Maquiladora
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a month ago

What Are Maquiladoras in Mexico?

Maquiladora

A maquiladora is a factory that operates in Mexico under preferential tariff rate programs that have been established and administered by the United States and Mexico. One of the main advantages of the maquiladoras in Mexico is that all the materials, components, and production equipment associated with this type of factory can enter Mexico without paying import taxes and duties. Additionally, the production from these factories can be exported to the US on a duty-free basis.

The term “maquiladora” has acquired widespread use in Latin America and some parts of Asia. It is used to describe similar arrangements, although the countries involved may be other than just the United States and Mexico. In Mexico, the maquiladora is important to businesspeople. The US – Mexican border region is particularly well-known for these types of factories, and many manufacturing executives choose to establish them due to their considerable advantages over conventional production facilities.

What is the Maquiladora Industry?

The Maquiladora Program came into effect in 1964. According to its governing legislation, the maquiladoras in Mexico could be the wholly owned property of non-Mexican citizens. This was part of what was then known as the National Border Industrialization Program. The program had already started in 1961, with the implicit purpose of boosting employment opportunities for Mexican citizens by attracting foreign investors to the country’s border region. However, in 1989, the Mexican government made specific reforms to the program due to the relaxation of Mexico’s strict foreign investment regulations. Under those changes, maquiladoras in Mexico were allowed to sell up to half of their total production into the country’s domestic market.  As a consequence of the presence of maquiladoras, the border region experienced unprecedented growth rates. As a result, over time, the maquiladora industry in Mexico has made significant inroads into the nation’s interior.

While the maquiladora industry was recognized as a vital component of the Mexican economy, there was always the feeling that investors did not fully realize some of the opportunities it offered until implementing the North American Free Trade Agreement (NAFTA). As a result, the NAFTA was enacted in 1994. Although the trade treaty eliminated some customs benefits that existed in the maquiladora era, it was still essential to the industry. However, under the NAFTA, stringent rules of origin were referenced every time decisions on preferential tariff rates were made. As a result, the agreement was beneficial to the extent that it allowed maquiladoras to sell manufactured products into the burgeoning US market without paying the import tariffs that were charged to products from other nations’ companies. In addition, NAFTA eliminated several quotas previously used to prevent companies from fully penetrating the US and Mexican markets.

Why Are Maquiladoras in Mexico Important?

The Maquiladora Program remains highly relevant to the Mexican economy. Some companies have been challenged by some of the laws governing the process. However, small, and medium-sized US companies have been able to take advantage of the Maquiladora Program to penetrate the Mexican market by accessing the services of a Shelter Service Provider. One of the most attractive benefits of using a shelter company reported includes cutting overall labor costs by up to fifty percent. In addition, using the program can allow a company to access a highly qualified workforce in Mexico. For example, it is possible to benefit from a six-day workweek for employees. This gives manufacturers greater flexibility. There are also clear logistical advantages, such as proximity to commercial border crossings for entry of manufactured products into the US.

US companies need to understand how the program works and how they can set up maquiladoras in Mexico. Some Fortune 500 companies have been successful in this area. Consulting services are essential for any American business considering this option. It may also be necessary to hire a local manufacturer who can reliably deliver the required supplies.  Then there is the option of using a shelter service provider. Some argue that this is the quickest and most convenient approach to setting up a maquiladora. However, some manufacturing executives may not yet fully understand the actual operation of this type of system.  For some companies, the answer to this situation is to contract with a shelter service provider to navigate all the complexities of doing business in Mexico.

How do Shelter Companies Partner with Manufacturers?

Shelter companies provide industrial space to manufacturing companies if they own real estate.  If not, they will find a suitable third-party building to rent from a landlord. The shelter company will also handle all details, such as securing all necessary permits and navigating the legal environment required to operate the facility. The shelter company also obtains the maquiladora registration, import permits, and local and federal licenses and permits. The manufacturer is responsible for opening its bank accounts and establishing an appropriate accounting framework that incorporates a tax payment program. Later, prospective employees will be interviewed and recruited by the Shelter company.  The manufacturer decides which individuals are to be hired.  The manufacturer also moves or purchases the equipment and machinery needed to assemble or manufacture its product. The cycle is closed when the manufacturing company appoints a production supervisor to supervise the production operation.

The role of maquiladoras in Mexico is to ensure that all the country’s relevant laws are followed while protecting the parent company from some of the operational challenges in a typical partnership. Some of the key compliance areas for which the shelter company provides guidance include zoning regulations, labor laws, customs regulations, taxes, facilities management, and environmental issues. Through careful research and development, a shelter company helps manufacturers establish a framework for compliance with local tax laws and practices. In the case of cross-border transactions, the shelter company can complete border documentation and organize transportation.

What Are Some Benefits of The Maquiladora Program?

The Maquiladora Program allows foreign companies, including those owned by Americans, to benefit from tariff incentives and other benefits granted to a national company. This is a convenient way for foreign direct investors to penetrate the US and domestic Mexican markets. For companies that do not wish to build the infrastructure of people and skills necessary to navigate Mexico’s business environment from the ground up, working to partner with a shelter company is the best option.

If you are interested in setting up a manufacturing facility in Mexico or are looking for a Shelter Company Partner, we encourage you to set up a consultation with one of our Manufacturing Experts. 

Review other timely articles in our Blog at https://www.tecma.com.

Toby Spoon

Executive Vice President of Human Resources

Toby Spoon

Executive Vice President of Human Resources

Mexico shelter company executive vice president, Toby Spoon, benefitted from early international experience.