For decades, successful producers around the globe have benefited from manufacturing in Mexico. The country’s unique maquiladora program (IMMEX) has allowed companies to leverage the country’s unique advantages with minimal investment. Small, medium, and large businesses alike have found Mexico’s business and labor environment ideal for their needs. And the ease of access to these assets has boosted bottom lines for manufacturers all over the world while simultaneously impacting Mexico and all of North America for the better.
What is Mexico’s relationship to manufacturing? How affordable is it do business there? And what legal framework governs import/export manufacturing in this Latin American country bordering the world’s largest consumer market? This overview will answer these and other questions, showing how and why Mexico came to be a manufacturing powerhouse and outsource location of choice for many of the world’s most prestigious companies.
The History of Manufacturing in Mexico
In the 1960s, the US ended a popular program that allowed Mexican migrants extensive access to work in US farms. In order to promote jobs for these unskilled farm laborers now back home and unemployed, the US and Mexico jointly created a Border Industrialization Program. This 1965 program allowed US companies to import raw materials into Mexico duty free for assembly by Mexican laborers.
Initially, this included only unsophisticated assembly of simple electronics, textiles, and industrial products. But over the years, this program eventually morphed into the modern Maquiladora (or IMMEX) system, which now facilitates far more complex manufacturing operations on a grander scale for export not only to the US but to many countries around the world. By 1985, maquiladora manufacturing was Mexico’s largest source of foreign exchange.
The North American Free Trade Agreement (NAFTA) was signed by the United States, Canada, and Mexico in 1994. Manufacturing in Mexico grew substantially afterwards. Now, maquiladora manufacturing is the nation’s second largest industry, involves over 2,700 facilities, and employs over 1.5 million Mexican laborers in a highly sophisticated manufacturing hub that is the dynamo for North American industry. Mexico is now known for high-tech and state-of-the-art manufacturing for aerospace, medical devices, automotive, electronics, and several other key industries.
What Is a Maquiladora?
Before considering whether or not manufacturing in Mexico is right for a given situation, many unfamiliar with this unique option ask, what is a maquiladora anyway? For most countries, shelter manufacturing means establishing a wholly owned foreign subsidiary. But when paired with a shelter service, Mexico offers foreign producers the option of maintaining full control of offshore production without having to relocate or open a foreign branch.
Foreign companies may establish a maquiladora operation in Mexico as a strictly Mexican entity. This allows for duty-free importation of equipment and raw materials as long as the final product is exported. The maquiladora employs highly skilled, low-wage Mexican labor and is subject to Mexican regulations, yet it works hand in hand with the parent company as a partner without any substantial limitations from national boundaries.
Manufacturing with Shelter Services
Using a shelter service makes it even simpler in that shelter companies already operate maquiladoras established and functional within the desired manufacturing niche. The shelter company handles all HR, regulatory, and even managerial functions as needed. This allows the foreign company to benefit from all the advantages of outsource manufacturing in Mexico via a maquiladora, but without any of the hassle of starting up a new operation.
Choosing a shelter over starting your own maquiladora is largely a matter of costs. But there are other benefits of utilizing an “insider” shelter company. Some of these advantages include:
- Insider access to trusted vendors
- Compliance oversight and management
- Regulatory detachment for the foreign company
- Immediate start-up
- Seamless interactions with labor unions
- Recruiting and HR
Contract Manufacturing in Mexico
Another popular method of manufacturing in Mexico is contract manufacturing. This option is similar to using a shelter service to leverage local maquiladora operations, except foreign companies simply place shorter term orders. Contract manufacturers are already set up to make similar products. So they can quickly transition over to your order with minimal commitment to a foreign presence on the part of the purchaser.
Owning or leasing a maquiladora or partnering with a shelter manufacturing company is often preferable for medium-to-large firms. This is especially true for those in the later stages of project maturity. But smaller businesses often find that the convenience of contract manufacturing makes the most sense for them.
Reshoring to Mexico is the New Trend
If you think you’re alone in considering moving some or all of your production to Mexico, think again. Manufacturing is currently undergoing a significant shift. While outsource manufacturing in Asia has been the norm since the mid-1990s, the past few years have seen a dramatic reshoring effect with US companies bringing manufacturing back to North America.
Much of this reshoring activity is actually going to Mexico. In fact, many Chinese firms are themselves now manufacturing in Mexico. While it has been common practice for US firms to outsource manufacturing to China to take advantage of low labor costs, the tides are shifting. Many are now finding it more profitable to do business in Mexico or the US.
This reshoring trend has seen manufacturers in the automotive, electronics, and other industries set up maquiladora operations south of the border in an effort to capitalize on Mexico’s unique advantages. And while some might not expect this, the effect has been positive for US jobs.
The two countries have a symbiotic relationship, and each country offers skills the other lacks. And the economies of Mexico and the US are so intricately linked. The return of Asian manufacturing to Mexico actually boosts US jobs. 40% of what consumers spend on goods manufactured in Mexico goes to American workers. Because these Americans make the inputs used in those Mexican-made goods. Goods typically cross the border numerous times on their way to market. And “made in Mexico” typically means made in Mexico using US parts.
Manufacturing in Mexico vs. China
So why is this reshoring trend occurring? What makes Mexico more desirable than China and other Asian countries? Just what is the benefit of manufacturing in Mexico? Why are so many companies choosing manufacturing in Mexico vs. China?
Mexico offers many unique advantages. So it’s no surprise that so many Asian, North American, and international companies have chosen to outsource manufacturing there. Some of these competitive advantages Mexico has over other manufacturing countries include:
- Lower Labor Costs
Mexico’s cost of manufacturing is approximately 19% lower than China’s thanks to their low cost of labor. And these costs aren’t rising either. They remain steady, unlike China’s rapidly rising wages. Mexico’s cost for labor is approximately 88% lower than Canada’s and generally 50-70% lower than most other manufacturing countries.
- US Consumer Market
The US consumer market is known to be the largest in the world. Manufacturing in Mexico vs. China means closer proximity to this market, shorter supply lines, and a better relationship as well. Additionally, the two countries share similar cultures and the same time zones for ease of management across the border.
- Educational Focus
Mexico isn’t satisfied with being one of the best – they’re striving to make their workforce unrivaled in skill and precision. Indeed, the country is investing heavily in technical training centers and colleges. This will meet growing demand for trades such as electricians, welders, computer programming, engineering, and more!
- Duty-Free Access to Nearly 50 Countries
Mexico has more free-trade agreements in place than China or any other country in the world. In this way, companies manufacturing in Mexico have duty-free access to the majority of the global population.
- Better IP Laws
China’s intellectual property protections have been problematic in the past. But Mexico’s legal framework provides extensive protections for patents and other IP assets for companies doing business there.
How to Go About Establishing a Maquiladora
If you are considering establishing a maquiladora in Mexico without the benefit of shelter manufacturing, you must first have three requirements in place in order to qualify:
- Certificate of Advanced Electronic Signature from the SAT
- Federal Taxpayers Registration (active)
- Registered operations location and address in the Federal Taxpayers Register
If you need help selecting a site that suits all your manufacturing needs, this online tool will simplify the search process and filter by your criteria. When you are ready to apply, remember to include the following documentation along with your application:
- Articles of Incorporation (certified)
- Possession documents for the location of the IMMEX operation with photographs
- Maquiladora contract or confirmed orders verifying the existence of an export manufacturing operation
- Power of Attorney for appropriate officers
- A letter detailing the operation and production process as well as the total operation capacity and starting capacity used
- A letter of conformity acknowledging joint liability for sub-manufacturers
- Meeting minutes, certified entries, tax ID card, maquila contracts, and authorization from the Secretariat of Finance and Public Credit for IMMEX Holding Company programs
- A letter of conformity from outsourcing company and certification by the Secretariat of Finance and Public Credit for IMMEX Outsourcing programs
- Registered Public Accountant’s Report and a letter stating the projected exports in dollars for the first six months of operations for operations in the textile industry
For companies considering manufacturing in Mexico, whether via a maquiladora or some other avenue, this complete checklist of considerations is worth consulting.
Superior Advantages with Unrivaled Options
Over the past half century, Mexico has positioned her economy, legal framework, and workforce. The country is now a key competitor for outsource manufacturing the world over. Mexico has numerous free-trade agreements, highly-skilled workers, extensive infrastructure, low wages, and many other advantages to attract foreign direct investment.
Companies seeking to capitalize on these benefits have an unrivaled number of options available to them. While larger companies may open freestanding branches in Mexico, many others find the maquiladora system ideal for integration with this booming economy. Others who desire less commitment can still access these benefits through utilizing a shelter service or contract manufacturing firm. No matter which route you choose, your company’s decision to manufacture in Mexico will likely be a profitable move for years to come.