Manufacturing in Mexico
Manufacturing in Mexico has become the option of choice for companies that are seeking to cut costs in order to sell competitively in the world’s largest consumer market, North America.
Manufacturing in Mexico is in vogue
After having been the world’s “shop floor” for the better part of the last decade, China’s attractiveness vis-à-vis manufacturing foreign direct investment (FDI) has waned somewhat. This is due mainly to escalating Chinese wages, fewer economic incentives granted to companies that produce for export, volatile transportation costs and the edge that geographic proximity that is enjoyed by those who situate production facilities on the doorstep of the United States and Canada. In direct terms, manufacturing in Mexico is once again in vogue.
Three ways of doing business in Mexico
There are essentially three most often utilized ways to begin as a company with an interest in manufacturing in Mexico.Two of the ways that companies can begin represent the lowest and highest risk roads to start-up Mexican production. On the low end of the risk scale is sub-contract manufacturing.
1. Sub-contract manufacturing.
Sub-contract manufacturing entails the delegation of the build or assembly of a product to a third-party. Typically the party seeking to have products manufactured in Mexico by a sub-contract producer will provide the drawings, raw materials and will provide the directions as to how the item, or items, will be build to spec. There is minimum capiital and legal risk involved with this option. Certain critical things, however, such as product quality control and delivery scheduling are in the hands of others.
2. Wholly-owned, foreign subsidiary in Mexico under the IMMEX program.
On the high end of the risk scale to begin manufacturing in Mexico is the formation of a wholly-owned, foreign subsidiary in Mexico. Companies that choose this path typically register their business under the IMMEX program. Applications to operate in Mexico under this regime must meet certain criteria, and be approved by Mexico’s Ministry of Economics. The first step in the process is to file a request for authorization with the Mexican Secretary of Foreign Relations (SRE), and provide five possible names for the Mexican company to be formed. These can be listed in any order of preference. If and when the request is approved by the SRE, certain information must be disclosed. Among these items are:
- The amount of fixed and variable share capital
- Capital requirements upon formation
- The names of company shareholders
- The purpose of the company, and a myriad of other details.
Once all the legal and tax infrastructure is set up to prepare to begin manufacturing in Mexico, companies must go about seeking and acquiring all of the expertise needed to conduct not only their core manufacturing functions, but also to run the G & A side of the business. This means recruting and contracting people that are well-versed in Mexican human resources management, preparing a payroll and administering benefits in Mexico, tending to the intricacies of Mexican Customs and environmental law compliance, as well as other very important functions that are critical to operating in Mexico under the IMMEX program. All risks related to manufacturing in Mexico fall squarely on the shoulders of the company that petitioned for and set up a Mexican wholly-owned subsidiary.
3. Client of the shelter company option.
The third most common option pursued to begin manufacturing in Mexico is the shelter option. Under this business model, companies typically set up and begin production in the country under a license held by a “shelter company.” Clients of shelter companies have no legal presence in Mexico and, therefore, are not directly legally liable for issues related to things like Mexican labor, customs and environmental law. As the party assuming the first line of risk in these areas, shelter companies in Mexico provide services aimed at ensuring their clients’ full compliance. In a nutshell, companies that begin manufacturing in Mexico under something like the Tecma Group of Companies Mexico Shelter Manufacturing Partnership (MSMP) can do so at reduced cost and risk.
When considering manufacturing in Mexico options, companies’ decison-makers should choose the one that will optimize their competitiveness and profitability, as well as the one which fits best within the framework of their corporate culture.