What Are The Pros and Cons of Setting Up a Maquiladora?
October 15, 2019
The past decade has ushered in an era of unprecedented economic growth and development within Mexico. Viewed as an emerging market, particularly in the commodities and manufacturing sectors, it now has the 15th largest economy in the world with a 2018 GDP of $2.6 trillion. Economists suggest that the recent growth within the manufacturing sector has been spurred on by changes in foreign markets and trade policy. In response, U.S. companies have begun to forgo conducting their business in China in favor of Mexican maquiladoras.
For those of you considering making the switch, below, we’ll discuss the maquiladoras pros and cons so that you can make an informed business decision.
Maquiladoras Pros and Cons
Maquiladora companies are: “Mexican assembly plants that imports materials and equipment on a duty-free and tariff-free basis. Maquiladoras receive raw materials from companies in the U.S. to assemble and export back as finished products. Maquiladoras are generally owned by U.S. companies that are incentivized to build Maquilas in Mexican border towns in return for low-cost labor and savings.”
But how do maquiladoras benefit Mexico? Among other reasons, various tax benefits, proximity to the U.S., lower costs, and a highly skilled labor force, maquiladoras benefit not only Mexico’s workers and the country’s economy, but also the companies looking to manufacture in Mexico. Simply put, maquiladoras benefit Mexico because they incentivize external investment by encouraging foreign businesses—especially American—to set up plants in Mexico. Further motivation was created by the 2006 IMMEX decree, which sought to lift many of the barriers to entry; in particular, it allowed for the duty free temporary import of:
- Raw materials
- Shipping containers
So long as they were exported, no tariffs were charged.
This is but one of the enticements for US companies to start manufacturing in Mexico with their own maquiladora program. Others include:
- Location – Compared to Asian manufacturing options, Mexico’s strategic proximity to the U.S. dramatically reduces the costs of transportation, especially as global oil prices continue to increase. The closeness to the northern border and heavy infrastructure investments make for quicker turnaround times and heightened visibility and control over the supply chain. Rest assured, the overhead and transportation cost reduction you can expect is not an insignificant figure.
- Highly skilled labor force – Mexico maquiladora companies boast competitive labor rates, now cheaper than those in China. According to trading economics:
Wages in Manufacturing in Mexico is expected to be 2.40 USD/Hour by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. Looking forward, we estimate Wages in Manufacturing in Mexico to stand at 2.50 in 12 months’ time. In the long-term, the Mexico Nominal Hourly Wages in Manufacturing is projected to trend around 3.00 USD/Hour in 2020, according to our econometric models.
Despite the fact that the minimum wage is less than in China, Maquiladoras’ labor forces consist of highly trained and skilled workers. Over recent decades, Mexico has gone to great lengths to train, educate, and encourage its citizenry to enter this industry. This type of education and training is another reason that maquiladoras benefit Mexico.
- Timely arrival into emerging markets – While there has been increased foreign investment and interest in Mexico’s maquiladora plants, it still is a relatively fledgling market, with massive growth on the horizon. By beating the rush, you can derive competitive advantage and gain control of your sector before competitors have the opportunity. Common advantages you can expect to reap include:
- An unsophisticated market
- Cheap labor
- Governmental backing
- Little competition
- Decreased operational costs
- Ability to be within foreign trade zones – According to CHT: “Maquiladora operations are primarily found in industrial and business parks adjacent to the U.S.-Mexico border reaping additional benefits from designated Foreign Trade Zones. The manufacturing ecosystem of Nogales, Mexico, and Santa Cruz County, Arizona is an example of the symbiosis of increased flexibility and trade benefits.” By setting up your maquiladora in a foreign trade zone, you reap layered tax and tariff benefits.
- Trade agreements – Mexico currently has 12 multilateral trade agreements, including the USMCA, granting it access to 44 countries. This makes it one of the most welcoming countries in the world for foreign investment and international trade.
Naturally, you may be curious about the concerns or reticence some US companies doing business in Mexico may have. Common complaints include:
- Environmental negligence
- Health risks
- Underpaid labor
- Unsafe working conditions
- Poor labor protection laws
Fortunately, many of these concerns have been addressed or are in the process of being tackled by the Mexican government. Recent laws and practices have sought to encourage best practices for both labor and the environment. The government, in particular, has allowed labor unions to form and has started levying heavy penalties on companies that fail to comply with new safer environmental standards and labor laws.
Maquiladoras in Mexico
The growing number of American businesses transferring their plants from China (and the U.S.) to Mexico are clear indicators that most companies believe the pros of Mexico maquiladoras far outweigh the cons. And while there is always room for improvement, the future looks very bright for maquiladoras in Mexico and the Mexican manufacturing sector.
Knowing this, if you’re considering making the move, now’s the time. Should you need help in this endeavor, NAPS stands ready to assist with any needs or questions you might have!