- Manufacturing in Mexico
- About Tetakawi
February 05, 2021
There are many advantages to manufacturing in Mexico under the umbrella of a shelter service provider—and many types of shelter providers from which to choose. Because many companies offer shelter services in Mexico, it's essential to recognize that the service offerings may differ widely among these companies. Before you select a provider, make sure you understand all available services.
Below we'll explain some of the different offerings you may run into from the wide range of shelter service providers.
The term "shelter" has been around for decades and has been broadly applied in that time. A loose definition may have contributed to some of the discrepancy in service offerings you'll find among shelter providers. Shelter companies serve as the legal entity in Mexico under which a corporation from another country can do business in Mexico. Operating under this "shelter," a foreign entity can operate in Mexico without the risk and potential liability that comes with the creation of a wholly-owned foreign subsidiary. The foreign entity essentially operates as a division of the Mexico shelter service provider.
In this relationship, the shelter company assumes all the risks that come with running a company in Mexico: tax liability, regulatory requirements, Customs compliance, labor claims, and the like. However, unlike in a contract manufacturing arrangement, the foreign entity maintains complete control over its manufacturing operations in Mexico.
Under alternative business models, used by some companies that may refer to themselves as Mexico shelter service providers, the foreign manufacturer may have to create a Mexican subsidiary through which to operate. In this case, the service provider would handle any of a wide range of administrative functions for the foreign entity on an outsource basis. However, the foreign company would not be "sheltered" from direct liability that might be related to Mexican regulatory agencies or employee issues.
Certainly, this business model can offer some advantages in simplifying the start-up process. The shelter company could provide anywhere between a single service or a complete array of HR and other administrative functions, depending on the foreign entity's needs.
A foreign company may see these service offerings as a stepping stone to operation as a standalone Mexican operation. However, this model is not a Mexico shelter company arrangement in the traditional sense.
It's important to ask potential shelter providers about how they handle business licensing and upcoming outsourcing reform. Would you, the manufacturer, operate in Mexico under the shelter service provider's business license? Or does the shelter service provider obtain a separate license for each client? The answer to this question reveals the level of liability to which your operations would be exposed and has important tax, labor, Customs, and legal ramifications.
While liability is the crucial distinction separating full shelter providers from alternatives, there are also some differences in the level of services available. For example, some full-service shelter companies own industrial parks, providing a space for tenants that operate under the shelter agreement.
This service offers more than convenience in finding real estate: it also provides economies of scale that can benefit each foreign manufacturer operating in this location. By concentrating services in a few such locations, service providers can maximize the number of benefits they're able to provide, including amenities such as on-site medical care or employee transportation, as well as consolidated freight services, to name a few. In other words, even a fairly small manufacturing company can gain access to a higher level of service that might not normally be available to small firms, and at a competitive price.
In addition to offering economies of scale, this concentrated business model can also contribute to lower labor costs. Through a site-specific approach, on-site personnel on the shelter company's payroll are available to handle a wide range of tasks. This might include responsibilities for HR, accounting, purchasing, Customs management, and more. While this higher level of responsibility can lead to a higher upfront shelter fee, it reduces the number of staff otherwise needed to support the foreign manufacturer's operations, making it an overall more cost-effective approach.
Not all shelter providers offer real estate, and not all provide a full range of offerings to keep a manufacturing operation running smoothly into the future. Some shelter service providers focus solely on administrative offerings. They may be able to connect a manufacturer with leasable Class A real estate, but this would be independent of their shelter offerings. And, in some cases, this may provide the manufacturer a preferential level of flexibility in where they're able to locate. This can provide more real estate options, or proximity to a major customer.
On the other end of this spectrum are real estate-focused companies that may also offer some level of administrative shelter services. It's important to understand how the shelter service providers with which you consider working prioritize their service offerings. You may wind up with a built-to-suit facility that leaves you scrambling to manage labor and related costs.
Of course, there are also options in between. Some shelter service providers in Mexico focus solely on helping manufacturers secure the resources they need to get up and running. These services veer more toward helping manufacturers put together a team and work through the regulatory hurdles that come with operating in a new country.
By understanding the levels of service available under the "shelter service" label, you can begin to make a better decision about what level of risk you're willing to accept.
Asking the right questions upfront can ensure that you get the level of service you want and the risk protection you need. To begin to dig deeper into the right questions to ask before you commit to a shelter service provider, download Tetakawi's free ebook, 50+ Questions to Ask About Manufacturing in Mexico.
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