Mexico - (IE) Singapore

Mexico
Open the door to the future
Drivers and Challenges
Main investment drivers
► Market access
► Cost reduction, supply chain
► Production factors
Investor challenges
Why?
How?
What & Where?
Page 2
Presentation title
Investment Planning
Why?
How?
What & Where?
Tactical
Planning
Implementation
Page 3
Presentation title
Strategic
Planning
Investment Strategic Planning
Specializing
H
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Investing
►
What is outsourcing?
Should I divest manufacturing activities, what
activities should I protect?
Is my know how protected?
How do I ensure quality on my products?
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Growth
►
Preserving
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L
Page 4
Where should I Invest?
What should my growth strategy be?
Which are my target markets?
Have we considered all relevant risks for markets
we are entering?
Should I buy or should I build?
Optimising
How do we protect our core business ?
Are we getting appropriate returns?
What are my competitors doing?
Are we over leveraged or are our borrowing
costs too high?
If we are not growing how do we maximize
value?
What are low capital intensive growth strategies?
Capital
►
►
►
►
►
Should we alter our geographic footprint?
Should we divest certain areas?
Do we need to move along the value chain to gain
strategic advantage?
Do we have the right/optimal and sustainable cost
and operations structure?
How do I reduce costs?
H
Business Plan
►
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What is my target
market?
Is my product right for
the market?
Where should I be to
maximize my
investment?
When should I negotiate
incentives?
What benefits do I
receive in Mexico?
What local supply is
available?
Can I be more efficient in
Mexico?
Is it worth it going to
Mexico?
Page 5
Presentation title
Business
plan
Financial
model
Supply
chain
model
Marketing
model
Market Analysis
Page 6
México
Country overview
►
Mexico is well positioned for
México 2014
Male
Female
stable, long-term
economic growth.
►
More than 110,000 Mexican
engineers graduate each year.
►
According to the FDI
Benchmark, Mexico
offers a higher quality
and availability of labor
force and talent than India,
China and Brazil.
Source: United States Census Bureau and Promexico
Page 7
México 2030
Male
Female
México
Country overview
“The country is one of the most
important emerging economies and is
renewing its efforts to become a leader in
the region. Mexico has agreed on an
ambitious and comprehensive National
Development Plan, which also guides the
structural reform agenda to enhance
productivity”—The World Bank
Source: IHS Global Insight
México will continue to steadily
grow over 4% year on year from
2014 through 2017.
Source: EY Mexico: country overview and update
Source: IHS Global Insight
Page 8
EY has identified five megatrends that will influence the Latin
American automotive industry over the next decade
Industrial policies and local trade
regulations, driven by economic priorities,
are impacting regional production footprint,
supply chain and localized R&D.
Economic and safety risks compel
auto industry to better engage with
regulators, invest in infrastructure
and develop labor training
programs.
How will
products need
to adapt?
Operating
environment
How will demand
for vehicles and
mobility evolve?
How will
business
models need to
adapt?
Growing middle class and first-time
buyers demand small and midsize
vehicles, necessitating automakers
to review their pricing strategies and
improve credit evaluation for
financing.
Customers
Suppliers
Inherent market potential and
competition for share are driving
investment in R&D, manufacturing
capacity and supply chain.
Page 9
What are the
supply/value
chain issues and
implications?
Competitors
What are the
new market
dynamics?
Regulations play catch-up with other
markets, while consumer demand
and competition drive installation of
safety, connectivity and fuel
economy features.
EY has identified eight megatrends that could impact
Mexico’s aerospace and defense (A&D) sector
1.
Business jet and single aisle
segments are growing fast, driven by
demand from developed markets.
Aerospace companies are focusing
on orders from the Middle East, Asia,
Africa and Latin America to improve
their revenues.
OEMs are considering vertical
integration and strategic alliances to
build global supply chain networks.
8.
2.
7.
Companies are coordinating with the
government to fulfil increasing
demand for skilled workforce.
3.
6.
4.
5.
Page 10
OEMs are focusing on fuel-efficient
and environment-friendly products to
gain a competitive advantage.
Companies are taking measures to
increase productivity and control
costs to meet demand while
remaining profitable.
OEMs are bringing manufacturing in
proximity of the US, to shorten lead
times
Regulatory measures and formation
of geographic aerospace clusters
specializing in niche skills will boost
Mexico's aerospace sector.
Value Chain
Page 11
México
Automotive market overview





México ranks as the 8th largest vehicle producer in the
world. The gap in vehicle production between México
and Brazil, the 7th largest producer, decreased from
715,863 units in 2011 to 319,670 units in 2012. The
auto industry accounts for 20% of the manufacturing
sector and 4% of México’s national GDP.
There are a total of 19 production complexes in 11
Mexican states and more than 48 car and light truck
models are currently produced in México.
In 2012, light vehicle production in México hit a record
high of around 2.88 million units and it exported 2.35
million vehicles, making it the 4th largest vehicle
exporter internationally. The US is the leading export
market for Mexican cars and trucks.
BMI forecasts México's passenger car sales to increase
6.6% in 2013, a slowdown from the 9.8% growth seen
in 2012.
BMI and IHS forecast México will return to a negative
trade balance after having its first trade surplus in 2012
since 1997. BMI’s forecasts solid 5.2% year-over-year
(y-o-y) US sales growth rate in 2013 compared to
13.8% y-o-y in 2012 due to pent up demand in the US
for Mexican cars and trucks. Additionally, temporary
caps on Mexican auto exports to Brazil, having recently
come into effect, will impact exports.
Page 12
Production vs exports of light vehicles, México (2006-2012)
(in thousands of units)
2,884
3,000
2,558
2,500
2,261
1,979
2,022
2,103
2,355
2,000
2,143
1,508
1,500
1,537
1,613
1,860
1,661
1,223
1,000
Production
Exports
500
2006
2007
2008
2009
2010
2011
2012
Source: Ministry of Economy with AMIA and ANPACT data, 2013.

For 2014, IHS has a positive outlook on exports from
the automotive industry, as vehicles assembled in
México continue to gain market share in the US; and as
output of new plants being built currently start to ship
abroad.
México automotive industry: Overview and considerations
Mexico: auto ancillary industry structure
70% of the tier-1, tier-2 and tier-3 automotive suppliers are foreign-owned.
Tier-1 (~746 companies)
Tier-2 and tier-3 (~466 companies)
Control and
automation
Brakes and
transmission
Seats and
interiors
Engines
Steering
and
suspension
Metal
mechanic
282
companies
143
companies
127
companies
124
companies
70
companies
282
companies
TRW Auto
GST Auto
Cummins
Detroit
Diesel
Delphi
Benteler
Autotek
Benteler
Schneider
Eaton
ThyssenKrupp
ZF Sachs
Other parts
327
companies
Number of tier- 1 companies is higher than tier-2 and tier-3 companies in Mexico.
Source: “Mexican automotive sector pre-study,” 2012 Swedish Trade Council in Mexico.
Page 13
Mexico: auto-components import scenario
Auto-parts import region -wise in 2010
Auto-parts import share tier -wise
T1 components
used for final
assembly
Produced in
Mexico
Imported
70%
30%
US
61%
China
T2 and T3
components
used to
produce T1
components
T1
+
T2
+
T3
11%
Japan
Produced in
Mexico
Imported
50%
50%
Produced in
Mexico
35%
Total
US$31 billion
9%
Canada
5%
Germany
5%
South Korea
3%
Brazil
3%
Others
3%
Imported
65%
0%
20%
40%
60%
80%
Out of the total imports of auto components in Mexico, 66% are imported from US and Canada.
Source: “Mexican automotive sector pre-study,” 2012 Swedish Trade Council in Mexico.
Page 14
Mexico: automotive export-import scenario
4,000
79%
3,200
59%
2,400
39%
1,600
19%
800
-1%
-21%
0
-800
-41%
Demand outlook
-1,600
-61%
2010
2011
2012F
2013F
2014F
2015F
2016F
Total vehicle exports, '000 units
Total vehicle imports, '000 units
Vehicle trade balance,'000 units
Vehicle exports as % of total domestic vehicle unit production
Source: Business Monitor International, 4Q12 Mexico auto report.
Export by major OEMs in 2011 (units)
Major export destination in 1H13
US
66.7%
Latin America
449,925
GM
443,237
Canada
8.2%
VW
Europe
7.6%
Nissan
Asia
3.4%
Others
2.2%
Source: ADEFA.
Page 15
11.9%
Ford
0.0%
20.0%
429,987
411,660
Chrysler
266,117
0
40.0%
60.0%
80.0%
200,000
400,000
600,000
Source: “Automotive industry in Mexico,” May 2012, Negocios.
Aerospace clusters enable companies to strengthen
their competitiveness.
Mexico has five geographic clusters which aim to develop specialized niches in the aerospace industry.
Chihuahua is positioned to
become a manufacturing
hub for high-tech and
dual-use goods.
Baja California intends to
be a KPO leader for
fuselage systems and
power plants.
Sonora is maximizing its
potential for
manufacturing turbine and
engine components.
Nuevo Leon is a potential
center of excellence in
aeronautical innovation,
engineering and
manufacturing.
Queretaro is focusing on
complex machining
processes and MRO.
International OEMs are opening facilities in Mexico to improve their market position in Latin America.
►
►
Bombardier wants to lower its production cost, strengthen its supply chain and increase its competitiveness through
manufacturing in the Queretaro cluster.
Airbus Helicopters aims to meet offset requirements, increase dollar exposure and improve competitiveness in Latin
America through manufacturing faculties in Mexico.
Page 16
The five aerospace clusters contribute 67% of Mexico’s
total aerospace exports.
Exports
(in US$)
% of
Mexico’s
export
Number of
companies
Manufacturing capabilities
Long-term vision
Major companies
Baja
California
1,391
million
28%
60
Precision machining, metal
plate conformation, electrical
and hydraulic systems,
complete integration testing,
interior design
KPO leader for fuselage
systems and power plants
Honeywell,
Gulfstream, Eation,
Rockwell Collins,
Lockheed Martin,
Goodrich
Chihuahua
568
million
11%
28
Electrical systems for aircraft,
helicopter structures and
assemblies, metal components,
engine components
Manufacturing hub for hightech and dual-use goods
Cessna, Textron,
Honeywell,
Beechcraft
Sonora
174
million
4%
48
Interior cabin systems and
components, engine
accessories, starting systems
and electrical power systems,
special processes
Leading turbine
manufacturer
Goodrich, Semco,
BE Aerospace,
Precision
Aerospace
Queretaro
673
million
13%
34
Propulsion systems, airframe
structures, subassemblies and
subsystems, engine
components, landing gear
systems
Hub for complex machining
processes and MRO
Bombardier,
Safran, Eurocopter,
Galnik, General
Electric
Nuevo
Leon
555
million
11%
28
Advanced manufacturing,
maintenance and repair
Center of excellence in
aeronautical innovation,
engineering and
manufacturing
Honeywell,
Rockwell Collins,
Hamilton
Sudstrand
Page 17
Mexico aims to become the 10th-largest supplier of
aerospace products by 2020.
Mexican aerospace exports (in million US$)
A&D sector in Mexico has been growing at a
CAGR of 20% since 2002.
6,000
5,040
►
Mexico is the 12th-largest exporter of aerospace
products globally and is the 6th-largest supplier
to the American industry. It has been the world’s
largest recipient of foreign direct investment
(FDI) in aerospace in the last three years.
►
A&D companies in Mexico employ 34,000
employees in 18 states.
►
The number of aerospace manufacturers in
Mexico is expected to grow by 85% by 2020 to
around 500 from the current 270 companies.
5,000
4,000
3,000
2,000
1,000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Mexico-based A&D companies will gain market
share within the industry.
Source: Ministry of Economy (SE), DGIPAT
Segmentation of A&D companies in Mexico
Manufacturing
►
79%
Maintenance, repair,
overhaul (MRO)
11%
Development and
engineering
10%
The percentage of Mexican companies will
increase from 8% in 2012 to 16% in 2020, while
the percentage of US companies will decrease
from 84% to 64% in the same period.
Source: MexicoNow research
Megatrends shaping the Mexican aerospace and defense sector
Page 18
Investment Analysis
Page 19
1 January 2014
México
Country overview
Best place to Invest 2013-2015
México is
building for the
future
159 companies interviwed
Source: UNCTAD, World Investment report 2013
Page 20
México
Country overview
México received over 35
Billion USD FDI in 2013
according to President
Enrique Peña Nieto
Source: Ministry of Economy
Source: EY Mexico: country overview and update
63% of senior manufacturing
executives chose México
as the most attractive
country for resourcing
manufacturing near the U.S.
Source: UNCTAD, World Investment report 2013
Page 21
Source: EY Mexico: country overview and update
Mexico offers lower wages and higher quality of labor
force as compared to other emerging markets.
Labor force quality (rating on 1-10 scale)
Mexico
6.02
Russia
5.85
India
5.73
South Korea
5.18
Indonesia
4.83
China
Brazil
4.44
3.8
Source: ProMexico
►
In 2012, the hourly compensation cost in the manufacturing sector in Mexico was US$6.36, as compared to US$11.20
in Brazil.
►
Mexico has almost 4.9 engineering students per 1,000 people, compared to 3.6 in the US. About 65,000
engineering majors students enrol every year in Mexico.
Page 22
Mexico’s undervalued currency favors exports.
The Mexican peso is undervalued against the US dollar by 40%. Companies based out of the US and Europe
can buy aircraft components from manufacturers in Mexico at cheaper rates as compared to local
manufacturers.
Currency valuation for BRIC/ MIST countries (as of January
2014)*
Brazil
-18.7%
-25.0%
-50.2%
-66.8%
Turkey
South Korea
-40.0%
Mexico
-40.7%
China
-43.3%
13.5%
Russia
Indonesia
India
Source: The Economist
* Valuations are on the basis of the Big Mac index published by The Economist, based on the theory of purchasing power
parity (PP). Positive value denotes over valued currency while negative value denotes under valued currency
Page 23
General overview of Mexican Taxation
System
Page 24
1 January 2014
General overview
Federal taxes
►Income tax: 30% (legal entities) escalating up to 35%
(individuals)
►Mandatory profit sharing: 10%
►VAT: 16% on most products and activities, and 0% rate
on certain cases.
Local taxes
►Real Estate Transfer Tax from 2% to 3.3%
►Real Estate Property Tax from .3% to 1%
►Payroll Tax from 2% to 4%
Page 25
Profit Sharing
► Not a tax that shall be paid by legal entities (Labor
Benefit)
► When entities are acting as employers they have the
obligation to distribute the equivalent of 10% of their
taxable profit for the year as employee profit sharing
► Labor benefit that shall be paid annually within 60 days
after filing the annual tax return required under the MIT
(usually in May). Only some cases of exception to such
distribution; note that deductions for payment of this
benefit are limited. The base for calculating profit sharing
is provided in the MIT.
Page 26
Income Tax
► Resident companies are taxed on worldwide income at a
30% rate. Corporations are deemed as Mexican
residents if their effective place of management is located
in Mexico.
► Permanent Establishments (PE’s) of foreign residents are
generally taxed as a Mexican resident, but only on income
attributable to the PE.
► Non residents in Mexico. In respect of revenues
proceeding of source located in Mexico.
Page 27
Value Added Tax (VAT)
►
►
►
►
Indirect tax, not cumulative in cascade
Charged at several levels in a chain of taxed activities
Tax on final consumption of goods and services
Allows crediting the amount taxpayers pay on acquiring the inputs
necessary to perform the taxed act or activity, with an economic
impact on the end consumer
► Individuals and legal entities that engage in any of the following
activities in Mexican territory are subject to pay VAT at the 16% rate
applied to the values set forth for each case:
►
►
►
►
Transfer of goods
Rendering of independent services
Granting temporary use or enjoyment of assets; and
Import of goods or services
► The tax will be calculated by calendar month (File Return on 17th of
the following month)
Page 28
Modifications to maquiladora regime: VAT
►
VAT on temporary imports remains
►
►
►
Sales between non-residents of temporarily imported goods are
exempt from VAT
►
Page 29
However, immediate credit mechanism allowed (so no cash flow
impact) for “certified” taxpayers
Effective date of VAT on temporary imports will be one year following
the issuance of the certification process rules
Notably, sales by non-residents to an IMMEX company now subject to
VAT
Modifications to maquiladora regime: Income
Tax
►
Permanent Establishment (PE) Exemption
► Consigned inventory must be temporarily imported and
subsequently exported by physical or virtual export
► 100% of a maquiladora’s productive income must be derived from
maquiladora income
► Foreign related party must own at least 30% of machinery and
equipment (M&E) used in maquiladora operation (grandfathering
provision is eliminated)
► Note: If PE exemption requirements are not met, facts and
circumstances analysis under domestic law and treaties would be
relevant
► “Shelter maquiladoras” are entitled to PE exemption for a
maximum period of 4 years
Page 30
Q&A
Page 31
Thank You
Page 32
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