Overview of Contract Manufacturing
Contract manufacturing is an arrangement between an international business and a manufacturer. It involves the business paying the manufacturer to produce goods for its brand. This is often essential for new businesses around the world who may not have the capacity or budget to produce goods in-house. The contract manufacturer handles the entire process, including product design, development, and production, ensuring that they are of the desired quality and delivered at the right time.
For many companies operating on a global scale, contract manufacturing makes a lot of sense. They simply do not have the physical production operations in place to run in each country in which they do business, so working with local third-party manufacturers provides access to a variety of advantages . Contract manufacturing allows businesses to do business more efficiently while cutting down on costs.
Consider the financial benefits of outsourcing manufacturing or product development to other countries. For example, Mexico provides paid labor for far less than its U.S. counterpart. Not only that, but it also provides access to favorable tax agreements with the U.S. and Canada. This not only makes production in Mexico less expensive, but also grants an easier entry into the U.S. and Canada. All the while, you retain branding control over your products.
There are many pros to working with a contract manufacturer around the world. You retain control over branding, while reaping the economic benefits of outsourcing.
Mexican Appeals for Manufacturing
When it comes to contract manufacturing, Mexico offers a strategic location, economic advantages, and a skilled labor force that make it an attractive option for companies looking to remain cost competitive in the global market.
For companies within the United States, Mexico is just across the border and only a few hours away from its major markets. For example, Juarez is the 5th largest metropolitan area in the United States with nearly 1.5 million people live in the City of El Paso or its neighboring Ciudad Juarez.
In addition to its location, Mexico also offers its free trade agreements making Mexico even more attractive to investors and this has resulted in an influx of contracts manufacturing in Mexico.
All of these advantages are compelling factors for outsource or finding a contract manufacturer in Mexico. Contract manufacturers in Mexico can reduce operating costs substantially while shipping costs continue to decrease because of NAFTA and the rapid increase of direct deliveries from Mexico to other countries.
Mexico’s Laws and Regulations
Manufacturing in Mexico has become an attractive option for foreign companies, and as a result, there are a number of legal frameworks and regulations in place to govern contract manufacturers. The primary governing body is the Federal Law of Workers’ Rights ("FL") which is enforced at the federal level by the Ministry of Labor and Social Security ("STPS") and its local counterparts. FL establishes the employer and employee relationship between the contract manufacturer and the personnel assigned to the relevant contract manufacturing project.
Another important regulation is the Mexican General Law of Commercial Companies ("GLCC"). The GLCC is enforced by the General Bureau of Foreign Commerce ("GFCS"), an administrative unit within the Commerce and Commercial Trade Section of the Ministry of Economy (previously related to the Department of Foreign Affairs). GFCS is responsible for the registry of foreign companies (Mexico does not require foreign entities to incorporate in Mexico, but the establishment of a local take provider requires such registration) and the issuance of the corresponding RFC (tax ID number). Under the GLCC, the formalities include a Mexican tax ID number, registration as a foreign direct investment company, VAT registration, and filing appropriate notices with the Ministry of Labor and Social Security and the General Bureau of Foreign Commerce. These corporate administrative proceedings are overseen by the Secretary of Commerce.
Industries Impacted by Manufacturing in Mexico
From electronics and electrical appliances to textiles, contract manufacturing in Mexico is a smart move for companies across a wide range of industries. Canadian appliance manufacturer Danby has been manufacturing products in Mexican maquiladoras since 1988. The company was able to save $500,000 yearly by moving production for its freezers for the U.S. market to Tijuana. Canadian corporate giant Cascades Inc. moved production for its American-made carpet underlay, dye nonwovens and recycled carpet products to the border region, saving 35 percent on production costs. Launched in 2000, Mintera Inc. designs and builds LED lighting products for a customer base that includes motorcycle companies and various industrial OEMs. Manufacturing manager Ron Marsh became convinced to move his company’s operations to Tijuana a few years later after seeing the success of other La Jolla, CA-based companies. In addition to streamlining distribution to Los Angeles, the San Diego-Tijuana region offers a qualified workforce and proximity to research institutions that promote product innovation.
Contract Manufacturing Considerations
For all of the advantages that Mexico offers to companies contemplating contract manufacturing in that country, and there are far more advantages than disadvantages, contract manufacturing in Mexico does pose certain challenges as well.
Language barriers can be difficult to bridge if your Mexican contract manufacturer is a local company with mostly Spanish-speaking managers and workers. In such a situation, one option you might consider is to hire a good project manager or project management firm that is English-speaking and has extensive working knowledge and history with your Mexican contract manufacturer. Such an intermediary can help you get the most out of your relationship with your Mexican contract manufacturer.
Cultural issues and differences can also cause production issues in Mexico, but these issues are usually manageable if you just take the time up front to see to it that you and your Mexican contract manufacturer understand the cultural issues that might be problematic for your contract manufacturing project.
The most common culture issue between US and Mexican manufacturers has to do with work hours. At many Mexican contract manufacturers, the workweek (of course) runs from Monday through Saturday, with Friday being the party day for many Mexican contract manufacturers. Because of this fact, it is typical in Mexico and the stereotype of Mexican factories to be highly social, where work hours average about 34 hours per week, rather than the 40 hours per week that most Americans are used to. That said, most Mexicans are highly loyal to their employers and extremely hard workers, so if there is a big order that needs to be completed, most Mexican workers will work nights and weekends to meet the deadline . But in general, you should not expect you Mexican employees or contractors to put in the long hours that American workers might be expected to put in.
Another common issue relates to the handling of personal relationships in Mexico. Most Mexicans are quick to befriend foreigners and do not view business relationships like Americans do. Mexicans will go out of their way to be nice to you and to help you out. They like foreigners and tend to be very open, especially if you are an American, as many Mexicans see Americans as being wealthy and successful. Expect Mexicans to treat you with respect and kindness and on the other side of that coin, expect Mexican contract manufacturers to expect you to be nice to them as well.
Another issue stems from the fact that Mexican government seems to have no real interest in enforcing the law when it comes to enforcing contracts and protecting intellectual property rights. The good news is the law in Mexico is not that bad, especially when compared with many countries in Asia (such as China). The big problems with the law in Mexico is that it is both slow and easy to corrupt. It takes everything longer to accomplish in Mexico and in many cases, you will not get what you want (even when the law is on your side) unless you pay someone off.
This means you need to do everything you can to keep your business out of litigation in Mexico. Try to straight out all issues through communication prior to having legal intervention be the only answer – or at least try to handle it in the United States. The one thing that usually gets you through the corruption and the sluggishness of the Mexican legal system is the threat of economic hardship to the person affected if you win your lawsuit.
How to set up Contract Manufacturing
As a preliminary matter, you need to understand the companies that are currently doing contract manufacturing and the potential companies with whom you might do contract manufacturing. Mexico is attracting contract manufacturing from China that is moving to Mexico because regionally based in-house and third party consolidation is on the rise. However, this is not the full picture at all. Mexico is the destination for companies that would otherwise do contract manufacturing in places as diverse as the Philippines, Central America, Canada, Bangladesh, India, Sri Lanka, Thailand, Vietnam, Malaysia, Hungary, Serbia, Republic of Georgia, Pakistan, and Egypt. When you actually count the number of foreign companies doing (and potentially doing) contract manufacturing in Mexico, it is both startling and dizzying.
Establishing contract manufacturing operations in Mexico typically follows this sequence:
- Identify and select your Mexican contract manufacturer.
- Enter into contracts with your Mexican manufacturer.
- Manage your new relationship with your Mexican contract manufacturer.
If you are seeking to develop a joint venture, your step one will be just as above but instead of an informal selection of your Mexican joint venture partner, you will enter into a formal joint venture formation process. An alternative to a pure lack of formality is the conciliation option for completing the terms of a formal joint venture agreement. The conciliation option allows the parties to mediate any outstanding issues related to the joint venture within the process of forming the joint venture agreement. Unless there is a useful vehicle for forming your joint venture agreement, a formal process is most advisable. This will minimize the likelihood of disputes later.
Emerging Developments in Mexican Manufacturing
The manufacturing landscape in Mexico is poised for a digital transformation. Speaking at a recent Expomaq Brunch, Rick Calderon, the Senior Vice President of Operations for Market Development at Protolabs, outlined how manufacturers in Mexico must adapt to the advance of technology (or face obsolescence) within the next five years. But advanced manufacturing is not just about the Buying 4.0 tools that allow you to acquire new customers and the Industry 4.0 tools that speak openly between machines. Calderon instead highlighted the need to embrace the digital factory. The digital factory is driven by digital data and lets manufacturers work backwards from customer demand to begin production immediately with little-to-no inventory.
Calderon described how the digital factory allows firms to produce highly complex products regardless of the variations from customer orders. In other words , every order can be customized quickly without the need to continually retool machinery. He also described how the digital factory allows for rapid prototyping. Companies can 3D print their products and rapidly iterate so that they only have to print a small limited production run before putting a new design into the field. Protolabs is focused industrial design and manufacturing, but these same strategies should be at work in any manufacturing facility in Mexico. It is finally time for increased level design thinking and high-level product adoption in Mexican manufacturing.