Evaluating the Pros and Cons When Establishing a Mexico Manufacturing Strategy
06.23.21
Mexico manufacturing includes several benefits, such as lower labor and production costs, access to a skilled industrial workforce, minimized risk through shelter services, and a close proximity to the U.S. However, as with any new operation, it’s important to establish a solid strategy before starting the process to ensure it aligns with your ideal budget, timeline, and goals. Entering the market in Mexico includes but isn’t limited to:
- Site selection
- Tax and accounting
- Customs compliance
- Employee recruitment and hiring
- Environmental health and safety regulations
There are three main ways to meet these requirements and move forward with your manufacturing strategy. Evaluating the pros and cons of each can help you determine which route will be most favorable to you.
#1: Setting Up Your Own Entity
When setting up your own standalone entity, you take on the responsibilities of establishing the proper permits, certifications, and compliance measures required when manufacturing in Mexico. This option also involves hiring and training employees, as well as finding the right real estate, and making connections with vendors and supply chain operators.
Pro: Setting up your own entity means you’re responsible for oversight for every part of production, and you’ll run your business using your own legal entity from day one.
Con: Add in potential language, cultural, and timeline barriers and this can seem less cost-effective or efficient than when you first began. Setting up a new legal entity can take up to six to seven months, compared to working with a shelter company, which can take as little as three months to start production.
#2: Contract Manufacturing
A second option when establishing your Mexico manufacturing strategy is hiring a contractor or third party to handle setup and fabricate your products in Mexico. Keep in mind, not all contractors provide the same services or the same level or price of services.
Also, typically, under contract manufacturing, you don’t have any control over shipping, quality, production, intellectual property protection, equipment maintenance, etc. You will only receive a finalized product with your name or brand on it. Additionally, you may be working with several different individuals to deliver everything you need to operate.
Pro: Contract manufacturing may be a good option if you need predictable solutions for consistent runs of certain products in the earlier stages of business growth.
Con: Manufacturers are at the mercy of the vendors and give up partial oversight over production quality, scheduling, shipping, equipment maintenance, and everything related to the fabrication of your products. There is also a higher likelihood of missed communication or delayed timelines since you don’t control this operation.
#3: Shelter Service Company
A shelter service company allows the best of both worlds. With this option, U.S. manufacturers retain complete operational control over their production as with a standalone entity. Plus, logistical responsibilities that may be contracted out are coordinated and implemented under the umbrella of an experienced shelter provider. This minimizes the risk and liability of manufacturing in Mexico that companies would otherwise face.
This mode of entry is also highly favorable since the shelter already has the certifications and permits necessary to operate, including the IMMEX maquiladora licensure. Companies operating under the IMMEX program are exempt from 16 percent VAT tax on all temporarily imported goods, materials, and equipment. This is a significant cost advantage that U.S. and other foreign manufacturers benefit from at the initial operating stages.
Read more: Are Mexico shelter services worth the cost?
Working with IVEMSA to Meet Your Mexico Manufacturing Goals
There are no serious cons to speak of when working with a shelter service company. Shelter services are customized and implemented to align with the goals of each manufacturer. Additionally, a shelter company like IVEMSA sets up manufacturers for success and eventually “graduates” them from the shelter program, if operating as a standalone entity is the end goal.