3 Key Strategies for Setting up Nearshoring Operations in Mexico
08.27.20
Historically, Mexico and China have both had prominent trade relations with the U.S. However, with an ongoing trade war between the U.S. and China and recent travel and shipping overseas restrictions due to Covid-19, the focus has shifted toward nearshoring operations in Mexico as the more alluring choice.
Global companies have already benefited from manufacturing in Mexico for decades, thanks to the country’s cost-effective, highly-skilled workforce, proximity to the U.S., and favorable trade relations. Additionally, Mexico’s unique IMMEX maquiladora program eliminates the 16 percent value-added tax (VAT) when importing raw goods, materials, and equipment and waives the duties when exporting finished goods back to the U.S.
As more U.S. manufacturers find value in starting or transferring nearshoring operations closer to home, they are considering Mexico as part of a long-term strategy for their own success. To navigate the complexities involved when setting up operations in any foreign country, it’s important to first understand the basics of what it takes to get up and running. In Mexico, it involves:
- Determining how you want to operate
- Registering in the IMMEX maquiladora program
- Analyzing the areas best-suited for your business
The best way to navigate the process is to partner with a shelter services company, such as IVESMA, that can guide you through the advantages of nearshoring operations and help you streamline the process in an effective way.
Determine How You Want to Operate
When setting up operations in Mexico, manufacturers can choose to work with a shelter services company, operate as a standalone entity, or implement contract manufacturing. Among the many benefits of working with a shelter company are:
- Minimized business risk and liability
- HR, accounting, and customs compliance support
- Access to technically skilled, cost-effective labor
- Maximized savings
- Reduced set up time
- Access to market intelligence information regarding HR, Accounting, and Trade Compliance best practices
A shelter services company also secures all necessary certifications and permits and can get your operation up and running in three to four months, as opposed to six or seven when operating a standalone entity. This is the most common choice due to the convenience and all-inclusive nature of the services included.
However, some prefer to operate as a standalone entity. While this route often takes longer, largely due to establishing permits, there’s still the option of receiving consulting assistance from IVEMSA to help expedite the process. As a standalone, there’s a higher learning curve, but as with working under a shelter, manufacturers maintain full control over their operations.
A third option is contract manufacturing. There’s often less quality control regarding production and transportation, but this could be an entry point for manufacturers starting with a smaller operation. Deciding which method works best for you depends on the size of your business, budget, and production goals. IVESMA will work with you to create a customized solution based on your specific needs.
Register in the IMMEX Maquiladora Program
After deciding how you want to operate, the next step is understanding the IMMEX maquiladora program. This allows manufacturers to temporarily import raw materials, machinery, and other approved goods into Mexico without paying Mexico’s 16 percent VAT tax, as long as they are exported as finished products within a certain timeframe.
Keep in mind, import duties may apply based on the country of origin and customs classification of your goods. Automotive, electronics, aerospace, and medical device manufacturing in Mexico are the top industries that take part in this program.
Another advantage of working with a shelter services company is that you can automatically work underneath their IMMEX maquiladora licensing. As a standalone entity, you’re required to apply for this license on your own, which is a complex process that could delay production. Among the various steps needed to acquire an IMMEX maquiladora license are:
- Establish a legal Mexican entity
- Fill out all required paperwork and documentation
- Present a complete business and financial plan outlining the proposed production process
- Identify the location of the production facility
- Commit to exports totaling more than $500,000 USD or 10% of total sales abroad
This is in addition to other various permits needed and compliance that must be met prior to starting nearshoring operations in Mexico.
Select the Right Location
A majority of operations are set up closer to the border for the sake of proximity. However, heading further into Mexico provides additional opportunities for manufacturers. Certain regions are already well-established for particular industries and provide more options when it comes to vetting facilities and hiring employees. For example, Chihuahua and Monterrey are regions with established manufacturing bases, specifically within the automotive and aerospace industries.
Working with IVEMSA starts with site selection. This includes creating an analysis of several areas that outlines the facility availability, pricing, competition, and other details prior to visiting the sites in person. This makes it easier and less time-consuming for companies when deciding which city will be the best fit for their production.
The advantages of nearshoring operations in Mexico have motivated U.S. manufacturers to diversify their portfolios and relocate facilities from China to right across the border. To get started, it takes knowing how you want to operate, registering in the IMMEX maquiladora program, and finding the right location for your facility.