iWith the high costs of manufacturing products in the United States, many companies have taken their manufacturing facilities to other countries in an effort to save money. In the past, Asia was a hotspot due to their cheap labor, but in recent years this has begun to change. With steadily increasing wages in Asia, Mexico has become an increasingly attractive location. Mexican manufacturing not only allows companies to lower their production costs, but also gives them the added benefit of staying close to home. With its numerous benefits, it’s clear why manufacturing in Mexico is such an appealing option, but it’s also important to recognize the potential challenges that come with running a cross-border manufacturing operation. Here are a few to keep top of mind in order to ensure a successful cross-border manufacturing operation.
Abiding by all environmental regulations
Understanding the environmental policies and regulations in Mexico is crucial to a successful cross-border manufacturing operation. In recent years, Mexico has made huge strides towards protecting the environment while also maintaining a suitable business environment. The two biggest concerns and priorities in Mexico are the protection of air and water quality. The General Law on Ecological Equilibrium and Environmental Protection serves as a primary guide of laws and policies, which are enforced by the Secretariat of the Environment. When it comes to manufacturers, the secretariat has the power to deny or grant certain permits and authorizations that affect the environment. Some of the policies and laws include the conservation of natural resources, adoption of eco-friendly technology in manufacturing when possible, monitoring the use of pesticides, pollutants and toxic substances, and formulating impact statements. These regulations are only a few of the many environmental laws within the country. As the owner of a manufacturing plant, it is ultimately up to you to ensure compliance with all Mexican mandates and institutions.
Understanding what is taxable & what is not
Under the original maquiladora program established in 1965, Mexican factories, also known as maquiladoras, were allowed to bring in materials, assembly components, and production equipment duty-free. These Mexican factories, usually owned by U.S. companies, were built in border towns and given special benefits as an incentive. Companies were even allowed to re-export final products back to the U.S. without having to pay taxes. In 1994, the passage of the North American Free Trade Agreement (NAFTA) opened foreign trade lines and removed quotas, allowing the maquiladora system to boom.
While there were many benefits to the agreement, there were a few downsides as well. NAFTA put a halt to certain Maquiladora benefits, establishing stricter rules in regards to preferential tariffs and treatment, making it slightly harder to import and export duty-free and tariff-free. Under NAFTA’s rules of origin, only specific goods qualified for the preferential tariffs. To determine whether a good qualifies, there are four general rules of origin. Under the NAFTA certificate of Origin, a good qualifies if:
- it is wholly obtained or produced in the NAFTA territory,
- if materials are not of NAFTA origin but undergo sufficient processing or transformation in NAFTA territory,
- if all materials used in the production of the good are NAFTA originating and
- in limited circumstances where the HS code for the product and its parts are the same, the manufacturer can determine where the food originates.
Abiding by foreign labor law
As the owner of a Mexican factory, companies must ensure they have a solid comprehension of the foreign labor laws. There are four important documents that are crucial to understanding Mexico’s current law: Mexico’s Constitution of 1917, Federal Labor Law of 1970, Social Security Law of 1997, and The National Workers’ Housing Fund Institute’s Law of 1972. It is also important to note that unlike the United States, Mexico does not have a flat minimum wage. Depending on the location, job industry, and occupation, the minimum wage can vary drastically. In regards to work shifts and overtime, Mexican employees can work one of three shifts: day shift, night shift, or mixed shift. Any employee that works over 48 hours is considered overtime and must be paid accordingly. Finally, there are several types of employment agreements that employees can enter into including probationary and training periods, initial training period, indefinite period, fixed term and specific-task.
Choosing the Best Location for Your Business
Choosing the most optimal manufacturing location is a major strategic decision in the course of establishing a cross-border manufacturing facility. If you want to be successful in this endeavor, it is crucial that you do your research when deciding on the site of your factory. When the maquiladora industry originally began, most manufacturing facilities were along the border of Mexico and the United States, but with the expansion of the aerospace and automotive industries, maquiladoras can now be found throughout all of Mexico. Depending on your business, certain cities in Mexico will offer you different manufacturing advantages. To determine what location is the best choice, you must look at logistics, space requirements, labor requirements, and corporate philosophies to name a few.
Hiring a shelter company
Establishing a maquiladora requires choosing a facility to lease, dealing with foreign permits, establishing accounting programs, hiring employees and much more. This is a lengthy and challenging process that companies can seldom take on by themselves. Fortunately, shelter companies can help guide American companies through the manufacturing expansion process quickly and efficiently. Through their human resources, accounting, customs and environmental health and safety expertise, they ease the process of starting and maintaining a manufacturing facility in Mexico. This allows the American company to focus on the quality of their products, while the shelter company deals with all of the administrative operations.