- Manufacturing in Mexico
- About Us
- Client Success
1 Manufacturing in Mexico
1.1 Mexico Shelter Manufacturing
1.2 Value Added Tax Certification
1.3 Maquiladora Definition
1.4 Intellectual Property Protection in Mexico
1.5 Title of Property or Inventory in Mexico
The term “shelter” is used to denote protection for your company from the complexities and regulatory burdens of doing business in Mexico. Under the shelter services model, we support clients before, during and after the transition to Mexico in areas of site selection, project management, human resource, recruiting, payroll, environmental compliance, import/export, logistics, statutory accounting, legal compliance, and government relations. The client maintains control of their operations and processes, while TACNA handles all supporting administrative services.
Companies that demonstrate the required level of compliance in trade, labor and tax matters are eligible for VAT certification by the Mexican tax authorities, thereby eliminating the requirement to pay value added taxes for temporary raw material and machinery imported to Mexico. The VAT certification is available in three tiers, A, AA, and AAA, each providing a higher level of benefit with an increased number of requirements. Manufacturers that obtain and retain their VAT certification do not pay Value Added Tax on their temporarily imported goods.
The word Maquiladora has become synonymous with manufacturing companies who produce primarily in the Mexico border region to take advantage of the low cost labor in close proximity to the United States markets. The term Maquiladora as it relates to manufacturing has its origins in a farmer having his grain ground at the local miller. The grinding fee was often paid in the form of a portion of the grain ground. Similarly, a portion of the profits earned in Mexico with low cost labor are paid in the form of a sharing of profits with the employees. There are several other terms associated with manufacturing in Mexico. Among them are production sharing, co-production sharing, off-shoring, shelter services, off-shore manufacturing, twin plants and In-Bond.
The U.S. is by far Mexico’s largest trading partner and a significant source of hard currency. That is not lost on the Mexican government and accordingly, Mexico has respected U.S. intellectual property rights and enforced such rights through its courts. Some companies who once operated in Asia have not found the same to be true and have left Asia for Mexico citing exactly that reason.
Inventory and equipment continue to be owned by you. It is imported into Mexico on a temporary status basis. An import/export inventory record must be maintained for all equipment and inventory in the country under this temporary import status. This inventory tracking is one of the services provided by TACNA. Companies who are using their equipment or inventory as collateral on loans should review their loan documents for any restrictions before exporting the equipment or inventory to Mexico. Raw or semi-finished inventories may only stay in Mexico for 18 consecutive months.
Not unlike any other area of the world, companies who establish a good work environment and motivate the employees enjoy high retention rates. Because jobs are plentiful in the border region, there is somewhat of a higher turnover rate than may exist in certain areas of the U.S. Employee attendance and punctuality is often encouraged with compensation structures such as a small attendance bonus and a punctuality bonus. Once employees demonstrate they can be successful in an operation, some employers grant step increases. Just like your employees in the U.S., Mexican workers are motivated by recognition for a job well done and Mexico market based reward, or compensation, commensurate with their relative contribution. Like the U.S. turnover is much less during periods of recession. In periods of high employment, turnover increases. When labor is plentiful at the border, workers gravitate from inland in the country toward the higher paying maquiladora jobs at the border. This helps to stabilize labor pools if the labor market heats up.
Baja California has the largest and broadest manufacturing base of any Mexican city. To stay relevant, the Mexican Federal, State and municipal governments have invested in many technical training and college programs. Tijuana has 40 technical colleges and institutes, which graduate thousands of trained engineering and other technical graduates each year. There are also active chapters of professional societies in Baja California such as the American Society for Quality and the American Production Inventory Control Society. Many professionals have received training provided by their employers locally and abroad. For example, there are many Japanese trained engineers available in Tijuana who understand and drive lean manufacturing techniques. In short, there is a broad pool of trained capable technicians and professional managers in the border region of Mexico.
In the past five years, the Mexican work force has been plentiful and stable. Many of the companies moving to Mexico have had a substantial pool of Mexican laborers in their U.S. plants and are already accustomed to the hard work ethic and reliability of the Mexican workforce. Similar attributes exist within the Mexican workforce on the other side of the border. Mexico is a country with a population of over 100 million people. The birth rate is relatively high, keeping the workforce young and in steady supply. The border region typically pays a wage premium compared to the wage rate paid more inland in the country. This wage rate and opportunity attracts potential employees to the border region for its relatively high paying Mexican jobs.
Most factories in Mexico are unionized. While any union is required and expected to look out for the interests of the employees, there are unions who take a more business minded approach and those who do not. Many of the unions in Baja California have historically taken a reasonable business minded approach while representing the interests of employees.
Mexican real estate developers are quite entrepreneurial and have found commercial real estate to be a good investment. Large US Real Estate Investment Trusts (REIT’s) have invested heavily in Mexico’s border region. Additionally, the global recession of recent years has made industrial property more available in Mexico, like it has in the US. U.S. financing is also increasingly available in Mexico for buildings through insurance funds or other sources. Accordingly, A, B and C grade building space to suit need can typically be found at reasonable market prices rather quickly. Note that in most cases the landlord is responsible for the building shell and the tenant does all improvements. Most buildings are rented on a triple net basis, however the property tax element of triple net in Mexico is much lower than it is in most U.S. cities. It is also possible to arrange for facilities on a build to suit basis.
There is generally an adequate supply of buildings in the Tijuana Metro area. These range from first class new industrial parks with full infrastructure, to much older buildings in older neighborhoods. Rents run from about $.40 per square foot to $0.55 per square foot per month. Like elsewhere, rents are driven by demand, length of the contract, square footage rented and the financial strength of the tenant. Most contracts are denominated in U.S. dollars and have renewal and rent escalation clauses. Tenants are typically responsible for all improvements and the landlord’s responsibility is limited to the roof, walls and plumbing. In many cases it is necessary to provide worker transportation as few direct level employees would have their own transportation.
Foreign individuals can own land and buildings anywhere in Mexico, except within the “Prohibited Zone” 100km from the border and 60km from the coast. Within that zone, land for foreign individuals is held in a 99 year trust, giving the individual effective ownership. Corporations do not have any restrictions on ownership.
Mexico is an industrialized nation and produces many products. Further, there is a concentration of manufacturing along the U.S./Mexican Border. Given this concentration, there are many material and supply items available in Mexico. Pricing of such is generally competitive. TACNA can assist you in obtaining quotes for in Mexico for some items. At a minimum, most companies usually buy all packaging and miscellaneous supply items in Mexico. There is a value added tax of 16% on items purchased in Mexico.
Many plants in Mexico have ISO, QS, or other certifications. Employees and managers have often had detailed training in quality processes, lean manufacturing training and training in compliance with tight certification programs. With the right management, supervision and training, certifications that are obtained and elsewhere in the world can also be obtained and maintained in Mexico.
TACNA can source these and other manufacturing services. Service companies are readily available from multiple sources in metro regions such as Tijuana. Not only are service support companies available, but providers of MRO supplies, packaging, machine shops etc.
Maquiladora entities can sell to other Maquiladora entities with a documented transfer of the items sold for purposes of tracking the import/export inventory. This documentation is sometimes called an “inter-maquila transfer” or “virtual transfer”. If the Maquiladora entity sells directly within Mexico on a commercial basis, it risks losing its favorable tax status as a Maquiladora. Most companies who sell commercially in Mexico return the product to the U.S., then ship from the U.S. to their Mexican customers. This saves considerable income tax reporting complication and cost in Mexico. Mexico does have certain favorable trade treaties with nations other than the U.S. or Canada. TACNA can work with you in evaluating methods for minimizing global duties for products made in your Mexican manufacturing location.
With some limited restrictions, U.S. citizens can work in a Maquiladora manufacturing business as long as concentrations do not exceed certain percentages. FMN Visas are required and can be readily obtained with a passport and/or birth certificate at the border crossing for up to six month visits. It is also possible to obtain annual visas for longer-term workers or frequent visitors. Surprise inspections are done in plants by the authorities, during which inspections, visas are checked. Doing business in Mexico without a valid visa is not advised. Penalties for noncompliance can be significant and typically include deportation and significant fines. Many plants in Mexico have U.S. executives and technical personnel who live in the U.S. and commute to Tijuana Mexico daily. TACNA obtains and renews appropriate visas for our clients as part of our service
Border crossing into Mexico is quick and simple for US citizens. Returning to the U.S. can take as little as ten minutes to several hours, because of much tighter controls for crossing back to the U.S. There is an option for shortening this crossing using an automated trusted traveler fast lane called “Sentri”. Issuance of permits to travel in this much faster (5-30 minute) crossing lane can be obtained for a small fee of $100, following a background check and screening interview. This trusted traveler crossing card is good for five years. An alternative to Sentri is Global Entry, which grants identical privileges. Passengers riding in permitted, Sentri lane cars can walk the last few hundred yards avoiding long waits in a car and can be met on the U.S. side. Valid passports are now required for a U.S. citizens returning to the U.S. In short, executives crossing the border in either direction can do so relatively quickly and simply.
Not unlike the U.S., there are significant and intricate rules for what can be imported and exported and in some cases there are duty implications. Under the North American Free Trade Agreement, NAFTA, many items manufactured in Mexico, the U.S. or Canada can be imported and exported duty free. There is still however significant control and tracking necessary for such items. Further, items exported to Mexico whose countries of origin are other than the NAFTA countries can be subject to significant duties. There are methodologies for reducing such duties for maquiladoras. TACNA helps its clients minimize, and in many cases, eliminate all duties. This is an intricate and complex ongoing effort as companies and regulations continue to evolve. For further information see our Shelter Services.
Freight crossings can be as short as an hour to as long as four to six hours. Typically commercial crossings are more time consuming near the end of a month and during holiday weeks. Morning crossings are less congested, so it would pay to arrange your shipping schedule for a morning crossing. Commercial crossings into Mexico are generally less time consuming than are crossings into the U.S. Government and business efforts are being made with technologies and other methodologies to reduce commercial freight crossing times while not compromising security in the U.S. There exists a trusted carrier program going both directions across the border such as CTPAT that allow for expedited crossings for those companies willing to apply for and obtain permission to be included in such programs. TACNA can explain those programs to you and help you minimize commercial transit times.