Automotive: A Pillar of Mexico’s Economy Last June, Ernesto Hernandez was named President and Managing Director of General Motors de Mexico. In this exclusive interview, Mr. Hernandez tells Executive Agenda why he is optimistic about Mexico’s automotive industry. At the recent A.T. Kearney conference, “Mexico as a Premier Source of Human Capital for Global Competitiveness,” held in New York City, Ricardo Haneine and Brian Irwin sat down with Ernesto Hernandez, President and Managing Director of General Motors de Mexico, to discuss the common view of Mexico as a source of low-cost labor, the country’s competitiveness, and what the future holds for its automotive sector. Executive Agenda: We often hear that companies build plants in Mexico for no other reason than to capitalize on less expensive labor. What is your perspective on this? Mr. Hernandez: American companies have had a presence in Mexico for many years. General Motors has a 76-year presence in Mexico. Yet there are still misconceptions about the workforce in Mexico. Not only is the workforce capable, but also well educated, loyal, ethical, disciplined, and flexible. People are not afraid to go the extra mile and deliver on deadlines. On a lot of fronts, particularly in manufacturing, much of what we have learned in Mexico—in terms of efficiencies and productivity—has been exported to other GM facilities in all parts of the world. There are a lot of good things happening in Mexico and we are very proud of our workforce. Executive Agenda: Performance and productivity are thoroughly measured in automotive plants, and nowhere more so than at GM. Where do your factories rank among GM’s overall lineup? Mr. Hernandez: We are adamant about measuring productivity, which includes monitoring many variables, such as the level of automation in manufacturing. In our case, we have exactly the right balance between automation, labor, and other factors such as access to distribution centers and logistics. Put all of these together and we hold our own in competing head to head with the best automakers in the world. Obviously, we take pride in that. We always view Mexico as a competitor for global projects, and we want to be the best. At the same time, we recognize there is always room for improvement so we promote efforts around continuous improvement. Executive Agenda: What are your views on Mexico’s competitiveness? Mr. Hernandez: Mexico has evolved. We have made significant progress, not only in preparing our people to operate at their highest possible levels, but also in preparing our plants and facilities to manufacture at the highest global standards. The automotive industry, and all of our competitors, are competing for global projects with other countries. Certainly Asia is a major competitor, but so are South America and Eastern Europe. There are advantages to being close to one of the biggest markets in the world—the United States—and probably the most complex. But proximity to the United States will be a fleeting advantage if Mexican manufacturers cannot produce at the right price. We are on the right path, not only in the automotive sector but also in related sectors. We know who we are today, and where we envisage our future. Executive Agenda: What do you think of Mexico’s investment in the automotive industry, compared to five or 10 years ago? Mr. Hernandez: The automotive sector is and will remain for the foreseeable future an attractive sector in Mexico. Not only have companies proved that they can produce to the highest standards, and that the logistics are strong, but it is also one of the pillars of the Mexican economy. Other than oil, which is pretty much state-owned, the most dynamic business sector is automotive. Automotive is an attractive investment because of our proximity to the United States and because of the sales potential in Mexico. Today we are selling almost 1 million new vehicles per year and we anticipate raising this number to 1.8 million per year. Although there are some anomalies to address, and some work to be done among the many players in this industry—namely the government, academia, and unions—the potential is huge, which makes investment opportunities very attractive. Executive Agenda: You mention the many players in the industry. What trends are you seeing in the relationships among these industry players? Mr. Hernandez: It is trending in the right direction. There are always issues, and over the years we have had disagreements. But the good thing today is that everyone is talking about the same topics and it appears, at least conceptually, that we’re all aligned. It’s just a matter of finding the right forums, putting the right labels on what we’re discussing, and seeing the same numbers regarding economic potential. Fortunately, no one has totally opposite views. Executive Agenda: Are there opportunities for Mexico beyond automotive manufacturing, for example, to get into R&D, engineering, and design? How can Mexico increase its presence in these higher-skill areas? Mr. Hernandez: From a manufacturing standpoint, Mexico is attractive because of how well we have developed into a manufacturing powerhouse. This has very little to do with our potential and a lot to do with our base of experience. We began “modern” production here more than 30 years ago so we are getting better and better. In terms of human capital, the talent is here. We have good educational institutions, not as many as we’d like, but there is access to good education. And many companies are already investing in design and R&D—primarily in the northern states and in the areas around Mexico City where investments in engineering and technical areas are on the rise. Executive Agenda: What could the government do to help the automotive industry? Mr. Hernandez: I think there is more needed. There are pockets of good stories, and there are officials in certain sectors who are doing the right thing. But in general, to move forward, we need deeper collaboration and a shared long-term vision. One of the biggest challenges in working with governments is that people move around a lot, not only when one administration ends but also within a current administration. So there is no continuity for some of the plans we put in place. That said, there is an overall shared commitment to create something good for the country over the long term. Executive Agenda: Regarding Mexico’s automotive sales numbers, what headwinds are you facing? Mr. Hernandez: The current size of the Mexican vehicle market is 940,000 units, but it should be in the neighborhood of 1.5 million to 1.8 million units. This is a nation of roughly 110 million inhabitants, mainly young people who need transportation. A car is probably, if not the most important, then the second most important purchase a family makes. There’s an appetite for vehicles—and a need. If we were to sell 15 to 17 units per 1,000 people, that is about 1.8 million units. Other countries with lower GDP and lower per capita income than Mexico are already at this level of penetration. They got there by simplifying regulations, offering incentives, and providing access to credit. Why isn’t Mexico meeting its growth potential? One reason is that we have very complicated tax structures and market incentives. The market is small and fragmented, with competitors fighting for share. Another reason is the lack of access to credit. We have solid financial institutions, but none is interested in taking on more risk. Finally, there is a constant inflow of used vehicles coming from the United States. Whether they come by agreement, decree, allowance, or illegally, the numbers are astonishing. This affects not only the purchasing cycle of new vehicles, but also our used-car market. And it results in security, environmental, and fiscal issues. We have to stop the inflow of vehicles from the United States and promote growth in our domestic market. Executive Agenda: How is consumer confidence in Mexico when it comes to buying cars and trucks? Mr. Hernandez: It’s difficult to read. We see good indicators, but then factors unique to Mexico also have an impact on the market. For instance, in the northern part of Mexico, consumer confidence is low and people are afraid to buy cars. Full-size pickups, fully loaded and luxury vehicles, are not being sold at the rate we expected. Some customers are postponing purchases or they’re buying down. In the central and southern parts of the country, consumer confidence is also low but for different reasons, primarily because of economic volatility and constant change in purchasing power parity. Overall, I am hopeful. I believe consumer confidence will improve. Executive Agenda: How can we make the automotive industry more appealing to young adults as they enter college and contemplate career prospects? Mr. Hernandez: Many things will attract young people to the auto industry. One is success. We have to communicate, in economic terms, the potential of this industry and entice investors to finance more state-of-the-art facilities and manufacturing plants. People, young and old, are naturally drawn to a successful industry. We also have to change the perception of the industry. Automotive has become something of a bad word in recent years. In reality, however, the automotive sector has made significant contributions to the economic well-being of numerous communities and nations around the world. Advances in the auto industry have led to advances in other industries, whether chemicals, mobility, technologies, or alternative vehicles. Automotive has been a great contributor to the economy in many different ways. We have to work with our universities in developing their curriculums to ensure they are turning out the best qualified engineers and technicians. The industry demands talented and highly capable individuals, both men and women. Executive Agenda: Before we end our discussion, what aspirations do you have for the company and for yourself over the next five years? Mr. Hernandez: I want to deliver several results in the next five years. For one, to position GM in a place that commands respect—the kind of respect that this company deserves. GM is one of the best companies in Mexico; it is a pillar of the auto industry and a pillar of the Mexican economy. And I want GM to be the workplace of choice, a place where people want to work. To do this will require making it easier and more attractive for people to join the company. My personal aspirations include having a positive influence on the Mexican economy, and leaving a legacy of cooperation with the government and with academia that leads to more opportunities for our people and a better future for Mexico. As a Mexican, I want to give something good back to my country. Because of GM, I am in a position to do just that.
Ricardo Haneine, partner and head of A.T. Kearney’s Mexico City office email@example.com Brian Irwin, partner and head of A.T. Kearney’s North America automotive practice firstname.lastname@example.org
Ernesto Hernandez Biography
Ernesto Hernandez President and Managing Director, General Motors de Mexico Ernesto Hernandez was named President and Managing Director of General Motors de Mexico effective June 1, 2011. Hernandez, the first Mexican to serve in this role, began his career at GM Mexico in 1980 in product engineering. In 1992 he transferred to manufacturing as planning manager for the Silao Complex Project and two years later he was promoted to executive for the Chevrolet Chevy Project in Ramos Arizpe. In the early 2000s Hernandez was marketing director for Cadillac in Detroit and then for the VSSM function in Mexico. In 2002, he was responsible for negotiating the alliance between Fiat Auto and GM Mexico, and later he managed the introduction of the truck and utility vehicles brand and created the Pontiac-GMC distribution channel. From 2003 to 2011, Hernandez was VSSM executive director of GM Mexico, responsible for commercial operations in Mexico, Central America, and the Caribbean. Hernandez earned a bachelor’s degree in mechanical engineering from Instituto Politécnico Nacional, a master’s degree in administration from Instituto Tecnológico Autónomo de México (ITAM), and a master’s degree in management from the Massachusetts Institute of Technology (MIT).
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