Modes of Entry for Manufacturing in Mexico
January 5, 2021
There are numerous benefits of manufacturing in Mexico, from lowering your production costs to accessing Mexico and its trade partners’ markets.
But as with any new business venture, it’s important to create a solid plan before taking action. Even if you’ve offshored manufacturing in the past, Mexican business culture and laws can present different growth opportunities, as well as challenges. While some companies find success in developing subsidiary operations from scratch, others opt to work with trusted partners to facilitate their market entry.
In this short guide, we’ll cover four potential strategies for market entry in Mexico and the criteria you should use to decide which is best for your business.
Before entering the market in Mexico, it’s vital to acquaint yourself with the local landscape. After one or more business trips, you’ll have a stronger sense of the best market entry strategy for Mexico, given your business’ unique needs.
Take the following steps:
- Assess your needs – What is your priority for entering the market—manufacturing at the lowest cost possible, having broad control over quality and costs, or lowering your legal liability? Consider these, as well as your ideal budget and timeline, before you begin further research.
- Visit the country – Both the Northern border region and the central “Bajio” region have extensive infrastructure that can facilitate manufacturing, fulfillment, and distribution. Research both regions’ suitability for your industry sector and pay visits to several cities throughout your chosen region. Look for the one with the right transportation logistics and workforce availability. Need more than one manufacturing site? Some companies choose to operate in more than one region when going through manufacturing site selection.
- Form relationships – The International Trade Association affirms that good relationships and open lines of communication are critical for successful business dealings in Mexico. While you can eventually keep in touch via email and WhatsApp, there’s no substitute for face-to-face interaction as you get acquainted with potential international business partners.
Once you’ve taken these steps, consider which of the following four strategies is best for you.
#1 Form a Subsidiary Operation
In some cases, it makes sense to build a manufacturing facility from the ground up. While you establish your operation, prepare for all aspects of doing business in Mexico.
This market entry strategy includes the following steps:
- Site selection – Choose the right city for doing business and negotiate favorable terms on the lease or purchase a suitable commercial space.
- Hire security – If there is no adequate security in your industrial park, hire security staff or contract security work to a third-party supplier.
- Procure materials – Understand how moving to Mexico impacts your supply chain and develop a strategy for procuring inputs in line with your production calendar. Establish relationships with suppliers.
- Hire staff – Recruit managers, engineers, payroll staff, and Mexican laborers who can quickly learn your production processes. Understand and comply with Mexico’s labor laws and regulations. Prepare for handling payroll procedures and tax withholding.
- Ensure health and safety – Maintain health, safety, and environmental policies in Mexico. Have a qualified agent available for government inspections.
- Prepare to import and export – Arrange for the transport and distribution of your goods to ports. Understand laws around Mexican imports and exports, establish shipping procedures, and keep records.
As you can see, this is a complex and multi-step process. If you choose to form your own operation from scratch, you and your leadership team will need to develop fluency in Mexico’s laws and develop a rapport with vendors and partners.
Even after completing these initial tasks and hiring tens or hundreds of employees, it’s important to self-audit to ensure you stay compliant. In addition, you’ll need contingency plans for dealing with employee turnover or any other issues that arise.
Pros and Cons
There are several potential benefits to establishing your own operation. Most notably, you’ll have total control over your business operations. You will also safeguard your business by understanding intellectual property rights.
However, there are some disadvantages, especially for small and midsize businesses. They include:
- Significant upfront investment
- Long entry ramp
- 16% VAT tax on goods exported to the U.S.
- Legal liability for your operations in Mexico
As a smaller business, you may not have the resources to invest in a risky venture.
But even as a large business owner, you may find it’s easier to bypass the complexities of establishing your own manufacturing operation by using one of the methods below.
#2 Find a Partner
As you look at the steps involved in creating your facility, it’s reasonable to want to outsource several of them to someone with more expertise in Mexico.
Forming a joint venture with an established Mexican company can help lower your costs and your risk. A partner who is well-versed in importing and exporting from the country can help deal with unfamiliar issues and logistics.
First, research your potential partner and examine their record in doing business with suppliers, clients, and the government.
Once you’ve found a suitable partner, keep the following in mind:
- It’s inevitable that you have different business goals than your partner. Ideally, your goals align to some extent—your investment capital and technological knowledge should complement their local connections and expertise. However, there will inevitably be some areas of divergence.
- Therefore, it’s essential to clearly outline responsibilities. For example, who will handle payroll administration and procedures? If there is an error, who is financially and legally liable?
- Lay out a process for settling disputes in advance.
Pros and Cons
The positives to a joint venture include a shortened market entry runway and lower upfront opportunity costs. The negatives include the need to share profits and tax liability. In addition, you may be concerned about the security of your intellectual property.
#3 Contract a Manufacturer
It’s sometimes preferable to avoid the startup costs of establishing a business presence in the Mexico market. In this case, you might choose to outsource your manufacturing to a third-party contractor.
To go this route, take the following steps:
- Work with an agent or partner with significant knowledge of the local market to research potential contractors
- Create clear contracts in line with Mexico’s laws and ordinances
- Create a game plan for any issues with product quality or timelines
Pros and Cons
This method of market entry has numerous positives.
- By contracting with an existing manufacturer, you significantly limit startup costs and can begin manufacturing in an incredibly short timeline.
- Without a legal presence in Mexico, you limit your legal and tax liability.
- Once you’re manufacturing in Mexico, you could easily shift fulfillment and distribution there, too. By utilizing a Mexico fulfillment center, you could lower your distribution channel costs and access international markets in countries that have preferential trade agreements with Mexico.
At the same time, there are some potential downsides to contracting out your manufacturing.
You’ll have significantly less control over production, including:
- Delivery timeline
- Production costs
While you can outline procedures for quality and shipping issues in your contract, you could still be left without the products you need on the timeline you need.
You also risk the security of your intellectual property.
#4 Shelter Services
A new or joint venture can expose you to legal liability in Mexico. In contrast, doing business with a shelter services company eliminates your liability while speeding up your timeline to market entry.
A shelter company work as follows:
- Conduct business under the “shelter” of an existing Mexican corporation rather than taking on legal liability
- Maintain a brand presence in Mexico, including company signage at your manufacturing site
- Take advantage of the shelter company’s existing networks and expertise in the Mexican market
- Work closely with the shelter service to set up manufacturing processes including sourcing, timetables, quality control to your specifications
- Outsource compliance, human resources management, and administration to the shelter service
Pros and Cons
Many companies consider shelter services a “best of both worlds” solution that combines the control you’d get when establishing your own factory with the diminished risk of contracting. This is why it’s among the most popular choices for companies moving their manufacturing processes to Mexico.
One potential issue is the difference in corporate culture between your company and the shelter service.
The Right Solution for Your Business
Which option is the best one for your company?
It depends on the size of your business, available startup capital, and your long-term goals.
- Small businesses may find that contracting their manufacturing to a third-party is cost efficient, especially if quality control is not a significant concern.
- Mid-sized businesses can avoid taking on legal liability by working with a shelter services company to facilitate easy entry into the Mexican manufacturing market.
- Large businesses may want to establish their own facilities as they seek to expand your marketing and sales channel in Mexico and throughout Central America. Even in this case, working with a shelter services company can potentially reduce liability and streamline administrative processes.
Formulate Your Market Entry Strategy Mexico With NAPS
Are you still considering which market entry strategy is right for you?
Whether you’re already networking with local businesses or you’re just starting to plan your first visit to Mexico, at NAPS, we have the resources and expertise to help you find the right solution for your manufacturing needs.
We help businesses of all sizes nearshore their manufacturing and distribution channel with support in site selection, shelter services, and administrative and compliant management services. With several services to choose from, it’s easy to customize your approach to fit your budget and your calendar.
International Trade Administration. Mexico Market Entry Strategy. https://www.trade.gov/knowledge-product/mexico-market-entry-strategy