Over the past two decades, Mexico has experienced significant growth and
development, particularly within its manufacturing sectors. An emerging market
with a GDP of over a trillion dollars, the country is now ranked as the
second-largest economy in Latin America
and the 15th in the
world. Because of this, Mexico has become an increasingly desirable
destination for foreign companies interested in international business
expansion and global employment
.
But Mexico it may not be the ideal business destination for everyone. It’s
important to consider both the pros and cons of doing business in Mexico as
part of any strategic growth planning.
Advantages of doing business in Mexico
There are several reasons why companies are increasingly interested in growing
their business Mexico, including:
Maquiladora system
Mexico excels as a manufacturing economy that focuses on four primary sectors:
- Automobiles
- Medical devices
- Electronics
- Aeronautics
These key industries have helped Mexico’s economy experience year-over-year
expansion. And over the past three decades, it's taken several steps to make
itself an even more attractive international market for foreign companies via
its maquiladoras system. In 2006, Mexico further sought to increase the
competitiveness of its manufacturing sector on a world scale by instituting
the IMMEX Program, which allowed for the duty-free and tariff-free short-term
importation of goods used in industrial maquiladoras processes.
IMMEX also sought to modernize and globalize Mexico’s manufacturing abilities
by embracing specialized technologies and cutting-edge manufacturing
methodologies. For foreign companies, these efforts combined with
international trade deals have helped make Mexico one of the most desirable
manufacturing destinations in the world.
Hiring and employment capabilities in Mexico
A skilled workforce has made hiring in Mexico
attractive
to foreign companies. The five largest employment sectors are:
- Manufacturing
- Social services
- Commerce
- Professional services
- Construction
When it comes to manufacturing, there are three aspects that set the Mexican
workforce apart:
Highly skilled workers
The Mexican government has invested in education and STEM training to produce
highly skilled and knowledgeable workers and engineers. And seeing as Mexico
has been embracing its manufacturing identity for nearly 60 years, there are
now three generations of workers that have a wealth of experience working in
factories and along supply lines.
As of 2015, Mexico was producing the world’s eighth highest rate of
graduates in engineering,
manufacturing and construction, with more than 110,000 students per year. That
figure is double what it was producing just a decade previously. In addition
to the national push, local and regional governments have also installed
specialized training programs to produce advanced and highly technical
workers, especially when compared with laborers in Asian manufacturing
destinations.
A young workforce
Mexico has a youthful and energetic workforce. Nearly four in 10
workers
are younger than 25 years old. There are more talented workers willing and
able to start a life-long career in manufacturing from the outset. For foreign
companies, this gives them access to a workforce that can be trained and
molded.
Inexpensive labor costs
Employee wages often represent the most significant investment for any
company, but especially so when it comes to manufacturing. That said, cost of
labor in Mexico is much more affordable and comparable to many of the Asian
manufacturing hubs.
Currently, the hourly average for a ground-floor worker in Mexico is $2.80
per hour . And
that figure has remained virtually stagnant over the past decade. This is a
competitive rate with China, but it's less costly when compared to the United
States’ manufacturing hourly average, which is $30 per hour.
Trade deals
Mexico has purposefully created an economic environment that is open to other
countries. It’s a member of:
- World Trade Organization (WTO)
- Asia-Pacific Economic Cooperation (APEC)
- G-20
- Organization for Economic Cooperation and Development (OECD)
- Pacific Alliance Trade Bloc
Besides Singapore, Mexico has the second most free-trade agreements of any
nation. There are currently 13 open free-trade agreements
with more than 50 different countries. Such deals make it easier and cheaper
for a foreign company to do business in the country.
For instance, the United States-Mexico-Canada Agreement (USMCA) of 2020 was an
update to NAFTA. Some crucial highlights include:
- 70% of all auto manufacturing parts must be manufactured in Mexico, the U.S. or Canada
- Improved Mexican labor laws
- Increased intellectual property rights laws
- Raised de minimis shipment value levels from 7% to 10%
Proximity to the United States and Canada
For companies in North America, Mexico is much more ideally located than Asia.
This was already true before the pandemic, but now there are also supply chain
crises, rising fuel prices and rapidly increasing inflation to contend with.
Put simply, trans-oceanic shipping has become a costly endeavor. Per Fox
Business :
“The cost to transport shipping containers between China and the United States
surged to a record high in September … the median cost of shipping a standard
rectangular metal container from China to the West Coast hit $20,586, nearly
double what it cost in July, which was twice what it cost in January.”
In comparison, Mexico’s proximity makes it less of a logistical and budgetary
challenge to get finished goods back to the U.S. or Canada. The country is
bordered by four American states—California, Arizona, New Mexico and Texas—and
has a robust highway and railway system that makes it cheaper and faster to
ship over rail lines than via cargo ship. Additionally, many of Mexico’s key
manufacturing sectors are strategically located along these passageways to
facilitate an even speedier freight process.
While this ensures faster fulfillment at a lower price, there’s the additional
benefit that comes with operating in similar time zones; this allows American
and Canadian companies to stay in constant contact with their operations. If
there’s an issue, it can be dealt with immediately without having to wait for
the right time window.
Challenges of doing business in Mexico
Although doing business in Mexico is an attractive proposition, there are some
potential drawbacks to consider and prepare for. These include:
Crime and corruption
Mexican cartels have an outsized hand in the goings-on of the country,
leveraging their power, money and threat of violence to exert control over
both the government and police.
Although cartels tend to avoid foreign businesses for the fear that an
incident will bring unwanted international attention, foreign companies must
be wary of both the potential threats of violence and corruption. As of 2020,
Mexico ranked No. 104
in the international corruption perception index.
Because of this, companies must be judicious about who they choose to partner
with to avoid reputational harm.
Slow permitting processes
Although there has been a concerted effort by the Mexican government to make
the country more business-friendly, particularly to international
organizations, but setting up shop can still be a confusing process. Companies
looking to expand to Mexico must navigate often complex permitting and license
requirements for forming a legal entity, establishing property, registering
with the state, and operating the business.
Complicated tax laws
Mexico has some of the more complicated tax laws for foreign businesses in the
world. Properly filing as a foreign company can be a significant time
investment and it requires substantial knowledge of Mexican tax laws. The
primary taxes companies in Mexico must consider include:
- Income tax (ISR)
- Value Added tax (IVA)
- Excise tax (IEPS)
- Social Security fees
Also, as Deloitte notes , “Companies with employees must distribute
and pay an amount equal to 10% of tax profits to their employees. Profits must
be distributed within 50 days after filing the annual ISR return.”
A trusted partner for expanding your business in Mexico
After a careful evaluation of the pros and cons of doing business in Mexico,
you may be ready to take the next step and begin making plans for expansion.
Whether you plan to hire employees in Mexico and need help navigating HR and
payroll requirements, or you’re considering a full entity establishment, it’s
helpful to consider an expansion partner, such as GEO
, that has in-
country expertise and can provide guidance to ensure a seamless transition.
Learn more about how a Mexico employer of record
can
help you successfully enter the Mexican market by speaking with a global
solutions advisor today .
Schedule a free consultation
Meet with one of our payroll experts to discuss your current business challenges and how our solutions can help.