What’s the Right Level of Risk for Your Mexico Organization’s Operating Model?

September 25, 2019

Making the decision to diversify your business footprint with a location in Mexico is just the first in a long string of decisions that must be made prior to operation. Perhaps one of the most impactful decisions comes in determining the type of operating model that will best meet your needs. That decision will impact the level, and risk, of investment you’ll be making as well as the amount of control you’ll have over every factor of the process.

Here we’ll take a closer look at the options available to help you identify the level of risk that’s right for your organization.

Greenfield investment

Companies that want full control over every factor of their operation may opt to make a greenfield investment. The Bureau of Economic Analysis (BEA) describes a greenfield investment as a project “where foreign investors establish a new business or expand an existing business on [another country’s] soil.” More than that, this type of independent investment includes the design and construction of a new facility.

The advantage of a greenfield investment is that it gives a company full control over every aspect of the company. This makes sense for specialized manufacturing operations that operate using manufacturing, staffing and branding processes already in place in locations around the globe.

Greenfield investments often benefit from having large economies of scale thanks to their global reach. This is critical because this is type of investment holds the highest level of risk. These companies may benefit from potential tax breaks due to the jobs they bring into the local economy from construction through operations, but they also likely face high upfront costs for permitting, facility construction and staffing.

BMW’s $1 billion facility in San Luis Potosi is the latest example of a massive greenfield investment. The global company’s most resource-efficient plant opened in June 2019 to further the company’s balance of products around the world. However, it opened ready to claim the benefits of NAFTA just as the agreement fell to renegotiation.

Brownfield investment

Foreign companies looking to enter a new market quickly or reduce their upfront expansion costs may invest in an existing facility, through lease, purchase or corporate merger or acquisition. This brownfield investment brings with it lower fixed costs because infrastructure is already established. In some cases, such, companies may be able to employ workers who already worked at the facility and thereby lower their staffing costs.

However, manufacturing operations typically have very specific needs and it’s likely organizations will require some level of renovation to ensure the existing facility fits new needs. Older facilities also demand a higher (read: more expensive) level of maintenance and upkeep.  

China-based Dynasty Golf, a manufacturer of premium golf clubs and golf accessories, opted for brownstone investment when it decided to diversify its global footprint with a location in Mexico. The company opted earlier this year to lease a 28,690-square-foot manufacturing facility in Tijuana.

Joint venture

Two or more companies may decide to create a joint venture to share resources in order to complete a specific  project. Through a contractual agreement, the parties involved will agree to share profit and loss as they work to meet a specific objective.

While joint ventures often are created so that the company may benefit from its partners’ technical knowledge, these partnerships also help alleviate the financial burden of entering a new market. In many cases, a company operating outside of Mexico may opt to enter the market by creating a joint venture with a local company that already meets local regulatory requirements and has infrastructure in place. Both companies can benefit from a rapidly expanded portfolio and global market share. However, this model isn’t without its challenges. Differences in priorities, management style and culture can rapidly derail the success of a joint venture.

This is the model that Chicago-based FreightCar America Inc. is taking. The rail car manufacturer has locations across the United States, but announced in September that it would be expanding into a new facility in Castaños, Mexico, through its new joint venture with Fabricaciones y Servicios de México S.A. de C.V. The announcement comes as FreightCar finalizes construction on a state-of-the-art facility in Alabama.

FreightCar is committing $25 million to the joint venture over the next several years, but the two companies announced plans to evenly share profits and losses of the joint venture. The entity will be consolidated and controlled by FreightCar.  

Subcontracting

Subcontracting involves hiring another company or workers to perform certain specific tasks. Not to be confused with outsourcing, subcontracting typically refers to bringing in outside companies to complete tasks that couldn’t be completed internally, whereas outsourcing generally refers to processes that could be performed internally by a company.

Companies that subcontract out work often benefit from lower prices as well as being able to focus on those tasks that they perform best. However, the overseeing company has virtually no control over the quality of the work being performed by the subcontractor. That makes it incredibly important to partner only with companies that have proven reputations for success.

Shelter model

Foreign manufacturing entities looking to expand into Mexico can work with a shelter service provider that acts as the local employer and manufacturer of record. The shelter manufacturing model provides a legal framework for operation and may offer a wide range of services that remove the regulatory and financial burdens of operating in Mexico. This model offers a rapid startup, low risk, and in many cases may help lower costs. There are many variations of the shelter model, so foreign companies have some flexibility in selecting the right partner.

As a shelter service provider, Tetakawi supports more than 75 multinational clients of all sizes with a range of support services. To learn more about the vast benefits of the shelter model, reach out to learn more about how Tetakawi can help you.

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