What Are The Risks Of Doing Business In Mexico?

October 06, 2021

Over the last few years, the Mexican economy has grown until it is now the 15th largest in the world. A large element of Mexico's success has come from the implementation of foreign trade deals with a number of nations—primarily, Canada and the United States. An increasing number of businesses are now realizing the benefits of offshoring.

In other words, companies are outsourcing aspects of their business to Mexico, allowing them to take full advantage of reduced manufacturing costs and access to quality, skilled labor at lower rates than those offered in either Canada or the United States, and then importing the merchandise from Mexico.

While there are undoubtedly a number of advantages to working and doing business south of the border, it is worth noting that there can also be downsides to Mexico's industry. Being aware of these before you make any decisions can help to ensure that you make the best move for your company. 

This article will discuss the global business complexity and potential effects of Mexican operations. Without further ado, it’s time to consider the risks of doing business in Mexico.

Be Cautious With Contacts

Staying sharp and shrewd is common sense in any country, but dealing with the wrong contact in Mexico could have legal implications for your company. The Mexican government will view your organization in a negative light if you are found to have connections with criminals or dangerous characters—for example, if your supplier is found to have connections to a gang or possesses a criminal record. 

To protect your professional reputation and your company, you need to be careful who you work with.

High Crime Levels

Another major risk is the high level of crime still present in many areas of Mexico—particularly Juarez and other Mexican border cities. Drug dealers and criminals retain a sinister presence in several border areas. Some places are more dangerous than others, and many factories will have strong security measures in place to protect foreign companies. 

However, the risks remain. Keeping your wits about you is crucial, not only to preserve your company but also to potentially save your life.

Slower Timelines

As with any other global country, there are a lot of forms, permits, and pieces of paperwork that must be completed, read, and processed before you can move ahead with any business deals or trade opportunities. 

The government departments of Mexico have a reputation for being notoriously slow when it comes to processing and granting trade permits, and this can be an issue if you need to move quickly, or have time-sensitive investments.

Tricky Tax and Government Policies

In a recent analysis by the World Bank, Mexico ranked relatively low down on the scale with regards to the ease of doing business in the country. The research considered a range of factors, including starting a business, dealing with permits, accessing electrical supplies, registering property, paying business taxes, enforcing contracts, and obtaining credit, amongst other factors. 

The highest possible number of points is 100, indicating the countries with the easiest government policies to deal with; Mexico scored a 72. While still ahead of India with 67, this is still far behind the United States’ score of 83. The point is that you may encounter some culture shock trying to do business in Mexico.

One of the key issues is around labor. Labor laws in Mexico favor employees, not employers, and this can be tricky to work with. As an example, while employees may simply leave your business, terminating an employee is a long, arduous, and often expensive process. 

Taxes and payroll can also be difficult to navigate, as Mexico uses a unique accounting system which can be tricky for even successful Mexican companies. Investing in an experienced consultant should always be considered an essential expense.

Learn The Language

One of the largest practical issues with moving your business to Mexico is the prevalence of Spanish. This is the official language of Mexico  nation and is considered the language of business. Any tax documents or official papers will need to be translated into Spanish. And Mexican companies require proficiency in Spanish.

In addition, you will need a good working knowledge of the language—not only to be taken seriously, but to avoid the risk of being ripped off or, as discussed earlier, unknowingly entering into business with a potentially harmful contact.

Uncertain Future

One of the largest concerns about doing business in Mexico comes from uncertainty over the future, especially with regard to ongoing discussions and conversations about the free trade agreements with the United States. 

A large portion of the Mexican economy has come from the benefits of these trade deals, and any alterations or adaptations could have serious impacts on the investment opportunities and potential profitability of trade and doing business in Mexico. 

This lack of certainty is an issue and risks becoming a self-fulfilling prophecy. The more businesses who hold off investing due to doubts, the larger the risk to the Mexican economy.

Doing Business in Mexico

Despite risks, Mexico’s competitive advantage promises great returns, attracting businesses to set up bases or expand their functions in the country. By manufacturing in Mexico, companies enjoy a low-cost skilled labor force that can efficiently scale trade operations. Plus, if you’re an American company, you get the advantage of being in close proximity to the United States, making it easier to trade and manage multiple entities.

Successful Mexican Companies

Mexico is home to several successful companies that are making waves even beyond Mexico's borders. Corporations like telecommunications giant América Móvil, beverage manufacturer FEMSA, and food processing frontrunner Grupo Bimbo are testaments to the might of Mexico as a business ground.

Even foreign companies that simply have a part of their business in Mexico are also relishing in significant growth and trade gains. These include entities in various industries, such as automotive (BMW, Nissan, Honda) and home appliances (LG, Whirlpool, Mabe). They typically host their manufacturing operations in Mexico, proving that the area is fertile ground for business efficiency and expansion.

The Challenges of Doing Business in Mexico's Market

Finding success in Mexico isn’t always guaranteed—as is with anything in business. There are a few challenges you may face along the way that could make running trade operations a bit more difficult–here are some examples:

Permits and Registrations

Dealing with the paperwork required to start and operate a business in Mexico can be arduous for any company. Registering with the authorities, getting electricity, securing construction permits, filing property, and enforcing contracts are just some of the necessary bureaucracy-heavy procedures that you must go through. Some of these take months to complete, and it can take a while to hear back from government agencies, so it can be complex for a global company unfamiliar with the environment.

Taxes

Paying taxes is a labor-heavy task in Mexico. Though there are only six types of payments to be made, doing so usually takes over 200 hours of a business’ time per year, primarily due to the need for in-person interactions with the state and a reliance on hard-copy documents. Mexico’s tax requirements also entail a strict recording of transactions to properly trace all transactions, money, and beneficiaries, which can get overwhelming for the group in charge of company finances.

Labor Laws

As mentioned, labor laws in Mexico are particularly tricky. To be able to employ people at your company, you must register with several authorities, all relevant procedures of which must be carried out by a legal representative. Plus, given that local labor laws favor employees, there are statutes in place that could affect your profits, such as the payment of certain taxes for payroll, which will be entirely shouldered by the company.

Global Entity Management

To alleviate the risks and overcome the challenges of doing business in Mexico, it’s essential to employ Global Entity Management from Tetakawi, a solution that allows you to manage compliance obligations in the country, even if your business is headquartered at a global location.

From services ranging from advisory to support to manufacturing communities, Tetakawi can guide you through the administrative, legal, logistic, financial, and operational requirements needed to establish factories in Mexico. Contact Tetakawi today to get started.

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