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US companies wanting to cut production costs are finding more benefits with maquiladoras in Mexico. Instead of offshoring to some remote region across the globe and reducing oversight and control over their manufacturing process, these US manufacturers find a ready-made solution awaiting them just south of the border.
Fortunately, in addition to cutting production costs and boosting profitability, the maquiladora system can be quite simple and easy to plug into. No need to lose out because of a steep learning curve. Here’s what you need to know.
In the 1960s, the Bracero Program came to an end. Previously, this program had allowed for skilled Mexican laborers to work on US farms. However, when the program ended, unemployment rose in Mexico. Out of this need came the Maquiladora program (IMMEX).
Maquiladoras – or maquilas, as they are also called – are manufacturing facilities in Mexico that operate on a tariff-free or favored duty basis. Sometimes called a twin plant, US companies maintain an administrative facility in the US while conducting manufacturing at the maquiladora facility in Mexico.
Under the IMMEX program, equipment and inputs may be imported for assembly in Mexico mostly duty-free and exported for distribution in the US (and globally) with little to no VAT taxes.
There are numerous benefits to US companies through this approach to outsourcing manufacturing. And these benefits extend beyond financial savings. Among them are:
In an increasingly competitive global economy, cutting costs is always an important consideration. Many of the most successful companies in medical devices, automotive, aerospace, electronics, and other industries have increased market share by leveraging maquiladoras in Mexico.
Specifically, they reduce tax and liability exposure, labor costs, and other operational costs to produce high-quality products more efficiently. Here are the major ways they do that:
1. Reduced Shipment Costs
Maquilas located along the border can typically ship products to US markets within days, not weeks. Trucking is the most common form of transporting goods. This represents numerous cost savings, including:
2. Quicker/Easier Startup
Because the Maquiladora program (IMMEX) is decades old and codified in USMCA/NAFTA, the process is well established and relatively simple to follow. US companies can be up and running within just a few months (less if using shelter services).
3. Lower Skilled Labor Costs
The average US company saves about $1 million USD per year due to the low cost of skilled manufacturing labor in Mexico. The average manufacturing wage in Mexico is a little over $2/hour, with skilled technicians making around $4. This strikingly low cost of labor in Mexico is augmented by the fact that labor in Mexico is more productive than in other outsourcing destinations.
4. Tax Savings
Tax savings may represent the most substantial way US companies cut costs with maquiladoras in Mexico. If done right, a maquila operation may eliminate or greatly reduce the following tax liabilities for US companies manufacturing for export in Mexico:
While maquiladoras offer significant savings in themselves, most successful US companies do not go it alone. It can pose quite the challenge to open a factory in a new country, source vendors and equipment, hire a qualified workforce, and navigate the red tape associated with import/export. While the maquiladora solution is handy and lowers costs, there even greater benefits in combining it with a shelter service.
A shelter service is typically a US company that already has the infrastructure in place in Mexico, has years of experience sourcing vendors and materials, and has a fully functioning workforce and HR department ready to go to work for you. A shelter partnership compounds the cost savings by allowing a US company to take advantage of the shelter’s momentum and insider access.
Some of the services a shelter service handles for you include:
These and other convenient service areas allows the average shelter client to save around $1.5 million USD per year and get up in running in just 90-120 days.
Manufacturing with maquiladoras in Mexico is rich in savings potential. At each point along the value chain, savings are realized and profitability is maximized. And utilizing maquila manufacturing with a shelter service can greatly magnify these savings while simplifying the process even further.