Arizona and Mexico: The Aerospace Manufacturing Connection

Arizona and Mexico: The Aerospace Manufacturing Connection
February 20, 2018
Vera Pavlakovich-Kochi, Ph.D., Senior Regional Scientist and Associate Professor of Geography and Regional Development

Aerospace Industry in Arizona – Long Ago Planted Roots

Aerospace manufacturing took root in Arizona during the WWII era in large part because of its favorable geographic location and weather conditions. After immediate demand declined in the post-war period, the industry experienced some road bumps until 1960s, when the right-to-work and sunshine made Arizona especially attractive for budding high tech industries. At the same time, the State’s investments in the expansion and strengthening of its university system sent unmistakable signals to CEOs of high-tech companies that Arizona was serious about preparing highly skilled labor for high-tech manufacturing. The expansion of aerospace manufacturing went hand in hand with the growth in the electronics industry.

The 1990s: Aerospace Identified as One of Arizona’s Key Industry Clusters

In the early 1990s, Arizona was one of the first states that embraced a model of cluster-based economic development. Following the work of Michael Porter [1] on competitive advantage, the focus on key industry clusters was viewed as a new strategy in economic development amidst increasing global competition. In Arizona’s state-wide economic strategic visioning project, known as ASPED (Arizona Strategic Partnership for Economic Development)  [2],  aerospace (together with microelectronics) was recognized as one of Arizona’s eleven key industry clusters [3].  The leading industry clusters were identified as the industry groups where Arizona had either a concentration  or a growth rate higher than the national average.  Simple measures such as higher-than-average wages, high value per unit of exported products, as well as the competitive advantage in world trade, were indicative of high importance of aerospace manufacturing in state’s economy.

Building a Transborder Manufacturing Cluster in the Arizona-Sonora Region

In the anticipation of signage of NAFTA in the early 1990s, the neighboring states of Arizona and Sonora strategized about encouraging crossborder economic integration for the purpose of becoming more competitive. The 1996 binational report, which was conducted under the auspices of the Arizona-Mexico Commission and Comisión Sonora-Arizona, acknowledged existing and potential transborder linkages in aerospace sector as being of high importance for the Arizona-Sonora Region’s competitiveness. The aerospace manufacturing companies were already involved in the maquiladora model of production sharing. Arizona’s aerospace parts and components were shipped duty-free to assembly plants in Sonora to take advantage of lower labor costs, and then returned duty-free to U.S. for finishing and distribution.  

Renewed Focus on Aerospace Manufacturing in the Arizona-Sonora Megaregion

Since the implementation of NAFTA, the supply chain has substantially expanded across the border. In the recently renewed vision of Arizona and Sonora as a megaregion, aerospace manufacturing has been regarded as one of key industries that offer companies competitive platform for growth by utilizing advantages of proximity and shared resources across the border. The importance of aerospace industry, together with three other sectors -- automotive manufacturing, mining, and tourism – was highlighted in the binational marketing plan, which was unveiled by the two governors at the joint summit of the Arizona-Sonora Commission and Comisión Sonora-Arizona in June 2017  [4].

More Than 200 Aerospace Companies Operate in Arizona

Based on Manta Media Inc. data online  [5], there are more than 200 companies in Arizona involved in developing, manufacturing, and testing a range of products from guided missile and space vehicle propulsion units and parts, to aircraft designing and manufacturing, to navigational and integrated weapon systems.  Among these are 17 leading names in the industry [6]:

  • Ascent Aviation Services
  • Aviage Systems
  • Aviation Communication Surveillance Systems
  • BEA Systems
  • Boeing
  • Bombardier Aerospace
  • Duralar Technologies
  • Honeywell Aerospace
  • J.B.' Precision Industries
  • MD Helicopters
  • Nammo Talley
  • Northrop Grumman
  • Raytheon Missilie Systems
  • Robertson Fuel Systems
  • Sargent Aerospace Defense
  • Securaplane
  • UTC Aerospace Systems

With 40 companies listed in Manta Media Inc., Tucson has the largest single concentration of aerospace companies in Arizona with Raytheon Missile Systems company at its core.  But, when major cities within Phoenix metropolitan area are combined, the Phoenix metro area accounts for 68.1 percent or 145 listed aerospace companies in Arizona. Outside these two concentrations, ten other cities/towns have at least one aerospace company.

However, the aerospace and defense industry cluster, which includes suppliers of various parts and services, is much larger. According to the Arizona Commerce Authority, there are 541 establishments in Arizona with more than 52,000 employees statewide [6].

Aerospace Industry in Mexico – One of the Fastest Growing

Industry analysts point out that in the last twenty years, Mexico’s aerospace sector has experienced one of the fastest growth rates among manufacturing industries. Since 2004, the number of aerospace manufacturers increased from approximately 100 to over 300  [7]. Major global aerospace companies such as Honeywell, Cessna, Beechcraft, Textron International, Bombardier, and Eurocopter established their assembly and production outlets in Mexico, which in turn attracted foreign suppliers and together established new geographic clusters. Among Tier 2 and Tier 3 suppliers are companies such as ESCO, Goodrich, Sargent, and Smith West.  At present, about 80 percent of aerospace companies are engaged in manufacturing and assembly, 10 percent in engineering and design, and the remaining 10 percent in maintenance, repair and overhaul (MRO).

Sonora Has One of Mexico’s Main Aerospace Industry Concentrations

More than half of Mexico’s states have at least one aerospace company (Figure 1), although key industry clusters are concentrated in six Mexican states: Baja California, Sonora, Chihuahua, Nuevo León, Queretaro, and Jalisco. Scroll over the Mexican states in the map to see a listing of aerospace companies.

Figure 1:

Sonora’s aerospace manufacturing has specialized in aerospace engine component operations. Manufacturing of turbines and components, including specialization in heat treating, plating, and anodizing, comprise one of the largest clusters in Guaymas and nearby Emplame  [8].  Companies with operations in Sonora include Williams International, Semco, ESCO, Sargent, Arrow Electronics, Damer, and others. [For a list of companies hover on Sonora in the map, Figure 1 ]

Arizona’s exports of aerospace manufacturing products to Mexico on the rise

According to NAICS (North American Industry Classification System), aerospace products and parts manufacturing – which are traceable in trade statistics – include a variety of manufactured products from aircraft, aircraft engine and engine parts, aircraft auxiliary equipment to guided missile and space vehicles, space vehicles propulsion unit and parts, and auxiliary equipment [9].  In 2016, Arizona exported close to $4 billion worth of such products world-wide, of which only $184.3 million were shipped to Mexico. Although relatively small, Arizona’s exports of aerospace manufacturing products to Mexico have grown faster than its worldwide aerospace exports. ( Figure 2)

Figure 2. Arizona’s exports of aerospace products to Mexico and world-wide (2008=100)
Figure 2. Arizona's Exports of Aerospace Products (2008=100)

Source: AZMEX based on USA Trade Online

As a result of faster growing exports to Mexico than worldwide, two upward trends are observed. First, the share of exports to Mexico (as percent of Arizona’s world-wide exports of aerospace products) has increased from 3.4 percent in 2008 to 4.5 percent in 2016, thus signifying Mexico rising importance as Arizona’s market for aerospace products.  Second, Arizona’s share of U.S. exports of aerospace products to Mexico has increased from 4.4 percent in 2008 to 5.6 percent in 2016, which suggests increasing importance of Arizona among U.S. states as exporter of aerospace products ( Figure 3 ).

Figure 3. US and Arizona’s exports of aerospace products to Mexico and world
Figure 2. Arizona’s exports of aerospace products to Mexico and world-wide

Source: AZMEX based on USA Trade Online

Arizona Aerospace Exports to Mexico vs. Other Border States

Three border states -- Texas, California, and Arizona – contribute more than 40 % of all U.S. exports of aerospace manufacturing products to Mexico [10].    Texas is by far the major player in aerospace manufacturing with respect to trade with Mexico. In 2016, Texas exported $979.6 million worth of aerospace products compared to California’s $262.7 million and Arizona’s $184.3 million.  

Figure 4. U.S. Border states: export of aerospace products to Mexico (2008=100)
Arizona and Mexico: The Aerospace Manufacturing Connection

  Source: AZMEX based on USA Trade Online

While Arizona’s exports of aerospace products trail behind those of Texas and California in dollar terms, in last few years Arizona leads the border states in growth rate. From 2012 through 2015, Arizona’s exports of aerospace products experienced highest growth rates compared to the beginning of the decade, significantly above those of Texas, as well as above California’s growth rates. ( Figure 4 ).

Beyond the “Obsession” with Exports: Trade as a Two-Way Highway in Crossborder Manufacturing Production Sharing

Traditionally, in regional economic development arena, exports are seen as one of a region’s (or country’s) engines of growth. Through exports new money is infused in the region (country) which initiates ripple effects throughout the economy by generating new jobs and new incomes. By the same token, imports leak the region’s (country’s) money out to other regions. In a simple accounting model when imports exceed the value of exports, this is defined as trade deficit. If and when imports are used as substitution for regional (national) goods, they will eventually cause negative ripple effects reducing jobs and shrinking incomes.

At first glance, comparing the dollar value of Arizona’s exported and from Mexico imported aerospace manufacturing products, one notices that imports exceed exports, which might produce an instant sour taste of “deficit” ( Figure 5 ).

Figure 5. Arizona’s trade with Mexico in aerospace products and parts ($mill)
Figure 5. Arizona’s trade with Mexico in aerospace products and parts ($mill)

  Source: AZMEX based on USA Trade Online

Even more disheartening could be the fact, if one continues looking through simplistic lenses, that imports were growing faster than exports. Compared to a base year 2008, exports in 2016 increased 115 percent, while imports increased 195 percent ( Figure 6 ).

Figure 6. Arizona’s trade with Mexico in aerospace manufacturing products (2008=100)
Figure 6. Arizona’s trade with Mexico in aerospace manufacturing products

  Source: AZMEX based on USA Trade Online

However, in the crossborder production sharing framework, a large portion of imported aerospace products was made in the U.S., and thus it is actually re-import.  Under NAFTA, import fees are paid only on value added in Mexico which include labor costs, services, and - according to NAFTA’s Rule of Origin -- components and parts that are incorporated in Mexico but produced outside the NAFTA area. In other words, a large portion of exports and imports of aerospace products comprises the intercompany trade between parent company in the U.S. (or in Arizona) and, by now quite complex, network of OEMs, Tier2, and Tier 3 suppliers in Mexico (i.e., in Sonora).

Borderless commodity flows in a border-bounded accounting system: a “trade deficit” is not what it used to be

Most people understand that it is not countries (or regions) who trade with each other; it is companies and individuals.  This has become more complicated with the rise of global companies that operate in different counties. When Honeywell sends aerospace parts to its maquiladora operation in Mexico, it is intracompany trade, yet it is being recorded as trade between U.S. and Mexico. The NAFTA made it possible for (almost) flawless movement of commodities among companies across the international border as if it were a single economic region, yet the accounting system is strictly based on national boundaries.

Of course, there are areas, such as consumer products, that fit the traditional definition of imports.  But for a large portion of intermediate products, such as manufactured aerospace components and parts, a composite measure of “trade,” i.e. the sum of exports and imports between two regions (countries), is more appropriate than a region’s trade “deficit” or “surplus.”

Arizona’s crossborder trade in aerospace products: an indicator of manufacturing integration with Mexico

Since 2010, as the economy was slowly pulling out of Great Recession, trade in aerospace manufacturing products between U.S. border states and Mexico started to pick up, and by 2016 more than doubled the 2008 level.  Even if Texas remains the state with the largest dollar value of traded aerospace manufacturing products with Mexico, Arizona and California experienced faster growth compared to the pre-recession levels. ( Figure 7 ).

Figure 7. U.S. Border States: Trade with Mexico in aerospace products
Figure 7. U.S. Border States: Trade with Mexico in aerospace products

Source: AZMEX based on USA Trade Online

When trade statistics in the NAFTA era is taken as an indicator of crossborder manufacturing integration, it clearly suggests that Arizona’s manufacturing integration with Mexico’s aerospace industry sector has strengthened in last several years.  

Conclusion

Whereas the crossborder manufacturing integration between U.S. and Mexico started long before NAFTA was implemented, there is no doubt that NAFTA led to new crossborder supply chains and contributed to geographic clustering. Data on trade in aerospace products suggest that Arizona’s manufacturing integration with aerospace industry in Mexico is on the rise. This is to a large extent influenced by Arizona’s proximity to Sonora, one of Mexico’s six main aerospace industry clusters. The data presented, however, show only narrowly defined aerospace products in trade statistics. There are all kinds of products and parts supplied from other industries, but are difficult to extract. Due to this high complexity of supply chain processes, any changes in aerospace trade resonate through many layers of economic activity.   


Notes

[1] Michael E. Porter, The Competitive Advantage of Nations , 1990 (first published).

[2] After completion, ASPED became GSPED (Governor’s Strategic Partnership for Economic Development). As the name indicates, the implementation of recommendations was to be carried under the leadership of Arizona’s Governor.

[3] Other ten industry clusters include: Bioindustry; Environmental Technology; Food, Fiber and Natural Products; Minerals and Mining; Optics; Plastics and Advanced Composite Materials; Senior Industries; Software and Information Industry; Tourism, and Transportation and Distribution. Source: Howard, Gail L., B.C. Catts, and D.A. De Kok, “Positioning Arizona in the new economy,” Moving All of Arizona into 21 st Century Economy , Seventy-Eight Arizona Town Hall, 2001: 75-104.

[4] https:/www.azsonoraregion.com; phoenix.gov/news/econdev/1686;

[5] Manta Media Inc., accessed January 2018;

[6] Arizona Commerce Authority, A&D Industry Overview (no date);

[7] “Investments in Mexico’s Aerospace Industry,” 9/19/2017;

[8] "Aerospace Manufacturing Industry in Mexico," The Offshore Group;

[9] According to NAICS, the aerospace manufacturing sector encompasses production in five manufacturing groups: (1) manufacturing of complete aircrafts, missiles, space vehicles; (2) manufacturing aerospace engines, propulsion units, auxiliary equipment and parts, (3) developing and making prototypes of aerospace products; (4) aircraft conversions (major modifications to systems), and (5) complete aircraft or propulsion systems overhaul and rebuilding;

[10] Export of aerospace products from New Mexico, although certainly important in the state’s economy, it is negligible in the national context where it accounts for less than 0.1%.