Subcontracting in Mexico’s manufacturing

Mexico and the U. S., strengthened their manufacturing resources since 1964, when the “Brasero Program” ended. Those were the times of US president LBJ and Mexico’s Diaz Ordaz.

By that time, millions of Mexican laborers had helped harvest large agriculture fields and build the railroad infrastructure. The program ended and they were no longer needed, thus turned back to Mexico.

The comeback overcrowded the city of Juárez and other border cities; the Mexican government had to be creative in generating jobs for an increasing number of unemployed repatriates: they invented the maquiladora industry through their Programa de Industrialización Fronteriza (PIF).

The maquiladora industry

Much has changed since the PIF started and Mexico has evolved through making subcontracting an easy process.

Maquiladoras started as low cost subcontracting manufacturing businesses. US manufacturers found it convenient to let Mexican manufacturers build labor intensive assemblies paying for that sometimes 90% less than if built by US workers.

US manufacturers using the maquiladora service back then, exported component parts to their Mexican contractors and then imported finished products back to the US. Although today, the Mexican revenue service does not provide waivers for duties or tax, importers may apply for their inclusion in the IMMEX program to gain duty exemption (NAFTA original products only) and quick tax drawback.

Despite the added freight, tax, duties and manufacturing fees paid by the average exporter, the cost savings of subcontract manufacturing in Mexico are huge; thus, availing US products to compete with similar products around the world.

Customs procedures and enforcement

Technology has changed substantially the way customs officers deal with the tremendous daily transit of merchandise crossing the common border. In the past, it required huge amounts of papers, signatures and extensive inspections; in addition, both the US exporter and the Mexican importer were overwhelmed by the “professional opinion” of the officers (vistas) on what they believed was the correct classification of products.

Classification of merchandise is critical. Using the wrong HTS code may be the difference between making or losing money.

Most of the forwarding process is carried out by the custom broker. Doing exports this way, the US manufacturer needs to only care for packaging, providing the proper documentation and shipping merchandise to the forwarding agent.

US forwarders commonly have offices at the Mexican side or collaborate wit a Mexican authorized broker (you know by their patent number) to handle the importation.

Obligations and responsibilities

We are always asked: whose responsibility is it to complete the importation process?

The truth is, responsibilities and obligations are shared between the exporter and the importer. But it is the importer’s obligation to comply with any Mexican government regulations.

The importer cannot bring in merchandise to their operation if paperwork, information or identification are missing.

However, there are limits to responsibilities that both parties should considered depending on the “INCOTERM” the exporter is using. This is of crucial importance in pricing a product.

Obligations involve that specific procedures are followed for controlled products. Those procedures may request proper labeling, identification, handling of hazardous material, sanitary controls, among others.

Paperwork

Exporters are the main source of information and paperwork for a smooth and quick export. The amount of documents that are requiered may be different for every specific merchandise, but any export will use at least the following:

  • Commercial invoice
  • Freight invoice
  • Bill of lading
  • Packing list
  • Certificate of Origin

Importer of record

Any Mexican individual or legal entity may be importers, but they all must have been approved as such by the Mexican revenue service.

Mexican importers, in most cases, appoint a professional broker as their importer of record by means of a power of attorney (encomienda). Nevertheless, the approved importer is liable to complying with the payment of taxes, duties, regulations, obligations, etc. Some large maquiladoras have their own importer of record professional inside their plants.

Is contract manufacturing still cost effective?

Some may think this is a silly question. It’s not.

Contract manufacturing is definitely not for small corporations. Contract manufacturing becomes cost effective when labor intensive operations, large volume manufacturing, or handcrafting is necessary. Savings are scaled when large volumes are involved.

Labor costs in Mexico have changed too. The standard of living of the Mexican families went up as it can be judged by the UN Index of Human Development where Mexico stands today at 77th, compared to a 61th place in 1994. This means, higher salaries are being paid and therefore, manufacturing costs are seen increased.

Summary

Mexico’s manufacturing has evolved at the point that now, Mexican workers and middle to high level management have developed higher technical expertise. This is a good reason for large FDI inflows to the country. Contract manufacturing in Mexico is an option to lower production costs and taking advantage of NAFTA. The US exporter has Mexico as their nearest cost effective trade partner and Mexico’s customs enforcement and management is coordinated with that of the US, in many ways.

With their combined efforts against terrorism, simplification of trade and standardization of transaction processes, Mexico and the US will continue fostering their historic trade relationship and shared business culture.

Reference:

  1. Bracero History Archive . George Mason University. Fairfax, Virginia. (http://braceroarchive.org/es/ensenanza)
  2. Douglas, Laurence; Hansen, Taylor. (2003). Los Origenes de la Industria Maquiladora en Mexico. Comercio Exterior. Bancomext Vol 53 Número 11 pp 1051 (http://revistas.bancomext.gob.mx/rce/magazines/59/7/RCE.pdf)
  3. Mandeel, Elizabeth W. (2013) The Bracero Program 1942-1964. Journal of Contemporary research. Col 4 Num. 1 p 171.
  4. UN Human Development Index (http://www.hdr.undp.org/en/2016-report)
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