When nearshoring to Mexico, there’s the option of setting up a standalone entity or operating under a shelter company. Most U.S. manufacturers agree working with a Mexico shelter services partner is key to their production strategy. However, there are several to choose from, all which may offer similar services and benefits.
Therefore, it’s best to first assess if a shelter model is the most beneficial option and then, decide which shelter company is the best fit. Here are five questions to help make the right choice.
The answer is probably not. For U.S. manufacturers nearshoring to Mexico for the first time, it’s best to work with a shelter services partner. Even industry experts aren’t sure about where to start in terms of site selection, recruiting, and compliance.
All of the administrative responsibilities necessary to launch production are included when operating under a shelter. Plus, it minimizes a manufacturer’s risk and liability of doing business. There is a learning curve when operating in a foreign country, and it’s beneficial to have a qualified team to ensure everything is set up smoothly.
Though some may consider operating as a standalone entity or employing contract manufacturing as a solution, a shelter company provides benefits the other options do not. If maintaining operational and intellectual property control is a priority, then the shelter model is the way to go.
Though a shelter company can also provide Mexico shelter services to standalone entities; ultimately, they still assume all risk and liability without the protection of the shelter umbrella. Additionally, manufacturers that choose contact manufacturing do not maintain full oversight over their production, processes, or property.
A key part in working with a shelter services partner is to improve economies of scale. This is achieved through access to supply chain management and inventory technology that maintains compliance and allows operations to run more smoothly.
In addition, having both U.S. and Mexico trade and compliance experts is necessary to keep current with changing regulations to avoid penalties and avoid setbacks. Usually, U.S. and other foreign manufacturers don’t automatically have the compatible technology or local expertise necessary to operate in Mexico.
Pricing is a key factor when evaluating a shelter services partner. IVEMSA is transparent and offers one price for the full suite of Mexico shelter services. There are no hidden costs or surprise fees, as is often the case with other shelter companies. Therefore, manufacturers can plan and budget according to their specific needs.
Though industry expertise should be assumed with any shelter services partner, a longstanding reputation in the industry helps manufacturers make the connections they need to be successful. With everything from expansive recruiting networks to established government contacts, IVEMSA provides nearly 40 years of shelter services experience and solutions.
Nearshoring to Mexico has been a successful strategy for global manufacturers throughout the years. Though China has historically been the leader in trade with the U.S., there’s been increased competition with Mexico over the past decade. And, it was recently reported Mexico has now surpassed China (and Canada) as America’s top trading partner.
China held steady in the number one spot throughout the 2010s, up until the start of the pandemic. Yet, challenges over the past few years have resulted in a change of heart for many U.S. manufacturers, with more choosing nearshoring to Mexico instead.
In the first four months of 2023, trade between the U.S. and Mexico reached $263 billion without any signs of slowing. With trade activity between the two countries reaching economic highs, the majority of U.S. manufacturers are relying on Mexico shelter services to quickly get them set up for success.
Mexico’s shelter model allows U.S. and other foreign manufacturers to operate in a cost-effective, low-risk way. Plus, manufacturers maintain full control over their equipment, processes, and intellectual property. Whereas, those who outsource production to China are responsible for setting up a Chinese entity, which puts their intellectual property and production quality in jeopardy.
When U.S. operators are nearshoring in Mexico, they have the option of partnering with a shelter company or hiring individual employees/departments. Shelter services in Mexico provide a valuable way for U.S. manufacturers to get an operation up and running without any additional cost. These services include:
Those new to nearshoring to Mexico typically don’t know where to start. Therefore, it’s beneficial to hire a shelter company who has the local expertise and experience. With a full administrative team already in place, it results in a quicker startup time of three to four months, compared to the six or seven months it may take launching production as a standalone entity.
Additionally, shelter costs are estimated to be 30-35% less than hiring their own personnel. There’s also production flexibility so manufacturers can scale up or down as needed. Plus, consulting and collaboration is provided throughout the entire process to help meet companies’ changing needs.
It’s important to note there are a few different ways to launch production when nearshoring to Mexico. Those interested in contract manufacturing are different from those who would benefit from shelter services.
With contract manufacturing, companies don’t retain full control or oversight over production quality and output. It may be an optimal choice for those with a higher product demand than production capacity, but most manufacturers value the benefits of Mexico shelter services to ensure all responsibilities and liabilities are handled.
Source:
https://businessinsider.mx/us-mexico-china-trade-world-economy-changing-2023/?r=US&IR=T
Mexico shelter services began in the 1960s, introducing a way for foreign manufacturing companies to be “sheltered” under the IMMEX program; thereby, reducing the risks and liabilities typically associated with production. For decades, industrial sectors such as automotive, aerospace, medical device, and electronics manufacturing have used shelter services as part of their operational strategy.
These special services are provided by shelter companies and include a range of administrative responsibilities necessary to get production up and running, including site selection, HR and recruiting, and legal, tax, and trade compliance, among other tasks. Since their inception, global companies have reaped the benefits and continued profitable growth while nearshoring to Mexico.
Therefore, understanding the benefits, particularly the cost-saving opportunities, of working with a shelter company gives U.S. and other foreign operators an advantage, as Mexico shelter services help to deliver a valuable, flexible manufacturing solution.
One of the goals of operating under a shelter is to create a more seamless transition to nearshoring in Mexico. Delegating administrative tasks allows company leaders to focus on production while still maintaining full control over all processes and ownership of equipment and materials. Under a shelter company, services include:
These shelter services can be customized to fit the needs of each company and are a cost-effective way to launch production for companies new to Mexico manufacturing.
The majority of manufacturers choose to work with a shelter company due to the extensive list of benefits it provides, such as:
These are a few of the many benefits shelter services in Mexico provide. However, to ensure a shelter company is a good fit, evaluate your processes, goals, and needs, and start by asking the following questions:
At IVEMSA, we offer transparency with shelter services pricing so there are no hidden or surprise costs. Additionally, we work collaboratively with our manufacturing partners to meet their unique demands. We support U.S. and other foreign manufacturers as they transition their operations to Mexico and strategize with them as they continue to grow.
U.S. companies manufacturing in Mexico have been historically successful and continue experiencing strong growth across all sectors. The medical device industry, in particular, has become a hub of production, following in the footsteps of global manufacturers like Medtronic, Stryker, and Johnson & Johnson. With the majority of industrial hubs set up along the border of Mexico, the proximity is conveniently close to California, a leader in the U.S. market for medical devices.
However, growth isn’t limited to a single state. Globally, the medical device industry is expected to grow from $536 billion in 2023 to nearly $800 by 2030. This spike in demand is predicted as a result of a rising number of inpatient admissions and surgical procedures. Also, increased research and development investments have allowed for greater development of technologically advanced products and equipment.
Therefore, U.S. manufacturers want to keep pace with the demand and are looking to medical device manufacturing in Mexico as a key part of the solution.
As medical device innovations become more sophisticated, knowing IP protections will be enforced helps drive further advancement in this sector. USMCA provisions secure intellectual property (IP) and copyright protections, which is an important benefit for manufacturers.
Meanwhile, the industrial workforce in Mexico allows U.S. manufacturers to save on costs without compromising production time or quality. This is especially valuable in the current landscape as millions of U.S. industrial roles go unfulfilled. Manufacturing companies are strategizing other ways to meet their production targets, and labor in Mexico is a cost-effective resource.
Mexico also offers quicker, cost-effective transportation compared to manufacturing in China. Though China has been a reliable source of outsourced production in the past, problems with retaliatory tariffs, delayed supply chains, and challenges with intellectual property rights have caused a shift to manufacturing in Mexico over the past several years.
In order to continually meet market demand, the close proximity between the U.S. and Mexico offers a distinct advantage to keep manufacturers competitive. Medical device manufacturing in Mexico allows companies to get their products to their target market faster while saving on costs.
Another unique advantage of manufacturing in Mexico is working with a shelter company. A Mexico shelter company handles all the administrative tasks necessary to set up production for foreign manufacturers. These tasks include:
Partnering with a shelter company can get a manufacturer up and running in as little as three to four months, nearly half the time it takes as a standalone entity. Furthermore, operating under a shelter company minimizes the risk and liability for U.S. manufacturers operating in Mexico.
Medical device manufacturing in Mexico is becoming increasingly competitive with higher demand. As a result, a rising number of U.S. manufacturers are seeing the benefits of nearshoring to Mexico as a way to save costs and meet market deadlines.
Sources:
https://ustr.gov/sites/default/files/files/Press/fs/USMCA/USMCA_IP.pdf
https://www.fortunebusinessinsights.com/industry-reports/medical-devices-market-100085
The benefits of manufacturing in Mexico have become common knowledge for most, though few may know about the specific importance of the IMMEX program. The IMMEX (formerly known as the maquiladora) program was established in the 1960s as a way to boost the manufacturing industry in Mexico. Due to its tax advantages, global companies have been able to expand their operations at a much lower cost for decades.
A maquiladora is a foreign-run factory in Mexico, and the IMMEX program is what all maquiladoras must operate under. Approved manufacturers that also obtain VAT certification are exempt from the 16% value-added tax placed on all temporarily imported materials, tools, and machinery as long as the final products are exported.
However, to receive these cost-saving benefits, regulations require diligent record-keeping of all inventory. Any miscalculations can be costly, either due to financial penalties or production delays. Therefore, it’s helpful for those new to manufacturing in Mexico to partner with a shelter services company.
Though each company is different, all manufacturers share one common goal: to reduce operational costs. This can be achieved by moving all or part of the production to Mexico and enlisting the help of a shelter company.
A shelter company is unique to Mexico and offers all the administrative services necessary to get a production up and running. Shelter services in Mexico include everything from HR and payroll to tax, accounting, and trade. By partnering with a shelter, manufacturers have all these departments managed together rather than hiring outside consulting, making it more cost-effective and efficient.
Also, a shelter provides immediate savings on permits and license fees, including IMMEX and VAT certifications, as well as reduced labor costs. Mexico labor rates are significantly lower than in the U.S. with greater accessibility to technically skilled talent. A shelter has the connections and network in place to quickly source workers needed to fulfill specific roles.
Shelter services also include site selection to determine which area and facility best supports each company’s specific processes and production goals. Nearly 80% of maquiladoras are set up in the border areas of Mexico, though competitiveness has caused the industry to spread out to other regions where there is more access to industrial space and labor. Regardless, U.S. and other foreign operators save money by being closer to their target markets and maintaining protection of their intellectual property. Plus, due to the close proximity, manufacturing in Mexico reduces travel and transportation costs while improving quality oversight for U.S. manufacturers.
Because of the benefits, most choose to operate under a shelter, though there’s the option of establishing a standalone entity. However, as a standalone, it can take weeks if not months to receive IMMEX program and VAT certification approval, which means all taxes and duties will be applied accordingly. Furthermore, standalone entities are legally exposed and take nearly twice as long to launch production.
At IVEMSA, we customize our shelter services for manufacturers whether they’re operating as a standalone or under the shelter. Either way, registering for the IMMEX program is the first step as a new company operating in Mexico, and we have that already taken care of.
Source:
https://www.gao.gov/assets/gao-03-891.pdf
Manufacturing in Mexico can be a rewarding yet complex endeavor. It involves legal, tax, and trade compliance, in addition to finding the right facility, recruiting and hiring workers, and setting up all administrative departments necessary to launch production. To alleviate this burden, the majority of foreign operators choose to work with a Mexico shelter company.
A shelter company accelerates the startup timeline by handling all administrative tasks and allowing manufacturers to focus their time and energy on operations. It also minimizes legal risk and eliminates the red tape that often comes with opening a business in a foreign country. In short, working with a shelter helps to streamline the process to create a seamless transition.
When planning operational expansion to Mexico, here are a few of the other advantages that working with a shelter like IVEMSA has to offer.
A shelter company is registered with the IMMEX program and maintains VAT certification. As a result, those working under the shelter are automatically exempt from the 16% VAT on all temporarily imported goods, materials, and equipment needed for manufacturing. Meanwhile, shelter services in Mexico include trade compliance to ensure accurate inventory; thereby, reducing risk of penalty or production delays.
Working with a shelter also saves on permits and license fees, labor rates in Mexico, and infrastructure expenses. On average, manufacturers can expect to save 30-35% in operational costs. Additionally, there isn’t the hassle and expense of hiring separate consulting teams to fulfill separate HR, accounting, legal, and broker roles. These are all housed under the shelter to work alongside each other for a quicker, more efficient process.
As a member of the USMCA, Mexico maintains the required intellectual property protection and privacy for personal information. With technology rapidly advancing and new products and models being sent to market faster, protecting copyright infringement and brand identity is extremely valuable. Since the shelter is special to Mexico, this type of security is fully upheld as per each of its trade agreements.
One of the many reasons why companies rely on shelter services in Mexico is the reduced time it takes to launch production. It can be achieved in as little as three to four months compared to six or seven months it takes as a standalone entity, which saves on costs and adheres to critical production timelines.
A shelter company relinquishes complete control to the company regarding processes, equipment, and intellectual property rights. Everything operates per the manufacturer’s guidelines with the support of shelter services along the way. A shelter is also flexible and customizable to grow with a company as they expand to ensure there are minimum disruptions.
When nearshoring to Mexico, why not partner with local experts who have the experience and reputational history in helping foreign manufacturers succeed? IVEMSA has nearly 40 years in the industry with an average 15-year customer retention rate. We provide cost-effective solutions that provide long-term value.
Choosing the right mode of entry is crucial to the success of manufacturing in Mexico. Each strategy has its own pros and cons to be considered, and manufacturers must take into account the differences in costs (initial investment plus ongoing expenses), risk tolerance, timeline, and production control when making a decision. To help determine the best route for your company, here are the four strategies to consider and the benefits and drawbacks of each.
The most popularly used method is working with an IMMEX shelter provider, an opportunity which is unique to Mexico. Most foreign manufacturers choose this option due to the significant cost and time savings, as well as the built-in expertise and experience it offers when manufacturing in Mexico.
Before production can begin in Mexico, foreign companies must apply for IMMEX registration, a process which can take weeks, if not months, to be approved. However, when operating under the shelter umbrella, manufacturers can work with the permits already in place, including the IMMEX program paired with the VAT certification. This automatically exempts foreign operators from the 16% VAT on temporarily imported goods, materials, and machinery necessary for production.
Furthermore, manufacturers are not required to establish a separate entity, which means they are not directly liable for legal or tax compliance. However, they still operate independently and maintain complete ownerships and control over production, while delegating all administrative duties to the shelter provider.
Shelter services include site selection, recruiting and hiring employees, payroll and other HR responsibilities, legal and tax compliance, as well as other tasks necessary to get a company up and running. Having the support of a shelter provider allows manufacturers to focus on production alone and get their products to market faster while also protecting their intellectual property and operational rights.
Though there are no significant drawbacks to the shelter option, it may not be as beneficial for companies with less than 20 people or more than 500. A favorable shelter partnership depends on a company’s size, growth projection, and goals for long-term success.
Contract manufacturing is another mode of entry available for foreign operators. It involves working with a third-party vendor to help launch operations under their established manufacturing processes. Under this model, the subcontractor bears the legal and compliance risks of manufacturing in Mexico, though the drawback is manufacturers may have to relinquish control over their specific manufacturing needs and forgo quality assurance oversight.
Nonetheless, contract manufacturing may be a favorable solution for companies requiring predictable processes for their products, such as injection molding or stamping. Whereas, companies wanting to protect their intellectual property and unique processes may not benefit as much and often choose a shelter instead.
U.S. and other foreign manufacturers can also operate as a standalone entity. The process of incorporation follows a similar protocol as other countries for those wanting to maintain their independence when manufacturing in Mexico. The drawback is it typically takes more than twice the time to launch production as a standalone entity than it does working under a shelter.
That’s because a standalone is responsible for handling all the administrative responsibilities a shelter handles. This requires the coordination and cooperation of separate vendors responsible for creating an LLC, securing permits and certifications, heading HR and tax departments, and other areas necessary to launch production. Also, operating as a standalone entity leaves companies vulnerable to legal and compliance risk, which could result in additional expenses and/or delayed timelines.
Lastly, some companies may look into joint ventures. This mode of entry isn’t as common when manufacturing in Mexico because it can be time-consuming to find the right partner with a similar vision and process. The advantage is it usually comes with expertise, operational space, and strategy to help launch production faster. Although, the downside is the eagerness to get started more quickly can lead to lack of due diligence when reviewing joint venture partnerships, which have the potential of damaging repercussions down the road.
As more manufacturers look to Mexico to expand their portfolio, working with a shelter continues to be the tried-and-true mode of entry. Global manufacturers have found success with this method for decades. However, all options should be considered based on your specific company and project needs.
Mexico manufacturing has been a core strategy for U.S. and other foreign manufacturers for decades. Though recently, it has increased in popularity due to significant economic changes. Many U.S. operators are considering nearshore manufacturing for the first time to save costs while meeting aggressive market demands.
Global manufacturers producing everything from electric vehicle parts to semiconductors have found a place in Mexico for good reason.
Here we outline 10 reasons why operators are considering manufacturing in Mexico under the shelter program.
Though competitive, Mexico’s labor availability is one of the most enticing reasons nearshore manufacturing remains critical to foreign production. Employee scarcity has been an ongoing concern for U.S. manufacturers as the industrial labor shortage continues. Millions of workers are vacating manufacturing roles due to retirement or in search of positions in other industries. This has left a significant gap in jobs needing to be fulfilled, which Mexico’s workforce can supply.
Since manufacturing is Mexico’s top industry, the country continues to invest in educating and developing workers for various manufacturing roles of all levels. Mexico also often partners with global brands to create unique training programs to help with production. This gives workers the specific skills and training they need and ensures companies have the labor necessary to support their efforts, a scenario benefiting all parties involved.
Read more: How Mexico is answering the labor shortage in the U.S.
In addition to the lower cost and greater availability of industrial labor in Mexico, there is also a higher production output. Mexico recognizes a 48-hour work week compared to the standard 40-hour work week in the U.S. This makes an impactful difference when working against strict deadlines and immediate market delivery expectations. The additional time allows U.S. and other foreign manufacturers more productivity while still saving on costs.
Another competitive advantage of nearshore manufacturing is proximity to the U.S. market. Moving operations to Mexico saves on transportation costs and prevents delayed timelines from receiving overseas shipments. It makes more economical sense to choose the closest delivery route, which means the proximity between the U.S. and Mexico is ideal. Additionally, when outsourcing production, companies have largely depended on China to supply low-cost goods. However, for technical industries like aerospace, automotive, and medical device equipment, it requires a greater attention to precision and quality.
Complementary time zones are part of the advantage of manufacturing in Mexico versus manufacturing in China. In many cases, the time zone is the same or within a few hours of each other between U.S. headquarters and Mexico manufacturing facilities. Whereas, the time zone discrepancy between the U.S. and China is well over a full business day and requires advanced planning to visit sites, schedule communication, and receive timely responses.
Mexico also maintains favorable trade relations with countries around the globe. It maintains 13 free trade agreements with 50 countries, including Japan, Israel, and countries part of the European Free Trade Area and European Union. Mexico also participates in the Pacific Alliance, a trade bloc formed by Mexico, Chile, Colombia, and Peru. This is in addition to the USMCA which provides incentives for the U.S., Mexico, and Canada to maintain trade within North America.
Furthermore, with regard to trade blocs, comments from all three North American leaders at the recent Leaders’ Summit solidifies the strong political relationship and economic ties between the U.S., Mexico, and Canada. Government leaders are focused on nearshore manufacturing in Mexico as the preferred alternative to operating in China. They seek to alleviate dependence on China and strengthen relations among allies to preserve the industrial future of their respective countries.
When products require a patent and other intellectual property protections, there is more structure and guidelines assumed in Mexico. Per the USMCA, there is greater oversight and violation enforcement to protect companies building new technologies and products in Mexico. This has encouraged U.S. manufacturers operating in China to consider nearshore manufacturing since historically, there have been trade problems involving IP theft over the years.
A unique benefit of manufacturing in Mexico is the country’s IMMEX program. Formerly known as the maquiladora program, it’s the way foreign manufacturers operate in Mexico. As part of the program, U.S. and other foreign manufacturers are exempt from the 16% value-added tax on importations. This provides valuable tax savings on all temporarily imported goods, equipment, and machinery. To automatically reap this benefit rather than waiting for IMMEX/maquiladora certification approval, which can take several weeks or months, manufacturers can partner with a Mexico shelter company.
Read more: Basics of the IMMEX program.
The shelter program itself provides numerous benefits for nearshore manufacturing. Those who choose to work with a Mexico shelter company minimize legal exposure. The shelter serves as the operating entity and is responsible for all compliance measures, including maintaining permits and licenses necessary to operate. Additionally, the shelter program provides impactful cost-saving opportunities across all areas of the operational process. This includes lower costs on cross-border transportation rates, currency exchange, software platforms needed to support your business, customs brokers, and local suppliers and services.
When manufacturing in Mexico the most common route is to partner with a Mexico shelter company, particularly for those who are setting up foreign operations for the first time. It provides an expert resource to guide the process and ensure the transition is as seamless as possible.
The experience and industry knowledge of a shelter proves invaluable to get a manufacturer up and running within three to four months versus the six or seven months it takes without the help of a shelter. If nearshore manufacturing is part of your business goals, our team of experts can help.
Source:
https://www.trade.gov/country-commercial-guides/mexico-trade-agreements
An increasing number of U.S. and other foreign manufacturers are considering Mexico as part of their strategy to expand production in the new year. This continuous shift has made it more challenging to secure industrial space and qualified talent to support these endeavors. Companies must start moving quickly to secure a competitive space in the market.
As of November 2022, 87% of Mexico’s imports come from manufactured products. And, in 2023, nearshoring will continue to boost Mexico’s economy as new foreign direct investments are made. In turn, manufacturing in Mexico will help U.S. companies combat rising manufacturing costs and the struggle to find the skilled labor necessary for production.
This is one of many reasons why U.S. manufacturers have decided to reshore production from China to Mexico over the past several years. The proximity between the U.S. and Mexico carries multiple advantages that China simply can’t compete with.
To get ahead in 2023 means Mexico manufacturing will play an even larger role in U.S. production.
Here are areas where companies benefit most.
Product volume is increasing, which subsequently leads to an increase in transportation costs as well. Cargo shipments from China cost thousands of dollars and take several weeks for delivery. Whereas, when manufacturing in Mexico, shipments can often occur same-day with significant logistical cost savings.
This is advantageous for American companies shipping heavy-duty machinery, heavy and/or bulky products, and large, customized orders. For instance, metal fabrication is a sector where it makes more sense to nearshore to Mexico versus offshoring to China. This industry may include companies that produce heavy automotive trailers which are cumbersome and costly to ship when produced overseas.
Another example is a company manufacturing metal products that require custom painting, welding, and specialized features. It requires heavily skilled technical workers who can accommodate their complex manufacturing needs. The labor force in China is more accustomed to high-volume, low-mix types of products. It can be difficult to source employees with the right skill set and experience to complete the project. Whereas, Mexico has a long-held commitment to the manufacturing industry and training workers for various roles.
In addition to Mexico’s industrial talent compared to China, projections about the decline in U.S. industrial labor are also causing manufacturers to consider nearshoring. As of October 2022, there were 746,000 monthly manufacturing job openings in the U.S. Whether it’s because workers no longer want to apply for these types of roles or do not have the adequate skills necessary, it continues to widen the gap in workforce availability.
Reduced transportation and labor costs are two of the main advantages of Mexico manufacturing. However, as U.S. and other foreign manufacturers expand their portfolios, they also benefit from Mexico’s IMMEX program. The IMMEX program exempts foreign manufacturers from the 16% VAT tax applied on all imported tools, goods, and machinery needed for production; and those who work with a shelter company can reap this tax benefit right away.
Many times companies may be ready to expand but are unsure of everything they’ll need to operate in a foreign country. Working with a shelter company also offers a unique competitive advantage. A shelter handles all administrative tasks and responsibilities necessary to launch production which frees up time for leaders to focus on their daily operations.
A shelter helps to reduce the learning curve and ensure everything complies in accordance with Mexican law. It also minimizes risk and liability while reducing operational costs. Startup time can begin in as little as three to four months compared to six to seven months when setting up a new legal entity. However, if all factors align and manufacturers are quick with their decision-making, it can take as little as eight to ten weeks.
Though China was once the premier trade partner for the U.S., times have changed. China is no longer the most convenient or cost-effective for complex manufacturing needs. Furthermore, supply chain shutdowns during the pandemic and the after-effects of the U.S./China trade war have hindered its value and reliability.
These issues, in addition to intellectual property (IP) disputes, have caused many U.S. manufacturers to grow wary when outsourcing production to China. On the other hand, the USMCA has secured trade relations between the U.S., Mexico, and
Canada with special regulations for IP protection, specifically.
When deciding the most optimal strategy, a shelter company such as IVEMSA can provide options based on your specific project needs. We align with the professional values and business culture of our partnerships and take pride in the experience we provide.
Sources:
https://tradingeconomics.com/mexico/imports
https://www.statista.com/statistics/872834/monthly-job-openings-in-the-united-states-by-industry/
Manufacturing in Mexico has been a significant global strategy for the past several decades. However, recent shifts in the economy have resulted in a spike in growth, particularly due to manufacturers moving their operations from China to Mexico. The effects of the COVID-19 pandemic illustrated how fragile a sole reliance on trade in China has become. Additionally, with the increase in production levels and costs, the advantages of trade with China are no longer as alluring as they once were.
Instead, U.S. manufacturers are reaping the benefits of nearshoring to Mexico, such as the close proximity, lower cost of labor, and secure supply chains. The main sectors increasing their presence include:
The automotive sector is already one of the most significant industries in Mexico. It makes up more than 3.5% of the nation’s GDP. Also, 90% of vehicles produced in Mexico are exported; 76% to the U.S. The country has been a leading supplier of automotive parts and components on a global scale and maintains maquiladoras for Volkswagen, Audi, Toyota, Nissan, Ford, Mercedes-Benz, and Kia, among others.
In addition, the United States-Mexico-Canada Agreement (USMCA) states that 75% of automotive content must originate in North America. This further solidifies a favorable trade relationship between the U.S. and Mexico in this sector. Most production takes place along the northern border of Mexico in Monterrey, Ciudad Juárez, and Hermosillo. However, expansion to other regions of the country, including Jalisco, Queretaro, Puebla, and Merida is on the rise. Though not as heavily saturated as the border region, these areas have the infrastructure, labor, and transportation in place to continue expanding at a steady rate.
Aerospace is also a significant sector in Mexico with industrial clusters already established in Baja California, Sonora, Nuevo Leon, Queretaro, and Chihuahua. Each area has its own specialization and a strong supply chain. Total exports from Mexico to the U.S. equal an estimated $4 billion USD as of 2022. This represents purchases for aviation and military-related products, specifically, and does not include the additional foreign direct investment for airport construction products and services.
The USMCA has also encouraged development in this sector due to enhancements in intellectual property protections. The agreement assures transparency and patent protection for technological innovations through regulatory measures. This level of security has been a challenge for U.S. manufacturers operating in China in the past, causing many to move their production to Mexico as a result.
Medical devices and supplies are one of the leading sub-sectors in Mexico’s overall healthcare sector. In 2021, $5.9 billion was imported to Mexico in this category and continues to represent a growing market. Baja California, in particular, has been an ideal location for companies like Masimo, Medtronic, and Becton Dickinson, among others. The close proximity of the northern border of Mexico supports quick turnaround times for delivery to central markets.
There’s been a recent shift of semiconductor production to Mexico. In September 2022, the U.S. authorized approximately $50 billion USD for a semiconductor program to incentivize Mexico to join forces as a global epicenter for the electronics industry. Mexico is already one of the world’s leaders in global exports of electrical and electronic equipment, topping $87 billion USD in 2021.
Baja California, Coahuila, Ciudad Juárez, Chihuahua, Monterrey, and Nuevo León are the main hubs for the electronics sector. As Mexico continues to develop new facilities throughout the country beyond the northern border region, it represents even more opportunities for manufacturing in Mexico.
Operating in a foreign country requires regulatory guidance and administrative assistance to launch production quickly and efficiently. The majority of manufacturers choose to work with a shelter company to reduce risk and liability and create a more seamless transition.
Sources:
https://www.trade.gov/country-commercial-guides/mexico-automotive-industry
https://www.trade.gov/country-commercial-guides/mexico-aerospace
https://www.trade.gov/country-commercial-guides/mexico-healthcare-products-services
The manufacturing industry moves quickly with changes frequently occurring, though its terminology remains constant. It is part of the foundation of what to expect when manufacturing in Mexico and is used frequently in discussions regarding the future. Though most may be recognizable, it’s important to have a refresher on the common terms that outline the manufacturing process and the ways they’re being used today.
IMMEX is the shortened reference to Mexico’s Manufacturing, Maquila, and Export Services Industries (IMMEX) program, formerly known as the maquiladora program. It was established in the 1960s to encourage foreign direct spending in Mexico and increase manufacturing activity to boost the economy.
The key benefit coinciding with the IMMEX program is Mexico’s value-added tax (VAT) exemption that you can only obtain when you are approved for the IMMEX program and you are also a VAT-certified company. This exempts foreign manufacturers from the 16% VAT on approved, temporarily imported goods, equipment, and machinery, and offers significant savings. A common misconception is that acceptance into the IMMEX program automatically makes a company duty-free, which is not the case. The IMMEX program can only help companies avoid VAT tax on all temporary imports.
However, a manufacturing company must first apply and be approved into the IMMEX program before applying for VAT certification. The only exception is if a foreign company decides to partner with a shelter operation. A shelter already has all required certifications in place, which means companies can skip the application paperwork and benefit from the tax advantage from day one.
A maquiladora is a term for a manufacturing factory in Mexico. To operate as a maquiladora in Mexico, foreign operators must establish a legal entity to conduct business. It requires establishing what kind of production will be performed, the types of products, and where the facility will be located.
Foreign manufacturers can decide to set up a standalone entity or set up operations under a shelter. Either way, IVEMSA can guide companies through the process by offering administrative services, such as HR, accounting, and trade operations, and securing all permits and certifications.
Nearshoring has resurfaced as a trending term due to the shift of foreign operations from China to Mexico. It is often used interchangeably with other terms like ally shoring and reshoring, as North American countries continue to relocate and/or expand their portfolio to Mexico.
For decades, the U.S. relied heavily on China as its main foreign trade partner. However, events over the past few years have led many to begin manufacturing in Mexico instead. One of the reasons for the shift is the trade conflict between the U.S. and China stemming from 2018. With retaliation and uncertainty regarding tariffs, it caused many U.S. manufacturers to retreat to closer proximity to their central market.
Additionally, the COVID-19 pandemic stalled and/or shut down many supply chains overseas. This disruption caused many U.S. and other foreign manufacturers to become hesitant about their sole reliance on China as a trade option. It led to portfolio diversification and/or a complete move of operations to Mexico, making nearshoring the more favorable strategy in terms of supply chain security.
The United States-Mexico-Canada Agreement (USMCA) is the revised trade agreement between the three countries. Following the success of NAFTA, the USMCA was officially enacted in July 2020. It establishes specific trade protection and regulations in North America, making it advantageous for U.S. manufacturers to switch their partnerships with China to those in Mexico.
The USMCA contains provisions for original content production, intellectual property protection, digital trade, and anti-corruption practices, which encourage North American trade to benefit all economies and provide greater oversight over new technologies and opportunities.
A shelter refers to a third-party entity that allows foreign manufacturers to operate in Mexico. Working with a shelter partner is the most popular way to set up operations due to its cost-effectiveness and efficiency. Additionally, it provides U.S. and other foreign manufacturers with the security and support they need to succeed.
A shelter company like IVEMSA is equipped to help manufacturers even if they choose to operate as a standalone entity. Though, as a standalone, there’s full exposure to Mexican fiscal, labor, and trade authorities, companies can still receive the same services to help with incorporation, including recruiting and hiring, taxes and accounting, and all other administrative responsibilities necessary to start production.
Part of manufacturing in Mexico is getting familiar with the lingo. IVEMSA helps to reduce the learning curve for foreign operators in all areas and ensures they have everything they need to operate.
Moving production to a new location and changing setup models is a complex undertaking that takes significant effort. However, due to
ongoing trade restrictions between the U.S. and China, as well as complications resulting from COVID-19 shutdowns and slowdowns, many U.S. manufacturers are considering nearshoring to Mexico as a competitive advantage that’s worth the commitment.
Nearshoring manufacturing rose to popularity in the 1980s as U.S. and other foreign companies began to seek ways to reduce costs while keeping up with market demand. During this time, offshoring to China also became popular due to the availability of low-cost labor. Although, once the North American Free Trade Agreement (NAFTA) was introduced in the 1990s, it became more favorable for U.S. manufacturers to reshore to North American markets, thereby making Mexico the optimal choice over China.
Now in 2022, shifts in the manufacturing industry no longer make China as lucrative as it once was. The industrial labor force is retiring, and fewer employees are taking on vacant manufacturing roles. Additionally, labor and transportation costs have spiked, delayed timelines have deterred production, and ongoing trade conflicts between the U.S. and China have created room for opportunity for nearshoring instead.
Mexico maintains a well-established infrastructure and steady transportation pathways. Plus, the close proximity between Mexico and the U.S. results in speedier shipment times compared to overseas. A shipping container from China can take several weeks to arrive at a U.S. port. Whereas, shipments from Mexico to the U.S. can often be transported same-day. The geographical location is unmatched, making it easier for advisors to conduct site visits and work in the same or similar business hour time zones.
Furthermore, production security and intellectual property (IP) protection has always been a concern for manufacturers, an area which has been strengthened between North American countries through the USMCA. Conversely, IP protection has been a common problem when outsourcing to China due to counterfeits and unenforced IP rules. As digitization and new technologies continue to emerge, ensuring regulations are observed is essential.
In addition to the proximity advantage and protections under the USMCA, an operational move to Mexico also comes with the unique advantage of partnering with a shelter provider. A shelter has the experience and expertise to launch production for a new foreign company within three to four months compared to the six to seven months it takes as a standalone entity.
Under the shelter, all administrative responsibilities are taken care of, including site selection, recruiting employees, permitting and licensing, and customs compliance and accounting. It saves time and costs and allows manufacturers to focus on day-to-day production, making the transition seamless and hassle-free.
The pandemic revealed maintaining supply chain diversity is important so as to not become reliant on Asia as the only option. However, when planning long-term, the advantages of nearshoring to Mexico for U.S. manufacturers remain unmatched and will continue to be a core strategy.