Entry Strategies for Setting Up Manufacturing in Mexico
November 5, 2019
In the last decade, market forces have altered the global manufacturing landscape, shifting the market share out of China’s grasp as other business havens became viable alternatives. Mexico, for example, has become an increasingly enticing option for American manufacturers seeking cheap but highly skilled labor, reduced supply chains, and clearer visibility over the entire process. As a result, many are now operating under the assumption that there is a cost-saving opportunity to be had by choosing to set up shop nearshore versus overseas.
Despite the proximity to the states, doing business in Mexico can be quite the endeavor. Therefore, a detailed entry strategy is a good idea for any business owner. Below, we’ll discuss some things you’ll need to know in order to properly navigate the legal, economic, and cultural barriers.
Entrance Strategies When Starting a Business in Mexico
Successfully entering the Mexican market is fairly similar to setting up supply chains and sales channels within the States. That said, Mexico has its own business culture, language, governmental operation, and system of laws that are all distinctly different from either America or Canada. Naturally, this adds layers of intricacy and convolution, thereby creating greater room for costly mistakes and errors.
The first decision you’ll have to make when starting a business in Mexico involves determining your manufacturing method:
There are several different ways that you can start a business in Mexico. Deciding the proper course will depend on your budget, market, logistics, and business size. That said, there are typically four primary manufacturing in Mexico options at your disposal. They are:
- Standalone Operation – A full subsidiary operation gives you complete control of every aspect of the business since you function as a Mexican entity. Typically, these types of operations will have at least 1,000 employees and will handle every aspect of management— including purchasing, accounting, HR, recruiting, managing imports and exports, and regulatory compliance.
- Pros – No need to share intellectual property; complete control of operation.
- Cons – High learning curve; high entry costs: 16% VAT income tax, profit sharing; high risk and liabilities.
Many businesses naively assume that they’ll be able to handle it on their own, only to crash and burn when they run into these foreign hurdles.
- Joint Venture – If the thought of entering a foreign market and starting a business in Mexico is daunting, many businesses decide to set up a joint venture partnership with another manufacturer. You share the risk, resources, expertise and responsibilities. That said, because your interests may not always be aligned, you’ll need to clearly outline contracts and operational functions with the shareholders in order to avoid issues down the road.
- Pros – Quick start up due to existing operations; low entry cost; a partner who’s already engaged in import and export transactions and is knowledgeable about the market.
- Cons – Income tax and profit-sharing obligations; partial intellectual property sharing; some risk for liabilities.
If you do go this route, you’ll have to be sure to do your due diligence and research the partner to see how they interact with clients, suppliers, and the government.
- Contract Manufacturing – Some companies—particularly small sized ones—want to avoid opening a business in Mexico but still want to be able to manufacture there. Such businesses will outsource production lines to a third-party contract manufacturing company.
- Pros – Ability to save money and grow internationally; low entrance cost and easy start up; local networks in place; limited liability.
- Cons – No control over production; intellectual property risk; no control on quality, delivery, or costs of production.
While this is a decent option for a small business, for medium- to large-sized, there is too little control over operations.
- Shelter Service Companies – Somewhat similar to a partnership, this strategy allows you to take complete control of the production line while the shelter service handles all aspects of administration including payroll, HR, import and export management, purchasing, taxes, and fiscal and environmental compliance.
- Pros – Ability to control and focus on the manufactory line; shelter service handles IMMEX certifications; local networking already in place; immediate access to other businesses in Mexico; quick start up; no liability risk.
- Cons – Dealing with cultural differences.
Frankly, there is very little drawback to such a method, which is why it tends to be the most commonly chosen option.
In 2006, the Mexican government created the Industrial Manufactuerera maquiladora y de Servicios de Exportacion (IMMEX). This is translated as the Manufacturing Maquiladora and Export Services Industry. In order to incentivize growth and foreign investment, it allowed foreign manufacturers to import components and raw materials into Mexico, duty- and tax-free, so long as all of the goods would be eventually exported. Per Braumiller Law Group:
Generally, an IMMEX is a business entity authorized by the federal government to temporarily import into Mexico raw materials, components, parts, other goods, etc., to be processed and subsequently exported or returned as finished or transformed products abroad. Provided legal requirements and Customs certifications are met, the temporary importation of the materials and goods may be Customs duty and Value Added Tax free. Additionally, IMMEX may save money via the low salaries and wages in Mexico. An IMMEX can represent big savings for large companies who are attracted by these and other incentives to invest in Mexico.
Simply put, obtaining Maquiladora status provides an American company a host of benefits. And today, the most common industries taking advantage of the IMMEX program include:
- Alternative energy
- Medical devices
- Metal mechanics
- General consumer parts.
All that said, it’s important to note that not all of your import goods will automatically be duty-free. In addition, you can’t simply come to Mexico and expect to instantly be granted IMMEX licensing. It can be a long, complicated process, which is why it’s best to work with a local partner in order to navigate the intricacies. For example, in order to obtain IMMEX status, a manufacturing business must do the following:
- Fill out all the proper paperwork and documentation.
- Become a duly incorporated Mexican entity.
- Present a fully fleshed business and financial plan about the service and production processes.
- Label the location where the IMMEX will be and where the various aspects of production will take place.
- Commit to exporting more than $500,000 USD or 10% of total sales abroad.
- State the industry sector.
- Identify the Harmonized Tariff Code (HTS) of all the inputs needed to perform your tasks.
Selecting the Right Location
Although you can technically set up shop anywhere in Mexico, most maquiladora operations are either located on the border or in concentrated industry sectors situated throughout the country. Per Export.gov:
Given the size of the market, the strategy should consider specific regional territories. Most firms assign Mexican agents or distributors in different locations. Many US companies manufacturing in Mexico find it works well to use three or four specific territories, often centered in Mexico City for central and southern Mexico, in Guadalajara for western Mexico, in Monterrey for northeastern Mexico, and in Baja California for the northwestern border and maquiladora (twin plant manufacturing) zones.
Knowing this, there are a few regions you’ll want to consider. These include:
- On The Border – Setting up shop close to home reduces inventories and freight costs, increases manufacturing turnaround times, and allows workers to live on the U.S. side of the border. Locations include:
- Juárez – Instant access to El Paso, Texas and the Pan-American Highway
- Reynosa – Instant access to McAllen, Texas and NAFTA Highway
- Near Border – By going a little more south you can draw from a skilled labor force experienced with complex manufacturing processes. You also join an already established manufacturing base, particularly within the aerospace and automotive industries. Locations include:
- Chihuahua – Access to the Pan-American Highway
- Monterrey – Access to NAFTA Highway
- Central Mexico – If you locate in the central areas of Mexico such as Guadalajara, Silano and Queretaro, you have easy access to seaports, the central market of Mexico, and an already established OEM manufacturing industry.
Finding a Partner
For Americans looking for new markets and a cheap manufacturing platform, Mexico is an increasingly enticing option. That said, by translocating south, you will encounter your fair share of barriers and hurdles arising from differences in cultural, language, and the local governmental. Laurence Hecht of Harvard Business Review writes:
Just as hiring local managers can form an important base of cultural expertise, finding a successful local partner can provide access to established distribution networks and build on the political and personal relationships that can make or break a company in Mexico. Indeed, an alliance with a proven Mexican partner is one of the best ways for a U.S. company to manage the inevitable risks.
Simply put, opening up a business in Mexico and selecting the proper entrance strategy is a very difficult task, especially if you are doing it on your own. There is so much on the line. This is why the safest and most effective way to make the transition is with the help of a partner and consultant.
That’s where NAPS comes in.
Since 1991, we’ve focused on helping American businesses wade through the mire of the Mexican manufacturing market. In our two decades plus experience, we have helped more than 150 companies not only reach but surpass their manufacturing goals. And we’re confident we can help you too. So, reach out today or call us at (888) 511-2563 to discover more about how we can help you achieve your aims!