What Are Maquiladoras?

December 12, 2016

 

A Maquiladora is a factory or manufacturing operation in Mexico run by a foreign company and exporting its products to the country of that company. These factories import certain raw materials on a duty-free and tariff-free basis for manufacturing and then export the manufactured goods back to the country of the company that produces the manufactured goods (often the United States or Canada). The foreign company is responsible for transferring the manufacturing knowledge to Mexico and typically directs the long-term business strategy. However, the Mexican based management typically runs the day-to-day operations. Maquiladoras allow companies to utilize a less expensive labor force in Mexico, while still retaining the benefits of maintaining a foreign headquarters and leveraging the many benefits of free trade agreements.

In order to understand the benefits of maquiladoras, it is necessary to understand their history.

 

The History of Maquiladoras

Maquiladoras were initially established in 1964 following the National Border Industrialization Program, which was established three years prior in 1961. The Maquiladora Program, now referred to as IMMEX program, allowed maquiladoras to be one hundred percent foreign-owned operations. The Maquiladora Program was created to attract foreign investment and was revised in a 1989 decree that allowed maquiladoras to sell up to fifty percent of their products to Mexico’s domestic markets. Despite these advances, The Maquiladora Program remained a relatively untapped resource until the North American Free Trade Agreement (NAFTA) was passed in 1994.

With the passage of the North American Free Trade Agreement (NAFTA), maquiladoras slowly became more common. The North American Free Trade Agreement made two-phase change to the maquiladora program.

The first phase lasted between January 1, 2994 and December 31, 2000. During the first phase, maquiladoras operated with waived Mexican import duties and preferential duty rates on certain products.

During the second phase, duties increased on materials from non-NAFTA countries. For an American company, establishing a maquiladora can be a daunting and complex process, but with the right company in place, it can be extremely beneficial. Companies like North American Product Sharing, Inc. specialize in helping companies attain long-term success manufacturing products in Mexico.

 

Maquiladoras / IMMEX Program Categories

There are five categories of the IMMEX / Maquiladoras Program according to the Secretariat of Economy (SE) based on the type of manufactured product or exported service.

  1. IMMEX Holding Company Program – an entity or corporation designated as the “holding” company which operates as the controlling arm of the IMMEX compliance
  2. IMMEX Industrial Program – A typical registration for the conversion of raw materials into finished goods and the subsequent exportation
  3. IMMEX Services Program – This includes exported goods that are serviced or export services that are provided. In other words, a service provider that administers goods from one manufacturer to another within Mexico.
  4. IMMEX Shelter Program – Those operating under a shelter program can include one or more foreign companies or entities that provide technology and production materials without direct involvement (registering with IMMEX).
  5. IMMEX Outsourcing Program – When a company lacks the facilities to carry out production and performs the manufacturing process through a third party

 

The Benefits of Maquiladoras

When analyzing maquiladoras, there are a number of benefits that promote creating maquiladoras:

  • Mexico possesses lower wage rates than those in United States, making it a more financially sound decision and increasing the profit margin of a business by lowering overhead costs. This can save the average company up to $20,000 per employee, per year.
  • Mexico’s geographic proximity to the United States reduces shipping and freight costs compared to those of overseas operations, which helps to reduce expenses and increase profits.
  • The parent company’s country will likely experience an increased need for skilled workers to perform administrative, warehouse and sales roles. These increased employment opportunities help to reduce unemployment.
  • The parent company can become increasingly competitive in world markets by lowering manufacturing costs through the lower labor rates in Mexico.
  • Maquiladoras create employment opportunities in border regions and help reduce Mexico’s unemployment rates.
  • Exporting foreign products increases foreign exchange in Mexico, which is very beneficial and needed.
  • The establishment of maquiladoras reduces the commercial deficit with the United States.
  • Companies can avoid high duties and reduce costs through the establishment of a maquiladora.
  • Maquiladoras have fostered an improved relationship between the United States and Mexico.

 

Maquiladoras Today

The rapid growth of the maquiladora industry has created over 900,000 jobs and has lowered the unemployment rate significantly in areas along the northern border cities. Maquiladora factories also comprise fifty percent of all exports from Mexico. This seismic shift ensures that manufacturing in Mexico will be an integral aspect of the global economy for the foreseeable future. Maquiladoras are ideal for companies that wish to lower operational expenses and produce goods without incurring high duties, tariffs, or labor costs. The maquiladora manufacturing model increases profitability for businesses and helps them contribute to a more stable, growing world market.

How to Start a New Maquiladora / IMMEX Program

In order for a company to assess which IMMEX program best suits their needs, they should consider the four high-level trading activities, as mentioned by Industry Week:

  1. US and / or Foreign Exports
  2. Mexico Imports
  3. Mexico Exports
  4. US and/or Foreign Imports

In order to be eligible for the program, The SE has set guidelines for applicants, which must establish the following:

  1. An active Federal Taxpayers Registration for the address and location of production(s)
  2. Certificate of Advanced Electronic Signature from the SAT
  3. The registered address and premises where the operations are carried out under the Program must be registered and active in the Federal Taxpayers Register

Once the above requirements are fulfilled, applicants must submit two printed copies of the IMMEX application along with a digital copy that includes the following:

  1. Certified copy of entity’s Article of Incorporation and amendments
  2. Copy of the certificate that details occupancy and location of manufacturing building
    • Must include photography of the physical location
    • If the property is loaned or leased, then the applicant must provide proof of contract that allows the applicant to use the facilities for eleven months
  3. Purchase contracts, IMMEX contracts or other means of confirming that an exporting entity exists
  4. Power of Attorney copy of the Central Register Accredited Persons
  5. A formal letter stating, in detail, the production process and or services that will be produced/provided as referred to in program application
  6. In the case of goods referred to in Article 4, Fraction I of the Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry** (IMMEX Decree), a letter detailing the production process or service which includes the installed capacity of the plant to process the imported goods or perform the service covered by the program and the percentage of that capacity actually used.
  7. Letter of conformity from the company or companies performing the sub-manufacturing process, stating under oath the joint liability for the temporary imported goods

In addition, those applying for IMMEX Holding Company Programs must submit the following:

  • Minutes of the shareholders meetings, stating the shareholding of the holding company and subsidiaries
  • The certificate entries in the shareholders registration
  • The documentation referred to in items 1, 2 and 5 of the above section, as well as a copy of the tax identification card. This documentation must be submitted for the holding company and each of the subsidiary companies, and
  • The maquila contracts that each subsidiary company has with the holding company or a maquila contract which establishes the obligations contracted, for the holding company and the subsidiary companies in relation to the objectives of the requested program, duly notarized (original and copy), and
  • Authorization as a certified company (copy), given by the Ministry of Finance and Public Credit.

For the IMMEX Outsourcing Program, applicants are required to submit:

  • Letter of conformity from the company or companies which will perform the outsourcing, stating under oath the joint liability for the temporarily imported goods (original).
  • Company or companies requesting the Outsourcing program must be approved by the Ministry of Finance and Public Credit as certified company.

As we can see from the above, establishing a maquiladora can be strenuous and time-consuming process for those unfamiliar with international and cross-border manufacturing. But as we’ve seen, and many can attest to, maquiladoras can create the most efficient, cost effective operation possible. By manufacturing goods in Mexico, companies can not only reduce manufacturing costs, but continue to offer products at cost efficient pricing.

When considering becoming a maquiladora, it is critical to seek out a trusted and established company that possesses an in-depth understanding of both domestic and international compliance. Partnering with NAPS provides your manufacturing with years of expert insight and knowledge of Mexico’s labor laws, best practices for offshoring (or nearshoring) production and manufacturing to Mexico. North American Production Sharing, Inc. (NAPS) helps companies achieve long-term success with offshoring/nearshoring and has emerged as a thought leader when it comes to manufacturing in Mexico. To learn more, contact NAPS today.