By Todd Nelson
Regional Business Development Manager
The Offshore Group
Once the decision is made to manufacture in Mexico using a shelter provider, the question becomes what type of “shelter” service should be chosen.[i] When evaluating the options, it should be kept in mind that the term “shelter” is not used homogenously by the various service providers. There are a number of Mexican shelter companies in operation. It’s probably safe to say that no two offerings are exactly alike.
The confusion is created in large part because the term “shelter” has been broadly applied some companies to describe the services they provide. As the term itself suggests, a Mexico manufacturing shelter relationship is designed to allow a corporation from the U.S. or another country to do business in Mexico without exposure to the risks and potential liabilities associated with the creation of a wholly-owned foreign subsidiary. Instead, the manufacturer operates, in effect, as a division of the Mexico shelter company’s legal entity. Consequently, the shelter company assumes all of the direct risks associated with running a company in Mexico including labor claims, tax liability, meeting environmental and other regulatory requirements, and customs compliance. However, as a division of the Mexico shelter company entity, the foreign manufacturer maintains full control over the Mexican manufacturing operations as if it were, for all practical purposes, a wholly-owned foreign subsidiary.
By comparison, under the alternative business model used by many companies that refer to themselves as Mexico shelter service providers, the foreign manufacturer must create a Mexican subsidiary through which to operate. The service provider will handle various administrative functions for this entity on an outsource basis. However, the foreign company is not “sheltered” from any direct liability vis-à-vis the employees and the various Mexican regulatory agencies. From the perspective of the foreign company, this may very well be a desirable business model; however, it is not a true Mexico shelter company arrangement in the traditional sense of the word.[ii] Under this business model, there are a wide variety of iterations available which vary primarily in terms of the level and scope of the contracted services. The relationship could range from the provision of a single service such as human resources to a full array of HR and administrative functions depending on what the client is looking for.
As to the specific business model used by the full shelter providers in Mexico, the primary distinction relates to where the services are offered. Some shelter providers own the industrial park in which all of the tenants operate under a shelter agreement. This has obvious advantages arising from the economies of scale made possible by concentrating a large of number of clients in one location. As a result, a relatively small manufacturing operation can take advantage of very high quality services at a competitive price. In addition, by concentrating the services in one location, the shelter provider can offer a number of benefits including in-park medical services, employee transportation, the ability to scale up and down in industrial real-estate within the park, the possibility of moving redundant employees to other companies within the park, large volume purchasing discounts, and Mexico logistics services that include consolidated freight service for imports and exports. These benefits could not be obtained by a manufacturer on a stand-alone basis without reaching a very high headcount.
By comparison, Mexican shelter companies that do not own industrial parks will provide services to clients at any location, whether it is in a third-party industrial park or a separate facility. Although this business model does not enjoy the advantages generated by economies of scale, it is more flexible. Foreign manufacturers have more real estate options to choose from which may be important if proximity to a customer or supplier is extremely important or if the industrial space requirements are not available within a shelter provider’s industrial park.[iii] Another disadvantage to this model, apart from the absence of scale economies, may be the level of experience and ability of those who are hired by the Mexican shelter company to carry out the administrative functions once a client comes on board. With a site-specific approach in which the foreign manufacturer operates in or near the shelter provider’s industrial park alongside other shelter clients, from the beginning the manufacturer will be served by a seasoned, experienced group of professionals. And any additional staff needing to be hired to serve a new client would work under the guidance of experienced senior staff.
Cost is of course another variable. In most cases, a concentrated business model in which the foreign manufacturer operates within a shelter company’s industrial park will lead to lower costs for two reasons. First, as mentioned above, by grouping a number of manufacturers together in a single facility, the shelter company is able to achieve significant economies of scale. Second, with an ad-hoc approach in which the Mexican shelter company is providing services at any site chosen by its client, the foreign manufacturer often must directly employ HR personnel, an accountant, a purchasing manager, a customs compliance officer, etc. and thus add to its overall labor cost. By contrast, with a concentrated, site-specific system, all of these services are handled by personnel who are on the shelter company’s payroll. Consequently, the shelter fee itself may be higher, but after factoring in the cost of the increased head count needed to make the alternative model work, the site-specific approach is normally more economical.
[i] For this discussion, it is assumed that the manufacturer has decided against establishing an independent subsidiary in Mexico at least in the short term.
[ii] For example, a foreign company may prefer this arrangement if it sees the use of the service provider as a stepping stone to a stand-alone, independent Mexican operation.
[iii] It should be noted that some shelter providers that own industrial parks will offer clients the option of operating outside the park in order to accommodate those manufacturers with specific site needs or those that are contemplating an eventual departure from the shelter model to a stand-alone Mexican entity.