Competitiveness

The U.S. economic recovery and current strength reflect in large part advanced industries. As other sectors faltered, both employment and output in these businesses grew. In 2013, they employed 12.3 million workers (9 percent of the U.S. workforce), who made on average $90,000 (compared to the U.S. mean of $51,500). These industries generated $2.7 trillion in output (17 percent of U.S. GDP), and indirectly supported an additional 14.3 million jobs. Central to this classification, as developed in a recent Brookings report, is innovation. Participants stand out on two criteria—over 20 percent of their workers are science, technology, engineering, or math (STEM) professionals and all spend $450 or more in R&D per worker. The authors classify some fifty different industries—from aerospace to semiconductors, satellite telecommunications to software publishers—across manufacturing, energy, and services as advanced sectors. These companies—think Boeing, Sirius Satellite Radio, and Google among the thousands of lesser known names—cluster in cities. 70 percent of their jobs are in the 100 largest metropolitan areas. Here they can link to local universities, benefit from a skilled pool of labor, and learn from other nearby firms. Spillovers from this sector help support the broader local economy. Advanced industry supply chains purchase on average $236,000 in goods and services per worker from other businesses (compared to $67,000 in other industries). And the higher salaries and profits feed back through greater tax intakes. Nationally these industries help maintain the U.S. competitive edge—they account for 90 percent of private-sector R&D and 85 percent of all U.S. patents. And they dominate exports, producing 60 cents of every dollar of products sent abroad. Still, when measured against other countries, U.S. advanced industries are losing ground. Jobs and output as a share of GDP are down. This has potential knock on effects for innovation, given the dominance of these businesses in R&D spending, and for future long term economic competitiveness and growth. As with so many other economic challenges today, better education matters. The United States ranks 23rd among developed countries in terms of annual STEM graduates per capita, behind South Korea, Portugal, and Poland. As a result, U.S. advanced industry employers often struggle to find qualified workers. The authors recommend the United States expand early education, improve the quality of schools, and encourage more students to study STEM areas to diminish the deficit. Foreign policy issues too can make a difference, especially with regards to U.S. neighbors. According to the CFR-sponsored Independent Task Force report, North America: Time for a New Focus, stronger ties enhance the United States’ ability to compete in a dynamic and competitive world economy. Export data shows that of the over $1 trillion in advanced manufacturing industries exports (which doesn’t include energy and services), roughly one third head to Canada and Mexico. This number rises to more than half for motor vehicle, railroad, and computer parts. This back and forth between the three nations in the actual manufacturing process reflects a deepening of regional supply chains and the important, if often overlooked, role U.S. neighbors play in supporting “domestic” advanced industries. As Washington debates broader trade, immigration, and security issues, the economic ramifications of these policy choices for our most dynamic industries shouldn’t be forgotten.

This is a guest post by Stephanie Leutert, who is beginning an MA in Global Affairs at Yale University in the fall. She previously was my research associate in the Latin America Studies program at the Council on Foreign Relations. Mexican manufacturing is perhaps best symbolized by the infamous maquiladoras in the border region. Yet, in states from Chihuahua to the Yucatán, Mexican engineers are changing the narrative. Alongside more established auto and medical equipment manufacturing, Mexico is growing its aerospace industry, attracting investment, creating jobs, and changing its economic identity. But many challenges remain if the benefits are to be felt widely. For now, Mexico’s aerospace industry is the world’s fourteenth largest. Some 287 aerospace companies operate in eighteen states, with five major clusters in Baja California (59 companies), Sonora (45 companies), Querétaro (33 companies), Nuevo León (32 companies), and Chihuahua (32 companies). And the sector is growing exponentially. From 2009 to 2012, Mexico’s aerospace industry received more foreign direct investment than any other aerospace sector in the world—boosting its exports to $5.5 billion in 2013. Driving the sector’s explosion is its integral role in the North American aerospace production platform. “The United States is the market, Mexico is the low cost manufacturing, and Canada is the partner for production,” explained Marcelo López Sánchez, the secretary of sustainable development for Querétaro. In the sector’s continental supply chains, “aircraft are designed in Canada, set up in Mexico, and final production takes place in the United States.” This role—along with Mexico’s macroeconomic stability, low wages, few if any tariffs for exports to the United States and Canada, protection of intellectual property rights, and growing number of aerospace engineers—have propelled the sector onto the global map. Mexico’s federal and state governments have also cleared the way—offering companies enticing tax incentives, cutting through bureaucratic red tape, and signing bilateral aviation agreements with forty countries to waive the inspections of pieces and parts before they are packed for export. Still, Mexico’s aerospace industry employs only about 43,000 Mexicans, a tiny portion of the country’s 50 million strong workforce and even small within the advanced manufacturing sector. But the real importance lies in the spillover effects. Every $1 million invested in engineering intensive manufacturing is estimated to create an average of four jobs. And every one high tech manufacturing job supports at least two jobs elsewhere (though some estimates are as high as fifteen jobs)—both directly (in the companies that supply the aerospace industry) and indirectly (in construction, transportation, and other service industries). However, for Mexico to reap the full benefits of its aerospace clusters, the sector will need to continue building out its local companies and employee base. The majority of aerospace companies operating in Mexico are foreign, limiting the economic effects for host regions. This stands in contrast to other advanced manufacturing industries where Mexican companies have a much larger presence. In Querétaro alone, Mexican companies make up almost a third of the state’s automobile manufacturing, and expanding into the burgeoning aerospace industry would appear to be a logical next step. But the transition has been slow. Part of the problem, according to Luis Lizcano, director general of the Mexican Federation of Aerospace Industry (FEMIA), is the different business model. “In the automotive industry, [production] is high volume, low mix, in aerospace it is low volume, high mix.” A company may get an order for 250 parts, many of which are different—and all must be of the highest quality. “It requires a different mindset.” For those companies already shifting mindsets and moving into aerospace, there is also the challenge of becoming certified. Compared to other advanced manufacturing industries, aerospace certifications are stricter and more expensive, and navigating the process can be tough for companies just entering the sector. “You have to be technically savvy to understand the industry and the certifications,” says Lizcano. To provide support, state governments have taken the lead—counseling Mexican companies on how to obtain the appropriate certifications necessary to break into global supply chains. But none of this matters without the human talent necessary for aerospace manufacturing. Mexico graduates an impressive number of engineers, but given the aerospace industry’s recent arrival, most are specialized in other sectors. Some communities are working hard to change this. In 2006, Bombardier arrived in Querétaro after the state agreed to build a National Aeronautics University to train aerospace engineers. Today, the university provides two-thirds of Bombardier’s workforce for its Querétaro plant and sets up specialized training programs when needed. Other universities and technical programs are also popping up across the country, and are increasingly partnering with schools in the United States. The goal for workers, says Lizcano, is to have a “higher knowledge base, higher skills, and then higher value added per job,” making the sector more competitive and hopefully pushing up wages. Today, Mexico’s aerospace industry employees continue to earn low salaries by international standards. An operational worker (the majority of the sector’s employees) earns an average of US$1,000 a month, and a technical job brings in about US$1,500 a month—limiting the upsides for families and communities. Fully addressing any of these challenges will take time, even given the current efforts among industry leaders and policymakers. Yet, the industry is already a powerful symbol of the country’s expanding economic identity. As the domestic suppliers and workforce continue to develop, Mexico’s aerospace sector has the potential to change the country’s economic narrative and ultimately its reality.