Attention on Hidalgo as an up-and-coming manufacturing powerhouse

The potential of Hidalgo as an industrial hub is hardly a new discovery, stemming back to the 1950s when the manufacturing city of Fray Bernardino de Sahagún in the southern municipality of Tepeapulco was founded as part of a federal government initiative to house the Mexican automotive producer National Diesel, also known as DINA, and national rail construction company Constructora Nacional de Carros de Ferrocarril (Concarril). Shortly after, the state began attracting other private companies in the automotive, metal, plastic and textile manufacturing industries. More recently a new focus has been placed on Hidalgo as global companies, new industrial parks and high-tech sectors are setting up shop backed by government support.

Making a Comeback

Growth in the region has not always followed a smooth trajectory, with several companies based in Sahagún going bankrupt in the 1980s and 1990s; however, the region has experienced something of a comeback. Canadian rail company Bombardier acquired Concarril in 1992 and won contracts to build trains from Monterrey and Guadalajara to Sahagún.

Currently, Bombardier manufactures light rail vehicles and metro cars operating in Mexico City. The firm also supplies components for projects in New York, Vancouver and Kuala Lumpur, further consolidating the importance of Sahagún to North American trade. According to the company, almost 70% of the rolling stock and transportation systems in Mexico were built at its Sahagún plant. Another major catalyst of Hidalgo’s rejuvenation came in 2006, when local automotive producers and distributors Giant Motors Latin America decided to put their 65,000-sq-metre minivan and truck factory and distribution centre in Sahagún.

The area has also received help from the public sector. According to Claudia Ávila, executive director of the Mexican Association of Industrial Parks (Asociación Mexicana de Parques Industriales, AMPIP), the reactivation of Sahagún also owes a great deal to the state government’s work in recognising the strong points in the area and actively promoting them. “One of Sahagún’s advantages is the productive chain that exists as a legacy of the industrial origin of the city,” Ávila told OBG. “The capabilities of the labour force, such as welders for train-building, are also widely recognised. These are the strengths that Hidalgo can work on expanding.”

Recent Moves

It is these advantages that have attracted international companies to Hidalgo in more recent years. In the second half of 2014 Brazilian-owned steel company Gerdau Corsa began production at its $600m mill. The plant has an installed capacity of 1m tonnes of liquid steel and 700,000 tonnes of finished product, including beams, pipes, sheets and angles. The mill was responsible for creating some 4000 indirect jobs at the time of construction, and currently hires 500 direct employees, generating about 2000 indirect jobs. “The plant is expected to reduce current imports of steel to Mexico,” Juan Ángel Córdova, a member of the board of directors at Gerdau Corsa, said in a company statement. “This is expected to bring notable benefits to all parties involved in the distribution, sale and use of structural steel,” he added.

The production of raw materials and component parts locally is part of efforts to reduce dependency on imports and develop local capacity. “In the last three or four years, there has been a big effort to improve the local supply chain,” Elías Massri Sasson, CEO of Giant Motors, told OBG. “We have successfully managed to substitute previously imported components with parts from local producers.”

New Partners

One of the most significant developments to Sahagún’s industrial landscape came in February 2017, when Chinese automakers Anhui Jianghuai Automobile (JAC Motors) announced a MXN4.4bn ($238m) investment in conjunction with Giant Motors to build two new sports utility vehicle (SUV) models in Hidalgo. Under the deal, Giant Motors will produce 10,000 vehicles annually with the JAC Motors brand for the domestic market. The decision came less than a month after Ford Motor Company cancelled a proposed manufacturing plant in San Luis Potosí due to political pressure coming from the administration of US President Donald Trump. The Hidalgo plant will use mainly Chinese imported parts and target domestic and Latin American markets. This means that the firms can circumvent regulations stipulated by the North American Free Trade Agreement (NAFTA), which at the time of publishing was under renegotiation with the US and Canada. A state government press release recognised the importance of JAC’s investment to the automotive industry in Sahagún. It is expected that the company will attract new auto-parts providers to the region, while bringing attention to the area’s growing infrastructure and technological capabilities as an electric vehicles manufacturing hub.

Electric Cars

The development of supply chains is largely what is behind the government’s eagerness to develop Hidalgo into Mexico’s centre for electric cars. “Sustainable mobility is a huge sector for the state,” José Luis Romo Cruz, secretary of economic development for the state of Hidalgo, told OBG. “This is the future. Adapting existing car factories to handle new technologies can take up to 30 years; however, we already have a good head start.”

Indeed, the JAC Motors investment was something of a seal of approval for this strategy, with Giant Motors and JAC also planning to build electric SUVs and sedan models in Sahagún. JAC’s involvement is particularly relevant given the company is a partner in the biggest electric vehicle project in the world: a $12bn joint venture with Volkswagen.

According to the Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO), plans for the sector include promoting electric vehicles usage, and installing electric charging points so that the cars become a viable alternative for residents. “We missed a lot of chances to build an automotive industry in Hidalgo,” Andrés Manning, director-general of the National Commission for the Efficient Use of Energy, told OBG. “However, we are now in a position to become the manufacturing centre for electric cars in Mexico.”

A number of factors bode well for this goal. The supply chains and assembly of electric cars have important differences to traditional cars. Components in an electric car have to be more lightweight than those of traditional automobiles, for instance, which means strong auto manufacturing hubs, such as Querétaro or San Luis Potosí, do not hold a particular market advantage – creating opportunity for Hidalgo. Echoing these sentiments, Omar Fayad Meneses, the governor of Hidalgo, told OBG that because competition across established industries in Mexico is so high, it does not make sense for Hidalgo to focus on attracting large original equipment manufacturers to the state as it did with BMW unsuccessfully under the previous government. “Hidalgo could potentially transform itself into the electric vehicle operational centre and logistics hub for all of the Americas,” Fayad told OBG.

The state’s proximity to Mexico City is also a boon. “Because Mexico City is close by, we have access to good logistics connections with ports for both imports and exports,” Manning told OBG.

Commercial Vehicles

Some firms have begun producing electric vehicles for commercial and official use. In collaboration with metal-mechanics company Moldex, a subsidiary of bread-making giant Grupo Bimbo, and a number of local academic institutions, Giant Motors is developing electric utility cargo vehicles that Bimbo can use for product distribution. Each vehicle has a loading capacity of 600 kg and a range of 70 km. According to Massri, the firm produced 600 such vehicles in 2017 that are already in use. Moldex and Giant Motors are planning to commercialise the vehicle to other companies with similar distribution needs.

In another move aimed at reducing Mexico’s dependence on NAFTA, the coalition are also working on a 100% locally manufactured and assembled electric car, which is expected to be used as alternative taxi vehicles for Mexico City.

Battling for Batteries

One of the challenges in building a cluster of electric car suppliers is the battery segment, with manufacturers secretive about the technology. But Manning also feels that Hidalgo could be the place for the assembly of electric car batteries. “Lithium would come from outside Mexico, Chile for instance, but assembling car batteries here would be a huge step,” he told OBG.

Commenting on the topic, Massri, of Giant Motors agreed. “Across the world the cost of the batteries are the biggest obstacle; however, if the government provides the necessary support, Hidalgo could attract battery manufacturers as well.”

In the Zone

In an effort to ensure it has the legislation to match its ambitious plans, the local government in Hidalgo is looking to take advantage of Mexico’s Federal Law on Special Economic Zones (SEZs), which was passed in 2016. An electric vehicles cluster could be one of the industries to benefit if Hidalgo can gain approval for an SEZ, which primarily offers federal fiscal incentives to attract high-value companies. The law was designed to ignite economic development in the 10 states with highest levels of extreme poverty, including Hidalgo. Five of these states have already gained authorisation from central government, but for Hidalgo to do so it needs a local law to regulate the process. With this in mind, in December 2017 the state government presented a new SEZ law. If approved, an SEZ could see the state generate 56,000 new jobs and MXN190bn ($10.3bn) in new investments over the next 20 years. According to SEDECO, an SEZ would create a development hub, bring investments in strategic sectors, and drive productivity and competitiveness, among others.

Industrial Parks

Amid the numerous high profile investments, Hidalgo’s industrial parks have become the region’s new focus, offering potential opportunities for international companies and investors. “None of the industrial parks here can compare in quality with the best parks in places like Querétaro and San Luis Potosí. This is one area where we are lacking,” Edgar Espínola, president of the Business Coordinating Council of Hidalgo, told OBG .

“However, given the agility and openness to change that the local government has shown so far, I’m sure it won’t be long until they bring in big investors to modernise the existing parks.”

Commenting on the situation, AMPIP’s Ávila agreed, saying that Hidalgo has great potential to develop more industrial parks. “Compared to the Bajío region, Hidalgo’s offering of industrial parks is limited – especially in terms of privately built parks with modern amenities,” she told OBG.

Hidalgo has 10 industrial parks – seven private and three publicly owned. The local government is looking to reactivate, develop and expand industrial zones and parks to capture productive investments and consolidate the industrial sector in the state. “We have divided the state into 12 industrial regions to evenly distribute economic activity so that we don’t end up like the Bajío region, where the clusters compete with each other,” Romo told OBG.

A number of global firms have already recognised Hidalgo’s industrial park potential, however. In 2014 Mexican fund Artha Capital began developing the Logistics Platform of Hidalgo (Plataforma Logística de Hidalgo, Platah) in Villa de Tezontepec in a public-private partnership with the state of Hidalgo. The 343-ha site is equipped with industrial sites, commercial areas and state facilities for education, health care and business tourism, and caters to local and global manufacturing firms.

Additionally, in 2011 international firm Hutchison Port Holdings began limited operations at its Logistics Activities Zone near the Port of Veracruz. The port is expected to begin fully operating at the beginning of 2019, with a capacity for 9000 twenty-foot equivalents. The zone is part of the wider Hidalgo Intermodal Logistics Terminal.

Community Development

The progress made by Hidalgo’s industrial base has also presented the government with clear opportunities to put money into the surrounding areas. The lack of urbanised areas around certain parks has been a drawback, contributing to longer commute times, and is something the state is eager to develop. “The main town of Tepeji del Río, for example, is located some 10-15 minutes from the plant, and public transport is not sufficient for the workers. Sometimes the company has to contract private services to transport employees to and from the town,” Igor Flores, plant manager at local firm Frialsa in Tepeji del Río, told OBG.

Investing in the surrounding community is particularly important when considering why BMW opted to build its manufacturing plant in San Luis Potosí over Hidalgo in 2017. Indeed, many firms have noticed that enticing people to live and work in these areas is a key part to attracting global brands. “It’s one of the factors that can determine whether a company locates its operation. For instance, foreign workers require good-quality accommodation for executives, social services and bilingual schools for their children,” Ávila told OBG.

Companies are also considering whether their local workforce will have access to public services, transport, schools and sometimes child care. Platah, for example, in addition to offering hotels and other amenities for its foreign workers, will offer 50 ha of open green spaces, commercial areas and sports fields, as well as child care facilities.

In August 2017 local real estate firm Grupo GICSA announced it would be building a MXN2bn ($108.1m) shopping and entertainment centre in Pachuca in Hidalgo as part of state efforts to promote urban development. The 185,000-sq-metre Explanada Pachuca Commercial Complex will be home to a hotel, fitness centre, commercial and entertainment zones, restaurants, bank branches, as well as accompanying power infrastructure. Explanada is one of four major real estate projects in Pachuca – alongside Via Dorada, Qualia Luxury Towers and Torre Dioon – that suggest the capital will be improving its offerings. Combined private investment in these projects is estimated at MXN5.6bn ($302.6m).

Local stakeholders are optimistic that Hidalgo will offer global firms the kind of services and investment climate conducive to becoming a major player. “We’re less than two years into Governor Fayad’s term, and already the current administration’s policies are showing positive results,” Espínola told OBG.