Mexico May Need More Tier Twos – But Is the Government Helping?

Commentary by Doug Donahue

A recent Automotive News article made the point, accurately, that Mexico needs more Tier Two suppliers in order for auto manufacturing there to continue to grow. As the author points out in the piece, the large, global Tier One suppliers that ship parts directly to automakers are well represented here in Mexico. In fact, 450 of the largest 500 Tier One auto suppliers already have operations in Mexico.

But they need to import a lot of parts and raw materials to keep up with production. According to INA, Mexico’s national association of suppliers, Tier One companies in Mexico produced parts valued at $76.8 billion in 2013, while imports of the components they use totaled $38.8 billion, 7% higher than in 2012.

If Mexico can encourage more Tier Two providers to enter the country, it will help them close this gap, generating more tax revenue and jobs in the process.

The article adds that the Mexican government has launched a long-term effort to develop a national network of Tier Two suppliers, including offering several million dollars worth of funding to assist the effort. But a closer look at the situation on the ground is a bit murkier.

Shelter Approach

In reality, the Mexican government has also been changing the shelter laws in the country over the past few years. These are the laws and regulations that shelter manufacturing in Mexico has been operating under for the past 40 years, specifically with respect to Tier One and Tier Two companies. But recently, Mexico has been putting more demands on shelter providers and their clients, making manufacturing in Mexico more complex and administratively burdensome. Unfortunately, most Tier Two companies typically lack experience in these areas, within a global environment.

For example, changes that will come into affect in coming years are more onerous than in the past, possibly requiring companies to incorporate and have a permanent establishment in Mexico, when in the past they were exempt from this costly endeavor, as long as all their product was exported outside of Mexico.

Why is it significant that the Mexican administration is changing the shelter manufacturing laws? Because the vast majority of Tier Two manufacturers elect to enter Mexico by way of a shelter service provider like Entrada Group. It is the most cost-effective way for a small- mid-size company to establish a Mexican presence.

Shelter providers make it easier for companies of this size to enter the country, requiring less compliance, oversight and cost. This is important, because most Tier Two manufacturers are asked to enter Mexico (or strong-armed into entering) by the Tier One companies they serve. Thus, changing the longstanding rules of the game will ultimately make it harder for the smaller suppliers to get to Mexico at all.

Source: Automotive News

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