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Francisco J. Sánchez: Synchronized Factories — The Key to Latin America’s Industrial Future

Francisco J Sanchez Cns Global Advisors
December 29, 2014
In 2005, Bombardier, the Canadian aerospace and transportation company, opened the doors of a factory in Querétaro, Mexico. At the time, the move seemed like a serious gamble. Though Mexico offered low wages compared to Canada, could it provide Bombardier with the environment required for such a highly technical manufacturing plant?

Almost 10 years later, it is clear that the gamble paid off. The factory has flourished and employs more than 1,800 workers. Bombardier continues to generate profits from its Mexico plants and is expanding there.

Bombardier is just one example of how Latin America is emerging as a manufacturing and export center. In 2013, Latin America exported more than $1 trillion in goods. In 2014, the fastest-growing industries were motor vehicles, computing and electronic equipment, and basic metals — creating high-paying jobs for a burgeoning middle class. Moreover, Latin American industry is forecast to expand output by 1.8% in 2015. While Latin America’s growth has undoubtedly experienced cycles of downturn, there is a trajectory towards greater growth and prosperity.

One of the most important questions facing Latin American leaders now is how to hasten long-term growth in a sustainable way. What policies can be put in place to continue the region’s launch into the future? Just like East Asia in the 1980s, Latin America has the potential to become a global manufacturing hub. However, Latin American leaders must recognize that the nature of manufacturing has shifted greatly in the last few decades and formulate their strategy for growth accordingly.

In the last 30 years, the efficiency of global commerce and trade has eliminated the need to centralize manufacturing in a single plant. Manufacturing is now fragmented, meaning that a final good is assembled from parts from many different locations that often come from all around the world.

One of the examples that best illustrates this shift is the American automobile industry. American carmakers used to employ a highly centralized production model, with almost the entire car and its component parts made within a 50-mile radius of a Detroit plant. Now, a typical American-made car has components made in China, Japan, South Korea, as well as other countries. Moreover, the core of the car may cross the U.S., Mexican and Canadian borders eight times or more during production.

With this model representing the new norm, the key for Latin American industry will be to synchronize its factories within a larger global supply chain. Rather than a challenge, this should be seen as an incredible opportunity. Centralized production is costly and requires more time to create an entire ecosystem for a complex manufacturing plant. Fragmented manufacturing will grant Latin American companies the ability to specialize in specific products and create jobs more quickly.

Currently, Latin America participates far less in global supply chains than the United States and the European Union. Greater integration into these global supply chains will be crucial to Latin America’s industrialization. A recent report by the Inter-American Development Bank (IDB), offers five key suggestions for how Latin American countries can help synchronize its factories into the global supply chain.

1. Improving Transportation, Communication and Logistics Infrastructure

In a world of integrated supply chains, global companies seek out countries where the fewest disruptions and delays occur during the shipment of goods. In this realm, Latin America can make huge strides in reducing the lag time caused by infrastructure. Everything from port efficiency to airport proximity and Internet access can radically shift companies’ perception of a business environment. Latin American countries should make investments in key infrastructure that makes it easy for companies to do business.

2. Encouraging Trade and Integration Agreements

Protectionism and a business-hostile environment will make companies reticent to fragment their production in Latin America. In this, Latin American governments can make strides to decrease tariffs and increase regulatory cooperation.

While bilateral trade agreements can greatly facilitate commerce, larger trade deals also present an incredible opportunity for Latin America. For example, the Trans-Pacific Partnership (TPP) agreement will draw together twelve countries around the Pacific — including Chile, Canada, Mexico, Peru and the United States. The ratification of this deal would bring these countries into an economic bloc that represents 42 percent of the global economy.

3. Improving the Contractual Environment

Contracts are key to brokering international business agreements. They grant businesses a way to ensure their investments and create mutual trust that can make transactions more frequent.

Currently, Latin America lags behind in terms of contract enforcement. In the Asia-Pacific region, the average time for enforcing a contract is 398 days, whereas in Latin America it is 733 days. Latin America needs to improve institutions in charge of contract enforcement. Until this issue is resolved, businesses will continue to be wary of making large investments in Latin American-based factories.

4. Investing in Human Capital

In the modern economy, the only constant is change. Business practices rapidly shift and often create a mismatch in Latin American economies between skills and opportunities.

As Latin America seeks to build its manufacturing sector, human capital will be a crucial ingredient. Latin America must invest in educational initiatives that give their people the right skills. Furthermore, it must make sure that their education sector is attuned to frequent global shifts.

5. Closing Information Gaps

Companies thinking of building a manufacturing plant often overlook a location only because it is an unknown entity. Since Latin America does not have an historic reputation as a manufacturing center, it is crucial that business leaders know that a shift is occurring.

Latin American governments should strive to showcase the progress they have made to promote a business friendly environment. Having set up a logistical and regulatory environment in their country, they need to make sure that global companies are aware of it. International business conferences and a strategic marketing plan are just a couple of the ways to accomplish this goal.

Returning to the example of Bombardier, one can see that the Mexican government facilitated the company’s successes with many of the methods seen in the IDB report. The North American Free Trade Agreement (NAFTA) and a close proximity to the United States made Mexico more attractive than East Asia for Bombardier. Querétaro itself also made large investments in a new airport. Once Bombardier was established, the leaders continued their efforts. Mexico signed the Bilateral Aviation Safety Agreement with the U.S., which eliminated one step in the supply chain and kept the company vested in its presence in Mexico. The state of Querétaro also created the Universidad Aeronáutica en Querétaro, which granted Bombardier a steady supply of skilled workers.

In a world of global supply chains, Latin America has great room to grow. Whether or not it does will rest on whether it has the foresight and willingness to adapt to the needs of the present.

Top image: Courtesy of Bombardier

Francisco J. Sánchez is the Chairman of CNS Global Advisors. Prior to CNS, he served as Under Secretary for International Trade at the U.S. Department of Commerce. During the Clinton Administration, Sánchez served as the Assistant Secretary for Aviation and International Affairs at the U.S. Department of Transportation. He previously served as a Special Assistant to President Clinton and as Chief of Staff to the Special Envoy to the Americas.