Nearshoring activities have had a substantial increase during the last years due to disruptions in the global supply chain derived from the pandemic and trade tensions between China and advanced Western economies.
For Mexico in particular, Nearshoring is seen as an enormous opportunity to further expand the manufacturing sector by both Government and the Private Sector. Currently, manufacturing is considered one of the pillars of the Mexican economy, representing 18% of the country’s GDP and sustaining an estimated 9.3 million jobs.
Mexico has 14 trade agreements with 50 countries but by far its most important trade agreement, economically speaking, is the U.S.-Mexico-Canada Agreement or USMCA. In 2019 US$1.1 trillion in goods were traded between US, Canada and Mexico. The three countries have well established supply chains in areas such as Automotive, Aerospace and Medical Devices, Home Appliances, to name a few.
For international companies looking to bring their manufacturing operations closer to their clients in the US and Canada, Mexico presents itself as a viable option due to its strategic location, extensive trade agreement network, competitive operation cost and experienced workforce.
Here is a list of different manufacturing schemes that are available for foreign companies in Mexico:
Contract Manufacturing
Contract manufacturing in Mexico is no different from what is found in other countries. In contrast to a standalone operation, the contract manufacturer in Mexico owns its production assets, controls all aspects of production, and charges the foreign company a fee for producing goods.
Shelter
Shelter services are a popular choice for businesses looking to “test the waters” when it comes to setting up operations. In this scenario, the foreign company operates under the “umbrella” or “shelter” of an established mexican entity. The foreign company typically controls all or most of the production-related functions and assets, while the local company oversees the administrative side. Also, the local Shelter company will already have a license under Mexico’s IMMEX programme which allows exemption from VAT payments on temporary imports such as raw material and machinery.
Joint Venture
A joint venture may prove to be a beneficial partnership when the foreign company has a captive market of customers, and the Mexican manufacturer has all the related assets and expertise in place to meet the foreign partner’s demand for specific product types. The joint venture is a partnership in which each partner contributes distinct strengths, with the intent of achieving a common goal.
Direct Investment
Direct investment will require forming a new legal entity in Mexico, building an entirely new manufacturing operation, leasing or acquiring industrial space, directly hire personnel and obtain licenses and permits. This model is typically chosen by large multinational companies that have the personnel structure and capital to do so. Most other companies will work towards this model gradually after many years in the market if ever.
If you are interested in exploring Nearshoring opportunities in Mexico please contact Capstone for an initial free 1hr consultation.
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