In July 2010, the U.S. healthcare reform (commonly referred to as “ObamaCare” or the “Patient Protection and Affordable Care Act”) was enacted. Contained within this voluminous legislation is a provision for a 2.3 percent tax on gross revenue from U.S. sales of medical devices beginning in 2013. It is increasingly recognized that this 2.3 percent tax will generally result in between a 15-23% negative financial impact on most manufacturers’ profits. This is in addition to the 35% federal corporate tax and state and local taxes already levied on medical device manufacturers. The excise tax on medical devices, if implemented, is predicted to cost the industry about $20 billion dollars, which is almost double the medical device manufacturers’ annual investment in research and development.
Given the costs to potentially be absorbed by manufacturers, many economists, policymakers and industry executives believe that this reform will cause medical device manufacturers to consider moving production to low-cost countries to maintain their profitability.
As the global marketplace faces economic challenges that impact worldwide business growth including hiring, benefits and healthcare many American companies point to near shoring as on implement in their collective tool boxes that enables them to cut costs and leverage competent and cost-effective talent. If manufacturers do choose to pursue the alternative of seeking out lower cost venues at which to produce medical devices, they may find that the use of shelter services in Mexico may be a way for them to begin to reap cost savings, while avoiding some of the risks and costs inherent to setting up and maintaining a nearshore manufacturing facility on their own.
It is important to recognize that setting up a nearshore facility is not a “zero sum game,” vis a vis the U.S. economy. Foreign investment often benefits the U.S. consumer in that Americans are able to purchase products for lower prices. This, of course, addresses the imperative to contain costs. One must also consider that when companies set up nearshore facilities millions of domestic shareholders receive a greater rate of return on their investments. The lion’s share of this money is injected back into the United States, therefore, boosting the American economy. Additionally, a bringing a low cost country manufacturing facility on line enables medical device manufacturers, as well as producers of other items, to successfully bid on jobs that, other other economic circumstances, would have been out of their reach. In these instances, increased Mexican production often creates opportunities for greater value-added, skilled labor in the United States.
When considering nearshore alternatives, it has been outlined in previous blog posts as to why Mexico is amongst the best investment options; Mexico has proved to be an attractive economic alternative. More specific to the current concern, medical device manufacturers view Mexico as a cost-effective near shore location preference for the production of products that range from medical attire to disposable devices and strictly refined precision instruments. Companies that manufacturer medical devices in Mexico benefit, not only in terms of cost, but also enjoy shorter supply chain leading to a lower total delivery cost, reduced working capital, shorter time to market resulting in shorter time to commercialization and sales, proximity to sources of technical support and markets that require customized production.
Mexican shelter companies provide manufacturing gain for firms that are under cost and competitive pressures to forcefully implement manufacturing cost-reduction measures and quality improvement strategies that are essential to maintaining profitability margins that are under increasing pressure.
The Offshore Group is the largest Mexico shelter company, offering an accessible, “full service” manufacturing fiscally sound solution. The plan offered is an adaptable and low-risk option. The Offshore Group’s Shelter Program enables companies to concentrate on their central manufacturing functions, in addition to providing developed real estate for lease at secure locations.
The fundamental of The Offshore Group’s objective is that clients have no direct transactions with Mexico’s fiscal law enforcement. Since The Offshore Group has been credited as a “certified” company by Mexican Customs, clients’ shipments receive superior treatment.
While it is currently unclear as to whether the Affordable Healthcare Act or “Obamacare” will be fully implemented, it is important for manufacturers of all sizes to assess the impact that an excise tax increase of 2.5% on gross sales will have on their bottom-line. Should the provision of this legislation be implemented, engaging with a Mexican shelter company will prove to be an easy, low-cost way for companies to maintain their profit margins.