After hearing about the existing insecurity, corruption, poverty, crime,
bureaucracy, rate of COVID 19 infection and other related horror stories
regarding Mexico, you might ask if there is still an opportunity to successfully
manufacture there. Considering everything that has been published, broadcast
and spoken about doing business in Mexico, have you been able to successfully
separate the truth from common misleading myths?
Is manufacturing in Mexico actually a good option for you, or
would it be a waste of your money?
Let’s consider two additional questions:
Have you ever wondered why other profitable companies are still seeking to do
business in Mexico? Why do all Fortune 500 companies have, at the very least,
a business presence there?
This article speaks to answering your questions based on current fact. Its
purpose is to provide you with a practical initial assessment and cost
approximation, allowing you to verify whether you or your company would benefit
from manufacturing in Mexico.
The short answer to whether you should manufacture in
Mexico depends on obvious variables:
1. Cost of manufacturing including labor, transportation and logistics, taxes, public utilities, real estate, and all other manufacturing costs;
2. Location of your current clients, your market, the possibility of Mexico being an effective base from which to serve your clients and/or grow your markets;
3. The origin of inputs and raw materials;
4.The availability of Mexican qualified professionals.
The full answer may be more complex and require additional research. In exploring further:
Please be aware that except for obvious zoning prohibitions (you cannot manufacture in a residentially- zoned area) there are no restrictions as to where you may manufacture in Mexico.
If your market is not in Mexico, it may be extremely beneficial for you to apply for and obtain what is known as ‘IMMEX’ or Maquiladora Program status. This program allows your Mexican entity to import machinery, equipment, spare parts, components, and raw materials free of any import duty, under the condition that the finished product is exported from Mexico. If you do obtain IMMEX status it is highly advisable to also get a VAT Certification, to obtain a 100% credit on the payment of the corresponding value added taxes, caused by the importation of items.
The determination of what can and what should be manufactured in Mexico needs to be made. In general terms, everything may be manufactured in Mexico.
Labor-intensive operations usually gain the biggest advantage with Mexican-based manufacturing because of the considerable savings that may be attained, vis a vis performing them in a country that pays lower labor rates but that is far from your market or in a jurisdiction where higher labor costs exist.
To illustrate: the current minimum wage in Mexico’s northern border region during 2021 is $213.39 pesos which is approximately $10.67 U.S. dollars/day. The minimum wage in the rest of the country is $141.70 pesos which is approximately $7.09 U.S. dollars/day. As per the Mexican Federal Labor Law, a day shift has a maximum duration of 8 hours, a mixed shift of 7.5 hours and a night shift of 7 hours.
Please allow me to emphasize that the amounts provided above are not by the hour, but by the day. However, I should also disclose that most Mexican workers make more than the daily minimum wage in salary and they also receive both statutory and non-statutory benefits. See how to obtain a closer approximation of a fully loaded hourly labor cost for manufacturing in Mexico, at the end of this article.
Also, there are products that are more difficult to manufacture in Mexico. These include firearms and ammunition, textiles, and items that are subject to quotas, restrictions and other customs limitations. These restrictions may be verified by researching the Tariff Classification of the product in question. You can verify the US Tariff Classification of a product at https://hts.usitc.gov/current, and once you find the tariff classification you can see restrictions from a Mexican perspective at:
http://www.diputados.gob.mx/LeyesBiblio/pdf/LIGIEx_220221.pdf.
There are different approaches to manufacturing in Mexico. I would like to highlight the four most commonly utilized methods:
The first entails entering into a Contract Manufacturing Transaction with an existing company; the second entails entering into a Shelter Agreement with a Shelter Operator; the third entails having your own IMMEX stand-alone operation, and the fourth is simply a stand-alone operation.
Contract Manufacturing Transaction:
Under a contract manufacturing transaction, a foreign client may simply order the
manufacture of products and provide specifications for what it wants fabricated. The
foreign client may enhance the agreement by also providing machinery, equipment
and raw materials to the contract manufacturer in Mexico, which would then import
these items and manufacture the product.
The contract manufacturer should assume responsibility for manufacturing the
product as per the provided specifications as well as being responsible for the
required infrastructure, importing, exporting, logistics, transporting, labor, Mexican
accounting, Mexican taxes and all other aspects of the operation. Payment made by
the foreign client is usually based on a pre-negotiated “by piece” or “by lot” basis,
once the product has been received to the foreign client’s satisfaction. The term of
this type of agreement may be a for a one time run or for ongoing production.
Shelter Operation:
A Shelter is a bit more elaborate. Under this option the foreign company will enter
into a Shelter Agreement, typically with a US company which owns a Mexican
subsidiary. The Mexican entity owned by the US company or ‘Shelter Parent’ leases
space, provides the labor and has a team of professionals to handle every facet of
the operation from the import, export, transportation, permitting, accounting, customs,
taxes, human resources, etc., for as many foreign clients as the Shelter Parent can
provide.
The foreign client is responsible for providing the machinery, equipment, raw
materials, and other inputs required for the manufacturing of the product(s). The
foreign client will also be responsible for the quality of the production, which entails
the training and development of the labor provided by the Shelter operator. Most
foreign clients will place a US employee at the Mexican production facilities to ensure
that the expected quality of the production is attained.
Under this option, the client is charged either on a set hourly wage that includes all
costs, expenses, and profit of the shelter operator, or on a cost-plus basis, payable in
US dollars to the Shelter Parent. In most cases, the Shelter Parent will request a
minimum term of 3 years to enter into a Shelter Agreement with a client. There are
clients that have been operating under a Shelter for more than 30 years.
It is said that a Shelter operation is a wonderful way of “getting one’s feet wet” in
manufacturing in Mexico and assessing if further investment can enhance profits by
getting the middleman out of the way.
IMMEX stand-alone operation:
Ultimately, this is probably the most cost-effective method of manufacturing in Mexico. This operation entails the incorporation of a Mexican subsidiary. The subsidiary will be the entity that applies for an IMMEX program and Value Added Tax certification. After being awarded both, it will perform the manufacturing of your product in Mexico. Mexican companies can be 100% foreign-owned and foreign managed.
Initially, the incorporation and chartering of a Mexican company requires about 6 to 8 weeks to complete. Once incorporated, the entity will need to lease or purchase a facility where the manufacturing process is to take place. It may start hiring employees. It must also start keeping books and records and start filing tax returns. Thereafter, it will be able to obtain an IMMEX program to commence manufacturing.
An IMMEX entity enjoys advantages in addition to the possibility of importing items free of duty. For instance, it has an “easy in, easy out” customs treatment, and it benefits from special income tax treatment, whereby its taxable income is either 6.5% of its total costs and expenses or 6.9 % of the value of the machinery and equipment used in the manufacture of its product, whichever is higher. Alternatively, it can enter into an Advance Pricing Agreement with the Federal Government to reduce the taxable income even further.
Simple stand-alone operation
This method is the same as the one mentioned above, with the exception that the Mexican based manufacturing entity would not have an IMMEX program or Value Added Certification. It is usually used by companies that already have an IMMEX operation but want to also sell into the Mexican domestic market. This results in their need to separate their manufacturing earmarked for export from product that is intended for the Mexican domestic market.
Under this option full duty is paid upon importation of any item into Mexico, although most of the items under Mexican Tariff Classification have either exempted duties or duties that do not exceed 10% of the value of the item, especially if coming from a country that has a trade treaty with Mexico. Also, there is no benefit in the tax treatment, for it is taxed as any other domestic Mexican entity. For your information, all commercial entities in Mexico are taxed at a fixed rate of 30%.
So how do you make a decision?
Again, there is a simple answer and a more elaborate response. The simple answer is simply “run the numbers”. The elaborate response requires the assessment of other factors such as security, effectiveness of the legal system, proximity to your market, clients and suppliers, potential savings and being able to adapt to cultural differences.
I suggest you start with a detailed study of requirements for your specific operation. There is an array of questions that deserve close examination. Among them are: What machinery and equipment do I need? Should it be new or used? How much electricity, gas, water or other energy source is required? Are they sufficiently available? How much do they cost? What is the cost of leasing a facility versus buying one in Mexico? Are there Mexican suppliers of my raw materials and components? Are there qualified engineers and technicians that I can hire? Can I hire bilingual managers? What is the cost of logistics and transportation?
After performing a study that answers these obvious questions and many others that you feel are specific to your operation, you will undoubtably conclude there are many items which are much cheaper in Mexico. However, depending on the details, other factors may also impact on costs, making the manufacturing process preferable or more economical where you are. Once you get to this point, and before you make a final decision, I recommend you apply the RYNOMT philosophy to ensure you are on the right track. RYNOMT is an acronym for “run your numbers one more time”. This time, try running them from a different angle to expand and enhance your perspective.
In addition to providing current, correct information for your consideration throughout this article, I am available to assist you, as you tackle all of the hurdles in this process. In fact, my firm specializes in serving foreign manufacturing clients in Mexico. Hoping to save you valuable time and effort in your research, we have developed a proforma which provides approximate costs of manufacturing in Mexico. There is no fee for this service.
To enable us to prepare a breakdown that is customized to your particular needs, please:
Enter www.toulet-gottfried.com/costform
Download the form
Answer the questions
Email the document to: atoulet@toulet-gottfried.com
Our team will return a cost projection based on the information you provide to us. We are confident that this process will prove valuable in your decision to move forward or not, to manufacture in Mexico.
ALEJANDRO TOULET
ATTORNEY AT LAW / CERTIFIED PUBLIC ACCOUNTANT
Biography
Attorney at Law and Certified Public Accountant with 37 years of experience representing companies doing business in Mexico, with emphasis on Foreign Investment, Maquiladoras, Mergers and Acquisitions, Real Estate, Construction and Development, Shelters, Financing, Banking, Securities, and Joint Ventures.
Partner; Toulet and Gottfried, responsible for Maquiladoras and Shelters, Real Estate, Mergers and Acquisitions, including planning, structuring, financing, and implementing transactions for foreign companies investing in Mexico.
Has practiced law throughout Mexico with experience in most states of the Mexican Republic. Before forming Toulet and Gottfried, he was a partner with Deloitte, where he headed the legal department. He was also a founding member of Toulet, Caballero, y Diaz Marin, S.C., where he also represented foreign companies doing business in Mexico, particularly in border cities. This firm was later merged into Deloitte.
In addition to his duties at Toulet and Gottfried, he currently enjoys teaching corporate law at The Law School of the Universidad Autónoma de Ciudad Juárez.
Education
American School Foundation AC, Mexico City. (1978).
Facultad de Leyes de la Universidad Anáhuac (1984).
Universidad Autónoma de Ciudad Juárez, Certified Public Accountant (2012).
Universidad Autónoma de Durango, Master’s in Real Estate Valuation (2014).
University of Pennsylvania, Wharton Executive Education, Corporate Valuation and Business Strategy Program (2017).
Universidad Autónoma de Ciudad Juárez, Master’s in Taxation (2017).
Universidad Autónoma de Chihuahua, Master’s in Finance (in progress).
Professor of Corporate Law at the Universidad Autónoma de Ciudad Juárez.
Languajes
English and Spanish.
Author
“Legal considerations of Maquiladoras established throughout the northern border of Mexico”. “The Conquest of the Aztec Empire: A Chronicle of the Collision of Two Worlds”.