What are some of the reasons that companies set up factories in Mexico?

U.S. automakers and companies that export goods to Mexico have been strongly affected by the implementation of tariffs on Mexican imports. But even in the midst of these changes, production of goods in foreign countries still remains attractive for US businesses. For the past few decades, Mexico has drawn many U.S. and foreign businesses with promises of low-cost labor and favorable trade agreements, which have resulted in increased migration and investment opportunities across the southern border.

Today, that pull has proven as strong as ever with several major operations recently setting up south of the border – just to name a few, Intel built a memory facility in Santa Clara while Kenworth cut production time by initiating a truck assembly plant in Chihuahua. Chevrolet, BMW and other automotive giants like Volkswagen already produce cars there; meanwhile Gulfstream newly opened their Aircraft Service Center at Toluca international airport this year. Companies move for various reasons but here are just a few:

1. Skilled, Low-cost Labor

In today’s business environment, companies buck for the advantages of efficient manufacturing. We often compare production costs between Mexico and China—although the country long known as a low-cost leader used to come out ahead when considering labor costs alone, the scales are now tipped in Mexico’s favor.

Wages in China have risen dramatically while Mexico’s have kept comparatively steady, meaning that companies can expect to save 20-30% in labor costs when making the move south. But it’s not just cost savings that makes Mexico attractive—it’s also the growing skills of its workforce.

In 2015, the median age was 27.5 years—this relative youth is part of what has helped shape modern Mexico for foreign investors. Over 110,000 students earn engineering degrees from Mexican universities and technical schools each year, giving employers a large pool of talented workers willing to learn new technologies and manufactured processes. This is especially true with engineers, machinists and trade craftspeople who represent highly skilled labor force components driving rapid economic growth across Mexico.

2. Location

Manufacturing in Mexico is attractive to companies that require quick turnaround times, or those who need fast, reliable deliveries. Not only is Mexico generally much closer than countries overseas, but it also has the advantage of being next door to its biggest customer: the United States. This proximity results in several advantages with shipping as well as communication and travel.

First and foremost, Mexico’s proximity to the US makes delivery times incredibly short—much quicker than dealing with factories abroad. With certain parts of the country being only a couple hours away from major cities in the US, products can get to their destinations quickly and efficiently. That’s great news for big retailers who rely on frequent deliveries, such as Amazon and Walmart.

Also beneficial is that manufacturing operations can be more flexible—should you need to make an adjustment quickly in the middle of a run, it’s relatively simple to do so from a Mexican facility compared with a factory abroad where communication delays might slow down production.

Finally, because of the physical proximate between these two countries, the US headquarters will usually be no more than three hours ahead or behind of their Mexican facility counterparts; this means communication about needed changes will be simplified and decisions can be made quickly due to minimal time differences. Additionally having sites close together allows for easy travelling so site visits take little effort or coordination with personnel situated across vast distances.

3. Emerging Market

Mexico has recently been named by Bloomberg as one of the most attractive emerging markets in 2018. As one of Latin America’s most populous countries, a major exporter and recipient of foreign direct investment (FDI), Mexico is an ideal destination for investors interested in emerging markets. Doing business in Mexico has become easier over the past couple of years due to reforms liberalizing the labor market, simplifying taxes, and streamlining infrastructure projects. Thanks to its convenient location next to the United States, Mexico also serves as a great partner for both Canadian and US companies who wish to access the rapidly growing Latin American economy. Mexico offers low-cost production facilities with highly skilled workers that are attractive for global businesses. In addition to this, Mexico also maintains relatively positive relations with many countries from around the world, which further benefitting business ties by providing additional access points for traders and investors alike.

4. IMMEX/Maquiladora Program Lowers Costs

The maquiladora program, known as IMMEX, is Mexico’s way of leveraging their location along the US border to attract foreign businesses. Starting in the 1960s, the program offers tax benefits to incoming investors who will be establishing manufacturing operations in Mexico. Companies are able to defer taxes when they import raw goods, materials and equipment (regarded as part of the production process but with no additional value), and pay lower tariffs when exporting finished goods to the US. As a result of this incentives program, companies can set up cost-effective assembly lines or relocating existing ones at taking advantage of the cheap labor force and economical costs of production. This has made it possible for Mexican factories to create competitively priced goods without sacrificing quality or design elegance

The IMMEX/Maquiladora program is a great way for companies to lower their costs when setting up factories in Mexico. This program offers tax benefits to incoming investors who will be establishing manufacturing operations in Mexico, allowing them to defer taxes when they import raw goods, materials and equipment (regarded as part of the production process but with no additional value), and pay lower tariffs when exporting finished goods to the US. This program has made it possible for Mexican factories to create competitively priced goods without sacrificing quality or design elegance, making it an attractive option for companies looking to set up factories in Mexico.

5. Shelter Services Minimize Risk

When deciding to set up a maquiladora in Mexico, companies often opt to utilize shelter services. Operating under a shelter means they don’t have an actual legal presence in Mexico—instead, a Mexican-owned entity sets up the maquiladora license and manages trade compliance for the foreign company. That takes on all of the legal liability; should any issues arise, it’ll lie with the Mexican provider that owns the maquiladora license.

Not only does using a shelter service minimize risk for those companies setting up shop in Mexico–it also brings cost savings: those operating under a shelter won’t have to pay income taxes for four years from their start of operations. But arguably just as important is that companies get peace of mind knowing that their partner will handle all of the set-up and administrative tasks, such as finding and leasing a facility, hiring workers, getting permits and licenses, and then handling every day personnel administration well after operations have started.

6. Innovation Happens in Mexico

Mexico isn’t just becoming an increasingly attractive place to build a tactical competitive advantage—it’s also a leading global location for advanced manufacturing. With workers who not only have the skills, but are also eager to add value and seek ways to continuously improve, it’s no surprise that companies often develop and test practices in Mexico that get implemented globally.

As the head of Ford Motor’s Mexico unit, Marcos Perez, said in Bloomberg in June 2019: “Now we are transitioning from Made in Mexico to Designed in Mexico.”

General Motors is similarly focusing on increasing the number of Mexican employees working on design as well as fabrication or assembly. We expect this focus on innovation to increase as Mexican engineering programs continue to grow.

If you would like to learn more about the many benefits of manufacturing in Mexico or get specific information about how much your company can save outsourcing production there, request a consultation with us today!

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