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Mexico Manufacturing Start-up: Three Ways To Get It Done

By Expert Author: Alan Russell

Companies interested in executing a Mexico manufacturing start-up have three primary methods to choose from which to get the job to done – hiring a contract manufacturer to manufacture for them, establishing a wholly owned subsidiary south of the border in order to conduct their own manufacturing operations in Mexico, or partnering with a shelter company such as The Tecma Group of companies, or one of the several other services providers in the marketplace.

There are pros and cons related to all of the three options mentioned above. Much of the consideration of how a company should conduct its Mexico manufacturing start-up is based on the size, scope, and focus of individual firms seeking to to cut costs by accessing the benefits related to producing in a low-cost environment. There is no “one size fits all” way to go about this. It is important for executives to analyze their companies’ current cost profiles, identify potential Mexico project goals, and consider several other general and company specific variables to determine which option is best in their particular circumstance.

Contract manufacturing is the least risk, lowest capital investment method of initiating Mexico manufacturing start-up for a company’s product or products in a nearshore, low-cost environment. It affords companies that are comfortable with a “hands off” approach, as regards production, the ability to assign related responsibilities to an established Mexican manufacturer with whom they contract for the production of specific goods under specific terms. Finding a contract manufacturer is often the best option for companies that do not wish to make sizable investments in capital and equipment, and whose products may require lesser amounts amount of labor to manufacture. Other types of manufacturers that may prefer to go the contract manufacturing route, have production that is of a seasonal nature, for instance.

There are benefits related to Mexico manufacturing start-up through a contract manufacturer. In addition to some level of cost savings, the company is exposed to little or no risk, as it has neither established a legal entity in Mexico, nor has it invested sizable amounts of cash on capital expenditures. Additionally, products made by a well-vetted and reputable contract manufacturer can be high in quality. There are downsides to contract manufacturing in Mexico, however. These are sometimes related to the fact that, under this method of Mexico manufacturing start-up, production, and, as a result, quality control is in the hands of a third-party. Quality goals are sometimes not met in contract manufacturing relationships. Another area for potential difficulties has to do with delivery. Since contract manufacturers control production, they also control delivery times. It is of the utmost importance that firms that use contract manufacturers check references of potential service providers that can vouch for the CM’s ability to deliver on time.

Lastly, working with a contract manufacturer represents another relationship that must be managed. This can take either more or less time and effort, depending on organizational chemistry.

The company that is culturally predisposed to want to have full control over all aspects of its Mexico manufacturing start-up and ongoing operations, as well as handle the execution of all non-manufacturing functions, might be most prone to seek to establish its own wholly-owned subsubsidiary in Mexico. This is the most complex and risk laden of the three main options available to a manufacturer seeking to reap the benefits of a near shore production solution. Larger, resource deeper corporations have consistently found success in opening up a manufacturing facility in Mexico under the maquiladora, or IMMEX, program. They are comfortable with, and have the necessary resources, to tend to all aspects (manufacturing value-added and non-manufacturing) of their operations. While this route can be very attractive, especially for larger organizations, it also presents the most risk and requires that the company assemble its own team of experts in areas outside of the manufacturing realm. This includes making the efforts and expenditures related to recruiting and retaining employees that are well-versed in all aspects of areas such as: Mexican human resources, payroll and benefits payment and administration, Customs operation and law, Mexican tax rules and regulations Mexican environmental rules and compliance issues, as well as in a myriad of other Mexico specific, specialized knowledge areas. There are companies for which, although it is a non-negotialbe requirement that they have direct control over all aspects of their production, quality and delivery schedules, have no interest in being burdened with the task of assembling and maintaining all the in-house capability needed to “run the business” side of things related to their Mexico manufacturing start-up.

The third option that can enable a manufacture to reap the benefits of operating in a near shore, low-cost environment is partnering with a shelter company in Mexico. This solves the problem of the company that wants to control its production, but does not want to be burdened with the issues that encompass the non-manfacturing side of their business. The Mexico shelter service provider business model is, for many, a “best of both worlds” solution. Companies conducting their Mexico manufacturing start-up as a result of choosing this option do not face the risks and responsibilities associated with the establishment of their own full-blown operation, or wholly-owned subsidiary. They, in most instances, are relieved of the requirement of incorporating in Mexico, but do usually enter the country as a “department” of their chosen shelter service provider. This means that they will relieve themselves of the expenses, risks and burdens that any direct dealing with Mexican taxation authorities may carry, and great diminish risks are associated with Mexican labor matters as well as Customs and environmental compliance issues. Companies that choose the Mexico shelter business model hold the reins of their production firmly in their own grasp, as well as those related to the quality and delivery functions. This happens while they place non-core functions, that are absolutely essential to their doing business in Mexico, in the hands of the shelter company and its trained professionals. . Although companies choosing the shelter option, must invest capital in equipment and inventory, Mexican service providers can provide them access to quality industrial real estate that will suit their particular needs.

As concerns a companies’ chosen method to conduct its Mexico manufacturing start-up and continuing operations, there is no one method that works for everyone. Each company that is interested in benefitting from the country’s near shore cost and other advantages must task its executive team with the exercise of determining which, for their organization, is the best way to go.

K. Alan Russell, President and C.E.O. of the Tecma Group of Companies. manufacturing in Mexico, nearshore manufacturing, Mexico industry

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