By: Rebeca Marichalar,
Instituto Tecnológico Autónomo de México
Until recently, it was widely believed that heading up industries with a high level of technical sophistication was complicated for lesser-developed economies. However, in recent years, companies from emerging economies have begun to gain ground on the multinationals of the traditional powers.
Today stories abound of companies that have established themselves as leaders in their respective markets despite the uncertain technical conditions in their countries of origin. China, India and Brazil are examples of countries with high rates of economic growth with high levels of poverty and inequality, but nevertheless they have begun to achieve notable business accomplishments, as seen in companies like Huawei Technologies, Tata Group or Embraer.
One of the industries of greater technological complexity – due to the rigor of their standards, requirements and international certifications for their products, processes and systems – is the aerospace industry. The demands posed for an emerging economy developing an industry of this magnitude are enormous. Some countries, such as Argentina and South Africa, have tried to develop it and failed. To design and manufacture a new airplane can take 5 to 10 years, during which time each component is subjected to rigorous testing. Millions of dollars are invested long before safety and quality certifications can be received. The financial risk is enormous and a single failed project can lead a company to bankruptcy.
Therefore, it is a sector that has been historically dominated by the United States and some European powers. It is characterized by its vertical integration and by being led by national champions such as Boeing and Airbus. However, increasing globalization has produced a radical change in the global value chain of the sector. Niosi and Xhegu (2010) have identified three major trends in the industry chain: 1) increasing concentration, 2) outsourcing or subcontracting, and 3) internationalization.
The first trend is the consolidation of competition in a few world producers in a natural oligopoly structure, which is necessary to achieve economies of scale, cover the high costs of development, and meet the reduced international demand facing manufacturers of original equipment. Companies have found great benefits in outsourcing, as they delegate certain production activities, particularly the secondary ones, to manufacturing companies in emerging countries. These tasks of sub-assembly and manufacture of subsystems allow them to reduce their costs, focus on the final assembly, marketing, and research and development (R&D) without losing control over their technology. Finally, with the latest trend – internationalization – de-verticalization and globalization of the production chain are favored. This trend is a result of the end of the Cold War and the reduction of government subsidies that has increased the cost of production and R&D, as well as the recent economic crises that have affected the demand for aircraft and have reduced sales volumes. Consequently, a phase of international cooperation for the development and assembly of aircraft has begun, as happened with the Boeing 787.
For emerging economies, these global trends present a great business opportunity and a means to increase their technological capacity. Among the commercial advantages, it should be noted that the incursion in the aeronautics chain generates an economic impact that is reflected in the contribution to the gross domestic product, in exports and in their value added, as well as in the increase in skilled employment (National Research Council, 1999). Second, according to Boeing (2015), the aviation and tourism industries are in full expansion, which will increase the demand for aircraft that businesses today do not have the capacity to meet completely. This opens a new market niche, especially for regional aircraft, that companies such as the Canadian Bombardier, the Chinese AVIC and COMAC, and the Brazilian Embraer are seeking to control.
On the other hand, there are also benefits to improving the technological capacity and levels of innovation. Emerging economies can participate in the waves of R&D, such as in the development of new composite materials, in the improvement of systems and security software or in the creation of biofuels. In addition, the high technological level of the industry and the multiplicity of contributing disciplines provide the beneficial effects of the technological spillover on other related industries, which increases their technological development, productivity and competitiveness.
According to data from ProMexico (2015), Mexico became the world’s largest recipient of foreign direct investment (FDI) in the aerospace industry between 1990 and 2010, with about 33 billion dollars, mainly from its principal trading partners, the United States and Canada, and to a lesser extent the European Union. In the last 10 years, the sector, which was almost nonexistent before, has grown at an average annual rate of 17% in terms of exports, and the number of companies has grown to more than 325. Among these are subsidiaries of companies of the stature of Bombardier Aerospace, Honeywell, GE, Safran and Airbus Helicopters.
The reason for this important inflow of FDI has to do with the competitive advantages that Mexico has and that make it a valuable ally for the original equipment manufacturers that want to internationalize their production.
First, Mexico went through an intense period of transformation of the industrial base beginning with the North American Free Trade Agreement (NAFTA), which allowed the installation of industries such as the metallurgical, automobile sector, electronics and chemical. These industries contributed to the formation of human capital with scientific and technological skills useful for the aeronautical sector and whose cost of labor is lower than in other attractive emerging economies. As if that were not enough, efforts have been made to create specialized institutions of higher education in the sector, such as the Aeronautical University of Querétaro (Villavicencio et al., 2013).
Second, the proximity to some of the world’s largest aerospace conglomerates, such as those of Seattle and Wichita in the United States, and Montreal in Canada, as well as the commercial benefits of NAFTA, reduce the costs of exportation and transportation, which places Mexico as a viable option to integrate into the U.S. aerospace chain.
Mexico also maintains relatively stable macroeconomic conditions in terms of inflation and economic growth and offers support and fiscal and economic incentives to firms so that they can install their operations in the country. In addition, Mexico provides security for industrial property, having adhered to international protection standards, and allows subsidiaries to maintain full control of the company, without having to resort to partnerships with Mexicans to be installed in the country, unlike other emerging economies (Brown-Grossman y Domínguez-Villalobos, 2013).
In summary, the competitive advantages offered by Mexico for the installation of large original equipment manufacturers and their suppliers of aircraft parts and subsystems are truly exceptional. However, serious challenges remain in order to take advantage of the technological and knowledge spillover and to scale steps in the aerospace value chain, especially in the training of skilled personnel and the integration of Mexican companies into the chain. Despite efforts to provide specialized educational programs, the lack of skilled labor remains the biggest barrier to taking advantage of these benefits, since it prevents original equipment manufacturers from relocating their R&D activities in the country. Similarly, the integration of Mexican companies to the value chain is still in its infancy and there are few success stories of Mexican companies that have achieved international certification as suppliers. The vast majority is dedicated to manufacturing, while only a small percentage performs engineering and design activities. This is cause for concern, because the specialization of low cost, low value added industrial activities could repeat the “maquila effect” observed in other Mexican industries, such as automobile, which took nearly two decades to incorporate itself as a link in the chain of high technological complexity. (Villavicencio et al., 2013).
The industry’s potential to increase the technological capability and economic growth of the emerging economies is indisputable. However, the perpetuation of Mexico as a low cost country rather than a center of aerospace innovation can lead it to missing the great benefits of the sector. The first steps in installing the appropriate companies were in the right direction. The following step is to acquire technological and innovation skills to be inserted into the chain and to develop products with greater value added so that the aerospace industry can contribute to the growth of innovation and the economy of the country.
References
Brown-Grossman, F. and L. Domínguez-Villalobos (2013), “¿Tiene la industria mexicana las condiciones para integrarse a la cadena de valor internacional de alto valor agregado?”, in La industria aeroespacial: Complejidad productiva e institucional, Mexico, FLACSO, 135-159.
National Research Council (1999), Recent Trends in U.S. Aeronautics Research and Technology. Washington D.C.: The National Academies Press.
Niosi, J. y M. Zhegu (2010), “Multinational Corporations, Value Chains and Knowledge Spillovers in the Global Aircraft Industry,” International Journal of Institutions and Economies, 2(2), 109-141.
ProMéxico, (2015). “Mexico’s Aerospace Industry Road Map: National Flight Plan 2015,” México: ProMéxico, 7-55.
Villavicencio, D., J. Hernández and L. Souza (2013). “Capacidades y oportunidades para el desarrollo de la industria aeronáutica en Querétaro,” in La industria aeroespacial: Complejidad productiva e institucional, Mexico: FLACSO, 49-86.
Mexico Aerospace… How High Can It Fly?
Instituto Tecnológico Autónomo de México
Until recently, it was widely believed that heading up industries with a high level of technical sophistication was complicated for lesser-developed economies. However, in recent years, companies from emerging economies have begun to gain ground on the multinationals of the traditional powers.
Today stories abound of companies that have established themselves as leaders in their respective markets despite the uncertain technical conditions in their countries of origin. China, India and Brazil are examples of countries with high rates of economic growth with high levels of poverty and inequality, but nevertheless they have begun to achieve notable business accomplishments, as seen in companies like Huawei Technologies, Tata Group or Embraer.
One of the industries of greater technological complexity – due to the rigor of their standards, requirements and international certifications for their products, processes and systems – is the aerospace industry. The demands posed for an emerging economy developing an industry of this magnitude are enormous. Some countries, such as Argentina and South Africa, have tried to develop it and failed. To design and manufacture a new airplane can take 5 to 10 years, during which time each component is subjected to rigorous testing. Millions of dollars are invested long before safety and quality certifications can be received. The financial risk is enormous and a single failed project can lead a company to bankruptcy.
Therefore, it is a sector that has been historically dominated by the United States and some European powers. It is characterized by its vertical integration and by being led by national champions such as Boeing and Airbus. However, increasing globalization has produced a radical change in the global value chain of the sector. Niosi and Xhegu (2010) have identified three major trends in the industry chain: 1) increasing concentration, 2) outsourcing or subcontracting, and 3) internationalization.
The first trend is the consolidation of competition in a few world producers in a natural oligopoly structure, which is necessary to achieve economies of scale, cover the high costs of development, and meet the reduced international demand facing manufacturers of original equipment. Companies have found great benefits in outsourcing, as they delegate certain production activities, particularly the secondary ones, to manufacturing companies in emerging countries. These tasks of sub-assembly and manufacture of subsystems allow them to reduce their costs, focus on the final assembly, marketing, and research and development (R&D) without losing control over their technology. Finally, with the latest trend – internationalization – de-verticalization and globalization of the production chain are favored. This trend is a result of the end of the Cold War and the reduction of government subsidies that has increased the cost of production and R&D, as well as the recent economic crises that have affected the demand for aircraft and have reduced sales volumes. Consequently, a phase of international cooperation for the development and assembly of aircraft has begun, as happened with the Boeing 787.
For emerging economies, these global trends present a great business opportunity and a means to increase their technological capacity. Among the commercial advantages, it should be noted that the incursion in the aeronautics chain generates an economic impact that is reflected in the contribution to the gross domestic product, in exports and in their value added, as well as in the increase in skilled employment (National Research Council, 1999). Second, according to Boeing (2015), the aviation and tourism industries are in full expansion, which will increase the demand for aircraft that businesses today do not have the capacity to meet completely. This opens a new market niche, especially for regional aircraft, that companies such as the Canadian Bombardier, the Chinese AVIC and COMAC, and the Brazilian Embraer are seeking to control.
On the other hand, there are also benefits to improving the technological capacity and levels of innovation. Emerging economies can participate in the waves of R&D, such as in the development of new composite materials, in the improvement of systems and security software or in the creation of biofuels. In addition, the high technological level of the industry and the multiplicity of contributing disciplines provide the beneficial effects of the technological spillover on other related industries, which increases their technological development, productivity and competitiveness.
According to data from ProMexico (2015), Mexico became the world’s largest recipient of foreign direct investment (FDI) in the aerospace industry between 1990 and 2010, with about 33 billion dollars, mainly from its principal trading partners, the United States and Canada, and to a lesser extent the European Union. In the last 10 years, the sector, which was almost nonexistent before, has grown at an average annual rate of 17% in terms of exports, and the number of companies has grown to more than 325. Among these are subsidiaries of companies of the stature of Bombardier Aerospace, Honeywell, GE, Safran and Airbus Helicopters.
The reason for this important inflow of FDI has to do with the competitive advantages that Mexico has and that make it a valuable ally for the original equipment manufacturers that want to internationalize their production.
First, Mexico went through an intense period of transformation of the industrial base beginning with the North American Free Trade Agreement (NAFTA), which allowed the installation of industries such as the metallurgical, automobile sector, electronics and chemical. These industries contributed to the formation of human capital with scientific and technological skills useful for the aeronautical sector and whose cost of labor is lower than in other attractive emerging economies. As if that were not enough, efforts have been made to create specialized institutions of higher education in the sector, such as the Aeronautical University of Querétaro (Villavicencio et al., 2013).
Second, the proximity to some of the world’s largest aerospace conglomerates, such as those of Seattle and Wichita in the United States, and Montreal in Canada, as well as the commercial benefits of NAFTA, reduce the costs of exportation and transportation, which places Mexico as a viable option to integrate into the U.S. aerospace chain.
Mexico also maintains relatively stable macroeconomic conditions in terms of inflation and economic growth and offers support and fiscal and economic incentives to firms so that they can install their operations in the country. In addition, Mexico provides security for industrial property, having adhered to international protection standards, and allows subsidiaries to maintain full control of the company, without having to resort to partnerships with Mexicans to be installed in the country, unlike other emerging economies (Brown-Grossman y Domínguez-Villalobos, 2013).
In summary, the competitive advantages offered by Mexico for the installation of large original equipment manufacturers and their suppliers of aircraft parts and subsystems are truly exceptional. However, serious challenges remain in order to take advantage of the technological and knowledge spillover and to scale steps in the aerospace value chain, especially in the training of skilled personnel and the integration of Mexican companies into the chain. Despite efforts to provide specialized educational programs, the lack of skilled labor remains the biggest barrier to taking advantage of these benefits, since it prevents original equipment manufacturers from relocating their R&D activities in the country. Similarly, the integration of Mexican companies to the value chain is still in its infancy and there are few success stories of Mexican companies that have achieved international certification as suppliers. The vast majority is dedicated to manufacturing, while only a small percentage performs engineering and design activities. This is cause for concern, because the specialization of low cost, low value added industrial activities could repeat the “maquila effect” observed in other Mexican industries, such as automobile, which took nearly two decades to incorporate itself as a link in the chain of high technological complexity. (Villavicencio et al., 2013).
The industry’s potential to increase the technological capability and economic growth of the emerging economies is indisputable. However, the perpetuation of Mexico as a low cost country rather than a center of aerospace innovation can lead it to missing the great benefits of the sector. The first steps in installing the appropriate companies were in the right direction. The following step is to acquire technological and innovation skills to be inserted into the chain and to develop products with greater value added so that the aerospace industry can contribute to the growth of innovation and the economy of the country.
References
Brown-Grossman, F. and L. Domínguez-Villalobos (2013), “¿Tiene la industria mexicana las condiciones para integrarse a la cadena de valor internacional de alto valor agregado?”, in La industria aeroespacial: Complejidad productiva e institucional, Mexico, FLACSO, 135-159.
National Research Council (1999), Recent Trends in U.S. Aeronautics Research and Technology. Washington D.C.: The National Academies Press.
Niosi, J. y M. Zhegu (2010), “Multinational Corporations, Value Chains and Knowledge Spillovers in the Global Aircraft Industry,” International Journal of Institutions and Economies, 2(2), 109-141.
ProMéxico, (2015). “Mexico’s Aerospace Industry Road Map: National Flight Plan 2015,” México: ProMéxico, 7-55.
Villavicencio, D., J. Hernández and L. Souza (2013). “Capacidades y oportunidades para el desarrollo de la industria aeronáutica en Querétaro,” in La industria aeroespacial: Complejidad productiva e institucional, Mexico: FLACSO, 49-86.