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It borders the vast and prosperous U.S. market, labor rates are less than 15% of those in the U.S., and with the USMCA trade agreement in place, it’s a good location for business. For these reasons, it’s no surprise that many U.S. businesses choose to do some or all of their manufacturing in Mexico.
Automobiles and auto parts, textiles, chemicals, and electronics are just some of the products currently manufactured in Mexico, primarily in states bordering the U.S. Companies with operations south of the U.S. border have multiple advantages over those manufacturing elsewhere. This page will discuss what those advantages are as well as answer questions regarding who can manufacture in Mexico, how to get set up, and where the best manufacturing locations are.
Why Manufacture in Mexico?
U.S. companies in Mexico enjoy a range of advantages, including reduced cost of production, convenient geographical location, and government incentives such as the maquiladora (IMMEX) program.
Benefits of Manufacturing in Mexico
Manufacturing in Mexico gives companies a competitive edge. Due to reduced cost of living, hourly wages in Mexico are approximately 15% of those in the U.S. Factory space and healthcare costs are also more affordable in Mexico.
Additionally, Mexico offers a significant geographical advantage. While shipping from offshore companies in Asia can be expensive and take weeks, nearshore companies in Mexico can ship goods to U.S. distribution centers in just hours or days.
Supply Chain Benefits
Long supply chains, such as those typical with shipping goods from Asia, pose two problems:
- Impact on cash flow. With a high likelihood of goods taking at least two months to arrive due to documentation, loading, transport, unloading, and customs delays, a lot of money is tied up.
- Flexibility. In many consumer markets, taste and demand can change quickly. Lead times of three months or more (to include manufacturing) limit the ability of a manufacturer to adjust production schedules. If a green model starts selling better, stock shortages could result in lost sales.
With transport from Mexico into the U.S. taking a few days rather than weeks (see Mexico’s Nearshoring benefits), manufacturing south of the border saves money and provides a great deal more flexibility. For these reasons, even Chinese companies are looking to sell into the U.S. from Mexico.
International Trade Agreements
Many U.S. businesses look at Mexico as a great place to manufacture for the U.S. market due to its highly advantageous location. While this is correct, Mexico also has the potential for exporting to other markets as well. Having a large number of international trade agreements with over 46 countries, Mexico is well-positioned as a global export center.
Understanding the Maquiladora (IMMEX) Program
“Maquiladoras” refer to factories that are located in Mexico but owned by a foreign company. The IMMEX program is a government incentive program that encourages maquiladoras in order to develop Mexico’s manufacturing industry and bring specialized technology and knowledge to the country.
It does this by making it easier for foreign companies to invest in Mexican manufacturing enterprises. It also eliminates duties on tools, materials, and machinery imported to Mexico for manufacturing, provided the company plans to export the finished products. When exporting these goods to the U.S., the IMMEX program often provides preferential customs treatment.
U.S. Companies in Mexico: Who Can Manufacture in Mexico?
Any manufacturer, regardless of size or industry, can move operations to Mexico. Companies may choose to produce products from start to finish in Mexico, or may manufacture components in Mexico and transport them to the U.S. for assembly. This versatility means that just about any company can gain advantages from nearshoring.
While there is no limit to the types of businesses that can nearshore to Mexico, certain industries are more prevalent than others. Manufacturers with complex assembly, operations that cannot be automated, or products too large for long distance shipping all benefit from manufacturing in Mexico. The main industries found here are:
- Appliance and Furniture
- Medical Devices
Five Well-Known American Companies in Mexico
It is worth noting the success of several well-known American companies in Mexico, including:
- General Motors
All of these manufacturers utilize complex technology that requires consistent reliability and quality.
How to Start Manufacturing in Mexico
Once a company has determined that manufacturing in Mexico is the best option, there are several methods for setting up operations in this region.
The Three Most Commonly Used Models
Although there are a number of ways to begin manufacturing in Mexico, most companies will opt for one of these three models:
- Standalone Business. The foreign company establishes its own business in Mexico and is thus able to retain complete control. This method has many benefits, but it can be time-consuming, costly, and challenging to accomplish due to foreign language barriers.
- Manufacturing Services and Shelter Company. The manufacturer partners with a Mexican business that is specifically designed to help foreign companies establish themselves. This model is efficient and straightforward.
- Contract Manufacturer. A pre-established Mexican company will take on some or all of the production work for the foreign company. Outsourcing in this way is often quick and affordable, especially for smaller companies.
Where to Manufacture in Mexico
Mexico is a large country, with production centers in a multitude of locations. However, industries will most often cluster in the north, near the Mexico/U.S. border.
Popular northern states for nearshore manufacturing include:
- Nuevo Leon
A particularly appealing city in Tamaulipas is Matamoros. Located near the border, it has four bridges connecting it to the U.S. It also has a large pool of skilled employees.
Key Location Considerations
While many of the most popular manufacturing locations are in the north of Mexico, where a company decides to settle depends on several key factors. Perhaps the most vital consideration is where the exports will be going. Factories exporting to the U.S. should be located near the border, while those exporting overseas would do better near a seaport. The ideal location should also offer government incentives and plenty of land availability, as well as access to larger cities to expand the available labor pool.
A Manufacturing Services Company That Can Help
There are many benefits of manufacturing in Mexico, but establishing operations can be challenging. From language barriers to different taxation systems, there are many factors that may be unfamiliar to you. This is why many of the most successful American companies in Mexico work with a manufacturing services company.
Working with a Manufacturing Services Company
Manufacturing Services and Shelter companies speed up the nearshoring process, eliminating a significant number of potential stressors. Rather than focusing on learning a new supply chain, onboarding a workforce, and finding trusted local vendors, manufacturers who work with manufacturing services and shelter companies can focus on strengthening their core manufacturing functions and growing their business.
Is Contract Manufacturing in Mexico Right for You?
The IMMEX program can incentivize companies setting up their own facilities in Mexico, but this isn’t the right option for everyone. Larger manufacturers often benefit more from the IMMEX program directly, while smaller or medium-sized companies can gain a significant advantage from working with a contract manufacturer, as this allows them to expand without stretching their infrastructure beyond capacity.
Why IAI Mexico
At IAI Mexico, we have nearly 30 years of experience in helping clients begin manufacturing in Mexico. Our experts work closely with you to determine the best plan for your unique needs, and we handle everything from facility maintenance to labor negotiations. No matter the size of your business, we take care of every logistical challenge so that you can focus on your day-to-day operations.