Is Contract Manufacturing in Mexico Right for You?

While many US firms understand the advantages of outsourcing operations, the specific benefits of contract manufacturing in Mexico are unfamiliar to them. Because there are a number of ways to lower manufacturing costs, it pays to explore all the different options to determine which is most advantageous for your particular situation.

When paired with the obvious advantages of manufacturing in Mexico, contract manufacturing is especially effective at maximizing efficiency and cost savings for companies within a particular set of circumstances. Let’s explore the pros and cons of contract manufacturing to better understand if this outsourcing option is right for your firm.

Manufacturing in Mexico

Since the 1990s and the protections of NAFTA, US firms have leveraged Mexico’s strategic advantages for manufacturing. The primary mode of manufacturing was through Mexican factories called maquiladoras. These manufacturing plants are unique in that they are incorporated under and subject to Mexican regulations, employ a Mexican workforce, but are owned by a US firm for producing exported goods.

There are many benefits and reasons US companies might want to utilize the maquiladora system to manufacture their products. Some of the more obvious benefits of manufacturing in Mexico include the following:

• Plants are located near the US border, allowing for quick and easy access.
• US firms retain full control over their product and factory operations without the administrative hassle under the maquiladora system.
• Manufacturing labor in Mexico costs substantially less than in the US and at less than $3/hour is even competitive with China.
• Because of free trade agreements, Mexico is able to export goods duty free to many nations around the globe, and not just the US.
• Manufacturing in Mexico also benefits the US economy as around 40% of the inputs used for made-in-Mexico products are created inside the US.
• Mexican maquiladoras can manufacture nearly any product from anywhere in the country, so long as they are sold outside of Mexico.
• Manufacturing in Mexico greatly reduces transportation costs associated with offshoring in Asia or other offshore locations.

Maquiladora manufacturing allows mature companies with existing, established manufacturing facilities to transition to an outsource option to cut costs without losing oversight over day-to-day operations. Opening a maquiladora operation typically takes only around 90 days, and companies with the capital can have their own Mexican factory taking advantage of the country’s duty-free manufacturing for export.

Contract Manufacturing in Mexico

But not every company has this kind of capital or is at this stage in the business life cycle. For early-stage or growth-stage companies with an existing product, it’s much simpler and convenient to utilize contract manufacturing or subcontract manufacturing. Essentially, a US firm may simply place an order with a contract manufacturer in Mexico, eliminating factory management entirely.

For the most part, late-stage companies prefer the control and long-term benefits of owning a Mexican maquiladora operation. Utilizing this option, they can manufacture most of their products at this plant. But for smaller or newer companies lacking the infrastructure or capital, contract manufacturing allows for more flexibility with less commitment.  Contract manufacturing is a very low-risk, short-term investment for companies wanting a more cost-effective manufacturing solution.

The Pros and Cons of Contract Manufacturing

Contract manufacturing in Mexico affords unique advantages over even the cost-reductions and flexibility of maquiladora manufacturing for certain firms. Below are some of the pros and cons of contract manufacturing to consider when evaluating Mexican manufacturing options.

• Greater Efficiency: Contract manufacturing requires less square footage of manufacturing space, allows greater economies of scale through combined purchasing, spreads overhead costs among multiple clients, and reduces overages through smaller batch orders.
• Reduced Control: For companies seeking full control over product standards and workplace practices, contract manufacturing is not the best option. But for smaller companies, the hands-off approach is often preferred.
• Minimum Learning Curve: Ordering through a contract manufacturer in Mexico circumvents the need for knowledge of local import/export regulations and labor laws.
• Faster Startup: While opening a maquiladora takes only a few months, ordering from a contract manufacturer may only require a few weeks.
• Increased IP Risk: Handing over your intellectual property and proprietary specifications over to a 3^rd party comes with the risk of having this information stolen or compromised. However, Mexico has a stellar record of high IP protections and enforcement.
• Minimum to No Regulatory Risk: Because contract manufacturing in Mexico places all the regulatory compliance burden on the contract manufacturer, US firms have virtually no obligation to implement Mexican standards in the factory.
• Reduced Long-Term Savings: Owning equipment, facilities, and a dedicated maquiladora operation affords greater cost savings long term than contract manufacturing in Mexico.
• Improved Scalability: Placing orders as needed means greater flexibility to meet changing market demand.

If your company has demand for a developed product and a need for flexibility and speed, contract manufacturing in Mexico may be the perfect option for you. If you’re not quite ready to commit to a full-scale maquiladora operation, but are attracted to the many benefits of Mexico, these are the factors to consider in weighing options. Contract manufacturing is not for every company. But for many, it provides the perfect balance of speed, affordability, and flexibility.