What Are Maquiladoras?
December 12, 2016
A Maquiladora is a factory or manufacturing operation in Mexico run by a foreign company and exporting its products to the country of that company. These factories import certain materials on a duty-free and tariff-free basis for manufacturing and then export the manufactured goods back to the country of the company that produces the manufactured goods (often the United States or Canada). The foreign company is responsible for transferring the manufacturing knowledge to Mexico and typically directs the long-term business strategy. However, the Mexican based management typically runs the day-to-day operations. Maquiladoras allow companies to utilize a less expensive labor force in Mexico, while still retaining the benefits of maintaining a foreign headquarters. In order to understand the benefits of maquiladoras, it is necessary to understand their history.
The History of Maquiladoras
Maquiladoras were initially established in 1964 following the National Border Industrialization Program, which was established three years prior in 1961. The Maquiladora Program, now referred to as IMMEX program, allowed maquiladoras to be one hundred percent foreign-owned operations. The Maquiladora Program was created to attract foreign investment and was revised in a 1989 decree that allowed maquiladoras to sell up to fifty percent of their products to Mexico’s domestic markets. Despite these advances, The Maquiladora Program remained a relatively untapped resource until the North American Free Trade Agreement (NAFTA) was passed in 1994.
With the passage of the North American Free Trade Agreement (NAFTA), maquiladoras slowly became more common. The North American Free Trade Agreement made two-phase change to the maquiladora program. The first phase lasted between January 1, 2994 and December 31, 2000. During the first phase, maquiladoras operated with waived Mexican import duties and preferential duty rates on certain products. During the second phase, duties increased on materials from non-NAFTA countries. For an American company, establishing a maquiladora can be a daunting and complex process, but with the right company in place, it can be extremely beneficial. Companies like North American Product Sharing, Inc. specialize in helping companies attain long-term success manufacturing products in Mexico.
The Benefits of Maquiladoras
When analyzing maquiladoras, there are a number of benefits that promote creating maquiladoras:
- Mexico possesses lower wage rates than those in United States, making it a more financially sound decision and increasing the profit margin of a business by lowering overhead costs. This can save the average company up to $20,000 per employee, per year.
- Mexico’s geographic proximity to the United States reduces shipping and freight costs compared to those of overseas operations, which helps to reduce expenses and increase profits.
- The parent company’s country will likely experience an increased need for skilled workers to perform administrative, warehouse and sales roles. These increased employment opportunities help to reduce unemployment.
- The parent company can become increasingly competitive in world markets by lowering manufacturing costs through the lower labor rates in Mexico.
- Maquiladoras create employment opportunities in border regions and help reduce Mexico’s unemployment rates.
- Exporting foreign products increases foreign exchange in Mexico, which is very beneficial and needed.
- The establishment of maquiladoras reduces the commercial deficit with the United States.
- Companies can avoid high duties and reduce costs through the establishment of a maquiladora.
- Maquiladoras have fostered an improved relationship between the United States and Mexico.
Maquiladoras Today
The rapid growth of the maquiladora industry has created over 900,000 jobs and has lowered the unemployment rate significantly in areas along the border. Maquiladoras also comprise fifty percent of all exports from Mexico. This seismic shift ensures that manufacturing in Mexico will be an integral aspect of the global economy for the foreseeable future. Maquiladoras are ideal for companies that wish to lower operational expenses and produce goods without incurring high duties, tariffs, or labor costs. The maquiladora manufacturing model increases profitability for businesses and helps them contribute to a more stable, growing world market.
Maquiladoras can create the most efficient, cost effective operation possible. By manufacturing goods in Mexico, companies can continue to offer products to the consumer at cost efficient pricing. When considering becoming a maquiladora, it is necessary to seek out a company that possesses an in-depth understanding of Mexico’s labor laws and best practices for offshoring (or nearshoring) production and manufacturing to Mexico. North American Production Sharing, Inc. (NAPS) assists companies and help them achieve long-term success manufacturing in Mexico. To learn more, contact NAPS today.