Talking Mexican Supply Chain with Javier Zarazua

Talking about Mexican Supply Chain basics with Javier Zarazua of JL Nearshoring Mexico, LLC.??

?I’d been working in Greater China and SE Asia since the 1991, but for the last few years I’ve been researching the opportunities – and challenges – that Latin America offers to US brands and manufacturers.?I recently had the chance to speak with Javier Zarazua, partner at JL Nearshoring Mexico, about what newcomers need to know about Mexican manufacturing, logistics, and general management.??I’ll follow up with the issues those of you with primarily China/SE Asia experience should know about, but here’s what Javier – a Mexican insider with years of international MNC project management experience – has to say about starting up in Mexico.?

About Javier: Javier has 25+ years of experience in Manufacturing and Supply Chain operations in the automotive, heavy machinery, wood, metal, textile, retail, logistics, and remanufacturing industries. Javier lives in Northern Mexico where manufacturing is key to the local economy.?He lived in the United States for 7 years and has worked for several multinational companies throughout his career. For the last 5 years, Javier has focused on helping foreign companies to nearshore manufacturing operations in Mexico. “The decision to nearshore in North America is easy: Mexico.?After that, however, the decisions managers must make get much more difficult.?That’s where local professionals can offer international investors an advantage.”

About Andrew:?Andrew Hupert has spent nearly half his professional life in China and SE Asia, but now lives, works, and studies in Mexico.?Andrew has lectured at various universities in Shanghai and around Asia, including NYU’s Shanghai campus, Hult School of Business in Shanghai and Dubai, and Viet Nam’s National University of Economics.??“When I look at the political and economic forces already shaping the business world, it’s clear to me that Mexico and Latin America are the next big opportunities – or challenges, depending on your position.”?

Question 1.?Relationships?

I kept the opening question general and focused on issues that supply-chain movers probably care most about.??I led off with the “relationship talk”.??

?Me: “What do Mexican owners & managers look for in an international/US partner?”??

Javier: “Seriousness.?Long-term commitment.?Openness about cost.?Patience and flexibility.”??

Me: “What are the best ways to build relationships with Mexican counterparts?”?

Javier: “Open, honest communications. Dine and wine.

Me. “What should people be on the lookout for?”

J: “People who pretend to know about a product or process and don’t.?People who promise to sell but cannot deliver or won’t deliver on time.”

The Old China Hand view:

None of this should come as a big surprise, because there’s nothing here the Old Hands haven’t heard countless times.?That’s the good news.?You know that you have to build relationships and become part of an influential group or partnership.?The bad news is that you don’t know how yet.?That’s job 1 for you, after you’ done your desk research and business environment analysis.?

Mexican business relationship builds are like the OLD days (2000s) in Shanghai.?Mexico is much more face-to-face than Asia – and you’ll see it in the way general business communications take place.?The general presence of technology in daily life here is lower than in the US – so it’s MUCH less tech-driven than most Asian business cities.?This can work for you or against you – depending on how much effort you are willing to put in to building the relationship.

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Question 2.?Industrial specialties & geographic regions

For many, Mexico will not be a difficult choice to make when it comes to finding a new/additional center for manufacturing and supply chain management.?The hard part will be figuring out where in Mexico to look.?One of the first realities I had to confront in Mexico was the sheer size and scale of the country.?It’s not as economically concentrated as China, but there are definite patterns.?Heavy industry is dispersed more or less along the US border.?There are also hotspots of economic activity & maybe even a start-up or two around Mexico City (particularly in the areas just north of the city).?

Me:?Are different parts of the country known for different management or industrial specialties?

Javier:

Automotive Industry

El Bajío (Querétaro, Jalisco, Guanajuato, Aguascalientes, San Luis Potosí,

Michoacán and Zacatecas)

Coahuila

Mexico State (Next to Mexico City)

Puebla

Queretaro

Chihuahua

Northwest Mexico (Tijuana, Mexicali, Juarez)

Monterrey

Reynosa

Aerospace and Defense

Northwest Mexico (Tijuana, Mexicali, Juarez)

Queretaro

Monterrey

Consumer electronics

Northwest Mexico (Tijuana, Mexicali, Juarez)

Reynosa

Electronics

Guadalajara

Medical appliances

Northwest Mexico (Tijuana, Mexicali, Juarez)

Monterrey

Appliances

Northwest Mexico (Tijuana, Mexicali, Juarez)

Monterrrey

Textile

Coahuila (Automotive, apparel)

Mexico City

Shoes and leather

Guanajuato

Steel

Monterrey

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Old China Hand View: ?The geographical spread of manufacturing in Mexico (and throughout Latin America) will be a significant challenge for supply chain adjusters.?Mexico is much more hands-on and DIY than China, and you will have to log the miles and put in the face time in a region that doesn’t enjoy SE Asia’s network of fast trains and transportation logistics.? Mexico will take time.?

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Question 3:?What are the options & key variables in setting up a business operation in Mexico??

I finished up the first Q&A with one of the key concerns of every CEO – and legal department – needs to know.?What are my business rights & vulnerabilities when I set up in Mexico??What is the best way for my situation??Are there any tax programs or special economic zones I should know about?

ME:??What are the common types of business organization / structure in Mexico??

Javier:??An individual person with enterprise activity (small businesses) will start a SA de CV (Sociedad Anonima de Capital Variable) similar to a corporation in US.??An S de RL de CV (Sociedad de Responsabilidad Limitada de Capital Variable) is very similar to an LLC in the US.

ME:?What is a maquiladora, and why is it so important to the supply chain adjusters??

Javier:?Industria Manufacturera, Maquiladora y de Servicios de Exportación (or IMMEX, Manufacturing, Contract Manufacturing and Services Export in English) is aprogram established 1965 as an agreement between Mexico and United States.?With the implementation of the USCMCA (also called NAFTA 2.0 or T-MEC in Mexico), this program is now very spread throughout Mexico.?It aims to support export manufacturing in Mexicowith heavy regional content of raw materials and components.

This program allows a manufacturing company (called maquiladora), which is normally owned by a foreign entity to bring foreign raw materials and components and import them temporarily in Mexico without paying VAT (normally 16%) and mostly without duties (tariffs may still apply). On top of the benefits of lower-cost manufacturing in Mexico, the program offers significant tax incentives for Maquiladoras. ?

Me:?What is a shelter organization??

Javier:?In order for a foreign company to operate as a maquiladora in Mexico, first, a legal entity needs to be established. Once established, the IMMEX and VAT certificates need to berequested to the Mexican government. This takes time and money. The decision to establish a legal entity in a foreign legal entity is not easy for most companies anywhere in the world. ?An alternative to start getting the benefits of low-cost manufacturing in Mexico without having to establish a legal entity, the Mexican government allowed the shelter companies, under the IMMEX program. A shelter company in Mexico is a legal entity set up in Mexico that assumes all risks and liabilities and produces manufacturing services to a foreign entity. ??The shelter company normally provides HR, procurement, accounting, taxes, safety, import/export and compliance services for the manufacturing operation. ?Under the shelter program, companies do not have to pay income tax in Mexico for the first four years of operation. One of the biggest advantages of starting manufacturing with a shelter company is speed, which can happen as fast as people can be hired and machines can be installed, which can be weeks.?

Next time we’ll continue our conversation about setting up business in Mexico with a look at the wide range of overlapping FTAs and trade organizations that Mexico belongs to – and what that might mean for your business.