Why do companies produce offshore in Mexico

How can manufacturing in Mexico be organized?

5 ways to manufacture products in Mexico

The independent model

Although the name implies independence from third-party providers, functions such as recruiting, payroll management, import and export as well as accounting, which can be carried out more efficiently by specialized companies, are often initially outsourced in an independent manufacturing company in Mexico. However, many companies build a full administrative team from the start and take care of the workforce, management and senior management themselves.

A new legal entity is usually required to set up an independent plant in Mexico. This new legal entity and the possible association with an associated foreign company leads to questions regarding income tax, consumption tax and compliance with employment, trade and customs regulations, which can be handled by competent and reputable experts in these fields in Mexico.

The substantial up-front investment required to set up a new manufacturing facility creates risks for companies and raises doubts that the facility in Mexico will achieve its goals. However, companies with independent operations have full control. That is why companies that have great confidence in their own capabilities and capacities usually opt for the independent model.

The offshoring model

The offshoring manufacturing model emerged in Mexico in the 1980s. With this model, foreign manufacturing companies in Mexico receive support, for example with administrative and regulatory tasks, and benefit from a lower risk. This model can be seen as a hybrid between stand-alone and contract manufacturing: the foreign company retains full control over all production-related functions and assets, but has to spend less energy on administrative and non-production-related tasks.

When operating through an offshoring company, the overseas company has complete control over production assets, engineering, production processes, quality control and supply chain, but the offshoring company is incorporated in Mexico as a legal entity. This legal entity is obliged to comply with the Mexican authorities and acts as a trading partner for the service providers on site.

In English usage, the term “shelter” is often used in connection with “offshoring”, which implies that the foreign company is shielded or protected from labor, trade and tax laws. In fact, the offshoring model is recognized by the Mexican authorities as a legal entity model because it is a proven mechanism that allows foreign manufacturing companies to enter the Mexican market. The Mexican state gives offshoring companies preferential treatment for income and consumption taxes and grants advantages for import / export in order to consistently protect offshoring companies and their customers.

The fewer than 20 offshoring companies in Mexico are mainly located in states near the border, but can also be found in the Bajío region. Even if offshoring companies ultimately have the same objective, the individual operational design shows differences. Most companies offer comprehensive personnel-related services and competencies for the import and export of goods used and produced in the manufacturing plant.

The contract manufacturing model

Contract manufacturing in Mexico is the same as in other countries. In contrast to the independent operation, the production assets are (for the most part) owned by the contract manufacturer in Mexico, who also controls all areas of production and bills the foreign company for the production of goods. Contract manufacturers in Mexico are typically EMS providers, although contract manufacturing is also increasing in the textile and apparel industries.

The merger or acquisition model

The merger (or acquisition of) a foreign company with an established Mexican manufacturing company is less common when opening a manufacturing facility in Mexico, as most of the established Mexican manufacturing operations that export most of their production are already in the hands of foreign companies are located or are connected to them.

Even if a merger or takeover can significantly shorten the potentially lengthy and expensive introduction of an efficient operation in Mexico, there is a risk that suboptimal management and leadership processes are taken over.

The joint venture model

A merger or takeover is a combination of both companies. The joint venture, however, is a partnership in which each partner contributes certain strengths, whereby a common goal is to be achieved.

A joint venture can prove to be a profitable partnership if the foreign company has its own customer base (e.g. if it is a sales, trading or branding company) and the Mexican manufacturing company has the appropriate assets and skills meet the demand of the foreign partner for certain types of products.

In Mexico's maquiladora industry, joint ventures between independent parties are rare, as each maquiladora has a counterpart overseas.