For companies that are looking to move their manufacturing to Mexico, there are three popular methods for establishing a manufacturing operation in Mexico: contract manufacturing, subsidiary (or stand alone) corporations and shelter operations.
Contract manufacturing is one option for foreign companies to manufacture in Mexico. Through contract, the foreign company provides all of specifications and requirements for the product to an established maquiladora (manufacturing center) in Mexico. This maquiladora then assumes full responsibility for shipment from the U.S. border facility to the Mexican facility, paperwork, materials, production management, administration, quality control of the finished product as well as customs clearance.
The main things that companies looking to hire a manufacturing contractor need to look for are industry experience, expertise in assembly within the companies’ needs, manufacturing certifications, quality programs in place, a reliable supply chain, turnkey capabilities and ERP system compatibility. Billing transparency also provides confidence for the foreign company.
One of the main advantages of this process is that it typically minimizes risk for the foreign contractor. Because the contracting company assumes responsibility for all aspects of production and also oversees customs regulation, foreign companies have a minimal exposure to setbacks of doing business in a foreign country.
Wholly Owned Subsidiary
Another way to establish operations in Mexico is to incorporate a wholly-owned subsidiary corporation. This is the most direct way to set up a maquila operation, but it is also the most resource-intensive. This situation requires the foreign company to obtain maquila and other necessary permits, import raw materials, hire the needed personnel and begin operations.
Any company interested in this type of operation needs to retain the services of a Mexican lawyer, who can set up the corporation and set up the necessary contact between the Mexican subsidiary and the parent company. This type of arrangement is cost-effective and allows for the greatest amount of control for the parent company. However, there are many disadvantages for this type of company, as it takes a longer time for the company to establish their manufacturing operations in Mexico and also increases the risk for making business and bureaucratic errors, due to a lack of experience in establishing a business in Mexico.
Shelter operations represent a way to get the best of both strategies for establishing manufacturing operations in Mexico. With this scenario, the shelter company, based in Mexico, provides all of the facilities as well as including inspection, customs, shipping, general administrative services, warehousing, and personnel management. However, the foreign company still maintains central control and assigns representatives that manage and run the production process and provide quality control in Mexico.
This strategy represents a marriage of knowledge. The foreign company provides the technical knowhow and the Mexican shelter operator provides expertise in Mexican corporate structure, labor hiring, administration, permits and customs procedures. When a foreign company enters into a shelter agreement, the shelter operator typically collects a service fee; during this time, the foreign company can learn the basics of manufacturing in Mexico and can convert to a stand-alone operation when the contract is completed. In many cases, however, the foreign company can elect to allow the shelter company to continue running operations in Mexico while they focus on production on their own end.
In many ways, shelter companies represent the best of both worlds for foreign companies. They allow companies to enter into a quick agreement and minimize start-up time allowing companies to focus on running their own end, minimizing startup expenses. However, these agreements still allow the parent company to maintain significant authority over their foreign operations. Shelter services provide a number of advantages for foreign companies looking to manufacture in Mexico, but it is essential that companies do their research in advance. Some organizations enter into agreements with shelter companies without fully realizing all of the costs and other disadvantages. Finding the right experienced partner is an essential part of establishing a successful shelter operation in Mexico that can, in time, transform into centrally-run subsidiary.