Mexico on the Move: Building New Opportunities

Realizing it missed the growth opportunities China is currently enjoying, Mexico’s government and business communities are now investing in logistics infrastructure. That change has created many opportunities for manufacturing and logistics companies to locate new facilities in Mexico.

Industrial and logistics properties in Mexico have always been attractive to both foreign and Mexican companies, and have expanded significantly over the past 10 years.

Recent improvements—including the quality of buildings, government cooperation, financing availability, and transport upgrades, among others—have further helped the situation, making the industrial real estate and site location landscape in Mexico among the most dynamic of the country’s property markets today.

Here is a market overview.

Manufacturing and logistics-related industrial properties share a number of common characteristics: they have a shell structure with available office space; are single-story buildings with direct truck access; and, increasingly, are located in industrial parks outside urban areas.

The quality of industrial buildings in Mexico has increased dramatically in the past decade, due to escalating tenant demands, as well as the awareness of U.S. and multinational companies spurring recent growth. Most warehouses and industrial parks in Mexico today meet international standards for security, technology, and access to transport facilities.

Important technological changes have also helped improve the quality of manufacturing and logistics facilities. Research and development space, and refrigerated warehouses, for example, often demand controlled temperatures and air quality, which developers can now provide.

Construction standards and building layouts have also improved. Mexican facilities now have high-quality materials, high ceilings, wide column distances, easy loading/unloading access, and crossdocking layouts.

Building standards should continue to improve in coming years with the arrival of a number of high-tech manufacturers in sectors as diverse as aerospace, automotive, and information technology. Furthermore, expansion by local and international retail chains has brought greater demand for efficient distribution space, as well as supporting port and inland infrastructure improvements.

When considering whether to locate a manufacturing or logistics facility in Mexico, it is helpful to look beyond just proximity to consumer markets and beneficial labor costs. It is also important to consider how similar properties fare, by examining investment activity in the area.

Risks and Rewards

Industrial developments, both speculative and build-to-suit, are increasingly available for rent. Investors weigh the risks and rewards involved with holding a property for a long period.

Most investors are satisfied with the risk-adjusted returns from these Mexican investments, although the market has became more competitive during the last few years. An increase in available properties for rent means those considering industrial sites have more leverage when negotiating lease terms.

The relatively short timeframe for constructing industrial properties—typically six to eight months—is attractive to those considering facilities in Mexico. Also, industrial properties generate long-term stable income due to the duration of lease contracts. Long leases also appeal to companies building and investing in industrial facilities.

While some businesses favor contracts in U.S. dollars, increasingly, many companies are indifferent to peso- or dollar-denominated contracts. Industrial properties’ long leases and strong tenants make investments particularly stable and predictable, which is valuable to both investors and potential tenants. That means more choices and more competitive terms for companies considering Mexico for site selection.

What else should companies examine before committing to a Mexican industrial property? An effective site analysis begins by identifying micro trends—such as building quality, tenant necessities, access to transportation links, and ease of doing business—that indicate whether the market is growing.

Additionally, it is important to anticipate macro trends such as the general state of the Mexican economy, consumer buying power, the future of Mexico’s manufacturing industry, and changes in legislation, among others.

Continuing Growth

In addition to demand for industrial properties, infrastructure—the availability of energy, water, and transportation and logistics networks—is one factor that greatly affects the likelihood a given region will continue to be an attractive location for industrial development.

The current climate indicates that the Mexican business community and government are committed to making the kinds of infrastructure investments required to attract foreign manufacturing, logistics, and transportation operations.

The trade growth spurred by Mexico’s open economy and rise as a manufacturing base, together with booming consumer demand in urban centers, has increased the number of companies needing manufacturing and distribution facilities across the country that meet international standards.

Without a doubt, “stability” is the word now used to describe manufacturing and logistics real estate in Mexico.

While some may misinterpret the Mexican marketplace’s dynamism as instability, it is actually the result of the Mexican industrial market’s evolution toward greater efficiency based on the stringent demands of multinational manufacturing, transportation, and logistics tenants.

That, plus the Mexican government and business community’s realization that it missed growth opportunities in the past, are strong reasons to take a closer look at locating a manufacturing or logistics site in Mexico.

Aerospace Industry Touches Down

Last October, Canadian aircraft manufacturer Bombardier Aerospace announced it would invest U.S. $200 million over the next seven years in a Central Mexico facility. The operation will initially manufacture wire harnesses, and later shift to production of major structural components and possibly final aircraft assembly.

The aerospace industry is one of the most competitive segments in the global economy. Bombardier’s decision to locate in Mexico comes in answer to increasing competition from Brazilian aerospace firm Embraer, which competes head-to-head with Bombardier in the small commercial aircraft market. Low labor costs in Brazil have, until recently, given Embraer a leg up on its Canadian competitor.

These aerospace competitors are following the path of automotive manufacturers, who have a long history of locating manufacturing facilities in Mexico.

The same factors that attracted auto manufacturers and their suppliers to Mexico—low-cost labor; incentives for manufacturers; a broad network of free-trade agreements with countries and trade blocs including the United States, Canada, Japan, and the European Union; proximity to the U.S. market; and an improving logistics infrastructure—are also drawing aerospace companies.

Mexico’s aerospace industry is optimistic that it can emulate the success of the automotive industry. Bombardier’s arrival is an important first step, comparable to when General Motors and Volkswagen first set up manufacturing operations in Mexico. In 2004, the automotive industry accounted for 15 percent of Mexico’s total exports, with exports having doubled between 1994 and 2004.

If Mexico’s aerospace industry follows a similar growth pattern, it will reinforce the country’s position as a leading manufacturing hub for North America.

In fact, Mexico’s automotive industry has, to some extent, contributed to the aerospace industry’s development by creating a labor force skilled in transportation equipment assembly and component manufacturing. In addition, certain Tier 1 suppliers, including Honeywell and Delphi, serve both the auto industry and the aerospace industry.

Bombardier’s new facility should bring additional aerospace suppliers to Mexico and could pave the way for other aircraft assemblers to set up operations in the country.

For the immediate future, however, aerospace manufacturers in Mexico will focus on supporting aircraft assemblers by producing high-precision machinery, manufacturing compound materials, hydraulic systems, and electrical systems.

The United States, Mexico’s primary export market, imported approximately US$25 billion in aerospace parts in 2004, but Mexican-manufactured aerospace components accounted for just 0.4 percent (US$160 million). Mexico’s share of the U.S. market for imported aerospace components has significant room to grow.

Logistics plays a crucial role in moving aerospace parts between the United States and Mexico. Given their large size, aircraft and aircraft components are not particularly easy—or inexpensive—to transport.

The growing push by aircraft manufacturers to make their operations more competitive could mean more business for countries that offer both reduced production costs and proximity to major markets (read: lower transportation costs).

Of the 63 aerospace suppliers operating in Mexico, 27 (or 43 percent of the country’s total) are concentrated in Baja. Baja’s proximity to the United States—and more importantly to California, which traditionally accounts for a large share of U.S. aerospace manufacturing operations—has been an important determinant in developing and growing the local aerospace industry.

Strict U.S. aerospace industry regulations require that all components manufactured in Mexico be sent to the United States, where Federal Aviation authorities certify them before they can be used in aircraft assembly. Mexico hopes to amend this regulation by joining the 14 countries worldwide that have Bilateral Aviation Safety Agreements (BASA).

These agreements allow local authorities to inspect and certify aircraft and components. Eliminating the need to ship Mexican-made aircraft components—and eventually entire aircraft—to the United States for certification would cut logistics costs and lead times.

A BASA would also permit cooperation in maintenance, flight operations, and environmental certification, giving an added boost to the Mexican aerospace industry through increased maintenance and repair operations and outsourcing of other aerospace-related activities.

The U.S. airline industry’s growing interest in smaller regional planes for domestic flights should spur a growing market for products such as those manufactured by Bombardier. But the assembly of smaller planes may not be the only prize in store for Mexico’s aerospace industry: manufacturers of large commercial planes and military aircraft could also be tempted to locate their operations in the country.

As competition between U.S. aerospace giant Boeing and its European counterpart Airbus intensifies, for example, manufacturing in Mexico may give Boeing a competitive advantage. Manufacturing in Mexico provided a similar boost to the U.S. automotive industry when Japanese manufacturers started to gain market share.

In addition to Mexico’s location and advances toward negotiating a BASA, another factor could motivate the aerospace industry: qualified labor. During the 1930s and 1940s, Mexico established the Colegio de Pilotos Aviadores (school of aviation), and offered a Bachelor’s Degree in aerospace engineering.

As companies such as Bombardier site locations in Mexico, they will find a qualified labor pool that is ready to roll up their sleeves and go to work.

Diverse factors currently reshaping the global airline industry and, by default, the aerospace industry could present a number of opportunities for Mexican aerospace manufacturers in the coming years.

The success of low-cost airlines in the United States and Europe—the one bright spot in an otherwise dreary period for the global airline industry—is now spreading to the rest of the world. The emergence of low-cost domestic airlines in Latin American countries, particularly in Mexico where five new carriers are in the process of setting up operations, should contribute to growth and demand for aircraft as air travel becomes more accessible.

But the greatest advantage to locating in Mexico is the opportunity to reduce costs. The push by aircraft, automotive, and other manufacturers to cut costs could spell more business for Mexico, with its promise of lower production costs.

And, the country offers reduced logistics costs due to its proximity to North and South American markets.

If the benefits of moving to Mexico are attractive to world-class manufacturing companies such as Bombardier operating in a highly competitive segment, then perhaps Mexico offers your company similar opportunities.