regimes. Some of the companies that could have short-term benefits with this type of agreement are: a) Honeywell: Design of tank transmissions, aerospace equipment, turbines (Chihuahua). Honeywell systems integration (Mexicali), which has announced that it would increase its export level almost five-fold. b) Safran: F15 wiring and electrical equipment design (Chihuahua). c) Zodiac: Design and manufacture of fuel tanks for military aircraft (Chihuahua). The Mexican government, through the Subministry of Industry and Trade made this matter a priority in the sector’s development agenda, and organized a mission to Washington, D.C., with a Mexican delegation headed by the Undersecretary of Commerce and Industry from the Ministry of Economy, with the participation of the General Directorate of Heavy Industries, the General Directorate of Foreign Trade, both from the Ministry of Economy, as well as ProMéxico and the U.S. Ministry of the Interior. During the meeting, the parties negotiated support from the US government for the implementation of an export control system in Mexico. It also determined that due to the level of maturity of the manufacturing sector in Mexico, steps should be taken to join the Wassenaar Regime, which, although one of the most complicated, is the one that contributes the highest value to the status of the industry in Mexico. The investments that would result from joining and participating in Wassenaar are potentially higher - by comparison - than other regimes, given the specificity of its products; therefore, imposing administrative loads on the industry related to regimes other than Wassenaar would be unjustified at this time.

61

Strategic Milestones

Mexico’s Aerospace Industry Road Map

Other treaties should also be considered, such as the Australia Group agreement which seeks to ensure that exports do not contribute to the development of chemical or biological weapons. Mexico also signed the Resolution 1540 of the United National Security Council (UNSCR 1540), which is the latest in a series of specific international measures aimed at preventing the proliferation of weapons of mass destruction and, particularly, preventing and thwarting their acquisition and use by terrorist groups. Thus, several measures have been taken to control products and dual-use technologies. The main challenges facing the implementation of Wassenaar are: • To perform a deeper import/export impact analysis with related companies and products. • To submit the entry application to Wassenar as soon as possible; therefore the regulation must be ready without delay. • The Ministry of Economy is working to obtain a draft of the regulation. • To analyze control lists, other departments must be involved to manage and monitor the regulation: SEDENA (Ministry of Defense), COFEPRIS (Federal Commission for Sanitary Risk), CISEN (National Center of Investigation and Security), Customs. • The industry must be approached. • The Ministry of Economy will participate and support institutions that lead projects for other regimes. A final decision on the possibility of Mexico joining this agreement is expected by mid-2011. If this scenario were to become a reality, the agreement is expected to start operating in the second half of 2012.

6.3 Integrated Platform of Aviation Services in Mexico In the next ten years, the world’s aerospace industry will undergo structural changes in its way of doing business. An increase in fuel and raw material costs, among other trends, will certainly affect the bottom line of airlines and manufacturing companies, as well as companies that maintain and repair air fleets. The search for competitive regions, specialized workforce and advantages in terms of logistics costs will be the main business drivers for the establishment of Integrated Aviation Services Centers. 62

These Integrated Aviation Services Centers are expected to offer advantages such as mature fleet maintenance, management and dismantling services; integration of parts, spare parts and repair services supply chain; establishment of preferential trade zones; as well as technician, engineer and pilot training and access, since the demand for these is expected to increase in the coming years. To leverage the opportunities offered by the Mexican aerospace industry, the goal is to establish an Integrated Aviation Services Center in Mexico. Experts in the global aerospace industry have highlighted Mexico’s great potential to establish the Integrated Aviation Services Center of the Americas in its territory, and have recommended a single large Center with the aim of attracting the critical mass of capabilities and businesses to create a pole of competitiveness in the region. This strategic milestone will include the following projects: • Maintenance Center of the Americas. • International Civil Aviation Training Center. • Mature Fleet Management (TARMAC).

6.3.1 Maintenance Center of the Americas (MRO) The goal is to develop an Aerospace MRO platform, with a level of excellence that draws air fleets from around the world and provide them with complete maintenance repair and overhaul services. Mexico’s development potential in the MRO market is very high because of its current strategic advantages such as geographic location, air traffic, airport infrastructure and connectivity to the sector’s leading markets. Also, under the right conditions of infrastructure, certification and training, its growth potential for 2014 would be particularly high. There are currently no MRO service supplier facilities (third parties) in Mexico that meet the requirements of the growing fleet of national commercial and private operators, or which seek a larger penetration in the international market, based in our country. A considerable part of the maintenance of the Mexican fleet is outsourced to foreign companies that perform their services abroad.

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Strategic Milestones

Mexico’s Aerospace Industry Road Map

11,000

GDP (USD)

500

>2 trillion 1 - 2 trillion

400 Germany

300

100 0

Brazil

Canada

0.5 - 1 trillion