Manufacturers are under competitive and pricing pressures requiring executives to aggressively control and reduce costs. While this can be achieved through the implementation of lean manufacturing and consolidation and automation strategies, some executives seek to reach their goals by shifting labor-intensive operations to lower cost countries for savings such as Mexico.
Mexico’s low landing costs can be attractive when compared to options in other developing countries. In many instances, Mexico is particularly well-suited to serve as a manufacturing venue for short to medium-run products with a high degree of engineering content.
The country’s proximity to the United States enables technical and production personnel to coordinate activities — easily bridging temporal and physical distances. This nearness-to-market also helps fulfill some just-in-time requirements.
Additionally, Mexican government efforts to enforce patent and intellectual property laws are advanced when compared with some judicial capabilities in place in other low-cost nations. Political risk associated with Mexico is minimal.
Product manufacturing in Mexico can be achieved in a number of ways. Companies are advised to consider the subcontract manufacturer as one option. As required labor numbers increase, alternate options provide additional savings as a result of economies of scales derived from increased labor content.
Contract manufacturing
Companies with high quality requirements must be certain to identify and work with contract manufacturing firms capable of meeting and maintaining their exacting standards.
If quality standards can be maintained, subcontract manufacturing can be the best option for firms seeking to manufacture product without be required to make large capital and organizational investments. Manufacturers with high intellectual property content must be assured that such property is protected.
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Joint venture
A second means by which manufacturers can set up operations in Mexico is by establishing a joint-venture with an indigenous party. Joint ventures can be an effective means to achieving organizational goals given a local partner’s knowledge of the local markets and prevailing conditions. Joint ventures with firms in Mexico that have established distribution channels can be of particular value to parties wanting to supply finished product to domestic markets in Mexico.
Establishing and maintaining joint ventures does create challenges. Both parties must share compatible cultures as well share similar business objectives. Finding a partner with sufficient similarity of process and purpose can prove to be difficult.
Wholly owned subsidiary
Companies can also become established in Mexico through the formation of wholly-owned subsidiaries. However, this can be a complex, costly, and risk-laden endeavor.
In addition to companies committing to a ‘bricks and mortar’ investment, executives must take the time, make the effort, and assume the cost of assembling the skill sets required to navigate the waters.
Expertise must be sought, acquired, and retained in diverse areas such as labor law, environmental law, customs law, and real estate law to name a few. Although there is a lot involved with wholly owned subsidiaries, they do enable organizations to have 100% control over all activities.
Manufacturing shelter
A fourth option that allows companies to control production, product quality, and allows executives to benefit from the experience of an organization that understands the local market and eliminates the need to make sizeable investments in physical and human assets is the manufacturing shelter.
Working through shelter service providers, a foreign-based manufacturer is able to initiate operations quickly without the need to establish a legal presence in Mexico.
In such instances, companies operate in the country as ‘department’ of their chosen service provider. Firms are ‘sheltered’ from some risks and liabilities that normally affect organizations alternatively choosing to incorporate in Mexico.
Under typical shelter arrangements, manufacturers send raw materials and supervisory personnel to train and manage a Mexican workforce while a shelter company performs the tasks and functions not core to the manufacturing process.
Some service areas shelter companies can offer clients include human resources; payroll and benefits administration, logistics, plant and park management, procurement, environmental and customs compliance, and real estate leasing.
One noteworthy benefit to a shelter is companies can pursue strategies of leveraged growth. Under a shelter arrangement, as a manufacturer expands, executives absorb only a portion of the additional overhead required for expansion.
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