Frequently Asked Questions About Manufacturing in Mexico

It depends on what your company is looking to gain financially by having a manufacturing presence in Mexico. You also need to think about readiness, willingness and the ability to go through the learning associated with operating in a foreign country.

Foreign companies that establish a manufacturing operation in Mexico are typically responding to cost reduction pressures or customer preferences.

Having a manufacturing presence in Mexico is no longer strictly for large multinational corporations. There are business models that allow small operations to benefit from operating in Mexico without having to build their own economies of scale to be competitive.

To evaluate if a manufacturing presence in Mexico is right for you, seek out information from experienced and reliable sources that currently operate in Mexico and have been successful.

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The first step is to know the lay of the land in terms of location , real estate, legal framework , labor, logistics, regulatory compliance and, of course, costs.

Foreign companies establish a manufacturing presence in Mexico using one of three primary business models: (1) standalone, (2) using a shelter provider that manages a manufacturing community, or (3) a joint venture. Each of the these business models has advantages and disadvantages in terms of startup and operating costs, risk and exposure and control.

Legal entities formed by foreign companies to produce goods in Mexico that will subsequently be exported are commonly known as a Maquiladoras or maquila operations. These operations are taxed differently than native manufacturers because of their relationship with the foreign company that provides all of the production materials.

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An assembly-line worker in Mexico with one year experience will cost the employer approximately $500 USD, which is comparable to the cost of a worker in China who has a similar skill set. The difference, however, lies not in the monthly cost, but in the hours worked during the month.

Mexico has a 48-hour work week compared to China, which has a 40-hour work week. Overtime pay is due to employees in both countries when the hours worked exceed the the standard work week hours. Labor laws in Mexico are strict.

Overtime pay is calculated at double the wage for up to nine hours worked beyond the standard work week threshold. . However, any employee who works 57 hours or more is paid at three times his or her regular wage.

While overtime pay and time-and-a-half are required by Chinese law, many employers may be unwilling to adhere to this legal requirement.

Without overtime, it is likely that an assembly-line worker costs the employer less in Mexico than in China.

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Yes. There are thousands of foreign companies with manufacturing operations in Mexico. While worker safety is always an element to consider in any country, the level of security required to do business in Mexico is no different from that of any other developed nation.

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The wages for direct labor in Mexico are often determined through annual negotiations between the employer and a labor union. The wages for indirect positions is driven by supply and demand.
Certain companies categorize direct labor by skill set required such as (1) assemblers and fabricators, (2) operators using certain type of machinery, (4) painters, (5) welders, (6) CNC machine operators, (7) CNC setup technicians, (8) CNC machinists, etc.

For people working as assemblers and fabricators, employer costs can range from $1.60 an hour at the time of hire, to $2.33 an hour after 1 year of employment, to $3.19 per hour after several years of being employed within that skill category. Wages and employee benefits vary by region and can often vary within a particular city depending on the location (supply and demand). For the foreign companies that make the payroll, the exchange rate of the Mexican Peso (MXN) will also change the cost.

Hourly employees as opposed to salaried employees are subject to overtime pay which can be double or triple time depending on certain conditions. Mexico’s regular work week is 48 hours (day shift), 45 hours (mixed shift), and 42 hours (night shift).

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Electricity in most areas of Mexico is monopolized by a government-run company called Comision Federal de Electricidad or CFE. Rates are established for residential, commercial and industrial users, and they vary by region, season and time of use.

On average, manufacturers can expect to pay CFE between $0.085 USD to $0.105 USD per kilowatt hour depending on the age/efficiency of the equipment drawing the power, the frequency of startup and shutdown and time of day when machines are in use.

In addition to receiving a monthly bill from CFE for the consumption of electrical power, manufacturers must pay CFE for electrical capacity which is approximately $100 USD per kVA. For example, if your operation in Mexico requires a 500 kVA transformer and you plan to run it at 80% of its capacity, then you will need to have 400kVA of service capacity connected to your transformer. CFE often provides some kVA service for free, i.e. 200 kVA and the additional 200 kVA (in this example) would need to be purchased by the manufacturer at 200 kVA x $100 USD = $20,000 USD.

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Yes. Ground freight moves through highways as modern as one would see in the U.S. and Europe. The country also has an adequate infrastructure in place to move goods into and out of the country by air, waterways and rail car.

Several major U.S. carriers provide service across the U.S.-Mexico border and move goods through the country as a result of partnerships with Mexican carriers.

Companies seeking space for warehousing or distribution will not have a problem finding options in the major and second-tier cities in Mexico. Although class A space may be limited, class B and C space is readily available for use.

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For foreign manufacturers operating in Mexico through a related legal-entity (a maquila operation), taxes are assessed and collected at the federal, state and sometimes municipal level in the form of income, consumption and payroll taxes.

When the Mexican legal entity is a related-party to the foreign company, the Mexican government assumes that arms length transactions will not take place and has therefore instituted a method for calculating income taxes based on asset value or operating cost since the maquila operation does not receive income from sales. This is commonly referred to as Safe Harbor.

Another form of calculating income taxes for maquila operations is known as advanced pricing agreements (APA’s). When the related-parties are companies located in NAFTA countries, double taxation is not allowed. Therefore, income taxes paid in one NAFTA country may be credited or deductible in another.

Value-added tax in Mexico is calculated at 16 percent and is assessed on most goods and is paid if the product will be used by a consumer in Mexico. Maquila operations may be eligible to receive a reimbursement on VAT if the consumer is outside of Mexico. The country recently underwent a major tax reform, much of which was enacted January 1, 2014.

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Yes. Mexico’s environmental and occupational health and safety laws, in many ways, conform to those of the EPA and OSHA in the U.S. Enforcement of these laws does take place in Mexico with substantial penalties and fines resulting from violations.

Companies that have processes in place to meet regulatory compliance related to the environment from their manufacturing operations in Mexico typically don’t encounter problems.

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The answer depends on the short- and long-term objectives of the manufacturer. Generally, foreign companies evaluate the advantages and disadvantages of establishing operations in a city or state in the U.S. that borders Mexico, or building a facility inside the country itself
Geography will have a direct impact on logistics and the cost of labor and these must be thoroughly researched before selecting a location. Other elements to consider include: wage structure, labor supply and demand, workforce stability (turnover and absenteeism), existing skills, skills development, work ethic, and union involvement related to a particular region.

Manufacturing Communities - such as the ones provided by The Offshore Group - in strategic locations in Mexico may also provide benefits beyond those achieved by operating as a standalone entity.

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Yes. The most common example of this is in the automotive. Automotive OEM’s operating in Mexico typically surround themselves with their primary tier 1 suppliers to provide raw materials for assembly operations.

Tier 2 suppliers to companies classified as tier 1, are doing the same with finished components made of metal, plastic, composites, or other materials. A growing number of lower tier suppliers are also emerging in Mexico which provide commodities such as metals, resins, and other raw materials.

However, the vast majority of raw materials and equipment used in maquila operations still originate outside of Mexico and are produced and shipped from the U.S., Canada, Europe, and the Far East.

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Relevant to manufacturing operations in Mexico, regulatory requirements exist in the areas of employment, importing, exporting, environmental, occupational health and safety, and income taxes. Mexican laws that regulate these areas are substantially different from those of other countries.

However, the Mexican government has made significant improvements to clarify its laws and provides effective mechanisms and processes for manufacturing companies to have access to information, request authorizations or permits and to obtain assistance when needed.

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Yes. Mexico’s international trade is based on a harmonized tariff system, much like the U.S. and Canada in which a particular good is classified using the harmonized tariff schedule and subsequent import duties based on country of origin and value.

The Mexican government has instituted a number of programs that helps manufacturers reduce and in most cases, eliminate, import duties for goods entering Mexico. In addition to NAFTA, Mexico provides programs such as PROSEC and REGLA OCTAVA (translates to the eighth rule) which reduce duties on many industry specific commodities.

While the 16 percent of a levied VAT tax is not an import duty, Mexico will assess VAT on all imports of raw materials and equipment effective January 1, 2015. There is however a mechanism that maquila operations can use to request an instant credit to this VAT tax at the time of import.

The mechanism is known as a SAT Certification.SAT is the enforcement branch of Mexico’s treasury department and companies that meet the certification requirements will not have to pay the VAT tax at the time of importing raw materials or equipment into Mexico.

Furthermore, VAT tax is assessed and payable each time consumable items enter Mexico.

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NAFTA is a trilateral agreement between Canada, United States, and Mexico to facilitate trade among these countries. In more specific terms, manufacturers in Mexico that import goods into Mexico which originate in a NAFTA country, are exempt from paying import duties.

The key term here is “originate,” which is not to be confused with shipped from. To determine if a good “originates” in a NAFTA country, the rules of origin must be applied to the goods themselves. Rules are listed in General Note 12(t) of the Harmonized Tariff Schedule of the United States

In addition, goods leaving Mexico for subsequent entry into Canada or the U.S. are also duty-free in the receiving country if the good originates in a NAFTA country. It is important to note that shipping a good manufactured in Mexico to the U.S. does not necessarily mean it satisfies the rules of origin under the NAFTA. To determine if it does, one must consult General Note 12(t) of the Harmonized Tariff Schedule.

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A devaluation in the Mexican peso (MXN) with respect to the U.S. dollar (USD) buys more pesos for each dollar which effectively lowers costs incurred in Mexico. However, currency devaluation is typically followed by an increase in wages.

Historically, foreign companies have benefited financially by having operations in Mexico since the currency devaluates.

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The answer depends on two factors, primarily labor and logistics. However, any labor savings from operating in Mexico can be offset by a logistics premium to move products through the supply-chain.

Labor along the U.S. border cities of Tijuana, Mexicali, Nogales, Ciudad de Juarez, Nuevo Laredo, Reynosa, and Matamoros generally have a higher transient workforce that has migrated from other areas of Mexico in search of work. Logistically, of course, border cities. offer lower freight costs when the ultimate destination of goods made in Mexico are located in the U.S. or Canada.

In terms of labor, interior locations may offer lower worker turnover and wages than in border towns.

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The automotive sector is growing rapidly in the central region of Mexico known as the “bajio,” which includes the Mexican states of Guanajuato, Queretaro, Aguascalientes, and even Jalisco and San Luis Potosi.

The aerospace sector, which primarily manufactures airplane engine components, is growing primarily in the northwestern contiguous states of Sonora, Chihuahua, and Baja, California. Additional aerospace manufacturing activities are growing in the state of Queretaro and Nuevo Leon.

Medical device manufacturing is becoming another growth sector in Mexico. The highest concentration of companies are located in Tijuana, but the industry is spreading to other cities in search of certain skills sets and labor characteristics.

Locations such as Guadalajara and Ciudad de Juarez have the highest concentration of electronics contract manufacturers or EMS companies.

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Permanent establishment (PE) is a status that triggers the Mexican treasury department to assess income taxes on the foreign company’s activities abroad. For example, when conducting business in Mexico using a local sales force this is deemed to be creating value and wealth that is then taxable in Mexico.

Companies conducting business in Mexico with no direct or indirect legal entity to tax, Mexico’s treasury assess taxes based on the foreign entities wealth abroad.

To avoid PE, foreign companies must either have a tax paying legal entity in Mexico or must work through a a shelter provider.

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What is a Maquiladora?

A maquiladora, also known as maquila, has preferential tariff programs agreed on by the U.S. and Mexico. A maquiladora identifies as a legal entity in Mexico that manufactures goods in the country through a foreign company. The Mexican government recognizes the benefits derived from foreign companies establishing manufacturing operations in the country and therefore extends certain tax and trade benefits to maquila operations. For example, manufacturing materials and equipment can enter into Mexico duty-free, while Mexican made products exported into the U.S. are at a lower tariff or free. To be eligible to capitalize on tax and trade benefits, Mexican legal entities must satisfy a number of conditions to be considered a maquila operation.

The Maquiladora Program

The Maquiladora Program was established in 1964 to enhance border employment and the border economy of Mexico and the U.S. The program is also meant to continue to attract foreign markets in conjunction with the National Border Industrialization Program - a program that encouraged foreign investment that helped stimulate Mexico's domestic market. In 1994, the Maquiladora Program changed under the North American Free Trade Agreement (NAFTA) and began to thrive with companies investing in Mexico for its high skilled labor, proximity, and low costs.

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IMMEX is a Mexican program that provides an incentive for companies that export goods. The incentive consists of allowing a Mexican company to carry out “temporary” importations of production inputs and assets without having to pay the otherwise assessed value added tax; which is 16%. To obtain the incentive a Mexican company must be in the business of directly or indirectly producing goods which are subsequently exported and must be registered with Mexico’s Department of Economy under the IMMEX program.

Being a registered IMMEX company and enjoying its benefits requires certain record-keeping and inventory controls for traceability in case of regulatory audits. Mexican companies that are registered under IMMEX and import goods “temporarily” must export those goods within a certain time frame out of Mexico or “transfer” those goods to another IMMEX company within Mexico or change the status of “temporarily” imported goods to a “definitive” status.

There are five distinct types of IMMEX registrations:

i. HOLDING COMPANY IMMEX. Example: ACME MANUFACTURING along with its 3 affiliates have 4 legal entities in Mexico that manufacture various types of goods. Rather than require each of the 4 companies to have their own unique IMMEX registration, one company designated the “holding” company can act as the controlling entity for purposes of ensuring compliance with IMMEX requirements.

ii. INDUSTRIAL IMMEX. Example: ACME MANUFACTURING transforms raw materials into finished goods in Mexico which are subsequently exported.

iii. SERVICES IMMEX. Example: ACME LOGISTICS is a legal entity in Mexico that distributes goods within Mexico that are subsequently exported or used in products that are exported. This designation may also be given to manufacturers’ recyclers, special processing, software developers, and other types of service companies. The criterion for approving SERVICE IMMEX registration is at the discretion of the Department of Economy.

iv. SHELTER IMMEX. Example: THE OFFSHORE GROUP has a legal entity in Mexico that that is registered as a “shelter” provider to foreign manufacturers that want to make products in Mexico without having to have their own legal entity and corresponding IMMEX registration.

v. THIRD-PARTY IMMEX. Example: ACME INDUSTRIES is a legal entity in Mexico that does not have manufacturing infrastructure of its own and therefore contracts its manufacturing with third parties. Rather than require all of the subcontractors to have their own IMMEX, ACME INDUSTRIES can be registered as IMMEX and include each subcontractor under that one IMMEX.

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For foreign companies with a manufacturing operation in Mexico, value added tax (VAT) affects cash flow more than cost. VAT is assessed on all goods that are imported into Mexico and the vast majority of purchases of goods and services carried out in Mexico. VAT is calculated by multiplying the transaction, fair market value, or computed value of a good or service by 16% which is payable to Mexico’s treasury department. Established mechanisms exist for VAT reimbursement as well as exemption. Among the most recent changes in VAT assessment and payment is a certification by Mexico’s treasury enforcement division known as SAT which essentially grants an exemption on VAT for imported goods to companies that meet a certain criteria.

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The wages for direct labor in Mexico are often determined through annual negotiations between the employer and a labor union. Additionally, wages for indirect positions are driven by supply and demand.

Certain companies categorize direct labor by skill set required such as (1) assemblers and fabricators, (2) standard machine operators , (4) painters, (5) welders, (6) CNC machine operators, (7) CNC setup technicians, (8) CNC machinists, etc.

For people working as assemblers and fabricators, employer costs can range from $1.60 per hour at the time of hire, to $2.33 per hour after one year of continuous employment. Wages can increase to $3.19 per hour after several years of being employed within a certain skill category. In addition, wages and employee benefits vary by region and can often vary within a particular city depending on the location. For foreign companies processing their own payroll, the exchange rate of the Mexican Peso (MXN) will also change the cost.

Hourly employees are subject to overtime pay that can be calculated at double- or triple-time depending on certain conditions.

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