Mexico Outsourcing Podcasts
The Mexican Aerospace Industry: Some Historical Background
Interview with Gale Thompson, VP of International Operations with the Tucson, Arizona-based Offshore Group.
Today we are very fortunate to have with us, somebody that I’ve had the pleasure to work with for about a dozen years now; his name is Gale Thompson. Gale Thompson is the Vice President of the International Operations for The Offshore Group.
Hello Gale, how are you today?
Gale Thompson: I’m just fine. Thank you for asking.
The Offshore Group: Just to start off so people understand a little bit of where you’re coming from, can you share some of your professional background with us?
Gale Thompson: Absolutely. I’ve graduated from San Jose State University and went to work with IBM as a quality control engineer. Five years later, I was offered a position in Mexico in the maquiladora industry as quality control manager at a small competitor to IBM. Over the years I was able to advance before joining Offshore International, I was vice president of ITT Power Systems. Sixteen years ago, I joined Offshore International as Vice President of International Operations.
The Offshore Group: Gale, you have a unique perspective regarding to the aerospace industry in Mexico. I don’t think I’m speaking in a hyperbolic sense, when I actually think that you can be considered as one of the fathers of the aerospace industry in Sonora and, to a certain degree, in Mexico in general.
I’m making this claim, because, a dozen years ago, you were one of the first individuals that I’ve came in contact with that began to see potential for aerospace manufacturing in Mexico. A lot of things have happened during this period. What were the things that indicated to you at that time that there could be a successful aerospace industry future in the cards for Mexico?
Gale Thompson: I would have to say that it was General Electric (GE) that was already making an effort in early 1999. They were encouraging their aerospace industry suppliers to open a Mexican manufacturing operation.
I attended one to two seminars done by GE, both in Mexico and in the U.S. One of the suppliers to GE gave me a call, that was back 1999, he said, in order for me to keep my business with GE I need to have a manufacturing operation in Mexico. Would you advise me what to do that?
I’ve visited with him in March of 1999. In May of 1999 they shipped their first machined products to General Electric from Mexico.
The Offshore Group: Your first contact with interest an interest in establishing Mexico manufacturing venue made the inquiry in 1999?
Gale Thompson: Yes, it was quite interesting at that time, because the business that Offshore International is in is providing “outsourced manufacturing support,” or “shelter services” in Mexico for its clients.
The key to the business model’s success has historically been to have a high headcount in assembly operations as clients.
Aerospace is not a high headcount industry in Mexico, so there was a bit of a conflict between that and the shelter company in Mexico business model at that time.
The Offshore Group: So early on, when you expressed your view of aerospace as a potential client industry that was showing movement towards, what kind of reactions did you get from your colleagues and associates at that time?
Gale Thompson: It was kind of interesting because, when I began talking aerospace with colleagues in the industry they said: “wait a minute, this is not a high headcount manufacturing industry, the automotive is because is high volume- low mix, and aerospace is low volume- high mix manufacturing, and they really don’t require a lot of personnel, so why would you pursue aerospace as a company offering shelter services in Mexico?”
The Offshore Group: And for full disclosure Gale, I’d like to tell the listeners I was one of those people. Obviously things progressed in a way which was more in line to what you had envisioned at that point in time, than I was thinking. There are things that I’m happy to be wrong about. That was one of them.
So, basically, when you were dealing with aerospace manufacturers and looking at capabilities in Mexico, you’ve mentioned a key issue. Mexico traditionally, prior to that point and time, was best known as a place for low-mix, high volume, and here you go coming to Mexico with low-medium mix, lower-volume and higher tech type of manufacturing in mind.
Besides the headcount issue, there had to be skeptics out there that had questions whether or not Mexico was capable to do the kind of manufacturing that is very demanding in terms of precision and close tolerances. What kind of reaction did you get to people in the industry looking at Mexico regarding their open mindedness of doing that kind of highly skilled manufacturing in Mexico?
Gale Thompson: It should be understood that about 12 years ago the Chinese opportunity was beginning to appeal U.S.-based and other companies. Companies were relocating their operations from Mexico to China in significant numbers. They were looking into the future and asking: What can we do to provide a future stable workforce, and stable business circumstances? High content labor products such as: sewing, harnesses, and other things were easy to relocate to China at the beginning of the 2000s.
Machining is not easy to relocate. One of the things I knew at the time was that, after World War II, Phoenix was not a good area for aerospace, but in 1999 Phoenix was a good place for the industry to be. I thought we could follow the same trajectory in Mexico: slow at first to develop the skills, but, over time, an industrial transformation would occur.
The Offshore Group: As far as companies that actually jumped into the water, what kind of companies were the first ones to take the Mexico plunge?
Gale Thompson: It is interesting that the first one’s that did aerospace manufacturing in Mexico were looking to do operations that were less complicated and less sophisticated. The concept was to send the product to the U.S. facility for a more complex operation.
The Offshore Group: Would it be correct to say that the motivation was an economic issue?
Gale Thompson: Pretty much so. GE was looking to increase their content in foreign markets with lower all-in manufacturing costs. The countries they choose were Mexico, China and India.
The Offshore Group: Given that fact, to recap from a period of 1999 to 2003, we saw simpler things going to Mexico; amongst them were wire harnesses. What else would you include on the list of items of that first wave of aerospace company products manufactured in Mexico?
Gale Thompson: Wire harnessing was perhaps the most common product to be made, not only in The State of Sonora, but also in other places in Mexico. It was the easiest type of product to transfer. Then after the year 2000 we began to see more complex types of operations. An investment casting company opened an operation; they made a commitment to come into Mexico to provide aerospace investment castings to a very large company that would then do the machining of those kinds of castings. Later things became even more sophisticated.
The Offshore Group: Gale, I have to say that over the years the only way I can describe your efforts is to say that it was yeoman’s work, because you obviously rightfully noticed that there was a limitation to what could be done in Mexico in terms of aerospace manufacturing without the presence of secondary operations. You pushed for years to get companies involved in things like installing capacity in Mexico to do metal finishing, coating and plating processes and operations.
Tell us a little bit more about some of the travails that you faced over the years when trying to move the ball forward by having secondary operations companies install in Mexico. What were some of the problems in achieving this, and how were obstacles related to this effort addressed?
Gale Thompson: To answer your question, I need to go back just a bit. When we were looking at high labor content jobs exiting Mexico, on their way to China, this occurred heavily in the electronics and textile industries, it was apparent that those products were moving out to even lower cost manufacturing venues. Whereas machining operations are complex. Many of these complex operations require secondary finishing operations performed on them.
I would say that very biggest challenge was enticing the secondary operations such as heat treating and plating and other things, there were the problem between the chicken and the egg. They would say: when you have enough business to justify putting an operation in Mexico, then we will come, because is expensive to set up a heat treat operation or other secondary operations. But the problem was that companies that were doing aerospace machining in Mexico that required secondary operations had to send the products back to the United States for those secondary operations and it was not worth to then return the product to Mexico.
It was the type of “chicken and egg” problem that we dealt with and still have issues with. Now things are falling into place more. We have a company doing heat treating today, and other companies doing secondary operations in Mexico. We have now been able to entice major OEMs, not that they are interested themselves in locating in Mexico, but they are now looking for suppliers to the aerospace industry that are in Mexico. The trend I see in the last four years is that more and more companies are looking for suppliers even though they’re not interested in having a machining or an aerospace operation in Mexico themselves.
The Offshore Group: One of the things that is fairly important related to this issue, and maybe you can expand upon it, is the Bilateral Aviation Safety Agreement (BASA) that was passed a few years back. Maybe you can explain the state of affairs prior to the BASA agreement taking effect. What changed in the aerospace industry when the BASA passed?
Gale Thompson: That was a major issue because before the BASA was passed. At that time, items manufactured in Mexico would have to be sent to their parent company in the U.S., or to another facility that was certified by the FAA. That was just another step in the process.
After the certification in Mexico, made possible by the BASA, products could then be manufactured in Mexico and sent directly to the customer. That made things less complex, and more cost-effective in terms of manufacturing.
Offshore Group: It was a time and a money saver obviously.
Gale Thompson: Yes.
Offshore Group: Just to review, there was a point in which machined items had to be processed through heat treating and other operations, and had to be shipped from Mexico to the United States to have these things done. Now we’re at a stage where the “chicken- egg” situation that you’ve referred to is gradually rectifying itself. Would this be a correct assessment?
Gale Thompson: I have to say, the egg hasn’t hatched but maybe the shell is cracking a bit. But even though many secondary operations that are available in Mexico, there are still many more opportunities for further secondary operations shops to offer their services in the growing aerospace manufacturing market there.
As they are becoming available, larger companies are putting more pressure on their suppliers to do more of their work in Mexico.
I began pushing for secondary operations to set up manufacturing operations in Mexico seven years ago.
The Offshore Group: This is why I said that your efforts have been a yeoman-like, because it has truly been a long term effort on your part.
Gale Thompson: Yes it has been.
The Offshore Group: Another thing I would like to bring up is volume of trade. We know that the amount of exports coming out Mexico, in 2003 to 2012 in the aerospace industry have increased exponentially. If you had to sum it all up, what is the state of the aerospace industry in Mexico today?
I think that’s a big question, but it possible for you to address it, because you’ve been working on this effort for many years.
Gale Thompson: When you look back, ten to twelve years ago, there was very little manufacturing of aerospace products in the maquiladora industry. There have always been MRO, or manufacture and repair operations, for aircrafts flying into Mexico.
But now, after attending many conferences, I have seen and learned that Mexico is rapidly becoming one of the largest suppliers in the world for manufactured aerospace parts. Looking forward, I would say that in ten years, Mexico will be in the top five global aerospace industry suppliers.
The Offshore Group: You’re saying that the future that what you see is continued growth.
One last question that I’ve liked to ask you is that, in terms of the human resource base available to do the kind of things done in aerospace: machining, none destructive testing, secondary operations, obviously there has been a big improvement in terms of the quality of the workforce doing these things over the dozen years that you’ve worked on this.
Today, do you see skilled gaps? How do you see them getting filled? What is your overall assessment of the human resource factor in Mexico’s aerospace industry?
Gale Thompson: Initially, that was a mayor problem; it is still an issue to some degree. Initially companies had to train their own workers, as they would get people without experience doing these types of processes, machinery or skills in the aerospace industry. The training was an internal activity taken on by each company, and it took time. We have one company that it took three to five years to get a large core of trained people to execute their Mexico plant expansion plans. Now they’re up over three hundred workers. It is becoming much better. Universities are now participating in the training of aerospace industry engineers and workers. Even local schools and local technical schools are increasingly getting involved. So there is a much better participation from the community, schools and companies themselves. The Mexican government also makes assistance available for training of workers. The progress has been good, but there is still a lot of work to be done in this area.
Offshore Group: Would it be safe to say that, similar to the automotive industry, the aerospace industry will build its own educational and training structure around it?
Gale Thompson: It’s not developed like in the automotive industry, but educational infrastructure for the aerospace industry is being to appear in more and more Mexican states. Some states have heavily invested in training, other states not so much. The northern states of Mexico have the interest of supplying training capabilities in services and individuals that are required.
The Offshore Group: Gale, one last question. Obviously having seen this, the genesis of the aerospace industry in Mexico from day one, there are probably folks out there that may listen to this in the future that might want to pick your brain. How can they get in contact with you?
Gale Thompson: The easiest way is to email me at: email@example.com. My phone number is: (520)-300-4665 or since I travel a lot my cell phone number is: (520)-237-1919.
The Offshore Group: Gale, I think that’s about all we have in terms of questions. I want to thank you for lending your perspective to all of these things that have happened during the last 12 years in Mexico’s aerospace industry.
Gale Thompson: Thank you very much. Hopefully I have been helpful.
The Offshore Group: As always, you have. Thank you.