Pros + Cons of Contract vs. Shelter Manufacturing Services (Q&A)

There are vast differences between contract manufacturing and shelter manufacturing services, though the two terms are often used interchangeably. While both production models support operating in a foreign country, that’s where the similarities end.

At IVEMSA, we receive inquiries from companies of all sizes wondering which business model is the right fit. Though many are familiar with what contract manufacturing entails, the term “shelter” raises a few questions.

The shelter program allows U.S. and other foreign manufacturers to reap the benefits of operating in Mexico without the requirement of setting up their own legal entity. In this context, it’s not associated with a building or tax shelter but rather a way to do business that minimizes risk and liability.

As more U.S. and other foreign manufacturers consider moving production to Mexico, it’s valuable to understand the options available. To help navigate some of the differences between contract and shelter manufacturing, here’s an overview of frequently asked questions regarding each. Evaluate the pros and cons as you decide which direction is the best fit.

How do contract manufacturing and shelter manufacturing services differ?

Contract manufacturing involves using a third-party operator to build products. Companies don’t have ownership or maintain quality control over the processes or products. Whereas, operating under a shelter can be viewed as the next step toward ownership.

With shelter manufacturing services, foreign companies run their own factories and processes and maintain ownership over all goods, materials, and intellectual property as it relates to production. Though many work under the shelter for several years, others eventually graduate from the program to become their own entity.

How is contract manufacturing charged?

Another main difference is contract manufacturing charges per unit which can make it difficult to anticipate expenses as production scales up or down. Alternatively, a shelter company establishes a standard fee that allows companies to run their factories without touching profitability.

Therefore, shelter manufacturing services make the most sense for companies that are already well-versed in their processes yet seek administrative assistance to launch production in Mexico. This is especially important for those manufacturing in Mexico for the first time. Having the expertise and experience of a shelter reduces the learning curve and minimizes the risk and liability of operating in a foreign country.

Are shelter manufacturing services unique to Mexico?

Yes. Shelter services in Mexico were first established as part of the IMMEX maquiladora program in the 1960s. Though manufacturers that are approved for the IMMEX program can choose to operate as a standalone entity, the majority opt for shelter services to help them get their operations up and running more quickly.

What are the benefits of shelter manufacturing services?

U.S. and other foreign manufacturers that implement shelter manufacturing services avoid legal exposure to Mexico’s authorities. There is also significant cost savings on labor, infrastructure, and permitting, as well as the flexibility to adjust to changes in production.

These benefits are not available through contract manufacturing, and companies face a greater risk of project delays and lower quality for their products. Though this option could be valuable for those with consistent processes for low-mix high-volume production, it’s not the typical route chosen.

Does IVEMSA assist with contract manufacturing?

IVEMSA is a shelter services provider. However, the team can assist manufacturers in determining the optimal business model for their needs. If contract manufacturing is the solution, IVEMSA can refer companies to local contract manufacturing representatives.

Working with IVEMSA

There are various options to choose from when moving production to Mexico. Find out whether contract or shelter manufacturing services will be the most beneficial for your business.

Contact IVEMSA today.