As nearshoring, friendshoring and reshoring become common, many companies are considering the IMMEX program in Mexico (also known as the maquiladora program) to mitigate the growing risk of sourcing from China. This article will review the benefits and pitfalls of IMMEX Mexico to help you determine if the program could work for your business.
What is the IMMEX program in Mexico?
IMMEX is a government initiative to promote manufacturing and foster economic growth in Mexico. Eligible companies can import raw materials, components, and equipment duty and tax-free if the goods are used in the production of merchandise that will be exported within a government-mandated time frame.
Typically, these maquiladora “factories” are operated by foreign companies looking for a cost-friendly, tariff-friendly way to manufacture goods and export them into the U.S. and elsewhere in the region. Facilities are most often located in Mexico close to the U.S. border. U.S.-based businesses, particularly, can take advantage of Mexico’s relatively lower labor rates and a location that allows business operations within the same time zone and convenient travel between the countries.
To be eligible for the IMMEX program in Mexico, companies must meet certain requirements and comply with several regulations.
What are the benefits of IMMEX Mexico?
Companies are primarily drawn to the IMMEX program due to Mexico’s proximity to huge consumer markets in North and Latin-America. Shifting manufacturing to Mexico capitalizes on Mexico’s preferential trade agreements with many countries, especially the U.S.
Other advantages of the IMMEX Program in Mexico include:
- Streamlined Customs processing
- Access to a skilled and relatively lower-cost workforce
- Infrastructure support within certain designated zones
- Goods can be held duty and tax free within Mexico until exported
- Reduced income tax rates on profits (lower than in the company’s home country)
- Lower property taxes on maquiladora facilities vs. production facilities elsewhere in the world
Dimerco is now working with an Asia-based electronics contract manufacturer that wishes to shift more of its value-added warehousing services (light assembly, replacement work, etc.) to an IMMEX-approved warehouse in Juarez, Mexico just south of the U.S. border. The goals: capitalize on lower-cost labor, send component/replacement parts into Mexico without paying a VAT tax, and re-exporting finished goods back into the U.S. duty free.
What are potential pitfalls of moving production to Mexico?
While the efficiencies and cost-savings offered by maquiladoras are tempting, companies should also understand the potential pitfalls of Mexico’s IMMEX program. Along with the usual component sourcing, quality control and cultural hurdles that come with relocating production to a new country, here are some challenges you might encounter:
Legal and tax complexities. As with any government program, there is a certain bureaucracy associated with the IMMEX program, and these details can get importers into legal or financial trouble. It’s critical that companies expanding to Mexico for the first time get advice up front from trade compliance and other experts.
Requirement for tight control over inventory. IMMEX administrators want to know exactly what inventory you have and exactly how long it’s been in storage. Having the right systems in place in advance of implementation is critical.
Limited support in certain commodity sectors. The electronics and automotive industries are well-established in Mexico, ensuring available skilled labor and component supply. Medical device maquiladoras are on the rise. However, textile and apparel companies are actually moving out due to rising costs. The benefits of the IMMEX program in Mexico don’t apply equally across all commodities.
Labor issues. About 90% of workers at companies of 25 or more staff are unionized and there’s a history of labor actions in Mexico. There are sometimes hidden costs in labor rates (social security, housing, profit sharing, etc.) that narrow the gap in wages. Have clear visibility into total costs and the available labor pool before getting started.
Less developed logistics infrastructure. As more companies move production to Mexico, seaports are struggling to handle the increased volume. The ports at Ensenada and Manzanillo operate at around 116% and 93% of their capacity, respectively. There are fewer industrial hubs across the country, making production and warehousing space scarce and more costly, especially along the border. Immigration challenges and a lack of cross-border truck capacity complicate congested U.S./Mexico border crossings. The good news is that help is available from 3PLs like Dimerco Express Group that have experience shipping goods into Mexico from China and other overseas locations, or shipping cross-border to/from the U.S.
Crime and corruption. These are well-known challenges in Mexico, which experiences more than 17,000 cargo thefts per year. Organized crime on the roads and in distribution centers is prevalent, so implementing proper security measures is important. And assuring anti-bribery policies are in place is another important step.
Protection of intellectual property rights. Mexico has a long way to go in this area. If you produce goods in Mexico, leverage every available option to protect your company’s intellectual property.
Country of origin issues. Nearshoring does not eliminate risk associated with forced labor in China or guarantee duty-free treatment of your goods. Many importers move production to Mexico only to learn that components are still sourced in China or don’t meet the product transformation requirements necessary for duty-free status.
Bottom line: none of the barriers noted above are insurmountable, especially if you align with the right experts to guide you in the areas of logistics, compliance, and duty deferral.
What’s the easiest way to capitalize on the IMMEX program in Mexico?
To participate in the IMMEX program, companies must be certified by the Mexican government. The certification process involves multiple steps, including the submission of an application, a review of the company’s financial statements, and a facility inspection.
Smaller firms can be overwhelmed at the prospect of setting up an IMMEX program from scratch. Recent delays in obtaining IMMEX permits also present challenges. “Shelter services” have emerged as an alternative for companies that want to quickly begin maquiladora operations.
The shelter program allows businesses to operate in Mexico without establishing a legal entity in the country. Companies using this program operate under a “shelter” – a Mexican-owned business that assumes the legal risk and liabilities. Under the shelter program, companies can achieve the benefits of the IMMEX program, along with the legal benefits.
Is Mexico’s IMMEX program right for your company?
By using the IMMEX program, foreign companies can operate in Mexico under a preferential, low-tax cost structure, while still taking advantage of Mexico’s skilled and lower-cost labor. The nearshoring strategy can mitigate supply chain risk, but it’s not a solution that works for everyone.
Assessing the applicability of IMMEX Mexico to your business requires a strong diligence process, a realistic review of costs, and a clear contingency plan to overcome potential pitfalls. Most of all, it requires support from experts like Dimerco Express Group that can advise you on the logistical challenges of moving goods to and from maquiladora sites, as well as the trade compliance and duty deferral processes that must be followed.
To discuss your situation in more detail, reach out to a Dimerco supply chain expert to start a conversation.
