Contract Manufacturing in Mexico

Low labor costs in Mexico provide many benefits than just a lower bottom line; see how your business can profit from utilizing the low-cost labor pool in Mexico.

U.S.-made parts and products are used by Mexico manufacturers up to four times more than China; this is a tremendous benefit to suppliers in the United States.

The Mexican government is very friendly to foreign business and investment, as demonstrated by their 44 trade agreements with countries around the globe, including the recently-signed USMCA agreement.

Production is closer to the U.S. border; faster time to the consumer market than shipping across the Pacific Ocean, which can take weeks. Mexico manufacturing means lower transportation, trucks and trains as opposed to ships, and the abundance of warehousing make Mexico a cost-effective solution.

U.S.-based businesses benefit from low cost, quality, and availability of labor, as well as proximity to markets. Other benefits of operating through a Maquiladora include:

• Unlimited duty-free imports
• Unlimited foreign capital investment
• Limitless options for type or amount of product that can be manufactured
• Reduced manufacturing costs
• High-quality product
• Reduced transport time and cost (specifically in comparison to manufacturing in eastern countries)

According to the Wall Street Journal: “Mexico has remained consistent with costs and taxing, which allows companies to plan budgetary needs in advance and avoid any surprises that may set them back. It has also permitted U.S. companies to rely on Mexico as a manufacturing partner. As of 2015, 90% of Fortune 500 companies have investments in Mexico, making the maquiladora industry vital to the U.S. economy.”

Maquiladoras are also vital to the Mexican economy. According to the Maquiladora Guide: Doing Business in Mexico, which was published by PriceWaterhouseCoopers, ‘Maquiladoras are the foundation on which Mexico’s GDP is built, and without their support the Mexican economy would suffer. Maquiladoras are responsible for more than 65 percent of the country’s manufacturing exports, and employ 80 percent of the manufacturing labor force.’

Beyond their foundational role in GDP, the impact of maquiladoras is multifaceted:

• Job Creation: The industry has generated over one million jobs, bolstering employment across regions.
• Industrial Growth: With the establishment of over 3,000 manufacturing or export assembly plants, maquiladoras have significantly expanded Mexico's industrial landscape.
• Unemployment Reduction: The maquiladora program has notably lowered unemployment rates in areas along the United States-Mexico border, providing economic relief and stability.
• Export Powerhouse: Accounting for 50% of Mexico's exports, maquiladoras are a critical component in maintaining the country's trade balance.

These elements ensure that maquiladoras are not just a pillar of the Mexican economy but also integral to its participation in the global market, underscoring their importance for the foreseeable future.”

The maquiladora industry in Mexico plays a vital role in the U.S. Economy. As of 2015, 90% of Fortune 500 companies have investments in Mexico due to the consistent costs and taxing environment. This reliance on Mexico as a manufacturing partner demonstrates the industry's significance and its contribution to the U.S. Economy.

As a result of a manufacturing revival in the Americas, the Maquiladora industry is currently experiencing growth. According to a study by the Federal Reserve, “Whereas China benefitted tremendously when the country entered the World Trade Organization in 2001, today the pendulum is swinging back. China’s GDP climbed from approximately $2 trillion in 2005 to just under $11 trillion in 2015, and as the country grew, wages nearly quintupled over the same time horizon, making China less competitive today. Trade agreements between the U.S. and Mexico, and Mexico’s reliance on maquiladoras have led to stable and consistent costs of labor, which are major benefitting factors for companies looking to outsource some or all of their manufacturing needs.”

Maquiladoras, or manufacturing plants in Mexico, offer foreign companies a strategic advantage by managing rising wages and labor costs effectively. These factories enable highly efficient and cost-effective operations, helping businesses navigate the challenge of increasing expenses. By manufacturing goods in Mexico, companies can reduce unnecessary costs while maintaining high-quality products at competitive prices. This solution is particularly appealing as businesses seek alternatives to the escalating labor costs seen in other countries.

Together, these factors make Mexico an attractive option for firms aiming to optimize their supply chain and maintain profitability in a competitive market.

U.S.-based businesses operating through a Maquiladora in Mexico enjoy several benefits. These include low cost, quality, and availability of labor, proximity to markets, unlimited duty-free imports, unlimited foreign capital investment, flexibility in the type and amount of products manufactured, reduced manufacturing costs, high-quality products, and reduced transport time and cost compared to manufacturing in eastern countries.

The establishment and management of maquiladoras in Mexico can be challenging due to ever-changing Mexican laws. These laws create an intimidating and confusing environment. However, despite this, thousands of manufacturing companies, including a substantial number of small to medium-sized American firms, have successfully navigated the process and established maquiladoras.

Navigating Legal Complexities
The constant evolution of Mexican regulations requires businesses to remain agile and well-informed. Managers must frequently update their understanding and implementation of these laws to ensure compliance, which can be both time-consuming and resource-intensive.

How do trade agreements like NAFTA and USMCA impact the maquiladora industry in Mexico?

The maquiladora industry in Mexico experienced significant growth after the approval of NAFTA in 1994. NAFTA allowed products manufactured in maquiladoras to be sold in Mexico without prior limits, facilitating market access. Moreover, certain quotas that impeded full penetration of U.S. And Mexican markets were eliminated, further enhancing the industry's expansion.

Transitioning from NAFTA to USMCA
With the shift from NAFTA to the USMCA, businesses are faced with adapting to new trade stipulations. This transition has brought about changes in tariff structures and trade rules, requiring companies to reassess their strategic operations to maintain competitive advantage.

Conclusion

In summary, while Mexican laws and evolving trade agreements present challenges, they also offer opportunities for growth and expansion. Businesses that stay informed and adaptable can thrive in this dynamic landscape, continuing to leverage the benefits of maquiladoras.

The maquiladora industry in Mexico experienced significant growth after the approval of NAFTA in 1994. NAFTA allowed products manufactured in maquiladoras to be sold in Mexico without prior limits, facilitating market access. Moreover, certain quotas that impeded full penetration of U.S. And Mexican markets were eliminated, further enhancing the industry's expansion.

Maquiladoras in Mexico are factories that operate under preferential tariff programs set up and administered by the American and Mexican governments. Material, components, and production equipment used in maquiladoras are allowed to enter Mexico duty-free. Maquiladoras are also often referred to as “Shelter manufacturing services“.

Corporate shelter services play a crucial role in facilitating the establishment of maquiladoras in Mexico for manufacturing firms. By partnering with a corporate shelter service firm like Made in Mexico, a subsidiary of The Tecma Group of Companies, American or foreign-owned companies can effectively establish a presence in Mexico without the need to own a Mexican business.

The process begins with the corporate shelter firm utilizing production volumes and specifications provided by the client to identify suitable buildings that are appropriately sized and designed for their assembly or manufacturing needs. Once a building is chosen, the shelter firm leases it on behalf of the client and handles all the necessary real estate transactions, permits, and legal work required to acquire and operate in the facility.

In addition to acquiring the physical space, the corporate shelter service takes charge of obtaining the maquiladora register, import permits, and local and federal licenses and permits. They also assist in setting up bank accounts and establishing accounting and tax payment programs for the client. This comprehensive support extends to the hiring process as well, where the shelter firm conducts interviews and assists in recruiting prospective employees. Meanwhile, the client firm focuses on relocating or procuring equipment and machinery necessary for their production needs, while designating a production supervisor to oversee manufacturing operations.

However, the assistance provided by the shelter service doesn't stop there. Once the maquiladora is up and running, the shelter firm ensures compliance with all Mexican laws related to taxes, customs, labor, zoning, facility management, and environmental protection. They also handle ongoing research and management to guarantee fiscal compliance with transfer pricing, permanent establishment, safe harbor, asset taxes, and payroll. Furthermore, the shelter service manages tasks such as hiring, termination, incentive programs, disciplinary actions, and compliance with labor laws and labor boards within the shelter package.

The corporate shelter service also offers additional support in terms of border crossing documentation, coordination with U.S. and Mexico brokers, and transportation arrangements. By leveraging these services, the client gains access to a fully functioning maquiladora in Mexico while avoiding the complexities associated with cultural differences, employee management and compensation policies, accounting, tax payments, and adherence to local and federal regulations. This enables the client firm to concentrate on maintaining production quality while leaving the administrative functions in the capable hands of the shelter service, thereby ensuring efficient and hassle-free operations.

The IMMEX Program has significantly transformed the maquiladora industry.

Key Outcomes:

1. Job Creation: The program has spurred the creation of over a million jobs, providing vital employment opportunities in regions near the United States-Mexico border.
2. Industrial Expansion: It has encouraged the establishment of more than 3,000 manufacturing and export assembly plants. This development has been pivotal in boosting industrial activity.
3. Reduction in Unemployment: Unemployment rates in border areas have dropped considerably, thanks to the influx of job opportunities from the maquiladora sector.
4. Boost in Exports: Maquiladoras now account for about half of Mexico's exports, highlighting their crucial role in the nation's trade activities.
5. Global Economic Integration: This sector has cemented its position as a key component in the global economy, ensuring that Mexico remains pivotal in international manufacturing landscapes.

In essence, the IMMEX Program has driven economic growth, reduced unemployment, and positioned Mexico as a major player in global manufacturing.

The devaluation of Mexico's currency, coupled with its geographical closeness to the United States, created a strategic advantage for investors. Firstly, the weakening of the peso meant that U.S. investors could achieve more purchasing power. This made it significantly cheaper to establish and operate manufacturing facilities in Mexico compared to other international options.

Moreover, the proximity of Mexico to the U.S. offered logistical benefits. Shorter transportation routes reduced shipping times and costs, enabling quicker turnaround for goods traveling between the two countries. This proximity also facilitated smoother communication and management between U.S.-based headquarters and Mexican operations.

In essence, these factors together made Mexico an attractive hub for offshore manufacturing, combining cost-effectiveness with practical efficiency.

In the 1980s, a confluence of economic pressures compelled U.S. Businesses to explore offshore manufacturing options, particularly in Mexico. One of the primary factors was the increasing competition from Asian manufacturers. These international competitors were offering products at much lower costs due to their access to inexpensive labor.

With American companies facing significant threats to their market share and profitability, seeking ways to reduce production expenses became imperative. Establishing operations in Mexico presented an attractive solution due to its geographic proximity and the opportunity to take advantage of lower labor costs.

This shift was further catalyzed by the end of the Bracero Program in 1964, which had previously allowed for the temporary importation of Mexican labor for agricultural work in the U.S. To address the ensuing economic challenges, the Mexican government initiated the Border Industrialization Program (BIP), also known as the Maquiladora Program. This initiative aimed to stimulate employment by inviting foreign investment in manufacturing facilities along the U.S.-Mexico border.

With these programs in place, U.S. Companies found a viable pathway to maintain competitive pricing while managing operational costs, making Mexico a strategic choice for offshore manufacturing.

To understand the historical connection between the Bracero Program and the Maquila Industry, we need to look back at mid-20th century economic strategies. The Bracero Program, initiated in 1942 during World War II, was pivotal in addressing labor shortages in the United States. It allowed millions of Mexican males to work temporarily in the U.S., mainly in agriculture, through short-term contracts. Over its 22-year span, the program facilitated around 4.6 million labor agreements, marking it as the largest contract labor initiative in U.S. history.

When the program came to a close in 1964, the Mexican government faced a challenge. The end of the Bracero Program led to increased unemployment pressures, especially along the U.S.-Mexico border. In response, Mexico introduced the Border Industrialization Program (BIP), commonly known as the Maquiladora Program. This program aimed to attract foreign investments by offering low-cost labor, thus bolstering the region's employment opportunities.

By the early 1980s, U.S. manufacturers grappling with competitive pressures from Asia sought cost-effective production solutions. The Maquiladora Program provided an appealing alternative, allowing American companies to outsource manufacturing processes to Mexican border towns where labor was cheaper. Thus, the transition from the Bracero Program to the Maquila Industry created a seamless historical and economic link between the need for labor mobility and international manufacturing dynamics.

For more in-depth information about maquiladoras and Mexico Shelter Services, readers are encouraged to visit our blog.