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Top Considerations Of Moving Manufacturing To Mexico | NAPS

March 3, 2016
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Mexico is catching the world’s attention as a rising star in the world of manufacturing. The low costs, favorable regulatory climate, quality of the workforce, and ease of trading to the North American and European markets mean that more and more companies are choosing to locate their production operations in Mexico. Mexico has several potential ways for foreign businesses to commence operations in the country, either alone or with a partner firm in Mexico. Mexico’s educated workforce heightens its appeal, which brings with it a corresponding increase in cost, but rising wages and regulatory risk both make China less favorable as a destination for manufacturing than it used to be. Mexico manufacturing is becoming an attractive option and current global trends, such as the weakness of the Chinese economy and the importance of shipping costs, are making Mexico even more competitive as a manufacturing destination.

The reason for Mexico’s competitiveness stems from a set of laws that make it easy for foreign companies to partner with Mexican ones in various configurations. The heart of Mexico’s manufacturing law is the Border Improvement Program, which is colloquially known as the Maquiladora Program. “Maquiladora” refers to millers of grain, who would process raw grain from suppliers for a fee. In modern manufacturing parlance, the program makes outsourcing to Mexico simple and cheap. The process is intuitive. A company located in the US hires a Mexican partner firm located in a designated free trade zone. These may or may not be located near the US-Mexico border. The US firm sends raw materials to the Mexican partner firm, and the partner firm handles processing the raw materials into finished goods. Finally, the Mexican firm exports the product- the destination may or may not be the US. The export is tax and duty free, and Mexico is not far from its target markets, so transportation costs are low.

There are several configurations of this relationship depending on how much oversight the foreign firm wants to maintain. This depends on the complexity of the production process and the level of trust in the relationship between the partner firms. There are five main categories of relationship. The first is contracting. In contracting, a foreign firm works on a small scale with a Mexican firm that already produces a product similar to what the foreign firm wants. The Mexican firm has the equipment and tools onsite prior to the beginning of the relationship. The second type is a joint venture. This is an equal partnership between a foreign and a Mexican firm, which can be difficult to manage if the companies don’t integrate and share responsibilities well. The third type is a subsidiary relationship- a foreign company either purchases or creates a subsidiary in Mexico that it controls. The foreign firm has full control, but also full responsibility and liability. It requires a major investment in time and skills to manage a subsidiary, but it pays off for companies that have exacting specifications. The fourth type is called sheltering. This is somewhat more involved- the foreign firm makes itself a department of a Mexican firm. The foreign firm trains the workers and oversees production, and the Mexican firm handles accounting, HR, and other business services. This allows each firm to specialize in their own role. The fifth and last kind of relationship is the classic maquiladora style. The foreign firm provides extensive training as well as equipment and supplies of raw inputs, and the Mexican firm carries out the actual production. This is unique to Mexican manufacturing law. The benefits include tight control without liability and the beneficial tax status this relationship holds.

The cost of manufacturing in Mexico depends on the specific relationship and the process in question. From one perspective, labor costs in Mexico are higher than in a place like China in an absolute sense. However, that depends on the goals of the manufacturer. Part of the reason Chinese labor is cheaper is because it is less skilled. Workers in Mexico tend to have more education and skill. That means that even though the wages for Mexican workers are higher, their productivity is also higher and they can better adapt to more advanced procedures. From that perspective, Mexico manufacturing wages are actually lower, because it is not as difficult to find educated and experienced workers, reducing hiring and training costs.

This is not to say that it is a simple matter to set up shop in Mexico. There are many important issues to settle and they all depend on each other. Some are common to all manufacturing and some are specific to Mexico. For example, locating close to the border will save on transportation costs, but the northern parts of the country tend to experience more drug violence, so more security in Mexico could be necessary. Finding a good partner firm and deciding on the best kind of relationship to pursue are two different, but related endeavors. The company might need to modify its plan as it searches for a partner. Each type of relationship places different responsibilities on the foreign firm and its Mexican counterpart, so both companies need to find a way to play to their respective strengths. This is particularly true for logistics. An outsourcing relationship, no matter the form, requires a tightly-run supply chain to manage costs and meet customer expectations. Developing strong logistics plans that ensure seamless handoffs is key to manufacturing in Mexico.

One of the most important considerations is balancing oversight and efficiency. The two firms need to agree on how much oversight the production floor needs. More oversight means the final product will be more consistent, but it can also slow production down. That’s true of any manufacturing process, but it is especially true when working across national borders and a potential language barrier. The two firms must draw up a contract that ensures the foreign firm has enough control to make them comfortable about the finished product, and there are several different options that determine how close the oversight can be.

Locating manufacturing in Mexico is an excellent reason because of the availability of high-quality workers at a bargain compared to the US. Mexico has a manufacturing-friendly economy and legal environment that is a step up in quality from China without being as expensive as producing in the US or Europe. However, all stakeholders need to be aware of the expectations that they share. Being explicit and clear at all stages of the process is critical to ensure that there is no miscommunication. Managers need to plan carefully before locating in Mexico so that they can truly make the most of their opportunity. This is not just a matter of whether or not the project will succeed, but also of whether the two companies are leveraging their best options and carrying out the work in the most efficient way. Two firms might have a good working relationship, but there might be a new type of contract or a better location available that would make it work even better. For that reason, research pays off when it comes to outsourcing to Mexico. Any company that is willing to pay a little more for a significant increase in quality will find Mexico a welcoming place to produce.

 

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