What would you say about the evolution and performance of Mexico’s aerospace industry?
If you compare it to other more traditional activities like the automotive industry, the history of the aerospace industry in Mexico is relatively recent. It starts operations in the country between 2004 and 2005 with the settling—in the state of Querétaro—of a company that has relevance in the sector worldwide: Bombardier. Since then, and in a very dynamic way, a supply network was developed that gained greater momentum and expanded to other regions of the country with the arrival of more world-class companies. It is therefore a short but very successful history: the industry grows year by year at double-digit rates and records an average historical growth of 14% per year.
How many companies are there in the aerospace industry in Mexico and where are they?
Around 400 companies are part of this industry, of which approximately 60% produce parts and components. There is also a relevant percentage that focuses on research and development, and of course service providers, among which are aircraft maintenance. The main sector clusters are in the states of Querétaro, Baja California, Sonora, Chihuahua, and Nuevo León. Some initiatives prosper in other states like Jalisco and Yucatán, but 90% of production is found in the first five states I mentioned.
What are the most relevant contributions of the aerospace industry to the Mexican economy?
The contribution of the aerospace industry to the country’s production is still modest, 0.8% of GDP; but it is gaining ground progressively and has really promising potential. In terms of exports, it sold more than $8.6 billion dollars in 2018 and went from being the tenth to the seventh exporter of parts and components to the United States. In attracting foreign investment, it received over $3 billion dollars. The aerospace sector employs more than 60 thousand people, and what stands out is not only the number of jobs, but the specialization and high salaries, higher than the manufacturing sector average. By 2025, this labor force is expected to almost double or at least reach 100 thousand jobs. In this task there is extensive coordination with the federal government, state governments and academia, developing specialized training programs to meet the particular requirements of the activity. The Technological University of Querétaro, for example, constantly updates its syllabus so that the profile of its graduates adjusts to the demands of the industry. In this endeavor, it collaborates with numerous companies in the field, and not only to update their syllabus, but also to design outreach programs to train the existing workforce.
Who is the Bancomext Aerospace Financing Program for?
The bank aims to support the productive sectors that contribute most to the generation of currencies or have the potential to do so. In this particular case, we seek to add more national content to aerospace exports. For this, we have programs that favor the incorporation of local suppliers to the supply chain of the aerospace industry, including of course the participation of small and medium-sized companies. Foreign direct investment is also promoted: cultivating the interest of global companies to invest and generate more employment, and increase the productive capacity of Mexico.
What type of projects are supported under this Bancomext program?
We promote the entire global value chain, including buyers of the finished product, that is, airlines. Our participation in the financing of commercial aviation is one of the most relevant in the entire Mexican banking system. And from there to the back of the chain, we support service providers, both in the aviation sector and in equipment maintenance, whose growth prospect is very promising, not only because of the evolution of the expected demand in Mexico, but also because of the world market outlook. We are also promoting industrial projects that involve the production of parts that are incorporated into other components and, finally, are sent to other countries to be assembled on airplanes. As you can see, the scope of our programs is very wide.
What are the most relevant features of the Bancomext Aerospace Financing Program?
This industry has very particular conditions: it is highly capital intensive and generally the projects are long maturing. Each aircraft model requires a specific project and those that intend to join its supply chain have to condition their plants and successfully complete a long certification process, before receiving the first set of purchase orders. Sometimes you have to invest and invest between five and seven years, without seeing returns. These are complex projects that, because of their very nature, often face difficulties in obtaining financing.
The advantage, of course, is that these projects have very broad time horizons. In narrow-body and medium-range aircraft, for example, a model remains in the market for 30 years or more; so, at first, the production of parts and components is destined to the assembly of new units and, subsequently, the demand for spare parts for aircraft maintenance becomes more relevant.
Because of its development vocation, Bancomext has specific programs to finance this type of long-term project. In the aerospace industry, we have projects with credit recovery periods of over 15 years and, in some cases, up to 20.
Could we say the Bank’s financial support is a tailormade suit?
That’s right. Sector specialization is one of Bancomext’s strengths. We have highly qualified staff to address the specific needs of different sectors, new and traditional. Tailormade suits for each project because, for example with the aerospace industry, it’s not the same to finance a project for the production of parts and components, than one to enable a maintenance base, or a research and development center. As long as the projects have sufficient elementary bases to make them viable, the bank can make these suits to measure.
What numbers can you share with us regarding financial support Bancomext has granted under this aerospace sector program?
To leverage our skills, we basically work in two different service channels. In the first, we work hand in hand with commercial banks and other financial intermediaries to meet financing requests of less than $3 million dollars. In this case, the bank can assume part of the risk of the operations so that the credits are granted in the best market conditions and adjust to the needs of the companies, mainly small and medium size. In the second service channel, we provide credits—directly—of more than $3 million dollars and up to—conservatively—$200 million dollars. In these cases, as I have already mentioned, the specialized divisions of the Deputy General Directorate of Business Banking ensure that the periods, and other terms and conditions of the credits are adjusted to the needs of the projects. If financing above $200 million dollars is required, we invite other banks and make syndicated loans to ensure full funding of transactions.
We have channeled over $13.5 billion pesos, and we currently have another $3.3 billion pesos tied up in financing in process. The current bank portfolio’s balance in this activity is five billion pesos. We have financed virtually all Mexican airlines, as well as other commercial services companies with helicopters and manufacturing supply projects. We have about 15 directly supported projects.
Of the almost 400 companies in Mexico’s aerospace industry, less than 30% are Mexican. Things have improved, but what can be done to speed things up?
What has greatly contributed to the incorporation of Mexican companies into the value chain is precisely the financing of joint ventures. Often, a foreign technology partner comes to Mexico to partner with companies that already have facilities that can be conditioned to manufacture parts and components of the aerospace industry. This happens a lot, for example, in the automotive sector, but other examples are seen in the treatment of materials and injection of plastics. Since there is a base facility, the path to be part of the aerospace industry supply chain is shorter. This activity requires certifications and, therefore, the simplest thing for a Mexican company is for such partnering to provide already certified processes and industry experience.
What support programs does Bancomext have to favor the incorporation of companies into industrial digitalization?
One of the programs that is most used by the bank is precisely the one aimed at capital expenditure: machinery, equipment, and new technologies. Bancomext acts like the Mexican government export credit agency and as such, signs agreements with its counterparts abroad to enable credit lines, guarantees or credit insurance for long-term export, so that Mexican companies can import capital goods, spare parts and services in the best market conditions.
Additive manufacturing, for example, will change the way in which various industries operate. In aerospace, for example, a very expensive problem for companies is to have an inventory of spare parts in different places of operation. With these new technologies, parts and components can be printed on demand and, in this way, reduce inventories and storage costs.
What is the expected evolution of the aerospace industry’s credit portfolio in 2019?
We currently have approximately five billion pesos in the sector’s credit portfolio, as I previously mentioned. By the end of the year we should see an increase of at least 20% with the credits in process. We will be in line with the growth of the sector, likewise in terms of investments; between 2009 and 2017 we were only behind the United States and Great Britain, among the best positioned destinations. We have a good geographical position, free trade agreements, specialized labor, and articulation of plans between different levels of government.
What should we expect from the evolution of Mexico’s aerospace industry?
We still have one problem—which could be seen as positive—in the amount of manpower required. The current staff turnover is still quite high according to industry parameters. To maintain the virtuous circle, we have to focus on specialized training. We are on the right track, but we have to speed things up. The demographic bonus, unlike other countries, helps us but we must incorporate the best educational practices. The experience I previously mentioned, in Querétaro, with the university, is being replicated in Chihuahua, Sonora, and Baja California. In Mexico City there are emblematic institutions, such as IPN, which has led the way in this type of degrees; and of course, there is UNAM. Jalisco is moving towards establishing its own aerospace cluster, based on infrastructure developed in science and technology.
What should we expect for the aerospace industry performance in the international arena?
The main aircraft manufacturers are planning to—at least—double the size of the fleet by 2036. Such is the business opportunity, because the sector grows even in times of recession. The fleet is going to double, but environmental challenges must also be addressed, by developing and producing increasingly environmentally friendly equipment. That is, in addition to incorporating more aircrafts, the renovation of a large part of existing units is planned. For example, there currently around 22 thousand Airbus and Boeing aircrafts; by 2036 there will be more than 43 thousand, a very significant growth that adds another 10 or maybe 12 thousand units that will replace the current units.
There is a similar forecast for the regional aircraft fleet. All Mexican airlines are investing in modernizing and expanding their fleets. In 2010, the Mexican commercial fleet averaged 18.5 years old, now decreased to 8 years. It is a breakthrough and it should be noted that a significant number of aircrafts have more efficient turbines, of which some parts are made in Mexico with the support of Bancomext. Sector expectations, as can be seen, are of sustained growth and with a very encouraging outlook for investment.