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Mexico: It's Kind of a Big Deal

By: Bob Dobrowsky

Monday, September 1, 2014
 

It’s hard to believe that 25 years ago Mexico was viewed as little more than a repository for light assembly operations. Today, businesses go to Mexico for a variety of value-added operations, including engineering, manufacturing and research and development. And that’s only going to continue.

Why has Mexico become so popular, and what pitfalls should companies be aware of when contemplating a move to Mexico? Here’s a brief overview of the bueno, the not-so-bueno and the maquiladora program in Mexico (IMMEX).

The Bueno

The OEM Perspective: Supply-Chain Opportunities in Mexico

Material and Component Availability

Wide availability of raw materials for most common manufacturing processes

Foreign companies are successfully identifying and localizing their raw-material/subcomponent purchases

Extensive support from local government to identify and develop local suppliers and/or locate suppliers for export

Developing a Supply Base

Initial relocation with current supply base

Transition to Mexican supply base

Negotiating with suppliers

Localized Mexican strategic partnership
One of the biggest factors driving Mexico’s continued popularity is interest from premium automotive brands. BMW, for example, recently announced plans to open a facility in central Mexico in 2017; production will start in 2019.

Because the automotive industry is flourishing in Mexico, other industries have been encouraged to similarly develop. For example, Mexico is the world’s largest producer of flat-screen TVs and two-door refrigerators. And, the aerospace industry has experienced double-digit growth during the last decade. The country has become a hotbed of activity for these and other industries in part because it’s lost the “low-quality” label that plagued it for years. Mexico now has become quite the opposite—a country whose manufacturers produce high-quality products.

In addition, labor continues to be relatively inexpensive, and Mexico’s vast array of trade agreements makes it very attractive as a stepping stone to other markets. The United States has no trade agreements with South America, but Mexico does. In fact, Mexico has many “amigos”—the country has trade agreements with 46 countries or economic regions, the largest number of trade agreements in the world. This obvious advantage is a major reason why Honda, Mazda and BMW decided to set up assembly plants in Mexico.

The Not-so Bueno

Lower-end labor is inexpensive in Mexico, and there’s no shortage of semiskilled workers. However, many companies struggle to find mid- to high-management-level staff that speak English proficiently and have experience working for a foreign company. In fact, a recent survey of automotive suppliers by the Original Equipment Suppliers Association identifies finding and retaining talent as the primary concern.

Further, once companies find the talent they may struggle to keep it. Manufacturers don’t just have to worry about competitors poaching employees; customers also may target top talent. Therefore, while it’s important to be located close to customers, you don’t want to be too close. And, it’s also why company culture becomes so important. To retain talented staff, companies must ensure their employees feel like they’re part of something bigger. Show them that you care about them and their families, and that opportunity for growth exists within the company.

Another challenge to keep in mind: Mexican manufacturers conduct business somewhat differently than do U.S. manufacturers. Mexico runs on relationships, so companies must invest the time into building those relationships. Also, the pace of business and life is slower, so it’s important to exercise patience.

Finally, the definition of success in Mexico has changed. In the past a company could succeed by providing a single manufacturing operation. Today’s customers expect more. It’s critical to stand out and be different, either by providing additional services (painting, welding, holding inventory etc.) or by excelling in customer service. The market is very competitive and only becoming more so.

The IMMEX

The IMMEX program (formerly known as the maquiladora program) allows companies to temporarily import machinery, equipment and the raw materials required to manufacture goods that are to be exported. Before the recently passed tax reform, imported assets and materials were exempt from the 16-percent value-added tax. This was considered one of the biggest advantages of the program and allowed Mexico to remain competitive in the global arena. Now, however, IMMEX companies that want to continue to take full advantage of the program must complete a certification process to show Mexican authorities that they are following the rules of the program.

The Elephant in the Room

It would be inappropriate to conclude without mentioning the proverbial elephant in the room: security, a longtime concern to doing business in Mexico. While crime still exists, the environment has changed greatly in the last 2 yr. The Mexican government has done an excellent job of addressing the problem, and foreign investors—specifically expatriates living in Mexico—have not historically been a target of drug-related crime. Still, business travelers should take proper precautions to arrange for travel with locals, avoid unknown areas, attempt to blend in and stay in areas popular among other business travelers. MF

The author thanks Alejandro A. Rodriguez, Plante Moran’s Mexico country manager (based in Monterrey, Mexico) for contributing to this article; Alejandro.Rodriguez@plantemoran.com.

 

See also: Plante Moran, PLLC

Related Enterprise Zones: Management


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