NUEVO LEON'S AEROSPACE INDUSTRY LAYING THE GROUND FOR A BIG

UNCLAS SECTION 01 OF 04 MONTERREY 000314

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: EAIR ECON EINV PGOV MX
SUBJECT: NUEVO LEON'S AEROSPACE INDUSTRY LAYING THE GROUND FOR A BIG
BLAST OFF

REF: A) 2007 MONTERREY 700; B) MONTERREY 306

MONTERREY 00000314 001.2 OF 004



1. (SBU) Summary: The state of Nuevo Leon is having success
building on its manufacturing prowess to develop a substantial
aerospace sector, and now hopes to move into more value-added
technology. Nuevo Leon's aerospace industry is now the second
largest in Mexico, with over $300 million in exports to the
United States. Although most of the aerospace companies within
the state are joint ventures that strictly manufacture
components, a few have moved into engineering and design. The
growth of this industry is largely due to a concerted and
collaborative effort between the state's public, private and
academic sectors to develop and promote an aerospace cluster.
Other contributing factors include Nuevo Leon's skilled
workforce, large pool of talent, relatively low wages, and
proximity to the border. However, in order to compete with
other states and continue to draw investors, Nuevo Leon needs to
develop more certified aerospace suppliers, provide greater tax
incentives and encourage more companies to move towards
value-added technology. End Summary.



The Sky's the Limit




2. (U) Mexico's aerospace industry is on the move, as its
global exports grew 54% from 2004 to 2006, rising from $606
million to $943 million. According to Bancomext, Mexico is the
thirteenth exporter within the aerospace industry world-wide.
Mexico also increased its exports of aerospace components to the
United States from $500 million to $600 million from 2006 to
2007, a ten-fold increase. Mexico's aerospace imports are
growing as well, up 25.6% in 2006 to $506 million. According to
Mexico's Secretariat of Economy, aerospace exports could reach
$2 billion by 2010. Though the aerospace industry in Mexico is
still considered to be in its early stages, it has much room to
grow. The U.S. Commercial Service recently ranked Mexico's
aerospace industry as eleventh in the top 20 U.S. markets in
2007, up from seventeenth the year before. Nevertheless,
Mexican aerospace manufacturers account for only 2% of the total
US import market of about $25 billion. Bancomext forecasts 10%
growth in the industry for the next 5 years.




3. (U) The Mexican aerospace industry has shown large growth in
players, employment and sophistication. According to
Jean-Claude Bouche, an aerospace specialist with Monterrey's
Technological Institute, the number of companies supplying the
aerospace industry jumped from 450 in 2004 to 650 today. The
number of aerospace manufacturers has also increased, from about
65 in 2004 to about 180 today. A little over half of these have
Mexican ownership, although most are joint ventures. The
industry now employs about 22,500, nearly double the 12,500
employed in 2004. By the end of the decade that figure could
grow to 100,000, according to a BizNews article published in
September 2006. Mexico's aerospace industry is also becoming
more sophisticated. Initially, it focused on manufacturing
processes, building upon its automotive industry. However, it
now produces everything from engine and landing system
components to video systems and interiors, and it is starting to
move into engineering design.




4. (SBU) Nuevo Leon is now the second largest aerospace cluster
in the country, knocking the state of Sonora into third place.
According to Luis Cabeza, Director of the Center for the
Development of the Aerospace Industry in Nuevo Leon (CEDIA),
there are now 20 companies linked to the aerospace industry, up
from 12 in 2004, with exports to the U.S. totaling about $320
million. In comparison, Baja California has 32 aerospace
companies, and Sonora has 16 firms. Baja California's companies
are primarily manufacturers, and only two provide engineering
and design services, Cabeza reported that there are 30 Nuevo
Leon companies nearly ready to enter the industry. For a
company to fully compete within this industry, it must be
certified by Nadcap (National Aerospace and Defense Contractors
Accreditation Program). Currently there are only 3-4 Nadcap
certified companies in Nuevo Leon. There are now about 3
aerospace companies in Nuevo Leon that are considered to be E&D
(engineering and design); Frisa, ICKTAR and ATM Group. On the
other hand, one of Nuevo Leon's biggest E&D aerospace companies,
EG Corporation, recently stopped manufacturing aerospace
components.


MONTERREY 00000314 002.2 OF 004




Shooting for the Moon




5. (SBU) Since the start of his administration, Governor Jose
Natividad Gonzalez Paras has been pushing Nuevo Leon to move
from manufacturing to a knowledge-based economy (reftel A). For
the aerospace cluster, the Citizen Advisory Council was
established in 2004 to bring together the public, private and
academic sectors to promote the aerospace industry in Nuevo
Leon. In October 2007, Nuevo Leon founded the Center for the
Development of the Aerospace Industry (CEDIA for its initials in
Spanish). CEDIA is sponsored by the state government, the Nuevo
Leon Secretariat of Economic Development (SEDEC),and
prestigious local university Monterrey TEC. CEDIA provides
consulting services to existing and potential aerospace
companies, and facilitates training and certification for local
companies, such as Nadcap certification. A Productive Joint
Aerospacial Center (CAP) was also created to support and promote
small to medium sized providers in Nuevo Leon and the
northeastern region. CAP is also sponsored by Nuevo Leon,
SEDEC, and Monterrey TEC. It offers discounted lab experiments
in its facility at the TEC, and offers continuous education and
certificates of training. Finally, Nuevo Leon last year passed
a law for investment and state promotion that would allow for
the provision of tax incentives to key strategic industries,
including aerospace.




6. (U) The federal Government of Mexico has enacted various
programs to encourage nationwide development of the aerospace
industry. The GOM offers income tax credit on projects
involving R&D, immediate capital investment deductions, income
tax deductions and trade facilitation programs for export
oriented companies, and payroll tax credits. Another boost to
the aerospace sector came with the passage of a U.S.-Mexico
Bilateral Aviation Safety Agreement (BASA) in September 2007.
This agreement will promote aviation safety, enhance cooperation
and increase efficiency in matters related to civil aviation.
The Mexican Association and Council of Aerospace Education
(COMEA) was created in 2007 to build the human capital necessary
to develop the industry. It is made up of 12 public and private
academic institutions. More recently, another missing component
to the industry was added with the creation of a national
aerospace industry association known as FEMIA in November 2007.
FEMIA is composed of aerospace companies in Mexico, such as
Honeywell, Bombardier, General Electric, and Goodrich, among
others, and one of its first objectives is to promote a tax
incentive program. Finally, Mexico is also in the process of
creating AEXA, a national space agency similar to NASA.



The Right Stuff




7. (U) Nuevo Leon has several advantages that have helped to
propel its aerospace cluster, principally its large supply of
skilled workers. Thanks to its success in developing an
automotive cluster, Nuevo Leon has a large pool of skilled
manufacturing workers with transferrable skills. Nuevo Leon
also has a large pool of talent since the state is home to 93
colleges and universities, among them Monterrey TEC and the
University of Monterrey, as well as the reputable state school
Universidad Autonoma de Nuevo Leon (UANL). The TEC has a
program with the University of Arizona to offer a Master's
degree in International Logistics, in response to the increasing
demand for aerospace components made in Mexico, and UANL
introduced an Aeronautics Engineering Program last summer.
Nuevo Leon also boasts 5,000 engineering graduates per year.
Nuevo Leon educates 11% of all engineering graduates in Mexico,
and in 2006 40% of all students were engineering or technology
majors. Nuevo Leon also has the competitive advantage of lower
wages compared to the U.S., although these tend to be higher
than in neighboring states. Lastly, Nuevo Leon's proximity to
the border makes it attractive to U.S. aerospace companies
looking to open a plant in Mexico.




8. (SBU) A good example of Nuevo Leon's success in the
aerospace industry is the company Frisa. Previously known as
Frisa/Wyman Gordon, this company started off as a joint venture

MONTERREY 00000314 003.2 OF 004


between the Mexican company Frisa and the U.S. company Wyman
Gordon, until Frisa bought out Wyman Gordon in 2006. Currently,
Frisa is considered to be the second largest titanium and nickel
rings producer. It began as a manufacturing company but has
since moved into engineering and design (E&D). According to
Eric Gonzalez, Sales Engineer, Frisa is 'not competing as a
[company in a] low-cost country,' but has become a world class
competitor which exports 100% of its products to the U.S. and
Europe. All its engineers are homegrown from Monterrey and
employee wages are comparable to those in the U.S. Gonzalez
predicted Frisa would have 100% growth in 2008 and 35-40% annual
growth in the next four years.




9. (SBU) Another success story is the relatively recent arrival
of MD Helicopters, an American company headquartered in Arizona
which opened a plant in Monterrey in September 2006. MD
Helicopters plant assembles fuselages and is expanding
production from 28 fuselages in 2007 to 68-69 this year, at
least one per week. Ignacio Tamez, HR Manager, noted that MD
Helicopters came to Monterrey because of the lower labor costs.
Tamez also noted that, although it currently only assembles
fuselages, they are moving to make their tools in-house. The
plant has 5 engineers, all from the U.S. Note. Frisa also
started off using foreign engineers before recruiting locally.
End Note.




10. (SBU) Ketema is a company from the neighboring city of
Saltillo, Coahuila, (45 minutes away from Monterrey) that can
contribute to the Nuevo Leon aerospace cluster. Ketema Senior
Aerospace opened its plant in 2000, and is a UK aerospace
company which produces engine structures, fluid control systems
and pressure control. It is the only one-stop shop in all of
Mexico, meaning it can manufacture and provide treatment for all
the parts it assembles. According to General Manager Aldo
Rodriguez, despite having a branch office in San Diego, Ketema
chose Saltillo over Baja because it found the workforce on the
border to be unstable. It also found Saltillo to have good
recruiting sources. All the plant's employees, including its
engineers, are from Saltillo. In addition, Rodriguez reported
that the Saltillo industrial park, where the plant is located,
offered good benefits, such as a Shelter Scheme that handles
payroll administration and applicant screening among other
things. He also noted that salaries in Saltillo are a little
lower than those in Monterrey.



Monterrey, We Have a Problem




11. (SBU) Despite the proliferation of aerospace companies in
Nuevo Leon, a growing issue is the lack of suppliers. Not only
are there insufficient companies to provide the products and
treatment needed, very few are Nadcap certified, as is required
by most U.S. aerospace companies. Heat treatment companies are
especially needed. Tamez of MD Helicopters reported that they
have to rely on their U.S. corporate office to make and treat
the pieces the plant then assembles, which can be very
inefficient. He noted that there have been times when the plant
was down up to 20 days waiting for these pieces to return from
the U.S. Currently, there is only one Nadcap certified company
in Nuevo Leon that provides heat treatment, Procesos Termicos.
However, the lack of suppliers is an issue not only for Nuevo
Leon but also for other states with aerospace clusters.




12. (SBU) Another potential disadvantage is the lack of
government financial support. Although both the federal and
Nuevo Leon governments actively promote the aerospace industry,
industry sources complain that there has been more talk than
investment. Despite Nuevo Leon's recent investment and
promotion law, the amount of incentives actually offered is
limited and not as generous as in other states. In fact, both
Frisa and MD Helicopters reported that, although Nuevo Leon has
been very supportive, they were not offered any tax incentives.
Meanwhile, other states are starting to offer more attractive
packages, to Nuevo Leon's detriment. Last year, Bombardier
opened a plant in Queretaro. Initially, it had considered
opening one in Nuevo Leon and was heavily recruited by CEDIA.
In the end, Bombardier chose Queretaro, apparently because it
was drawn by the federal government's decision to create an

MONTERREY 00000314 004.2 OF 004


Aerospace Supplier Park there offering free 49-year land leases
and infrastructure costs. Bombardier also joined up with a
Canadian university to open an aerospace school in Queretaro.
Queretaro has become a player, moving from one aerospace company
in 2004 to six now, and three are firms with engineering and
design (E&D). With the addition of Bombardier and its
aerospace school, Queretaro is well-positioned to develop an
aerospace cluster that offers more value-added technology.




13. (SBU) Nuevo Leon must also compete with aerospace clusters
in Baja California, Sonora, and Chihuahua, among others. In
all, there are nine clusters (with at least 5 companies),
including Nuevo Leon. Baja California is the largest and has
the advantage of being closest to California, home to many U.S.
aerospace companies. Among the companies that have opened up
shop in Baja are heavy-hitters such as Honeywell, General
Dynamics, Tyco, and Delphi. Sonora, still considered by many to
be the second biggest aerospace cluster in Mexico, also has the
advantage of being close to California. It has a growing
reputation among the U.S. aerospace industry developed by the 16
aerospace companies there, most of which are American.
Chihuahua is another strong competitor with 10 existing
aerospace companies, including Honeywell and Lockheed Martin.
In a high-risk industry such as aerospace, where investors tend
to follow the products, companies that have proven successful
are bound to attract others. The big prize will go to whichever
state manages to land the Brazilian aircraft manufacturer
Embraer. Embraer representatives traveled to Mexico in the Fall
of 2007, and the Nuevo Leon Secretary of the Economic
Development assiduously recruited them as potential investors.
To date, however, there has been no word as to when or where
Embraer will touch down.



Comment: Will Nuevo Leon Achieve Escape Velocity?




14. (SBU) Comment. Nuevo Leon's aerospace cluster is clearly
developing and, like the rest of the country, has much room to
grow. Nuevo Leon would do well to follow Frisa's example in
promoting itself not as a low-cost country, but as a world
competitor. However, in order to continue to compete with other
aerospace clusters, Nuevo Leon needs to develop more suppliers
and to encourage existing and future companies to move towards
engineering and design, developing a true aerospace cluster. In
addition, Nuevo Leon will have to put its money where its mouth
is and offer more incentives to lure future investors. The
current approach of relying primarily on the private and
academic sectors to promote and develop this industry in Nuevo
Leon has been effective in laying the ground for an aerospace
cluster, but it may not be sufficient to sustain it. End
Comment.
WILLIAMSON