Manufacturing in Mexico: Everything You Need to Know About Mexico Production
February 22, 2020
Mexico remains a popular destination for foreign direct investors looking to diversify their manufacturing footprint, and for good reason. Since 1999, more than 13,000 companies have reaped the benefits of manufacturing in Mexico.
As more companies move to invest in Mexico, they attract supply chain partners, strengthening the existing operational infrastructure for major industries in Mexico. And as more large organizations recognize the benefits of regionalization, centering manufacturing hubs within low-cost centers close to their largest markets, Mexico has become an even more enticing target.
Manufacturers wondering what Mexico may hold for them will find a straightforward path to operational readiness, set by countless other organizations. If your company is thinking about manufacturing in Mexico, this article will provide you with all the information you need to start your due diligence process.
Advantages of Manufacturing in Mexico
There are many reasons that foreign direct investors looking to diversify their manufacturing footprint consider Mexico manufacturing locations. Here are some of the main benefits associated with manufacturing in Mexico:
1. Government incentives
The federal government is committed to supporting manufacturing in Mexico, which made up 17 percent of the country’s GDP in 2018. One of the primary forms of support is through tax incentives under the IMMEX program. Through this government program, Mexico manufacturers exporting their goods within a set timeframe are allowed “temporary” importation of production materials and assets without having the pay to 16 percent value-added tax on those items.
Companies must be registered under the IMMEX program and obtain an IVA Certification to take advantage of these significant cost savings. The simplest way to take advantage is through the maquiladora program. Manufacturers in Mexico operate under the legal framework of a shelter service provider registered under the IMMEX program. In this way, manufacturers moving into Mexico can simplify regulatory red tape, lessen their tax burden and, in some cases, get new operations up and running in as little as 30 days.
2. Access to global markets
Given its proximity, it’s no surprise that the United States is Mexico’s largest trade partner. A full 76.5 percent of Mexico’s exports were sent just north of the border to the U.S. Companies looking for a foothold into the U.S. market may establish Mexico operations for the added benefit of cost-effective shipping. Consider that it costs $1,800 and takes one week to ship a 40-foot container to the U.S. from Mexico, compared to the $4,300 cost and 5-week timeline to ship from China. Deepwater ports with access to the Atlantic and Pacific markets, supported by rail lines, international airports, and the NAFTA Superhighway running all the way to Canada, make this trade possible.
In addition to its direct U.S. trade, Mexico is also a reliable choice for investors worldwide. In 2018, Mexico shipped USD 450.9 billion worth of products around the world. With more free trade agreements (FTAs) than any other country in the world, Mexico is a trading partner with more than 50 countries, with agreements reaching into Europe, South America, and Africa. These agreements reduce barriers to trade, including tariffs and import quotas, to build strong cooperation in the exchange of goods and services.
What’s more, the trend of regionalized production, with manufacturing hubs in several of Mexico's regional markets, is taking a stronger hold in many industries. With disruptions to trade in China, ranging from U.S. tariffs to viral outbreaks, manufacturers around the world are recognizing that a broad manufacturing footprint offers more flexibility and less risk than concentrating production in a single location.
3. Cost for skilled labor
The low costs for skilled labor remains one of the leading advantages manufacturers see from operating in Mexico. Due to the cost of living differences, hourly wages for direct manufacturing laborers in Mexico range from USD $2.40 to $3.04 versus $16.07 to $25.98 in the United States. While the U.S.-Mexico-Canada Agreement has set stipulations urging employers to increase wages, experts predict that projected increases will be phased in across decades. Those same experts expect that those wage increases ultimately will help employers retain more highly trained workers in Mexico while boosting overall manufacturing productivity.
Perhaps more important than the cost equation is the fact that, particularly around industrial clusters, it is relatively easy to find workers well trained to perform sophisticated manufacturing tasks. Because of the manufacturing industry’s critical role in supporting of the national economy, there are many training programs available to Mexico manufacturers, many of which provide a combination of technical training with hands-on experience.
Major manufacturing industries in Mexico
While any manufacturer can benefit from doing business in Mexico, a handful of manufacturing industries will find tremendous benefit from concentrated supply chains. These industrial clusters help companies scale supply chain efficiencies and often generate stronger training resources for a local workforce focused on securing these jobs. Five industries, in particular, have attracted supporting manufacturers to concentrate strong supply chains within Mexico.
Aerospace manufacturing makes up nearly half of foreign direct investment in Mexico. Approximately 300 aerospace manufacturing companies, including OEMs, Tier 1, 2, and 3 suppliers, operate out of industrial clusters concentrated in Queretaro, Sonora, Chihuahua, Nuevo Leon, and Baja California. Queretaro, home to the largest aerospace cluster, draws support from local university partnerships with Bombardier.
With nearly a century of experience in Mexico, the local automotive industry is the fourth largest exporter of auto parts in the world, and first in auto exports to the United States, making this one of the most significant industries in Mexico. Ten automotive OEMs have established a presence in Mexico and consistently work with tiered supplier networks to enhance productivity and export functions. Automotive manufacturing companies in Mexico have established a presence in every corner of the country, but are primarily clustered around Coahuila, San Luis Potosí, Baja California, Sonora, Nuevo León, Queretaro, Jalisco, and Guanajuato.
3. Medical Devices Manufacturing in Mexico
Producing medical devices is a complex process, often produced by hand due to the intricacy and small size of many such devices. The multiple-part assembly process demands highly skilled labor, readily found in Mexico’s workforce. All told, Mexico’s medical device industry manufactures a range of products from nearly 650 companies that export about USD 8 billion altogether. The vast majority of those products — 92 percent — head to the United States, with the remainder exported to Germany, Italy, Spain, the Netherlands, and Japan. The largest cluster can be found in Baja California, with 67 medical device companies, followed by Chihuahua, Coahuila, Nuevo León, Jalisco, Sonora, and Tamaulipas.
Electronics manufacturing in Mexico supports many of the other manufacturing activities taking place in the country. Overall, western Mexico specializes in manufacturing aerospace, hi-tech, IT, and electronic sub-assembly parts in the states of Baja California, Sonora, Chihuahua, Jalisco, and Aguascalientes. Eastern Mexico specializes in manufacturing parts for computers, home appliances, and consumer goods, with activity concentrated in Coahuila, Mexico City, Nuevo León, Querétaro, and Tamaulipas. Both regions specialize in automotive and telecommunications components.
5. Appliance Manufacturing and Furniture Manufacturing
Mexico is the fifth-largest exporter of appliances in the world, and a significant exporter within the furniture and household manufacturing industry. Many of the companies in these industries gravitate towards other industry clusters to pull from a similar workforce knowledge and supplier network. Queretaro, Tecate, Guadalajara, Monterrey, and Saltillo are particularly attractive for both furniture and appliance manufacturing in Mexico.
Steps to start manufacturing in Mexico
Companies ready to take advantage of the strengths of Mexico’s manufacturing centers have several choices to make about how and where they’ll enter the market. With each option, an organization will have to decide the level of control they want to maintain over each aspect of their business and where they might benefit from in-place solutions. The first of those choices is related to the operational model.
Step 1: How do you manufacture in Mexico?
The first step to launching a manufacturing operation in Mexico is to identify the right operational model for your organization. There are several options available, each with varying levels of control and responsibility.
A standalone factory requires the organization to form a new legal entity in Mexico and manage the related regulatory requirements, proper permitting, and to take responsibility for full income and consumption taxes. While this model gives a company complete control over its Mexico operations, many companies do opt to outsource certain functions to local consultants, at least initially.
The “shelter” manufacturing model began in the 1980s as a way to help foreign investors reduce their risk in manufacturing in Mexico and help speed their operations to market. The term “shelter” implies shielding the international company from exposure to trade, labor, and tax laws. Through this model, the foreign investor maintains total control of all production-related functions and assets, while an IMMEX-registered shelter service provider handles all administrative and non-production burdens. The shelter provider is the legal entity responsible for regulatory compliance and with which local service providers trade.
Shelter service providers do not all offer the same level of service, so it’s essential to identify the level of support that is right for your organization. There are roughly six levels of services available from shelter companies in Mexico:
- Full-service Mexico shelter companies provide a complete array of services, with help from start-up and real estate leasing to ongoing accounting and HR support.
- Full shelter services focus on administrative support from day one. However, these companies aren’t in the business of leasing real estate.
- Mexico shelter companies for start-ups help foreign manufacturing entities get set up, but then turn daily operations over to the international manufacturer’s in-house support team.
- Contract manufacturing plus some shelter services is an option that connects manufacturers with support on an as-needed basis, including subcontracted workers.
- Real estate companies that also offer shelter services focus on the rental and sale of industrial real estate. Some may also provide some level of administrative support.
- Pick-and-choose shelter services allow manufacturers to tailor service offerings that meet specific needs.
Contract manufacturing model
Contract manufacturing in Mexico is similar to models used in other countries. Unlike a standalone operation, a contract manufacturer in Mexico owns most production assets, controls production, and charges the foreign company a fee for producing goods. As a result, the overseeing company has little control over the quality of the work being performed by the contractor.
Merger or acquisition model
Although less common, some foreign investors opt to enter the Mexican market by merging or acquiring an established Mexican manufacturer. Through this method, the international company benefits from established manufacturing operations in Mexico that already meet Mexico’s compliance and regulatory requirements. While a merger or acquisition can shorten the process of launching operations, it also presents risks in integrating management partners.
Joint venture model
A joint venture is a partnership through which each company contributes their unique strengths toward achieving a common goal. This model can be beneficial when the foreign company provides a customer base, and the Mexican manufacturer offers the necessary assets and expertise to meet the demand for specific product types.
Step 2: Where do you manufacture in Mexico?
For many Mexico manufacturers, proximity to industrial clusters provides a good starting place for site selection. Companies seeking a rapid startup may find the most benefit from joining a manufacturing community. These communities are far more than industrial parks. Typically, they combine leasable Class A industrial space with shelter services under the IMMEX umbrella that include a legal framework and onsite support such as assistance with HR, payroll, import/export, accounting, and purchasing. Communities like the Bella Vista Manufacturing Community in Sonora or the Zapa Manufacturing Community in Saltillo, Coahuila, ensure utility connectivity, provide onsite training, and even feature amenities to appeal to your potential workforce.
Manufacturers looking for more customized solutions may opt to build new. In this case, it’s essential to consider the following site selection factors:
- Transportation ease. Consider proximity to major highways, land ports of entry, airports, seaports, and rail spurs. Easy transport to the U.S. is one reason more than 56 percent of maquiladoras are located in one of the six Mexican states bordering the United States.
- Utilities availability and cost. Overall, utility costs also are competitive with U.S. costs. However, not all industrial areas are fully serviced with natural gas. While pipelines are under construction to alleviate demand, manufacturers may want to focus on areas already connected to a source of natural gas to prevent the risk of service disruptions.
- Potential for available staffing. Every location will have unique staffing costs. Regional manufacturing centers, with plenty of competition, may push companies to offer more competitive wages for employees. However, operating in rural areas may lead to additional costs for employee transportation or food services. Employers may weigh their need for already trained staff compared to providing training in-house.
Primary manufacturing locations in Mexico
Each region in Mexico offers its own benefits, so it’s essential to have your priorities in order as you consider future sites. Is immediate access to the U.S. market a priority? Or are you willing to locate further south where wages may be less competitive? Are there certain supplier types whose proximity you’d like to leverage? Or do you just need ample room to launch your own facility? Here are the most popular manufacturing locations & venues in Mexico:
- Tijuana, Mexico’s top export manufacturing base, attracts manufacturers in a range of sectors due to its proximity to the U.S. border. As a result, the city is also home to one of the country’s largest populations, 26 percent of whom are active employees in manufacturing. This easy U.S. access comes at the cost of potentially steeper costs for wages and facilities.
- Other manufacturers might benefit from moving slightly further afield to Monterrey, the third-largest city in Mexico and a commercial, industrial, educational, and transportation hub of northern Mexico. As of 2017, manufacturing in Monterrey made up more than 60 percent of exports from Nuevo Leon. The city is a center for steel production, which has proven attractive to manufacturers of every industry: from aerospace and automotive to electronics and medical devices.
- Many automotive manufacturers look just beyond Monterrey to nearby Saltillo, the industrial capital of the state of Coahuila. Chrysler and General Motors established bases here in the 1950s, and robust infrastructure of training institutes and research centers has grown up in support.
- Meanwhile, aerospace manufacturers, including Airbus, Bombardier, and Safran, have prompted a greater focus on Queretaro. Because the city’s growing manufacturing sector sits roughly nine hours from the U.S border, wages for the local workforce tend to be more competitive than in other areas.
- Guanajuato sits just north of Mexico City, in the El Bajio manufacturing region. It has become the fastest-growing manufacturing state in Mexico. Economic output, particularly from its strong automotive manufacturing sector, is the sixth highest in the country and growing fast.
- Hermosillo, Guaymas, and Empalme, Sonora create a network of manufacturing cities where manufacturers in aerospace, automotive, electronics, optical, medical device, metal fabrication, and other industries can find a stable and competitively priced labor force. The cities have easy access to a deep-water port, international airport, and major U.S. highways.
Step 3: What does it cost to manufacture in Mexico?
The only real way to ensure your company will see cost savings from manufacturing in Mexico is to launch a complete cost analysis of initial and long-term costs. Some factors to focus on in that analysis include:
- Lease rates: Average lease rates per square foot per month, triple net, ranging from an average USD 0.42 in Monterrey to $0.48 in Tijuana. Prices will fluctuate depending on the specific region and quality of the industrial property.
- Utility costs: Electrical costs, on average, fall around $0.110 per kWh. In some areas, these costs may be offset by different demands for air conditioning or humidity control. Natural gas costs will range from USD 0.037 per m3 to $0.0956 per m3, depending on the region and monthly volume. Water and sewer costs of USD 0.007 per gallon is typical.
- Payroll: Wages will vary depending on the skill set required. On average, unskilled direct laborers in Mexico may earn around USD 2.40 per hour. More skilled direct laborers, such as CNC machinists who may have several years of training, may make closer to USD 6.02 per hour. For indirect labor positions, such as a materials planner, wages might average closer to USD 13.51 per hour for a specific skill set. Of course, these averages are based across a wide range of pay scales across Mexico but offer some insight into potential cost savings.
- Logistics: In addition to typical freight costs, companies will need to factor in customs costs. These costs will vary based on where you’re shipping your products and how often you ship.
- Regulatory and administrative costs: There will be initial fees for incorporation, registration requirements, and operating permits. Some of these costs can be reduced by manufacturing through a shelter service provider.
- Comparable costs: An accurate cost analysis should benchmark operational costs in similar industries and regions to get a sense of whether you’re getting the most out of your operational expenditures.
Step 4: How will you set up a factory in Mexico?
Companies ready to begin manufacturing in Mexico can ramp up operations in as little as 30 days with the assistance of a shelter service provider. And any company ready to maximize their speed to market can get a new operation off the ground quickly with ample advance planning. Important considerations to examine in this ramp-up stage include the following:
- Decide if you will sell goods in Mexico or solely export products. Foreign investors that will export all goods manufactured in Mexico do not need to establish a separate legal entity in Mexico. However, if the manufacturer plans to invoice the sale of those goods and services to companies within Mexico, it must have a Mexican entity.
- Determine the appropriate corporate structure. Companies will want to explore fully whether a level of shelter service can help them better manage costs or determine whether they are best benefited by a S.A. de C.V. or S. de R.L. corporate structure.
- Identify regulatory requirements. Companies operating under a shelter service provider can reduce a regulatory burden that includes IMMEX registration and obtaining registration or permits from the Social Security Department (IMSS), Customs (ADUANAS), and the Department of Environmental Health and Safety (SEMARNAT), among others.
- Choose whether to lease, buy, or build new. Ample Class A industrial space can be found across Mexico, often in well-connected industrial clusters, and quickly adapted to meet a manufacturer’s unique needs.
- Identify staffing needs, including training. Strong vocational training in universities and specialized manufacturer-supported training centers, is a priority in Mexico.
- Evaluate local suppliers. There may be opportunities to streamline costs by getting to know local suppliers’ parts capacity and competency in providing quality parts.
- Meet with authorized customs brokers. Only approved Mexican customs brokers can clear your manufactured goods through Mexican customs.
Ready to manufacture in Mexico?
Operating in a low-cost manufacturing environment is a fine strategy for reducing operational expenses. However, truly seeing those cost benefits demands ample advance planning. Speed to market also plays a major role in realizing cost savings. Companies that quickly ramp up their manufacturing operations will more quickly see a return on their investment. This is one more area where manufacturing in Mexico offers significant advantages. The shelter service model can be a major boon to companies willing to benefit from working with an experienced advisor.
To develop the right approach for your company to begin manufacturing in Mexico today, contact Tetakawi.
Below this text, you will find a recording of our webinar, "Should you manufacture in Mexico?".