5 Ways to Manufacture Products in Mexico
The Standalone Model
Although the name implies independence from third parties, a standalone manufacturing operation in Mexico is likely to initially outsource functions that are more efficiently carried out by companies specialized in personnel recruitment, payroll, import and export, accounting, and others. Many companies, however, decide from day one to build a full administration team and handle all of the labor, management, and leadership competencies from scratch.
A standalone factory typically also requires the formation of a new legal entity in Mexico. This new entity and its possible association with a related foreign company raises questions about income taxes, consumption tax, employment compliance, and trade or customs compliance, which can be handled by competent and reputable specialists in these fields in Mexico.
The significant up-front investment required to build an entirely new manufacturing operation creates risk for companies lacking a high level of certainty that their Mexico operation will meet its intended objectives. However, standalone operations have total control. Therefore, the standalone model is typically chosen by companies with a high degree of confidence in their ability to do it all, at least eventually.
The Shelter Model
The “shelter” manufacturing model began in Mexico in the 1980s as a way to help foreign companies manufacture in Mexico with reduced risk – and with lots of help with the administrative and compliance functions that every company in Mexico must carry out. Think of it as a hybrid between the standalone and contract manufacturing models: the foreign company keeps 100% control of all production-related functions and assets, while administrative and non-production burdens are removed.
By operating in Mexico through a “shelter” company, the foreign company owns and controls its production assets, engineering, production processes, quality control, and supply chain, while the shelter company is the Mexican legal entity of record – the entity that the Mexican government looks to for compliance and the legal entity with whom the local service providers trade.
The term “shelter” implies shielding or protecting the foreign company from exposure to labor, trade, and tax laws. In fact, the shelter model is recognized as an “entity-type” by the Mexican government because it is a time-proven mechanism that facilitates the entry of foreign manufacturers into Mexico. The Mexican government awards income tax, consumption tax, and import/export benefits to shelter companies and consequently to shelter company clients.
The less than 20 shelter companies in Mexico are located principally along border states, but can also be found in the Bajio region. While shelter companies have a commonality in their ultimate value proposition, each operates with distinct features. Most provide a comprehensive offering of human resource related services and competencies in the importation and exportation of goods used in and produced by manufacturing operations.
The Contract Manufacturing Model
Contract manufacturing in Mexico is no different from what is found in other countries. In contrast to a standalone operation, the contract manufacturer in Mexico owns its production assets (for the most part), controls all aspects of production, and charges the foreign company a fee for producing goods. Contract manufacturers in Mexico are typically EMS providers, although contract work is increasing in the textile and apparel industry.
The Merger or Acquisition Model
The merger of a foreign company with an established Mexican manufacturer (or the acquisition of one) is a less commonly chosen approach for establishing a manufacturing operation in Mexico because most of the established manufacturing operations in Mexico that export the majority of their production are already owned by or affiliated with foreign companies.
While a merger or acquisition could drastically shorten a potentially lengthy and costly learning curve of operating efficiently in Mexico, it also presents the possibility of inheriting less than optimal management and leadership practices.
The Joint Venture Model
While a merger or acquisition is a marriage of sorts, the joint venture is a partnership to which each partner contributes distinct strengths, with the intent of achieving a common goal.
A joint venture may prove to be a beneficial partnership when the foreign company has a captive market of customers (i.e., is a sales, trade, or branding organization) and the Mexican manufacturer has all the related assets and expertise in place to meet the foreign partner’s demand for specific product types.
In Mexico’s maquiladora industry, joint ventures between independent parties are uncommon because every maquiladora has a related foreign party.