The Report: Hidalgo 2019

28 Oct 2019

Harry van Schaick, The Americas Regional Editor

Harry van Schaick
The Americas Regional Editor
Follow Harry on Twitter LinkedIn

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 and new industrial parks are setting up shop backed by public support and a raft of private investment. A major focus is being put on implementing diversification strategies, making improvements to available infrastructure for new industrial investments and bringing more added value to the economy.

Consolidated Sectors

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 experienced something of a comeback in the following three decades to now. Canadian rail company Bombardier acquired Concarril in 1992 and won contracts to build trains from Monterrey and Guadalajara to Sahagún. Bombardier currently manufactures light-rail vehicles and metro cars operating in Mexico City. The company also supplies components for projects in New York, Vancouver and Kuala Lumpur, further consolidating the importance of Sahagún to North American trade.

The logistics sector is boosted by state’s proximity to Mexico City and its connectivity with the Bajío manufacturing and industrial region. In 2012 Hutchison Ports opened the Hidalgo Intermodal Logistics Ports, which receives around half of the country’s container port throughput. In 2018 US dry bulk transport firm Bulkmatic announced it would be investing $100m in building two fuel storage terminals, one of which will be located in the municipality of Tula de Allende. Original plans put storage capacity at 690,000 barrels, but it was recently decided that the terminal would be made larger, which could be credited to improved economic prospects under the current government (see Economy analysis).

Brazilian metal and steel manufacturers Gerdau Corsa began operations at its Hidalgo steel factory in 2015. At $600m, the development marked the largest single investment in the state at the time. The factory has an installed capacity of 1m tonnes of liquid steel and 700,000 tonnes of finished products, including beams, pipes, sheets and angles. At the time of construction, the mill created some 4000 indirect jobs, and currently hires 500 direct employees and generates about 2000 indirect jobs.

Automotive

Building on the history begun by DINA, the automotive sector has expanded with a particular focus on buses and light-load trucks. In 2006 local automotive makers and distributors Giant Motors Latinoamérica chose Sahagún as the location for its 65,000-sq-metre minivan and truck factory and distribution centre. Then, in 2017, Giant Motors announced a MXN4.4bn ($227.5m) investment in conjunction with Chinese firm Anhui Jianghuai Automobile Group (JAC Motors) to build two new SUV models, followed by an April 2019 announcement to launch two more traditional models: the SEI 4 SUV and the Frinson T8 pick-up truck.

“People say that Hidalgo is not industrial but I do not believe this to be true,” says Elvia Noriega Hernández, president of the Pachuca delegation of the National Chamber of Industry (Cámara Nacional de la Industria de Transformación, CANACINTRA). “There are several crucial industries in the state, and coupled with the rising investment seen in the last couple of years, this activity should increase.”

Sustainable Transport

Amid the numerous high-profile investments, the automobile industry has become the region’s new focus, offering environmentally-friendly opportunities for international companies and investors. On top of the agro-industry, renewable energy and chemical-pharmaceutical sectors, the government has placed a strategic focus on promoting sustainable transport. Omar Fayad Meneses, the governor of Hidalgo, said in a March 2019 press release that the state should avoid competing with areas like Puebla, Querétaro and San Luis Potosí that have well-established traditional automotive industries. Instead, local manufacturers are looking to produce vehicles that run on alternative fuel sources. Indeed, the JAC Motors investment in the area was something of a seal of approval for this strategy, with Giant Motors and JAC Motors also planning to build electric SUVs and sedan models in Sahagún. JAC Motor’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.

In March 2019 Mexican firm Ensambladora Latinoamericana de Motores (ELAM) opened a new plant to build five natural gas-powered vehicles by Chinese state-owned car manufactures FAW Trucks. These gas vehicles reportedly release 20-30% less greenhouse gas into the atmosphere. ELAM’s MXN460m ($23.7m) investment in the western municipality of Zapotlán de Juárez is expected to generate 70 direct jobs and 250 indirect positions, according to the state’s Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO).

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 Grupo Bimbo can use for product distribution. Each vehicle has a loading capacity of 600 kg and a range of more than 70 km. Moldex and Giant Motors are planning to commercialise the vehicle to other companies with similar distribution needs.

The pair is also working on a 100% locally manufactured and assembled electric car that is expected to be used as an alternative taxi vehicle for Mexico City, which has historically suffered from high levels of pollution. If Giant Motors and Moldex succeed in commercialising these vehicles, it would mark an important step in Hidalgo’s ambitions of becoming the new home of electric and alternative-fuel vehicle manufacturing in the country.

Zone Cancellation

A setback to these goals has arisen, however, as plans to develop an electric vehicle-manufacturing cluster – alongside renewable energy and chemical-pharmaceutical developments – in a proposed special economic zone (SEZ) have been cancelled at the federal level. The idea was to take advantage of Mexico’s Federal Law on SEZs, which was passed in 2016, and use the fiscal incentives to attract investment. However, CANACINTRA issued the cancellation on the grounds that previous SEZs had resulted in little benefit for the economy. Still, state lawmakers remain resolute that building a more sustainable manufacturing centre in Hidalgo will bring added benefits. “This cancellation will not deter us, and we will keep up our efforts to develop the sustainable transport sector in the state,” José Luis Romo Cruz, the secretary of public policy of Hidalgo, told OBG.

Supply Chain

Despite the cancellation of the SEZ, there are signs that Hidalgo is gradually attracting more providers and building supply chains in key sectors. “The state has been able to attract a sufficient amount of suppliers. This is important because when companies are looking for new sites, they consider the strength of the local productive chain,” Claudia Ávila Connelly, executive director of the Mexican Association of Industrial Parks, told OBG.

Sahagún’s history means that there are well-established providers in the area, but now stakeholders are looking to develop other sectors and add value, and the government is providing an opportunity for companies to supplement larger investments. In this vein, a string of Mexican and international firms have recently arrived to the state, boosting local industry. In February 2019 Italian firm Mapei opened its construction materials factory in Zimapán with a MXN170m ($8.8m) investment. The company plans to manufacture 185,000 tonnes of adhesive and sealant products per year, and expects to provide jobs to more than 230 people.

Meanwhile, US company Beaver Manufacturing spent MXN130m ($6.7m) in setting up its first plant in Latin America in Tepeji del Río, providing technical fibre reinforcements for automotive, industrial, and oil and gas businesses. The manufacturer expects to employ 30 people at its Tepeji facility, from where it plans to expand its business into the rest of Mexico and South America. Austria’s Anton Paar, which produces scientific instruments for industry and research, began construction on its MXN100m ($5.2m) plant in Villa de Tezontepec in January 2019.

A number of notable Mexican companies have also chosen Hidalgo as an investment destination, such as packaging company Envases Universales, which arrived in the state in early 2019 to become a major supplier for brewery Grupo Modelo. Turbomex, which makes recipient parts for various industrial processes, invested MXN30m ($1.5m) in its facilities in Villa de Tezontepec. Meanwhile, Pesa Uniformes has spent MXN50m ($2.6m) on its facilities in Zapotlán to provide uniforms for industry and other sectors, with this investment alone generating 200 direct jobs.

However, it is not always easy for smaller local companies to participate in the large new investments. “Hidalgo’s businesses have the technical and administrative capacity to carry out work for the impressive amount of private investment that is arriving in the state,” Edgar Espínola, president of the Business Coordinating Council of Hidalgo, told OBG. “However, because large investors tend to pay their suppliers between 120 and 180 days after the job is completed, smaller local firms are often expected to operate without income for a substantial period.” Although local companies are participating in almost all of the new investments, financial limitations means that firms without sufficient capital are forced to act as subcontractors rather than the principal suppliers. 

New Parks

While Hidalgo still cannot boast the activity of some of Mexico’s more industrially developed central states, sector stakeholders could now be in position to effectively capitalise on the recent influx of private investment. “Hidalgo still has available land at a very competitive price compared to other regions, for example,” Connelly told OBG.

A number of global firms have already recognised Hidalgo’s potential. The state has 10 industrial parks – seven private and three publicly owned. In 2014 Mexican fund Artha Capital began developing a new industrial park – Platah, which is located in Villa de Tezontepec – under a public-private partnership with the state of Hidalgo. The 343-ha site is equipped with industrial sites, as well as commercial areas and state facilities for education. Platah has quickly become one of the most popular parks in the state, hosting a number of major companies including Envases Universales, drugstore chain Farmacias Guadalajara and Anton Paar.

The MXN20m ($1m) first stage of the Tulancingo Industrial Park is due to open in the municipality of Santiago Tulantepec in the second half of 2019. The total corridor is aimed at micro-, small and medium-sized enterprises, and is expected to boost employment in the nearby municipalities of Singuilucán, Cuautepec, Acatlán, Santiago and Tulancingo. While the entire park will eventually cover 40 ha, the first phase will see 17 ha come on-line. “We always knew that we had a strategic location,” Noé Paredes, head of Tula-based conglomerate Grupo UNNE, told OBG. “What we did not have was connectivity or investment in top level industrial and logistics parks, but this is changing significantly.”

Quality of Life

As well as industrial infrastructure, Hidalgo must also offer the quality of life necessary to attract international companies. In this sense, having industrial activity spread around the state – from the capital Pachuca de Soto, to Tula, Tepeji and Tizayuca in the west, and Sahagún and Tulancingo in the south – has represented a challenge. Hidalgo’s proximity to Mexico City has also somewhat hindered the development of services and entertainment in the state. However, being at a relatively early stage of economic development compared to other states also provides a chance for government to ensure that industrial growth is implemented in a sustainable fashion.

“Hidalgo has a great window of opportunity to define the vocation of its 84 municipalities; not every one has to be industrial,” Connelly told OBG. “Some could be more residential, tourism based, or agricultural. There is also great scope to develop urban infrastructure and services in Hidalgo, particularly away from Pachuca,” she added.

Outlook

With a record MXN53.5bn ($2.8bn) in private investment received from September 2016 to September 2019, Hidalgo’s efforts to expand and modernise its industry are paying off. As better infrastructure becomes available, efforts to deepen the supply chains bear fruit, and local companies learn how to work with the multinationals arriving in the state, Hidalgo will continue to build its reputation as a top industrial destination.

While progress moves forward, public and private sector stakeholders will have ample opportunity to take advantage of the state’s logistics and connectivity to diversify the demand side of the equation.

Tags:

The Americas Mexico Economy Industry

Harry van Schaick, The Americas Regional Editor

Harry van Schaick
The Americas Regional Editor
Follow Harry on Twitter LinkedIn