Quick Guide to Maquiladoras in Mexico: Definition and Benefits
January 28, 2020
Setting up manufacturing operations in Mexico by establishing a maquiladora affords many benefits when it comes to cost, tax incentives, available labor, and more. Get a quick overview on what maquiladoras are, how they began, and some maquiladora pros and cons.
What is a Maquiladora?
A "maquiladora" is a foreign-run manufacturing operation that exports goods to other countries. With beginnings on the border between Mexico and the United States, maquiladoras offer tax, labor, and other benefits to their foreign-owned companies. Though located throughout Latin America, Mexico is home to the vast majority of maquiladoras.
Maquiladoras can import raw materials they use for manufacturing duty- and tariff-free, and then export the final product to the company of ownership. Typically this is the United States or Canada, but recently interest from Germany, China, and other countries throughout the globe have increased maquiladora ownership in these regions. The foreign company is responsible for manufacturing expertise and know-how and generally controls the long-term goals and strategy. However, typically the management of day-to-day operations and administrative tasks are handled by Mexican-based management.
How the Maquiladora program started in Mexico
The Maquiladora Program was established in 1964 as a way to enhance employment and economy along the Mexico-U.S. border and allowed maquiladoras to be one hundred percent foreign-owned and operated. The program was initially developed in 1961 following the National Border Industrialization Program (which encouraged foreign investment to help stimulate domestic markets in Mexico).
In 1989, a revision to the program allowed maquiladoras to additionally sell up to fifty percent of their products to domestic markets in Mexico. Despite these benefits, however, maquiladoras remained a relatively untapped resource until the passing of the North American Free Trade Agreement (NAFTA) in 1994. Under NAFTA, maquiladoras could make use of waived Mexican import duties and receive preferential rates on duties for specific products.
In 2006, the IMMEX Program was established with some additional benefits and became what we know as maquiladoras today.
Understanding IMMEX: The Modern Maquiladora
What is IMMEX? IMMEX stands for Industrial Manufactuerera Maquiladora y de Servicios de Exportacion, which roughly translates to the Maquiladora, Manufacturing and Export Services Industry. IMMEX incentivizes manufacturers to export goods and strengthen Mexican exports. In fact, the program led to a ninety-nine percent increase in export trade in just over a decade, going from $210 billion in 2005 to $419 billion in 2017.
In essence, the development of IMMEX reduced costs, created new ways for companies to operate, and, overall, modernized the procedures associated with maquiladoras. There are five distinct types of IMMEX registrations based on the type of product or service exported:
- IMMEX Holding Company Program
- IMMEX Industrial Program
- IMMEX Services Program
- IMMEX Shelter Program
- IMMEX Outsourcing Program
You can learn more here about the IMMEX Program and the applicable registrations.
Now that you understand what a maquiladora is, what are some pros and cons of setting up a maquiladora in Mexico?
Flexible Locations: Maquiladoras in Mexico can be built virtually anywhere, as long as the products manufactured are sold outside of the country. If they aren't, the foreign company must pay a customs tax. Though this is an additional cost, it is a minor one when compared to the many other significant benefits that come with manufacturing in Mexico.
Easy Manufacturing Start-Up: Starting manufacturing operations in Mexico can initially seem like a daunting task. Beginning production in a foreign country necessitates a clear understanding of the culture, government structure, regulations, and policies. However, the maquiladora model is well established, which makes it a more accessible way to enter the country.
Flexible Products & Services: Foreign companies setting up maquiladoras in Mexico have no limit on the types of items that can be manufactured, with the only caveat being the production of handguns and other firearms. In this instance, the foreign company must obtain a permit from Mexico's Secretary of Defense before operations begin. Additionally, if products involve the use of radioactive or nuclear components, the Mexican Nuclear Regulatory Agency must be notified in advance. A manufacturing permit is granted upon inspection and approval.
Easy Administrative Management: One of the easiest ways to manufacture in Mexico is to operate via and IMMEX Shelter Company while who has a manufacturing community. Typically provided by a shelter service provider, manufacturing communities help companies reap the cost-effective benefits of manufacturing in Mexico without needing to tackle every nuance of foreign company ownership. More than a industrial park, these communities provide several services, such as leasing buildings, obtaining necessary permits, setting up payroll, benefits, daycare services, taxes, zoning, benefits, customs, and more. While Mexican policy has made manufacturing in maquiladoras increasingly more accessible, manufacturing communities help make the process as efficient and straightforward as possible.
Cost Benefits and Tax Incentives: One of the most important aspects of any manufacturing operation in Mexico is compliance with tax and fiscal regulations. These regulations can potentially be costly and complicated for some entry strategies. However, maquiladoras offer a variety of tax benefits for corporate income tax, payroll tax, and VAT tax (value-added tax) payments. Low labor costs, low shipping costs (especially to the U.S.), fast delivery, and duty-free production materials and equipment are also significant benefits that can directly impact a company's bottom line.
Setting up a Maquiladora in Mexico
Because there are numerous reporting requirements that companies must fulfill to gain IMMEX registration, many entities new to Mexico opt to work with a shelter service provider. These partners are experienced with maquiladora establishment and management. They can help navigate the red tape to get you quickly up and running with several options for the level of control needed from your provider. Options range from full-service management (including everything from registration to recruitment) to service-specific possibilities that allow you to select precisely the areas where assistance is required.
If you're ready to dive deeper into the benefits of the maquiladora and IMMEX program, we can help. To get your questions answered or get started, talk to a Tetakawi expert to see how we can make manufacturing in Mexico a reality for your company. You can also learn more about the Maquiladora program and what it costs to manufacture in Mexico by watching the video below.