Trade and Invest Magazine April 2011: Shelter Companies in Mexico
Based on an Interview with Entrada Group’s Doug Donahue
The possibilities for manufacturing in the NAFTA region inevitably raise the question: In which of the three countries – Canada, the US or Mexico – should I produce?
With a unique concept called the Shelter Program, Mexico is attracting European and North American manufacturers whose products are mainly destined for export.
Currently, a German supplier of sensors and switches for the automotive industry is in the middle of conducting a location analysis in North America. The medium-size company supplies a German carmaker in the US and Mexico, and it would like to manufacture locally in the future. Though the English language, general infrastructure and quality of life in the US are attractive, personnel costs can be two to three times higher than its southern neighbor. “To maintain our competitive edge, we must look at all options,” says the supplier’s director of business development.
This is where Shelter Services fit in. The term “shelter” could not be more appropriate. Shelter programs offer turnkey solutions to companies that locate their production in Mexico in order to gain access to the US market. It offers protection – shelter – from some of the inherent risks of offshore production. The idea was conceived with the birth of the maquiladora industry 40 years ago. Mexican assembly plants (maquilas), which assemble imported parts or semi-finished goods for export, are well known in Germany. Roughly paraphrased, the shelter concept not only allows manufacturers to take advantage of Mexico’s labor cost advantages, but the program itself provides a comprehensive range of services including start-up activities and on-going back office functions delivered within the confines of the shelter provider’s industrial park It is designed to provide the manufacturer with the benefits of economies of scale and speed.
The Shelter program helps to accelerate the start-up of companies from non-NAFTA countries in Mexico, because through it, businesses avoid the complexities associated with having to create a legal entity there. Instead companies can operate under the legal entity of the shelter. As a result, they are not subject to income tax as long as the finished goods or components are made for export. The foreign operation’s time-limited contract covers everything from the leasing of manufacturing and office space to other overhead functions and staff, which are also provided by the shelter.
The shelter provider also supervises things like building management and IT. Its team recruits qualified staff, handles payroll, completes administrative procedures, obtain permits, regulates the local purchase of materials, and helps with import and export of the raw materials and the finished product. The manufacturer essentially only has to provide the machinery, equipment and production know-how to get started. This model will appeal to SMEs, particularly as high level managers can remain at home and don’t have to be on the other side of the world for months selecting and setting up a new site from scratch.
“All costs are transparent and controllable,” says Wolfgang Meier, who speaks on behalf of the Entrada Group, a US-owned company providing the shelter program serving customers in Germany. “The costs comprise three components: personnel costs, operating costs including rent of the facility and a service fee for the services.”
The set-up of an automotive speaker manufacturer took Entrada Group eight weeks – an absolute record. According to Meier, the shelter model which appeals to auto parts suppliers is also interesting for companies in the medical, aerospace and electronic engineering sectors.