The benefits of setting up maquiladoras in Mexico, such as lower production costs, outweigh the hurdles.
What is a Maquiladora?
A maquiladora is a manufacturing operation or factory established in Mexico, usually near the border, that imports raw materials and equipment for assembly, processing or manufacturing. Its products are then exported under a special program that grants them tax breaks and other benefits.
Most maquiladoras in Mexico produce electronic equipment, clothing, plastics, furniture, appliances and auto parts, with clothing being the top product. While these factories have lost some clothing work to cheaper locations in Asia, recent pay raises in Chinese factories have made the Maquiladora Program more attractive to foreign companies. Maquiladoras rank second only to oil in Mexico’s industrial sector.
Mexico’s Maquiladora Program
In 1964, Mexico launched IMMEX (Maquiladora, Manufacturing and Export Services Industry), also known as the Maquiladora Program. It aims to attract foreign investment, create jobs, foster industrialization and boost Mexico’s economy, especially along the U.S. border. The program, jointly administered by Mexico and the U.S., offers foreign manufacturers tax incentives to invest in Mexico production and labor.
The program appeals to manufacturing companies seeking to lower their production costs and to maintain control of their offshore production rather than having to create foreign legal entities or subsidiaries. Manufacturers must meet certain conditions to qualify as maquiladoras, and the imported raw materials and equipment are tax-free as long as the final products are exported.
In the early years of the program, there were some 2,000 maquiladoras with 500,000 workers in Mexico. In 1994, the North American Free Trade Agreement (NAFTA) sparked the growth of maquila plants, and within a few years the numbers more than doubled. The proliferation of maquiladoras in Mexico has lowered the rate of unemployment in Mexico, most notably along the border, employing more than one million Mexicans.
Currently, about 80 percent of all goods produced in Mexico are shipped to the U.S. and maquiladoras are responsible for 65 percent of Mexico’s exports, according to PricewaterhouseCoopers’ “Maquiladora Guide: Doing Business in Mexico.
Maquiladora/IMMEX Program Benefits
The IMMEX program helps U.S. manufacturers compete in the global marketplace by lowering their production costs. Following are some of the benefits of establishing a maquiladora in Mexico.
1. Duty Free
Maquiladoras can import materials, production equipment and assembly components duty-free.
2. Skilled Workforce
Mexico’s workforce is growing and improving the technical skills required to manufacture quality products. Foreign companies can employ skilled workers in the areas of machine operation, mechanics, administration, warehousing and design, among others.
3. Lower Labor Costs
Cheaper labor is one of the most alluring benefits of establishing a maquiladora in Mexico. From 2007 to 2018, maquiladora workers earned an average of $2.48 per hour, according to data from Trading Economics. These wages represent a significant savings over the hourly $15 to $40 range paid for skilled manufacturing labor in the U.S.
Although low by our standards, maquiladora wages are higher than wages paid in other industries in Mexico. As result, turnover is lower than the turnover seen in minimum-wage jobs in the U.S. Mexico manufacturing wages also tend to be lower than those paid in most Asian countries.
4. Low Shipping Costs, Quick Delivery
Unlike Asian countries, Mexico is just around the corner. Goods manufactured or assembled in Mexico can be delivered to factories on the U.S. side of the border within hours. U.S. manufacturers save money on transportation and warehousing costs and enjoy on-time delivery schedules. They do not have to worry about items taking weeks or months to arrive from the other side of the world. Even custom orders take a few days, making maquiladoras more competitive.
5. Reduced Trade Risks
The close relationship between Mexico and the U.S. lowers the risk of trade disruptions.
Maquiladora Program Challenges
For decades, U.S. manufacturers have been reaping the benefits of the IMMEX program in Mexico. While there are great benefits, some difficulties also make part of the equation.
Globalization, increased competition from other low-cost locations, and tax cuts have put maquiladoras on the spot and challenged them to step up their efforts to become innovative.
1. Trade/Customs Compliance
Customs compliance is probably the most critical and difficult aspect of operating a maquiladora in Mexico. While maquiladoras enjoy many customs-related benefits, these would not be possible without meticulous accounting and documentation.
Because of the import/export conditions and tax benefits, the Mexico government requires maquiladoras to use specialized software to track all imports, exports and scrap. The companies must keep detailed records of these activities. Non-compliance with IMMEX regulations can result in large fines and losing the maquiladora permit.
2. Finding and Retaining Skilled Workers
Finding, training and retaining a skilled and productive workforce is critical to the success of any manufacturing operation, maquiladoras included. It is also a challenge in today’s fickle labor market and difficult when dealing with operations in foreign countries.
Maquiladoras need Human Resources (HR) departments that can find job candidates with the right qualifications, conduct background checks, train and educate workers, work with the unions and labor lawyers, and implement effective employee retaining programs, among other critical functions. Outsourcing these functions to a reputable HR company is a suitable option.
3. Accounting Compliance
The reduced tax obligations under the IMMEX program make accounting accuracy and compliance extremely important for foreign manufacturers to keep their maquiladora status and proper certification. Any change in a manufacturer’s maquiladora certificate would affect its tax rating, tax liabilities and cash flow.
Mexico has strengthened its efforts to enforce compliance in the maquiladora industry. Therefore, it is imperative that companies establish competent accounting departments, outsource these functions to a reputable accounting firm or hire a reputable shelter company to handle all administrative and compliance tasks.
4. Changing Political Landscape
Tax benefits do not last forever. New political and economic developments can prompt changes in tax regulation that can affect the maquiladora industry. Starting in 2014, maquiladoras were hit with a value-added tax (VAT) on their imports under a tax reform law that also eliminated some tax breaks and established strict new requirements to qualify for other tax benefits.
The 2014 VAT, due at the moment of importing the goods, is credited back at the time of export. At the very least, the VAT can create challenging cash-flow problems for maquiladoras because they must wait until they export the final products from Mexico to get that credit.
5. Financing Maquiladoras in Mexico
Maquiladoras are outside of the box. They do not fit the mold that traditional banking institutions are accustomed to when negotiating financing for manufacturing operations. Like most small- and medium-sized manufacturers, maquiladoras have few financing options.
Given the available options, maquiladora parent companies often leverage finance instruments, such as equipment leasing, to better manage their cash flow and accounting records. When searching for equipment leasing options, they usually must jump through hoops to find alternative sources of cross-border financing.
The Offshore Group, VDC Research, IndustryWeek, MarketWatch, Bloomberg, MaquilaReference.com, White Clarke Group, Sovos, Statista, Equipment Leasing & Finance Foundation, U.S. Department of Commerce, Alta Group.